Of Bankruptcy and a Debtor's Collateral

Article excerpt

Recently, the 11th Circuit Court of Appeals ruled in a Florida bankruptcy case that a creditor is not required to return collateral (a vehicle in this particular case) if the creditor repossess the collateral before the debtor files bankruptcy.

The case is a favorable ruling for creditors regarding the issue as to whether a debtor may compel a creditor to turn over collateral that was repossessed before the debtor files bankruptcy.

The 11th Circuit's decision was issued for two consolidated bankruptcy appeals, In re Kalter and In re Chiodo. In Kalter, the debtors signed a security agreement pledging their 1997 Mitsubishi Galant as collateral to Bell-Tel Federal Credit Union in return for a loan from Bell-Tel. Thereafter, the Kalters defaulted on their loan.

Bell-Tel repossessed the vehicle. The next day the debtors filed a voluntary Chapter 13 Bankruptcy Petition and requested that Bell- Tel return the vehicle to them. After the credit union refused, the debtors sought an order from the bankruptcy court requiring Bell- Tel to turn over the vehicle. The bankruptcy court ordered Bell-Tel to return the vehicle. The bankruptcy court also found that because Bell-Tel had intentionally and willfully kept the vehicle after the Kalters filed bankruptcy, the Kalters had been damaged in terms of missed work, the cost of a rental vehicle, and damages to the vehicle's fuel injectors. Therefore, Bell-Tel was ordered to pay the debtors more than $6,400.

Bell-Tel appealed the bankruptcy court ruling to the district court. The district court reversed the bankruptcy court decision. The debtors appealed the district court's ruling to the 11th Circuit Court of Appeals.

In Chiodo, the debtor bought a 1998 Honda Civic from a car dealership. The dealership financed the sale and reserved a security interest in the vehicle for the unpaid purchase price. Thereafter, the dealership assigned the contract and lien to Tidewater Finance Co. Subsequently, the debtor defaulted on his car payments and Tidewater repossessed the vehicle.

Debtor filed a Chapter 13 Bankruptcy Petition before Tidewater could sell the car. Then, the debtor demanded that Tidewater return the vehicle. The debtor and Tidewater entered into an agreement stating that Tidewater would return the vehicle to the debtor, but that the parties could continue to seek an order from the bankruptcy court as to who was entitled to the vehicle.

The bankruptcy court ruled against Tidewater. Tidewater appealed the decision to the district court. Relying on its ruling in Kalter, the district court ruled in favor of Tidewater. The debtor appealed the district court's ruling to the 11th Circuit. The 11th Circuit consolidated both Chiodo and Kalter.

The 11th Circuit began its analysis of both cases by framing the relatively straightforward issue: whether the vehicles repossessed before debtors filed bankruptcy were property of the debtors' bankruptcy estates. Only if the court determined that the vehicles were property of the debtors' bankruptcy estates would debtors be entitled to regain possession of the vehicles.

In bankruptcy, a number of concepts interact which determine the outcome of a case. One such concept is what property a debtor owns when he files bankruptcy. Property that the debtor owns when he files bankruptcy is known as "property of the estate. …