March 25th, 1998

Precedential

97-6175

                                  United States Court of Appeals,

                                          Eleventh Circuit.

                                             No. 97-6175

                                      Non-Argument Calendar.

                         In Re: Elgin LEWIS and Onetha Lewis, Debtors.

        CHARLES R. HALL MOTORS, INC., d.b.a. C. Hall Motors, Plaintiff-Appellee,

                                                  v.

                       Elgin LEWIS, Onetha Lewis, Defendants-Appellants.

                                           March 25, 1998

Appeal from the United States District Court for the Northern District of Alabama. (No. CV-94-B-
1571-E), Sharon Lovelace Blackburn, Judge.

Before HATCHETT, Chief Judge, and COX and CARNES, Circuit Judges.

       HATCHETT, Chief Judge:

       Appellants-debtors Elgin and Onetha Lewis (the Lewises) appeal the district court's reversal

of the bankruptcy court's entry of judgment in their favor following a non-jury trial in their adversary

proceeding against appellee-creditor Charles R. Hall Motors, Inc. (Hall Motors). Addressing an

issue of first impression concerning Alabama debtors' and secured creditors' rights in personal

property repossessed prior to the filing of a bankruptcy petition, we affirm.

                                         I. BACKGROUND

       In August 1992, Elgin Lewis purchased a used automobile from Hall Motors. Elgin Lewis

agreed to make weekly installment payments and granted to Hall Motors, as collateral, a security

interest in the automobile. In October 1992, Elgin Lewis breached the purchase agreement through

his nonpayment. Soon thereafter, Elgin Lewis and his spouse, Onetha Lewis, filed a joint petition

in the United States Bankruptcy Court for the Northern District of Alabama, seeking relief under
Chapter 13. For reasons unrelated to this appeal, the bankruptcy court dismissed their case on

March 28, 1993.

       On June 2, 1993, upon receiving notice of the Chapter 13 dismissal, Hall Motors repossessed

the automobile.1 Two days later, the Lewises filed a second joint petition for Chapter 13 relief and

listed the automobile in their schedule of assets. Also, in their proposed Chapter 13 plan filed with

their petition and schedules, the Lewises offered to pay to Hall Motors sixty-two cents on the dollar

for the automobile's outstanding secured balance.2

       After Hall Motors refused to return the automobile, the Lewises initiated the instant

adversary proceeding. They sought, among other relief, turnover of the automobile under 

11 U.S.C.

§ 542

(a).3 After conducting a non-jury trial, the bankruptcy court found in favor of the Lewises,

reasoning that under Alabama law, Elgin Lewis had both title and a right of redemption in the

repossessed automobile. The bankruptcy court concluded that the automobile was "property of the

estate" and ordered Hall Motors to return it to the Lewises.4




   1
    The parties do not dispute the lawfulness of the repossession.
   2
    According to the proposed Chapter 13 plan, the trustee would pay $ 20.76 per week for 60
weeks, totaling $ 1,245.60. The purchase agreement, in contrast, called for a total outstanding
secured payment of $ 2,000. In other documents filed contemporaneously with the proposed
plan, Elgin Lewis expressed an intent to "reaffirm" the debt under 

11 U.S.C.A. § 524

(c) (West
1993 & Supp.1997). He did not express an intent to "redeem" the automobile under 

11 U.S.C.A.
§ 722

 (West 1993).
   3
    The Bankruptcy Code's turnover provision provides, in pertinent part, that "an entity ... in
possession, custody, or control, during the case, of property that the trustee may use, sell, or
lease under [

11 U.S.C. § 363

] ... shall deliver to the trustee, and account for such property or the
value of such property...." 

11 U.S.C.A. § 542

(a) (West 1993).
   4
    The bankruptcy court also ordered Hall Motors to pay $ 1,700 in compensatory and $ 7,000
in punitive damages.

                                                 2
       Hall Motors appealed the judgment to the United States District Court for the Northern

District of Alabama. See Charles R. Hall Motors, Inc. v. Lewis (In re Lewis ), 

211 B.R. 970


(N.D.Ala.1997). The district court reversed, holding that under Alabama law, Elgin Lewis had only

a right of redemption in the repossessed automobile, which prevented the automobile from being

property of the estate. 

211 B.R. at 974-75

.

                                              II. ISSUE

       In this appeal, we address whether the district court erred in reversing the bankruptcy court's

judgment requiring Hall Motors to return the automobile that it had repossessed prior to the

commencement of the Lewises' second Chapter 13 case.

                                       III. CONTENTIONS

       The Lewises contend that the repossessed automobile should have been returned because it

was "property of the estate." They argue that under Alabama law, particularly the state's version of

the Uniform Commercial Code, Elgin Lewis retained legal title or an equivalent ownership interest

in the repossessed automobile, in addition to a statutory right of redemption.

       Hall Motors, on the other hand, points to Alabama's law of conversion and argues that Elgin

Lewis lost both title and possession when Hall Motors exercised its contractual right of repossession

on June 2, 1993. Hall Motors further maintains that it had no duty to return the automobile because

the proposed Chapter 13 plan failed to tender the total outstanding secured balance plus expenses.

