In Re Herbst
2012 WL 1212248, 77 U.C.C. Rep. Serv. 2d (West) 346, 469 B.R. 299 (2012)
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Rule of Law:
A creditor's passive retention of property lawfully repossessed pre-bankruptcy constitutes an "exercise of control" over property of the estate in violation of the automatic stay under 11 U.S.C. § 362(a)(3), so long as the debtor retains a right of redemption in the collateral under state law.
Facts:
- Jason Herbst entered into security agreements with Talmer Bank & Trust (the bank) for various equipment, including a truck and a motorcycle.
- Herbst defaulted on his payment obligations under the agreements.
- Pursuant to a state court judgment of replevin, the bank repossessed five items of Herbst's equipment on December 8, 2011.
- The bank placed the repossessed equipment at an auction house for future sale.
- Before the bank sold or entered into a contract to sell the equipment, Herbst filed for Chapter 13 bankruptcy.
- After the bankruptcy filing, the bank was notified of the proceeding but refused Herbst's demand to return the repossessed equipment.
Procedural Posture:
- In March 2011, Talmer Bank & Trust filed a complaint for replevin against Jason Herbst in Lafayette County state court.
- The state court entered a default judgment against Herbst on May 16, 2011, granting the bank the right to possess and sell the collateral.
- Herbst filed a petition for Chapter 13 bankruptcy in the U.S. Bankruptcy Court for the Western District of Wisconsin on February 29, 2012.
- On March 6, 2012, Herbst filed a Motion for Contempt and for Return of Property in the bankruptcy court, alleging the bank violated the automatic stay.
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Issue:
Does a creditor's passive refusal to return property lawfully repossessed pre-bankruptcy violate the automatic stay under 11 U.S.C. § 362(a)(3) when the debtor retains a right of redemption in the property under state law?
Opinions:
Majority - Robert D. Martin, Bankruptcy Judge
Yes. A creditor's refusal to return property that was lawfully repossessed before a bankruptcy filing violates the automatic stay because it constitutes an 'exercise of control' over property of the estate. The court reasoned that under the Supreme Court's precedent in United States v. Whiting Pools, property seized by a creditor pre-petition remains part of the bankruptcy estate as long as the debtor retains some ownership interest. The dispositive question is whether Herbst retained such an interest. The state court's replevin judgment granted the bank a right to possess and sell the collateral but, unlike the judgment in In re Karis, it did not explicitly extinguish Herbst's 'right, title, interest and equity of redemption.' Under Wisconsin Statute § 409.623, a debtor's right to redeem collateral continues until the secured party has sold it, contracted for its disposition, or accepted it in satisfaction of the debt. Since the bank had not yet taken any of these actions, Herbst's right of redemption survived. Therefore, the equipment was property of the bankruptcy estate, and the bank's continued retention of it, per the Seventh Circuit's holding in Thompson, was an act to 'exercise control' in violation of § 362(a)(3).
Analysis:
This decision reinforces the expansive interpretation of the automatic stay's 'exercise of control' provision within the Seventh Circuit. It clarifies that a creditor's state-law right to possess collateral does not override the requirements of federal bankruptcy law. The case establishes that the debtor's retention of any interest, such as a state-law right of redemption, is sufficient to bring the repossessed property into the bankruptcy estate. This places a clear, affirmative duty on creditors to return such property upon notice of a bankruptcy filing, rather than requiring the debtor to initiate a formal turnover action under § 542.
