In re Hall

502 B.R. 650

In reRobert William Hall, Debtor.

Case No. 12–00753

United States Bankruptcy Court, District of Columbia.

Filed January 3, 2014

Richard L. Costella, Miles & Stockbridge P.C., Baltimore, MD, Justin Michael Flint, Eccleston & Wolf, P.C., Washington, DC, Borislav Kushnir, Eccleston & Wolf, P.C., Washington, DC, for Respondents.

Joseph A. Guzinski, U.S. Trustee's Office, Alexandria, VA, for U.S. Trustee.

(Chapter 11)

MEMORANDUM DECISION RE DEBTOR'S MOTION SEEKING SANCTIONS AND DAMAGES FOR VIOLATION OF THE AUTOMATIC STAY AND FALSE IMPRISONMENT

S. Martin Teel, Jr., United States Bankruptcy Judge

The debtor has filed a Motion to Show Cause Why Sanctions Should Not Be Imposed on the Parties Named Below for Violating the Automatic Stay and Damages for False Imprisonment (Dkt. No. 63). The Motion will be denied for the following reasons.

IBACKGROUND

The debtor owns a unit at a condo property in Ocean City, Maryland. Mann Properties manages the condo property. Coral Seas Homeowners' Association (“Coral Seas”) is the property's homeowners' association. As previously ruled, part of the Motion must be dismissed as seeking damages for prepetition misconduct that, under Fed. R. Bankr.P. 7001, must be pursued via an adversary proceeding complaint. What remains is a claim that Mann Properties and Coral Seas violated the automatic stay of the Bankruptcy Code (11 U.S.C.) contained in 11 U.S.C. § 362(a). That claim must be dismissed for the reasons that follow.

The debtor filed the petition commencing this case on November 15, 2012. Prior to the commencement of the case, Mann Properties and Coral Seas withheld from the debtor the condo's access code to a storage area in which the debtor had stored various property, thereby effectively obtaining possession of that property. The debtor sent an e-mail on November 15, 2012, and then a letter on November 27, 2012, to the attorney for Mann Properties and Coral Seas demanding that they give him the access code. On November 29, 2012, in response to the November 27, 2012 letter, Coral Seas and Mann Properties provided the access code to the debtor. The debtor contends that the delay in providing the access code and the consequent continued retention of possession of his personal property constituted a violation of the automatic stay, presumably meaning, specifically, 11 U.S.C. § 362(a)(3), which bars any act to exercise control over property of the estate.

IITHE VARYING VIEWS OF § 362(a)(3)

The courts are divided as to the proper interpretation of § 362(a)(3).

A.The D.C. Circuit View

Controlling precedent in this jurisdiction limits the applicability of 11 U.S.C. § 362(a)(3), and requires the conclusion that Mann Properties and Coral Seas did not violate the automatic stay by failing to provide the debtor with the access code and continuing thereby to retain possession of his personal property upon the commencement of this bankruptcy case. As noted in United States v. Inslaw, Inc., 932 F.2d 1467, 1471 (D.C.Cir.1991):

Section 362(a) provides that the filing of a bankruptcy petition operates as a stay, applicable to all entities, of—

(3) any act to obtain possession of property of the estate or of property from the estate or to exercise control over property of the estate....

11 U.S.C. § 362(a) (1988) (italics in original). In Inslaw, 932 F.2d at 1474, the court of appeals held that § 362(a)(3) was not violated by an entity's failure, upon the filing of the petition, to cure alleged prepetition misconduct. The court of appeals explained:

The automatic stay, as its name suggests, serves as a restraint only on acts to gain possession or control over property of the estate. Nowhere in its language is there a hint that it creates an affirmative duty to remedy past acts ... as soon as a debtor files a bankruptcy petition. The statutory language makes clear that the stay applies only to acts taken after the petition is filed.

Id. (emphasis added and citations omitted). In arriving at this view of the limited role of the automatic stay, the court of appeals noted:

The object of the automatic stay provision is essentially to solve a collective action problem—to make sure that creditors do not destroy the bankrupt estate in their scramble for relief.... Since willful violations of the stay expose the offending party to liability for compensatory damages, costs, attorney's fees, and, in some circumstances, punitive damages, ... it is difficult to believe that Congress intended a violation whenever someone already in possession of property mistakenly refuses to capitulate to a bankrupt's assertion of rights in that property.

Inslaw, 932 F.2d at 1473 (citation and footnote omitted).

