Repossessions and bankruptcy: What the Fulton decision means for turnover | Auto Finance News Repossessions and bankruptcy: What the Fulton decision means for turnover | Auto Finance News
Auto Finance News

No products in the cart.

Subscribe
  • Home
  • News
    • All News
    • Capital & Funding
    • Compliance & Regs
    • EVs
    • Exec of the Year
    • Innovation & Technology
    • Powersports
    • Risk Management
    • Sales & Marketing
  • Events
    • Auto Finance Summit East
    • Auto Finance Summit
    • Powersports Finance Summit
    • Equipment Finance Connect
  • EXCELLENCE
    • Best Practices
    • Columns
      • Strategy Upshift: Georg Bauer
      • Under The Hood: Marcie Belles
    • Topics
      • Compliance
      • Customer Experience
      • Technology
    • White Papers
    • Glossary
  • Data
  • Magazine
    • Latest Issue
    • Features
    • New Tracks
    • Car Culture
    • Staffing Shuffles
    • Under The Hood
    • Spotlight
    • Issue Archive
  • Podcast
AFN PLUS
Log In
No Result
View All Result
Auto Finance News
  • Home
  • News
    • All News
    • Capital & Funding
    • Compliance & Regs
    • EVs
    • Exec of the Year
    • Innovation & Technology
    • Powersports
    • Risk Management
    • Sales & Marketing
  • Events
    • Auto Finance Summit East
    • Auto Finance Summit
    • Powersports Finance Summit
    • Equipment Finance Connect
  • EXCELLENCE
    • Best Practices
    • Columns
      • Strategy Upshift: Georg Bauer
      • Under The Hood: Marcie Belles
    • Topics
      • Compliance
      • Customer Experience
      • Technology
    • White Papers
    • Glossary
  • Data
  • Magazine
    • Latest Issue
    • Features
    • New Tracks
    • Car Culture
    • Staffing Shuffles
    • Under The Hood
    • Spotlight
    • Issue Archive
  • Podcast
AFN PLUS
Log In
No Result
View All Result
Auto Finance News
No Result
View All Result

Repossessions and bankruptcy: What the Fulton decision means for turnover

Rudy CeronebyRudy Cerone
May 7, 2021
in Compliance
Reading Time: 4 mins read

The February Supreme Court decision in City of Chicago v. Fulton was widely celebrated in the lending community because the court found that a lender who repossesses a vehicle before a borrower files for bankruptcy is not in violation of the “exercise control” provision of the Bankruptcy Code’s automatic stay section. That provision was the only one at issue in Fulton, and the court held that provision does not require lenders to turn over a repossessed vehicle as soon as a bankruptcy petition is filed.

On its face, this is welcome news for auto lenders. However, Fulton left open a number of other areas of exposure for lenders who refuse to return repossessed collateral to borrowers who have filed for Chapter 13 bankruptcy. Given these areas of exposure, now is a good time for lenders to update their repossession and bankruptcy policies and procedures to avoid or mitigate a potential wave of new lawsuits taking advantage of the gaps left open by Fulton.

The process

Before examining the effects of the Supreme Court decision, let’s review the intersection of repossessions and bankruptcy. In most states and jurisdictions, when a borrower falls behind on vehicle loan payments, a lender is authorized to repossess its collateral and have the vehicle seized and then sold to satisfy the loan.

Oftentimes, the borrower hires an attorney who advises them to declare Chapter 13 personal reorganization bankruptcy because, once a bankruptcy petition is filed, an automatic stay is placed on any actions against the borrower and the borrower’s property, which becomes property of the new bankruptcy estate.

The automatic stay prevents a lender from selling the vehicle, and the Chapter 13 debtor is authorized under the turnover section of the Bankruptcy Code to seek to reclaim possession of the vehicle. Repayment of the loan is dealt with later in the bankruptcy case in the debtor’s Chapter 13 plan.

Prior to the Fulton decision, several courts of appeal ruled that a lender violated the automatic stay because it “exercised control” over bankruptcy estate property when it did not immediately return the repossessed vehicle to the borrower after the bankruptcy case was filed. Those decisions subjected the lenders to damages, possibly even punitive damages, as well as attorney’s fees awards to the debtors.

