From the Bankruptcy Court for the District of South Carolina :

In McCall v. Anderson Brothers Bank (In re McCall), Adv. Pro. No. 16-80008-jw (Bankr. D.S.C. 2016), the Honorable John E. Waites held that a creditor did not willfully violate the automatic stay under the particular facts of the case where the creditor initially refused to return a vehicle to the Debtor after she filed a Chapter 13 case and demanded the vehicle’s return.

Pre-petition, the Debtor’s stepmother, Minnie Yeargin, purchased a 2012 Toyota Tundra.  Anderson Brothers Bank (“ABB”) provided the financing for Ms. Yeargin to purchase the Tundra, and the Department of Motor Vehicles issued a South Carolina Certificate of Title for the Tundra with Minnie Yeargin as owner, and ABB as lienholder.  Minnie Yeargin was the sole borrower on the promissory note to ABB.  After the payments fell into default, ABB repossessed the Tundra on September 19, 2015.  Less than a week later, the Debtor, Belinda McCall, filed a voluntary petition for Chapter 13 bankruptcy protection and demanded ABB return the Tundra to her.  In that demand, the Debtor indicated that she had been the individual making payments on the loan, and enclosed a copy of the Title with Ms. Yeargin’s name listed as owner and an insurance card showing Ms. Yeargin as the insured driver.  Because ABB was not in possession of any document showing the Debtor had an ownership interest or any other legal right to control and possession of the Tundra, ABB refused to return the Tundra to the Debtor.  The Debtor took no further action at that time.  However, on October 2, 2105, ABB filed a motion in the Bankruptcy Court for relief from the automatic stay.  The hearing on ABB’s stay relief motion was continued once at the Debtor’s counsel’s request, and ultimately held in mid-November.  Subsequent to this hearing, on December 3, 2015, the Bankruptcy Court entered an Order finding that the Debtor had an equitable interest in the Tundra, making the Tundra part of her bankruptcy estate and ordered that ABB return the Tundra to the Debtor.  However, importantly, the Court stated in a footnote to this Order that ABB acted reasonably to this point in not returning the vehicle.  ABB complied with this Order and returned the Tundra to the Debtor.

Shortly thereafter, the Debtor filed an Adversary Proceeding against ABB for a willful violation of the automatic stay for its refusal to return the Tundra to the Debtor at the time of her initial demand.  The Debtor alleged damages related to her being without possession of the Tundra for an approximate 10-week period before ABB returned the Truck to her.  ABB asserted, among other defenses, that it did not commit a willful stay violation because it could not have known that the Debtor had an interest in the Tundra when she made the initial turnover demand, and the Debtor did not legally have an interest in the Tundra until the Court’s December 3, 2015 Order.  The Debtor argued that ABB’s knowledge of her bankruptcy case along with its intentional refusal to turn over the Tundra demonstrated a willful violation.

The Court granted ABB’s motion for summary judgment, holding that ABB did not commit a willful violation of the automatic stay.  In the Order, the Court discussed the general procedure for creditors when faced with a turnover demand.  In the vast majority of cases, creditors likely are committing a willful stay violation by refusing to return a vehicle to a debtor where the debtor has an interest in the vehicle, the debtor shows the vehicle is insured, and the demand for turnover is in writing.  In this case, however, the Debtor failed to provide any proof to ABB that she had an interest in the Tundra at the time of her initial demand, and had no such proof until entry of the Court’s December 3, 2015 Order that granted her an equitable interest.  The Court also noted, importantly, that the Debtor took no action after ABB informed her counsel on September 25, 2015, that it would not be returning the Tundra to the Debtor.  The Debtor could have filed an emergency motion or adversary proceeding seeking the Court order turnover of the Tundra, but she did not do anything.  In fact, ABB is the one who took action in October 2015 to bring the issue before the Court. 

In short, the evidence submitted by the Debtor to ABB in September 2015 was insufficient for ABB to conclude that the Debtor had an interest in the Tundra.  The Debtor sent banking documents showing that she made certain of the payments; however, the Court acknowledged it is not uncommon for family members to make payments on other relatives’ loans.  In conclusion, the Court held “[i]n general, in circumstances where a debtor asserts a right to turnover or the protection of the automatic stay for an undisclosed, undocumented and unrecorded equitable interest in property, it seems that the better practice is for the debtor or trustee to initiate, as an emergency matter, a turnover request by an adversary proceeding or by motion.  In such instances, the debtor should demonstrate the facts or evidence establishing the interest[,] . . . which is often peculiarly within the knowledge and control of the debtor.  To do otherwise, would unfairly place the duty to disprove the debtor’s interest on the creditor.”

What about North Carolina?

North Carolina bankruptcy courts have yet to address this issue.  However, it is reasonable to surmise that a bankruptcy court in North Carolina would reach a similar ruling to that in McCall. Like South Carolina, North Carolina recognizes equitable interests in property. 

In contrast to McCall where the debtor claimed her equitable interest brought property into the bankruptcy estate, North Carolina debtors have generally invoked the concept of an equitable interest to keep property out of the bankruptcy estate. Instead of claiming to hold an equitable interest in a piece of property, debtors have claimed to hold mere legal title to the property while a non-debtor holds the  equitable title and ownership interest and, as a result, the property is not part of the bankruptcy estate.  For instance, in In re Alston, the bankruptcy court rejected this argument, finding that property held by a debtor in a resulting trust could still be property of the estate because the trustee, as a bona fide purchaser for value under 11 U.S.C. § 544(a)(3), would have superior rights to the beneficiary of a resulting trust if the trustee did not have notice of the trust.  Resulting trusts are equitable in nature and are “designed to prevent unjust enrichment and to ensure that legal formalities do not frustrate the original intent of the parties.”  In re Alston, 355 B.R. 529, 531 (Bankr. M.D.N.C. 2006).  Thus, North Carolina bankruptcy courts recognize the concept that a party must have notice of an equitable interest to be bound by it.  

The court’s reasoning in Alston is an interesting parallel to the result in McCall in favor of ABB, and provides a clue as to how a bankruptcy court in North Carolina may treat a similar situation: a third party generally will not be responsible for unknown and unnoticed equitable interests in property.