Today's Trends in Credit Regulation

Towing Companies and the Bankruptcy Code's Automatic Stay
By Thomas B. Hudson

One of the principal activities of a bankruptcy court is to sort out the often conflicting claims by various parties to the property that makes up what the Bankruptcy Code refers to as "property of the estate" (just a fancy phrase describing all of the debtor's property that the bankruptcy process is designed to deal with). Repossession companies, I suspect, are infrequent visitors to the bankruptcy courts, so perhaps we can look over the shoulder of one such company that became ensnared in the bankruptcy process in Wisconsin.

Austin Ingram co-owned a truck with his grandmother. The truck was financed by Allied First Bank. Scott Wilson obtained a judgment against Ingram and directed the sheriff to seize the truck to pay off the judgment.

The sheriff had Jensen Towing remove the truck despite Ingram's contentions that the truck was fully encumbered by Allied First's lien. Ingram filed a Chapter 7 bankruptcy petition to get the truck back.

Jensen Towing initially refused to release the truck because Wilson would not authorize the release. Jensen Towing also threatened to sell the truck if its fees were not paid within a certain time. After Wilson authorized the release, Jensen Towing still refused to release the truck until it received storage charges from the date the bankruptcy petition was filed.

Allied First filed a motion in the bankruptcy court against Jensen Towing for violating the "automatic stay." Basically, the "automatic stay" goes into effect when a debtor files for bankruptcy, and it prohibits all parties from exercising any control over the property comprising the bankruptcy estate. Jensen Towing eventually agreed to release the truck a month and a half after the bankruptcy petition was filed, but Allied First, evidently displeased with Jensen Towing's actions (and inactions), continued to pursue the motion for sanctions, punitive damages, and attorneys' fees.

The U.S. Bankruptcy Court for the Eastern District of Wisconsin denied Allied First's motion because there was no violation of the stay. The court found that Jensen Towing did not violate the automatic stay because it had a valid possessory statutory lien on the truck that, to the extent provided by state law, had priority over Allied Bank's lien. Moreover, Jensen Towing's post-petition possession of the truck, which was necessary to perfect its statutory lien, did not violate the stay. Jensen Towing could have been required to return the truck through a turnover action under the Bankruptcy Code, but Jensen would have been entitled to receive reasonable compensation for its services and reimbursement of expenses incurred in holding the truck before doing so. The court did caution that Jensen Towing would have violated the stay if it had gone forward with its threat to sell the truck.

Federal bankruptcy courts are notorious for their varying interpretations of what are supposed to be uniform laws and rules that apply to bankruptcy cases. In addition, an encounter with a bankruptcy court isn't a common occurrence for many towing companies. For both reasons, when you hear the words "bankruptcy court," it's usually worthwhile to give your lawyer a call to avoid scrapes like the one this towing company nearly stumbled into.

In re Ingram, 2014 Bankr. LEXIS 1218 (Bankr. E.D. Wis. March 27, 2014).

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