The decision

In Fulton, the Supreme Court sided with the courts of appeal that had ruled that the failure to turnover did not violate the “exercise control” provision of the Bankruptcy Code.

However, the Fulton decision did not address three other provisions of Bankruptcy Code: two other automatic stay subsections and the turnover section itself. These all could impact a lender’s duties after bankruptcy is filed. The Supreme Court left open the possibility that a lender’s failure to turn over a vehicle could violate those other provisions.

So, Fulton did not close the door on a borrower’s actions to reclaim vehicle possession by filing for Chapter 13 bankruptcy, but simply encouraged debtors’ attorneys to bring different arguments in an attempt to recover possession. Because of Fulton, debtors will now file lawsuits in bankruptcy court, through complaints commencing turnover adversary proceedings, rather than by simply filing motions in their bankruptcy cases.

Unlike a stay violation motion, a turnover adversary proceeding is an ordinary lawsuit, which typically is very time-consuming. What we are seeing is that debtors’ counsel now are filing these turnover adversary complaints, but they also are attempting to short-circuit the normal timeline by including expedited motions to recover possession of repossessed vehicles in their adversary proceedings.

These motions often require vehicle finance lenders to make quick decisions on whether to relinquish possession of repossessed vehicles, or to contest turnover of the vehicle based on a lack of “adequate protection.” Even if the lender turns over possession of the vehicle, the litigation may not end, as debtors often seek damages from lenders for the failure to turnover possession, and seek to recover their attorney’s fees as well.

The upshot

Vehicle finance lenders should give thoughtful consideration to preparing for a potential wave of turnover adversary proceedings. For example, a lender may wish to establish a policy as to what constitutes a minimum level of “adequate protection” of the lender’s security interest in a repossessed vehicle prior to turning the vehicle over to the borrower. At a minimum, adequate protection includes appropriate insurance coverage on the vehicle to protect the lender against loss of its collateral during the bankruptcy case.

Based on particular circumstances, adequate protection also may include cash payments to be made prior to Chapter 13 plan confirmation that approximate the depreciation in the vehicle’s value resulting from its use by the debtor. If a debtor provides evidence satisfying the lender’s minimum level of protection, then the lender’s counsel may consider arranging for turnover of the vehicle with debtor’s counsel, consistent with local practice.

Importantly, however, lenders may seek to contest any automatic stay violation claims brought in a turnover adversary proceeding, or by separate motion in the main bankruptcy case, because such claims likely no longer are viable under the reasoning used by the Supreme Court in Fulton.

The rationale of Fulton is that the automatic stay freezes the status quo as of the date the borrower filed the bankruptcy petition. If the lender does nothing more than retain possession of the vehicle, and does not make any attempt outside of the bankruptcy case to collect the loan or to enforce its lien, Fulton’s rationale supports the position that the lender is not violating any provision of the automatic stay section of the Bankruptcy Code.

The Bankruptcy Code’s turnover section should not be construed as compelling a lender to turn over a repossessed vehicle upon a debtor’s demand without a ruling by a bankruptcy court in the course of a turnover adversary proceeding brought by the debtor. Therefore, without violation of such a court order compelling turnover, a lender should not be held to violate the turnover section simply by retaining possession of a repossessed vehicle.

Auto Finance Risk Summit, the premier event for risk and compliance in auto finance, returns May 11-12, 2021 as a virtual experience. The virtual experience will offer the quality networking and education of past events, all through an online platform. To learn more about the 2021 event and register, visit www.AutoFinanceRiskSummit.com.

Tags: bankruptcycompliancerepossessionsSupreme Court
Previous Post

Moody’s senior economist joins Auto Finance Risk Summit

Next Post

US job growth disappoints in challenge to economic recovery

Related Posts

© Can Stock Photo / zolnierek
Compliance

Data Sharing: Which privacy laws apply?

March 9, 2023
© Can Stock Photo / slickspics
Compliance

How an affirmative action decision could impact workplace diversity

February 23, 2023

COMPLIANCE

sponsored by mcglinchey

Data Sharing: Which privacy laws apply?