Accordingly, under the reasoning of Inslaw, it is only an affirmative act to change control of property of the estate that can give rise to a violation of § 362(a)(3). In short, § 362(a)(3) does not bar continued retention of property seized prepetition. See In re Bernstein, 252 B.R. 846 (Bankr.D.D.C.2000); In re Young, 193 B.R. 620 (Bankr.D.D.C.1996).¹

B.The Contrary Majority View

There are decisions constituting a majority view to the contrary, including three at the court of appeals level, Weber v. SEFCU (In re Weber), 719 F.3d 72 (2d Cir.2013); Thompson v. Gen. Motors Acceptance Corp., LLC, 566 F.3d 699 (7th Cir.2009); and Knaus v. Concordia Lumber Co., Inc. (In re Knaus), 889 F.2d 773 (8th Cir.1989),² and others at lower levels. ³ Those decisions largely fail to address the analysis I set forth in Bernstein, and they have been persuasively criticized by Professor Ralph Brubaker in a trenchant and cogent two-part analysis:

• Turnover, Adequate Protection, and the Automatic Stay (Part I): Origins and Evolution of the Turnover Power, 33 No. 8 Bankruptcy Law Letter NL 1 (August 2013) (hereinafter “Brubaker, Part I”); and

• Turnover, Adequate Protection, and the Automatic Stay (Part II): Who is “Exercising Control” Over What?, 33 No. 9 Bankruptcy Law Letter NL 1 (September 2013) (hereinafter “Brubaker, Part II”).

As stated in Brubaker, Part II at 1, “[t]he majority position is highly dubious, ... and seems driven more by certain ‘practical considerations' (as the courts themselves have put it) than a sound, principled interpretation of the meaning of the relevant Code provisions.” I elaborate at length below why the majority view is in error, and why the reasoning of Inslaw continues to be sound, and requires the conclusion that there was no violation here of § 362(a)(3).

IIITHE MAJORITY VIEW RESTS ON THE ERRONEOUS CONCLUSION THAT 11 U.S.C. § 542(a) IS SELF–EXECUTING

The majority view of § 362(a)(3), espoused by Weber and its ilk, is premised on an erroneous interpretation of one of the “turnover” provisions of the Bankruptcy Code. Specifically, courts that follow the majority view contend that 11 U.S.C. § 542(a) is “self-executing” and “requires that any entity in possession of property of the estate deliver it to the trustees [sic], without condition or any further action....” Weber, 719 F.3d at 79. Weber then reasons that, notwithstanding that the debtor is not actually in possession of the property on the petition date, the self-executing nature of § 542(a) operates to vest the debtor with a possessory interest in the property such that a creditor's continued retention of possession constitutes an act to “exercise control” over property of the estate. Id.⁴ A careful analysis, however, demonstrates that § 542(a) is not self-executing.

Section 542(a) was part of the Bankruptcy Code as enacted in 1978, and has remained the same since then. In United States v. Whiting Pools, Inc., 462 U.S. 198, 103 S.Ct. 2309, 76 L.Ed.2d 515 (1983), aff'g674 F.2d 144 (2d Cir.1982), a case relied upon heavily by courts following the majority view, the Court explored the effect of § 542(a) and whether a court could subjectthe IRS to a turnover order for property that had been seized prepetition, but not yet sold at a tax auction. It was not until the following year, 1984, that Congress amended § 362(a)(3) to extend the stay to “any act ... to exercise control over property of the estate.” ⁵ Accordingly, to understand why Whiting Pools cannot be read to support the view that creditors violate the automatic stay under § 362(a)(3) if they fail immediately, upon the debtor's filing of the petition, to return property that was seized from the debtor prepetition, it is relevant to explore whether § 542(a) was viewed as self-executing prior to the 1984 amendment of § 362(a)(3), the context in which Whiting Pools was decided. It was not, and as will be seen, none of the language of § 362(a)(3) suggests that Congress meant by its amendment to change the meaning and operation of § 542(a).

With exceptions of no relevance here, § 542(a) provides that:

an entity ... in possession, custody, or control, during the case, of property that the trustee may use, sell, or lease under section 363 of this title, or that the debtor may exempt under section 522 of this title, shall deliver to the trustee, and account for, such property or the value of such property, unless such property is of inconsequential value or benefit to the estate.

Sometimes a debtor is vested with a trustee's rights under § 542(a). ⁶ For simplicity's sake, I will analyze what rights § 542(a) confers on a trustee, but that analysis applies as well to a debtor when a debtor is vested with a trustee's rights under § 542(a).

In contrast to the automatic stay of § 362(a), § 542(a) does not provide that it is to operate as an order (which would carry with it the consequence that it could be enforced by contempt sanctions), and the provision is subject on its face to defenses (with an additional defense against entry of a turnover order, of lack of adequate protection, being contained in 11 U.S.C. § 363(e)). For those reasons, and other reasons explored below, the statute was not viewed as self-executing prior to the 1984 amendment of § 362(a)(3) and continues to be not...