THE LEGAL CORNER
IN IN RE Jared Trenton Cowen, 1 the U.S.
Court of Appeals for the Tenth Circuit
ruled that there is no violation of Section 362 of the Bankruptcy Code when
a secured creditor merely withholds collateral acquired prepetition as opposed to
taking affirmative action to gain possession of, or exercise control over, property
of the bankruptcy estate.
In doing so, the court admitted this
was a minority rule. But it said this interpretation was simply an application of
the literal words of the statute.
The factual background is fairly simple. It involved two trucks. The bankrupt
had financed a 2000 Peterbilt 379 with
one secured party and a 2006 Kenworth
T600 with another secured party.
When the deadline for paying the loan
on the Peterbilt arrived, the truck was
undergoing repairs at a repair facility.
The Kenworth was repossessed by
saying, “A court must have the power to
compensate victims of the violation of the
automatic stay and punish the violators,
even after the conclusion of the underlying
bankruptcy case.”
Having said that, however, the Tenth
Circuit turned attention to Section 362
(a)( 3) of the Bankruptcy Code that bars
“…any act to obtain possession of prop-
erty of the estate or of property from the
estate or to exercise control over property
of the estate.”
The court recognized the majority rule
that Section 362 (a)( 3) is violated when
a party passively holds on to an asset.
But reading the statutory language, the
court said the statute prohibits “any act
to obtain possession of property” or “any
act to exercise control over property” and
that “act” means to “take action” or “do
something.” Based on that language, the
court opined that the section prevents
entities from doing something to obtain
possession of, or to exercise control over,
estate property but does not cover pas-
sively holding on to property.
The court’s conclusion was that “only
affirmative acts to gain possession of, or
to exercise control over, property of the
estate violates 362 (a)( 3),” a decision for
the withholding creditors.
WHAT’S THE POINT?
This decision is at odds with a majority of courts that have considered the
issue. It turns on the construction of the
word “act.” Does one act by not acting?
Or must acting involve some affirmative
conduct? Should Congress give greater
clarity to the statutory language?
BY MICHAEL L. WEISSMAN
Michael L. Weissman is counsel to the Chicago law
firm of Levin & Ginsburg Ltd. He is an instructor for
RMA’s Commercial Loan Documentation course and a
member of The RMA Journal Editorial Advisory Board.
He can be reached at mweissman@lgattorneys.com.
Note
1. No. 15-1413, February 27, 2017.
Creditor Does Not Violate
Bankruptcy Code by Refusing
to Surrender Possession of
Collateral Acquired Prepetition
the creditor through self-help and
intimidation.
When August 6 arrived, Cowen, the
debtor, sought bankruptcy court relief.
He demanded that the two creditors
return both trucks. They refused. One
month later, Cowen sought show cause
orders against the two creditors for their
willful violations of the automatic stay.
The bankruptcy court obliged and
show cause orders were issued. Once
again, the creditors failed to comply. The
debtor filed an adversary case against the
creditors based on a willful violation of
the automatic stay. A few months later
the debtor’s bankruptcy was dismissed.
But the court retained jurisdiction over
the adversary proceeding.
When the case reached the Tenth Circuit, the court first observed that dismissal
of the bankruptcy case did not mandate
dismissal of the adversary proceeding,
SH
U
TT
ERS
T
OCK .C
O
M
