In re: Moffett, a recent Fourth Circuit case, seems to have changed this and shifted the balance of power to the creditor! In Moffett, the creditor repossessed a vehicle following a default by the debtor. Within hours after the repossession, the debtor filed a Chapter 13 bankruptcy and demanded turnover of the vehicle. The creditor refused to return the vehicle claiming that the debtor no longer had any interest in the vehicle that had become part of the bankruptcy estate. The Fourth Circuit disagreed with the creditor and found the estate did have some interest in the vehicle and that the debtor retained a right to redeem it under Virginia state law. In order to effectively exercise this right, the Chapter 13 plan must provide for the full payment of the secured creditor’s claim, including the reimbursement of the reasonable costs and expenses of the repossession. 

The court began its analysis by looking at Virginia law to determine what interest, if any, the debtor had in the vehicle at the time of the bankruptcy filing. Under Virginia law, once a creditor repossesses the vehicle, the debtor has a right under state law to redeem the vehicle by tendering the entire obligation owed under the contract plus the reasonable costs and expenses of the repossession. The court found that this interest was a legal and equitable interest that became property of the bankruptcy estate, thereby making the vehicle property of the debtor’s estate. However, the Moffett court found that in order to properly exercise this right of redemption, the debtor must provide for the full payment of the obligation through the Chapter 13 plan. Any attempt to cram down the creditor’s interest would be less than the creditor was entitled to under state law and therefore not be an effective attempt to exercise the debtor’s right of redemption. Until the debtor provided for the full payment of the claim, the creditor did not have to turn over the vehicle. In Moffett, the debtor’s modified Chapter 13 plan did provide for such treatment so the creditor was directed to turn over the vehicle to the debtor. 

The effect of this decision is that where state law requires a debtor to tender the full amount of the obligation in order to redeem a vehicle that has been lawfully repossessed by a creditor prior to the filing of a bankruptcy case, the creditor’s interest is not adequately protected until such time as the debtor provides for the full payment of this claim through the plan and the creditor can lawfully refuse to return the vehicle to the debtor. Recently, the Bankruptcy Court for the Eastern District of North Carolina followed the holding in Moffett and required a debtor to provide a creditor who had repossessed a vehicle prepetition with a fully secured claim in order to recover the vehicle, In re Jackovich, 04-04514-8-ATS - (Bankr. E.D.N.C. January 13, 2005). In Jackovich, the court, after examining North Carolina law, found that a debtor must tender the full obligation under the contract, including paying the reasonable costs and expenses of the repossession in order to exercise his right of redemption. The debtor’s plan did not provide for the full payment of the claim and therefore the creditor was not required to return the vehicle to the debtor. The court gave the debtor 10 days to amend its plan to provide for the full payment of the creditor’s claim and if he did not do so, the creditor was allowed to liquidate the vehicle. This ruling was consistent with the holding in Moffett. 

A Judge in the Western District of North Carolina also considered this issue recently in In re: Jeffrey W. Nicholson and Sherri Nicholson, 05-30168 (Bankr. W.D.N.C. January 26, 2005). In Nicholson, the Court followed Moffett and referred to Jackovich in holding that in order for the debtors to regain possession of a car repossessed prepetition, they must redeem it pursuant to North Carolina Law. The Court denied debtors’ Motion for Turnover and granted the creditor’s Motion for Relief from Stay to liquidate the vehicle - but allowed the debtors 20 days to modify their plan to provide for full payment of the outstanding balance plus costs of repossession within the plan.

Also noteworthy is that in all the cases referenced herein, the underlying state law in Virginia and North Carolina was a statute in the Uniform Commercial Code. Therefore, it is likely that other jurisdictions will have the same or substantially similar statutes.

The Jackovich and Nicholson rulings are unpublished opinions and not binding precedent in all jurisdictions. You should consult with your counsel about the effects of these decisions before relying on them. Please be aware that the failure to return property to the debtor following the filing of a bankruptcy case could subject you to sanctions for violating the automatic stay. 

Poyner & Spruill regularly represents creditors in consumer bankruptcy cases in all three Federal Districts in North Carolina and provides advisory opinions to clients in consumer bankruptcy and credit matters all over the country. Should you have any questions about this publication, please contact Charlie Livermon at clivermon@poyners.com or 252.972.7091 or Anna Gorman at agorman@poyners.com or 704.342.5276. 

This electronic publication is published by Poyner & Spruill LLP to provide general information about significant legal developments. Because the facts in each situation vary, the legal precedents noted herein may not be applicable to individual circumstances.