It is clear that the automatic stay prevents a creditor from repossessing a debtor's vehicle once a bankruptcy petition is filed without relief from the stay. This article, however, addresses the situation in which a secured creditor lawfully repossesses a debtor's vehicle but the creditor has not sold the vehicle before the debtor files bankruptcy. As will be shown below, a debtor's state-governed right of redemption in a repossessed vehicle has been held to constitute property of the bankruptcy estate making the repossessed vehicle subject to turnover under §542 of the Bankruptcy Code.

Turnover of Property of the Estate

Under §542(a), if property in the hands of a creditor is such that the trustee may use, sell or lease it pursuant to §363 or that the debtor may exempt it pursuant to §522, then the debtor may compel the creditor to release possession of the property unless the property is of inconsequential value or of no benefit to the estate. See 11 U.S.C. §542(a); Turner v. Dekalb Bank, 209 B.R. 558, 561 (Bankr. N.D. Ala. 1997). Section 363 grants the trustee the authority to use, lease or sell "property of the estate." 11 U.S.C. §363(b)(1). This article will limit its discussion to redemption rights.

Based on §§542 and 363, the primary consideration for determining whether a repossessed vehicle must be turned over to the debtor is whether the vehicle in the hands of the creditor still constitutes property of the estate as defined under §541.

Property of the Estate Under §541

Section 541(a)(1) provides that the commencement of a bankruptcy case under any chapter creates the bankruptcy estate, and the bankruptcy estate includes all legal and equitable interests of the debtor in property, wherever located or by whomever held, as of the commencement of the case, subject to exceptions contained in §541(b) and (c)(2). (Emphasis added.) The U.S. Supreme Court has held that property of a bankruptcy estate under §541 may include collateral that has been repossessed pre-petition. United States v. Whiting Pools, 103 S.Ct. 2309 (1983). Specifically, the Supreme Court recognized that the House and Senate Reports on the Bankruptcy Code indicate that the scope of §541(a)(1) is broad and that it is intended to include in the estate any property made available to the estate by other provisions of the Code. Id. at 2313.

The Supreme Court noted specifically that §542(a) of the Bankruptcy Code is a provision that brings property into the bankruptcy estate that was not in the possession of the debtor at the time the bankruptcy proceeding was commenced. The court concluded that §542(a) does not require that the debtor hold a possessory interest in the property at the commencement of the reorganization proceedings. Id. at 2314.

Whiting Pools has been cited in a number of decisions concerning the turnover of motor vehicles repossessed pre-petition. See Leverette v. NCNB South Carolina (In re Leverette), 118 B.R. 407 (Bankr. D. S.C. 1990); Chrysler Credit Corp. v. Caldwell, 81 B.R. 164 (Bankr. N.D. Ga. 1988); In re Kirk, 199 B.R. 70 (Bankr. N.D. Ga. 1996); and Turner v. Dekalb Bank, 209 B.R. 558 (Bankr. N.D. Ala. 1997). These decisions make it clear that a bankruptcy estate may include property of the debtor seized by a creditor prior to the filing of a bankruptcy petition. State law determines whether the debtor has a sufficient property interest in repossessed collateral so that the collateral must be included as a part of the bankruptcy estate. See Turner v. Dekalb Bank, 209 B.R. at 561.

Property of the Debtor

As stated above, state law determines the extent of any property interest that a debtor may have. Therefore, the state law in each jurisdiction in which a vehicle has been repossessed should be examined to determine what property interests exist. Because the state-governed right of redemption is governed by the Uniform Commercial Code (UCC), which has been adopted in almost all states, this article concentrates solely on that right.

A debtor's redemption of collateral is generally governed by the state versions of Section 9-506 of the UCC, which provides as follows:

At any time before the secured party has disposed of collateral or entered into a contract for its disposition under §9-504 or before the obligation has been discharged under §9-505(g), the debtor or any other secured party may, unless otherwise agreed in writing, after default redeem the collateral by tendering fulfillment of all obligations secured by the collateral as well as the expenses reasonably incurred by the secured party in retaking, holding or preparing the collateral for disposition, in arranging for the sale, and to the extent provided in the agreement and not prohibited by law, his reasonable attorney's fees and legal expenses.