How an affirmative action decision could impact workplace diversity

CUSTOMER EXPERIENCE

sponsored by mcglinchey

SaaS-based lending automation crucial to hybrid workplace 

Company culture shapes positive customer experiences

TECHNOLOGY

sponsored by InformedIQ

Leveraging technology to maximize efficiency in auto lending

Watch: Income verification and the future of lending

Next Post
Photographer: Ty Wright/Bloomberg

US job growth disappoints in challenge to economic recovery

About

ABOUT US

PRIVACY TERMS

ADA COMPLIANCE

CODE OF JOURNALISM ETHICS

Manage Cookie Consent

Contact Us

ADVERTISE

HELP CENTER

Follow Us

twitter linkedin podcast
© 2023 Royal Media
No Result
View All Result
  • Home
  • News
    • All News
    • Capital & Funding
    • Compliance & Regs
    • EVs
    • Exec of the Year
    • Innovation & Technology
    • Management
    • Powersports
    • Risk Management
    • Sales & Marketing
  • Events
    • Auto Finance Summit East
    • Auto Finance Summit
    • Powersports Finance Summit
    • Equipment Finance Connect
  • Excellence
    • Best Practices
    • Topics
      • Compliance
      • Customer Experience
      • Technology
    • White Papers
    • Glossary
  • Magazine
    • Latest Issue
    • Features
    • New Tracks
    • Car Culture
    • Staffing Shuffles
    • Under The Hood
    • Spotlight
    • Issue Archive
  • Podcast
  • Data
  • +PLUS
  • SUBSCRIBE
  • Log In / Account

THIS WEBSITE USES COOKIES

We use cookies on our website to give you the most relevant experience by remembering your preferences and repeat visits. By clicking “I CONSENT”, you consent to the use of ALL the cookies.

