College Columns May 2019 - Page 14

Doing the Splits

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The Eighth Circuit started the debate in 1989 in Knaus v. Concordia Lumber Co. (In re Knaus), 889 F.2d 773 (8th Cir. 1989). The pre-petition seizure of property under a writ of execution with an intervening bankruptcy filing prior to disposition of the property to pay the judgment creditor framed the issue. When the judgment creditor refused to return the property upon the filing of bankruptcy, the debtor instituted a turnover proceeding and alleged a violation of the stay. Meshing the language of Section 542 with Section 362(a)(3), the Eighth Circuit held that—in the light of a duty to turnover estate property under Section 542—the passive retention of such property by a judgment creditor constituted “a prohibited attempt to ‘exercise control over property of the estate’ in violation of the stay.” Id. at 775. The Eighth Circuit also upheld punitive damages in the case, noting that “the efforts by creditor’s controlling officer to have the debtor excommunicated from his church . . . [as the creditor] brazenly attempted to punish the debtor for pursuing his rights given by the code” was sufficient to prove “appropriate circumstances” required for punitive damages. Id.

The D.C. Circuit answered and created the circuit split in U.S. v. Inslaw, Inc., 932 F.2d 1467 (D.C. Cir. 1991). The property at issue was a software system, and the alleged violator of the automatic stay was the Department of Justice itself. Reasoning that the words of the statute did not create an affirmative duty to remedy acts taken prior to the filing of the bankruptcy petition, and reinforcing this conclusion by a discussion of the limits of bankruptcy court jurisdiction and the turnover provisions of Section 542, the D.C. Circuit concluded that because the Department had taken no affirmative acts since the filing of the bankruptcy petition, no stay violation occurred. The Circuit concluded on a memorable note: “Offensive as lawless conduct by one branch of government may be, however . . . it does not justify another’s lawlessness.” Id. at 1475.

The Eighth Circuit’s position soon became the majority opinion as the Ninth, Seventh and Second Circuits followed its lead in decisions rendered in 1996, 2009, and 2013. Weber v. SEFCU (In re Weber), 719 F.3d 72 (2d Cir. 2013); Thompson v. GMAC, LLC, 566 F.3d 699 (7th Cir. 2009); Cal. Empl. Dev. Dep’t. v. Taxel (In re Del Mission), 98 F.3d 1147 (9th Cir. 1996). These Circuits not only relied on the plain meaning of “exercise control” and the interaction of Section 542 with Section 362(a)(3), but looked also to the policies and practicalities of the Supreme Court’s decision in Whiting Pools to reach the conclusion that the statute should be read expansively to protect all interests of a debtor or estate in order to fulfill the rehabilitative purposes of bankruptcy law. See, e.g., In re Weber, 719 F.3d at 75 and Thompson v. GMAC, LLC, 566 F.3d at 701, citing United States v. Whiting Pools, Inc., 462 U.S. 198, 103 S. Ct. 2309, 76 L. Ed. 2d 515 (1983).

Just as it began to look as if the circuits were coalescing around this majority view, more recent decisions in 2017 and 2018 have revived the minority view and the circuit debate. The Tenth Circuit weighed in to follow the D.C. Circuit’s position that passive retention of property of the estate does not violate Section 362(a)(3) in Davis v. Tyson Prepared Foods, Inc. (In re Garcia), 740 Fed. Appx. 163, 2018 U.S. App. LEXIS 29152, 2018 WL 5045613 (10th Cir. Oct. 17, 2018) and WD Equip., LLC v. Cowen (In re Cowen), 849 F.3d 943 (10th Cir. 2017). In the Cowan case, the Tenth Circuit criticized the majority view as being driving by “practical considerations” and “policy considerations.” In re Cowen, 849 F.3d at 948. It noted that the plain language of the statute requires a court not only to consider the plain meaning of “exercise control,” but the grammatical context of the

phrase, which prohibits “any act . . . to exercise control over property of the estate” with the plain meaning of “act” requiring the party to “take action” or “do something.” Id. at 949. As summarized succinctly, the Tenth Circuit stated: “Stay means stay, not go.” Id. However, while this reaffirmed the minority view, this was not the end of the story in this case. The Tenth Circuit explained that while the pre-petition acts of luring the debtor “under false pretenses” to


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