Under this provision, a debtor has a right of redemption up until the time the secured party has disposed of the collateral or entered into a contract for its disposition or until the obligation has been discharged. This right may be waived in writing only after default. See Hawkland, Lord & Lewis, UCC Series §9-506:05 (Art. 9) (1997); and UCC §9-501(3).

In Turner v. Dekalb Bank, a decision interpreting §9-506 of the UCC, a debtor sought to compel turnover of a vehicle that had been repossessed by a creditor pre-petition following the debtor's default. The bankruptcy court examined Alabama Code §7-9-503 (1975) (UCC §9-503), which provides that "unless otherwise agreed, a secured party has on default the right to take possession of the collateral" and noted that this provision addresses only the right of a secured party to repossess the collateral. It does not state that title passes to the secured creditor upon repossession. Id. at 564-565.

The bankruptcy court then examined §7-9-504 (UCC §9-504), which provides that a secured party must give notice to the debtor of any sale of the repossessed property, and which further provides for the transfer of ownership from the debtor to the bona fide purchaser, not from the creditor to the bona fide purchaser. Finally, the bankruptcy court reviewed §7-9-506 (UCC §9-506), which grants the debtor the right to redeem the collateral at any time before the secured party has disposed of or entered into a contract for its disposition. Based upon these provisions, the bankruptcy court held that upon repossession of a vehicle, a secured creditor receives only possession and not title. Id. at 564-567. This holding is in accord with the holdings of the courts in other jurisdictions interpreting their versions of the UCC. See Commerce v. Green Tree Acceptance Inc. 858 P2d. 560, 563 (Wyo. 1993) and Kouba v. East Joliet Bank, 135 Ill. App. 3d 264, 268, 89 Ill. Dec. 774, 778, 481 N.E. 2d 325, 329 (1985).

The bankruptcy court in Turner v. Dekalb Bank concluded the following:

The right to redeem being sufficient to propel property into the debtor's estate, it is certainly clear that the debtor may recover the vehicle when, as in the present case, she retains many additional rights in repossessed property, including that of ownership (Ala. Code s 7-9-504), notice of sale (Ala. Code s 7-9-504), proper conduct of the sale (Ala. Code s 7-9-505) and the surplus from the sales proceeds (Ala. Code s 7-9-504).

The Turner v. Dekalb Bank decision stands for the proposition that the right to redeem is sufficient to propel property into the debtor's estate. Id. at 570-571. The courts from other jurisdictions are in agreement. Agricredit Corp. v. Harrison (In re Harrison), 987 F.2d. 677, 681 (10th Cir. 1993); In re Pluta 200 B.R. 740, 742 (Bankr. D. Mass. 1996); In re Young, 193 B.R. 620, 621 (Bankr. D.C. 1996); Jackson v. GMAC (In re Jackson), 142 B.R. 172 (Bankr. N.D. Ohio 1992); Leverette v. NCNB South Carolina (In re Leverette), 118 B.R. 407 (Bankr. D.S.C. 1990); Chrysler Credit Corp. v. Caldwell (In re Caldwell), 81 B.R. 164 (Bankr. N.D. Ga. 1988); see In re Montgomery, 29 B.R. 609 (Bankr. E.D.N.C. 1983).

Conclusion

The redemption provisions of the UCC, adopted in most states, clearly provide for a right of redemption of a debtor until repossessed property is sold or until a contract is made for its disposition. This right of redemption can be waived by the debtor only after default.

In most jurisdictions, case law makes it clear that an unexpired right to redeem is a property interest of the debtor that places the repossessed collateral in the bankruptcy estate upon the filing of a bankruptcy petition. Because a repossessed vehicle constitutes property of the estate, it is subject to turnover under §542 of the Bankruptcy Code, and failure of the creditor to turnover the repossessed vehicle to the debtor could result in sanctions for violation of automatic stay.