Cookie settingsI CONSENT

Review our Cookie Policies
.
Manage Cookie Consent

Privacy Overview

This website uses cookies to improve your experience while you navigate through the website. Out of these cookies, the cookies that are categorized as necessary are stored on your browser as they are essential for the working of basic functionalities of the website. We also use third-party cookies that help us analyze and understand how you use this website. These cookies will be stored in your browser only with your consent. You also have the option to opt-out of these cookies. But opting out of some of these cookies may have an effect on your browsing experience.
Necessary
Always Enabled
Necessary cookies are absolutely essential for the website to function properly. These cookies ensure basic functionalities and security features of the website, anonymously.
CookieDurationDescription
34f6831605sessionGeneral purpose platform session cookie, used by sites written in JSP. Usually used to maintain an anonymous user session by the server.
a64cedc0bfsessionGeneral purpose platform session cookie, used by sites written in JSP. Usually used to maintain an anonymous user session by the server.
CookieConsentPolicy1 yearUsed to apply end-user cookie consent preferences set by our client-side utility.
cookielawinfo-checkbox-advertisement1 yearSet by the GDPR Cookie Consent plugin, this cookie is used to record the user consent for the cookies in the "Advertisement" category .
cookielawinfo-checkbox-analytics11 monthsThis cookie is set by GDPR Cookie Consent plugin. The cookie is used to store the user consent for the cookies in the category "Analytics".
cookielawinfo-checkbox-functional11 monthsThe cookie is set by GDPR cookie consent to record the user consent for the cookies in the category "Functional".
cookielawinfo-checkbox-necessary11 monthsThis cookie is set by GDPR Cookie Consent plugin. The cookies is used to store the user consent for the cookies in the category "Necessary".
cookielawinfo-checkbox-others11 monthsThis cookie is set by GDPR Cookie Consent plugin. The cookie is used to store the user consent for the cookies in the category "Other.
cookielawinfo-checkbox-performance11 monthsThis cookie is set by GDPR Cookie Consent plugin. The cookie is used to store the user consent for the cookies in the category "Performance".
crmcsrsessionGeneral purpose platform session cookie, used by sites written in JSP. Usually used to maintain an anonymous user session by the server.
JSESSIONIDsessionThe JSESSIONID cookie is used by New Relic to store a session identifier so that New Relic can monitor session counts for an application.
LS_CSRF_TOKENsessionCloudflare sets this cookie to track users’ activities across multiple websites. It expires once the browser is closed.
LSKey-c$CookieConsentPolicy1 yearUsed to apply end-user cookie consent preferences set by our client-side utility.
viewed_cookie_policy11 monthsThe cookie is set by the GDPR Cookie Consent plugin and is used to store whether or not user has consented to the use of cookies. It does not store any personal data.
Functional
Functional cookies help to perform certain functionalities like sharing the content of the website on social media platforms, collect feedbacks, and other third-party features.
CookieDurationDescription
__cf_bm30 minutesThis cookie, set by Cloudflare, is used to support Cloudflare Bot Management.
_zcsr_tmpsessionZoho sets this cookie for the login function on the website.
663a60c55dsessionThis cookie is related to Zoho (Customer Service) Chatbox
e188bc05fesessionThis cookie is set in relation to Zoho Campaigns
Performance
Performance cookies are used to understand and analyze the key performance indexes of the website which helps in delivering a better user experience for the visitors.
Analytics
Analytical cookies are used to understand how visitors interact with the website. These cookies help provide information on metrics the number of visitors, bounce rate, traffic source, etc.
CookieDurationDescription
_ga2 yearsThe _ga cookie, installed by Google Analytics, calculates visitor, session and campaign data and also keeps track of site usage for the site's analytics report. The cookie stores information anonymously and assigns a randomly generated number to recognize unique visitors.
_gid1 dayInstalled by Google Analytics, _gid cookie stores information on how visitors use a website, while also creating an analytics report of the website's performance. Some of the data that are collected include the number of visitors, their source, and the pages they visit anonymously.
CONSENT2 yearsYouTube sets this cookie via embedded youtube-videos and registers anonymous statistical data.
vuid2 yearsVimeo installs this cookie to collect tracking information by setting a unique ID to embed videos to the website.
Advertisement
Advertisement cookies are used to provide visitors with relevant ads and marketing campaigns. These cookies track visitors across websites and collect information to provide customized ads.
CookieDurationDescription
__Host-GAPS2 yearsThis cookie allows the website to identify a user and provide enhanced functionality and personalisation.
_dc_gtm_UA-1038974-31 minuteUsed to help identify the visitors by either age, gender, or interests by DoubleClick - Google Tag Manager.
_fbp3 monthsThis cookie is set by Facebook to display advertisements when either on Facebook or on a digital platform powered by Facebook advertising, after visiting the website.
fr3 monthsFacebook sets this cookie to show relevant advertisements to users by tracking user behaviour across the web, on sites that have Facebook pixel or Facebook social plugin.
test_cookie15 minutesThe test_cookie is set by doubleclick.net and is used to determine if the user's browser supports cookies.
VISITOR_INFO1_LIVE5 months 27 daysA cookie set by YouTube to measure bandwidth that determines whether the user gets the new or old player interface.
YSCsessionYSC cookie is set by Youtube and is used to track the views of embedded videos on Youtube pages.
yt-remote-connected-devicesneverYouTube sets this cookie to store the video preferences of the user using embedded YouTube video.
yt-remote-device-idneverYouTube sets this cookie to store the video preferences of the user using embedded YouTube video.
yt.innertube::nextIdneverThis cookie, set by YouTube, registers a unique ID to store data on what videos from YouTube the user has seen.
yt.innertube::requestsneverThis cookie, set by YouTube, registers a unique ID to store data on what videos from YouTube the user has seen.
Others
Other uncategorized cookies are those that are being analyzed and have not been classified into a category as yet.
CookieDurationDescription
caf_ipaddrsessionNo description available.
citysessionNo description available.
countrysessionNo description available.
gnt_eidsessionNo description available.
gnt_eu6 hoursNo description
iamcsrsessionZoho (Customer Support) sets this cookie and is used for tracking visitors (for performance purposes)
systemsessionNo description available.
traffic_targetsessionNo description available.
Save & Accept
Powered by CookieYes Logo