Post Petition Repossession

by Jay Winston, Winston and Winston P.C.

What happened to one of our client’s last year is an example of how not to conduct oneself in a bankruptcy proceeding.

Our client had financed a truck and refinanced the paper with its bank. The debtor made several payments, but then defaulted in the payments and failed to pay the insurance. The client repossessed the truck and then found out, to his dismay, that the debtor had filed a petition in bankruptcy. The attorney for the debtor immediately moved in the bankruptcy court to have the truck surrendered to the debtor since the repossession took place after the filing of the bankruptcy petition.

At this point, and before our firm represented the client, the client attempted to retain counsel in Georgia to oppose this hearing for surrender of the vehicle. Unfortunately, the firms that he contacted requested astronomical fees and the client failed to retain any firm. By the time the client had devoted additional time to locating a law firm, the time of the hearing came and passed and the client defaulted. The judge awarded actual damages of over $20,000 and punitive damages of $20,000. Thereafter the attorney for the debtor finally contacted the client and again demanded that the vehicle be surrendered and finally several months later the client, after consulting, but not retaining an attorney, did surrender the vehicle to the bankrupt debtor. Shortly thereafter, the attorney for the bankrupt debtor went to court again to ask for additional punitive damages and again the client defaulted and did not appear and additional damages of over $60,000 were awarded. This brought the total of punitive and actual damages and attorneys fees to a total of over $115,000.

The attorney for the bankrupt debtor forwarded the judgment to a New York attorney for enforcement and at that point the client consulted our firm. The client was not aware of the bankruptcy, because the payments were being made directly to the bank (who financed the debtor) and the bank received the notice of the bankruptcy. Unfortunately, this information was not presented to the judge, and the judge opined that no business repossesses equipment without being certain that the debtor is not in bankruptcy.

First, either the internet or one of several service bureaus will provide information on whether a debtor has or has not filed a bankruptcy petition. No repossession of any vehicle or equipment should be done without determining whether or not a debtor has filed a petition in bankruptcy. Secondly, a creditor should not at any time for any reason ignore a notice of a hearing before a judge, whether it is in a federal district court, a state court or a bankruptcy court. When a creditor defaults, this insults the presiding judge and provokes the judge to award whatever actual damages are asked for and perhaps to award punitive damages.

Our office perceived a trend across the country by bankruptcy judges to award substantial amounts in punitive damages for a failure to comply with the provisions of the bankruptcy act whether they be in reaffirmation cases, pursuing collection efforts after filing the petition or in repossession cases such as the one described. Perhaps the bankruptcy judges are demanding a certain amount of respect, but whatever the reason, the strong recommendation is not to ignore the filing of a bankruptcy petition or any order of the court.

Section 362 of the Bankruptcy Code states that a petition filed under the Bankruptcy Code operates to stay any act to obtain possession of property of the debtor or to create or enforce a lien. Once a petition is filed, no right exists to obtain possession of the property of the debtor or to enforce a lien on property of the debtor. If the creditor has knowledge of the bankruptcy either by receiving a written notice from the bankruptcy court or by word of mouth or any other form of communication, the creditor should not repossess the property without first making an application to the bankruptcy court to remove the stay on enforcing the lien.

If the creditor has no knowledge of the bankruptcy nor any indication from the conduct of the debtor that a bankruptcy is imminent, and the creditor repossesses property such as a motor vehicle, the creditor at that point in most jurisdictions should surrender the property to the trustee of the bankrupt estate immediately upon acquiring said knowledge (see Pre-Petition Repossession below). If the creditor delays in surrendering the vehicle, the creditor may be exposing himself to both actual and punitive damages. The actual damages arise by virtue of the vehicle being used for the business of the debtor.

Once the petition has been filed, you cannot acquire possession even if the debtor wishes to surrender it to you voluntarily. The creditor must make an application by motion or stipulation to the bankruptcy court for removal of the stay. Another alternative is to have the trustee abandon the property.

The third mistake my client made was that the order of the court in the first hearing decreed the vehicle should be returned promptly. The client thought he was justified in delaying until the debtor had made a payment to reinstate the insurance. Finally, after consulting with local counsel, he did surrender the vehicle. The court found that the surrender 2 ½ months later was a violation of the court order and prompted the awarding of the additional $60,000 in punitive damages.

If a business is financing vehicles or equipment in states other than the state in which they are located, the creditor must make arrangements through their own local attorney or directly to have competent representation in the state in which the debtor resides.

Several law firms in the country (including our own firm) maintain a network of attorneys in all 50 states as well as internationally to service the creditor who is conducting business across the United States as well as other countries. Utilizing these law firms will enable the creditor to obtain the services of an attorney in the state who is engaged in credit and collection law.

As to the end result of the circumstances of our client’s case, we obtained a substantial reduction in the punitive damages awarded, but the client was liable for significant damages, all of which could have been avoided if they had first checked to see whether the debtor had filed a petition in bankruptcy.