In Thompson v. General Motors Acceptance Corporation, __ F.3d. __ 2009 WL 1457718 (7th Cir. 2009), the Court of Appeals for the Seventh Circuit fell in line with the Courts of Appeals for the Sixth, Eighth, Ninth, and Tenth Circuits in holding that a creditor, who lawfully seizes a vehicle pre-petition, must immediately return the vehicle to the debtor.  The Court of Appeals for the Seventh Circuit framed the issue as follows:


We must decide whether an asset that a secured creditor lawfully seizes pre-petition must be returned to the buyer’s estate after he files for Chapter 13 bankruptcy, and, if so, whether the creditor must immediately return the asset even in the absence of a showing that the debtor can adequately protect the creditor’s interest in the asset. In the United States Bankruptcy Court for the Northern District of Illinois, it has been an accepted standard procedure for a creditor to retain possession of a seized asset until the creditor subjectively determines that the debtor has shown the creditor that it can provide adequate protection of the creditor’s interests. If a dispute ensues, it is the debtor’s obligation to litigate the adequate protection issue in turnover proceedings before the bankruptcy court. In the sixth, eighth, ninth, and tenth circuits, the procedure is just the opposite. Upon the debtor filing for Chapter 13, the creditor must immediately return the asset to the bankruptcy estate, and, if the debtor and creditor cannot achieve accord on the issue of adequate protection, it is the creditor’s obligation to file a motion before the bankruptcy court.


The Court of Appeals held that a creditor must immediately return the vehicle to the debtor.  The Court of Appeals first held that GMAC exercised control over something in the debtor’s bankruptcy estate, even though GMAC has lawfully possessed the vehicle pre-petition:


We find that the act of passively holding onto an asset constitutes “exercising control” over it, and such action violates section 362(a)(3) of the Bankruptcy Code. Accord In re Yates, 332 B.R. at 5; In re Sharon, 234 B.R. at 682; In re Abrams, 127 B.R. 239, 241-43 (BAP 9th Cir.1991); In re Knaus, 889 F.2d 773 (8th Cir.1989). Here, GMAC exercised control over Thompson’s vehicle when it refused to return it to the bankruptcy estate upon request.


The Court of Appeals then held that the issue of whether GMAC was adequately protected did not stay the return of the collateral.


The majority of district courts in Illinois, as well as several district courts in other jurisdictions, have followed the precedent set forth in In re Nash, 228 B.R. 669 (Bankr.N.D.Ill.1999) and In re Spears, 223 B.R. 159 (Bankr.N.D.Ill.1998), which hold that a creditor need not return seized property to a debtor’s estate absent adequate protection of its interests. These decisions reason that requiring immediate turnover would force the creditor into an untenable position-having to turn over an asset in which the creditor has an interest without being adequately assured that its value will be retained. They further reason that since the purpose of the Bankruptcy Code’s stay provision is to maintain the status quo, the car should be kept by the party that had possession immediately prior to the filing of the bankruptcy petition. ¶  Although our circuit has not ruled on this issue, several circuits have held that the creditor must first re-turn the asset to the bankruptcy estate and then move to have its interests adequately protected. See In re Yates, 332 B.R. at 7; In re Sharon, 234 B.R. at 685; In re Abrams, 127 B.R. at 246; In re Knaus, 889 F.2d at 778.    A plain reading of 11 U.S.C. § 363(e) and 542(a), the Supreme Court’s decision in Whiting Pools, 462 U.S. 198, 103 S.Ct. 2309, 76 L.Ed.2d 515, and a myriad of policy considerations, support our sister circuits’ view.

NOTE:  In the Ninth Circuit, In re: Abrams involved seizure of a vehicle post-petition and without knowledge of the bankruptcy.  For a pre-petition seizure case, see In re: Fitch, 217 B.R. 286 (Bank. S.D. Cal. 1998).  Caution should be exercised in a similar situation, combined with a careful review of the law in the applicable circuit and district.