It’s understandable that debtors would pawn property before considering New York bankruptcy. It’s sort of like a securitized payday loan. It’s also common for debtors’ property to be repossessed, which I’ve discussed here. What’s not necessarily intuitive is why after a debtor files bankruptcy the repossessed property is returned but the pawned property is not.
The difference stems from how the Bankruptcy Code distinguishes pawnbrokers from other secured creditors regarding the bankruptcy estate and the automatic stay.
In New York bankruptcy, a creditor that has repossessed a vehicle must return it to the debtor once the debtor files bankruptcy. Not doing so violates the automatic stay according to section 362(a)(1) of the Bankruptcy Code. The case establishing this rule is Weber v. SEFCU, Docket No. 12-1632-bk, which was decided by the Second Circuit Court of Appeals in 2013.
In that case, the lender, State Employees Federal Credit Union (SEFCU) repossessed debtor Weber’s pickup truck. Four days later, Weber filed chapter 13 bankruptcy, and he demanded SEFCU return his vehicle. It refused, and Weber initiated an adversary proceeding against SEFCU, which returned the vehicle after holding it for several weeks. Weber then sued again for damages because of SEFCU’s violation of the automatic stay.
The bankruptcy court sided with SEFCU, but the federal district court and the court of appeals favored Weber. SEFCU argued that debtors and trustees should obtain turnover orders from bankruptcy courts before retrieving repossessed properties, but the court disagreed because it didn’t want to “place on the debtor or trustee the burden of undertaking a series of adversary proceedings to pull together the bankruptcy estate, and thereby increase the costs of administering the estate and decrease the assets available to effect a successful reorganization.”
Yet for pawned property, the outcome is reversed: The pawnbroker may keep the pledged property even if it explicitly knows about the debtor’s bankruptcy. The reason this doesn’t violate the automatic stay is that section 541(b)(8) creates an exception for pawnbrokers. It states that the bankruptcy estate does not include any interest in property pledged or sold for money. The pawnbroker exception only applies to people who are licensed pawnbrokers by the state. The pawnbroker must possess the property, and the debtor must not be obligated to repay the pawnbroker at a stipulated price. Pawnbrokers need to establish all of these points in adversary proceedings against them if the debtor or the trustee believes the pawning agreement is invalid and the property should belong to either of them.
The text of Weber v. SEFCU can be found here.
Property that’s not in the debtor’s hands can easily lead to adversary proceedings to ensure the bankruptcy case can proceed. If your property has been repossessed, bankruptcy can help you get it back.
For answers to more questions about bankruptcy, the automatic stay, effective strategies for dealing with foreclosure, and protecting your assets in bankruptcy please feel free to contact experienced Brooklyn bankruptcy attorney Bruce Weiner for a free initial consultation.