As a result, Hall Motors contends, Elgin Lewis's statutory right of redemption did not render the

automobile "property of the estate."

                                        IV. DISCUSSION




                                                 3
        Where, as here, the parties contest only issues of law, we review the district court's and

bankruptcy court's conclusions de novo. Levine v. Weissing (In re Levine), 

134 F.3d 1046

, 1049

(11th Cir.1998). Under the Bankruptcy Code, the court may generally order a third party to turn

property in its possession over to the debtor's estate if three primary requirements are met. See 

11

U.S.C.A. §§ 362

(d)(1), 363(b)(1), 363(e), 542(a) (West 1993). First, such property must be

"property of the estate." See 

11 U.S.C.A. §§ 363

(b)(1), 541, 542(a). Second, at the moment the

debtor filed a petition, the debtor must have had a right to use, sell or lease the property. See 

11

U.S.C.A. §§ 301

, 302, 323(a), 541(a), 542(a). Finally, upon request, the court must ensure that the

third party's interest in the property is adequately protected. See 

11 U.S.C.A. §§ 323

(a), 362(d)(1),

363(e), 542(a); Capital Factors, Inc. v. Empire for Him, Inc., 

1 F.3d 1156

, 1160 (11th Cir.1993).

        Our first concern, therefore, is whether the repossessed automobile was "property of the

estate" on June 4, 1993, the date that the Lewises commenced their second Chapter 13 case.

"Property of the estate" is defined broadly to include "all legal or equitable interests of the debtor

in property as of the commencement of the case." 

11 U.S.C.A. § 541

(a)(1); cf. United States v.

Whiting Pools, Inc., 

462 U.S. 198

, 204, 

103 S.Ct. 2309

, 2313, 

76 L.Ed.2d 515

 (1983) (observing in

a Chapter 11 case that "Congress intended a broad range of property to be included in the estate"

because "reorganization ... would have small chance of success ... if property essential to running

the business were excluded from the estate"). Readily apparent from the face of the statute, whether

a debtor's interest constitutes "property of the estate" is a federal question. Southtrust Bank of

Alabama v. Thomas (In re Thomas), 

883 F.2d 991

, 995 (11th Cir.1989), cert. denied, 

497 U.S. 1007

,

110 S.Ct. 3245

, 

111 L.Ed.2d 756

 (1990). As the bankruptcy and district courts correctly stated,




                                                  4
however, "the nature and existence of the [debtor's] right to property is determined by looking at

state law." Thomas, 883 F.2d at 995.

         The parties vigorously contest the nature and existence of Elgin Lewis's ownership interest

in the automobile after Hall Motors repossessed it. Their dispute is not an isolated one. At least in

the Northern District of Alabama, the bankruptcy and district courts are apparently split on this

issue.    See Charles R. Hall Motors, Inc. v. Lewis (In re Lewis ), 

211 B.R. 970

, 974

(N.D.Ala.E.Div.1997) (holding that under Alabama law, a secured creditor has "both legal title to

and right of possession" in a automobile that it repossessed upon the debtor's default). But see

Turner v. DeKalb Bank (In re Turner), 

209 B.R. 558

, 564-68 (Bankr.N.D.Ala.E.Div.1997) (holding

that "the Uniform Commercial Code as adopted by the State of Alabama replaced the common law

by providing the creditor with a right to possession only"); Mattheiss v. Title Loan Express (In re

Mattheiss), 

214 B.R. 20

, 31-32 (Bankr.N.D.Ala.W.Div.1997) (following Turner ).5

         We find no indication, however, that Alabama's state courts are similarly split. In the context

of the closely-related law of conversion, the Alabama Supreme Court has repeatedly stated that a

plaintiff must have both title to and a right of possession in the allegedly converted property to

maintain a claim. See, e.g., Huntsville Golf Development, Inc. v. Ratcliff, Inc., 

646 So.2d 1334

, 1336

(Ala.1994) (plaintiff may prove conversion if he or she can show "that the defendant destroyed or

exercised dominion over property which, at the time of the destruction or exercise of dominion, the

plaintiff had a general or specific title and of which the plaintiff was entitled to immediate

possession"); Roberson v. Ammons, 

477 So.2d 957

, 962 (Ala.1985) ("Legal title with immediate

right of possession by the plaintiffs to the converted property at the time of conversion is a necessary


   5
    The bankruptcy judge in this case also authored Turner.

                                                   5
element of the conversion action."). The court of civil appeals, in turn, has stressed that "[u]pon a

debtor's default, title and right of possession pass to the creditor." American Nat'l Bank & Trust Co.

of Mobile v. Robertson, 

384 So.2d 1122

, 1123 (Ala.Civ.App.1980) (reversing trial court's denial of

secured creditor's motion for directed verdict on debtor's van-conversion claim); Pierce v. Ford

Motor Credit Co., 

373 So.2d 1113

, 1115 (Ala.Civ.App.) (affirming trial court's denial of debtor's

motion for new trial following entry of directed verdict in favor of secured creditor on debtor's

truck-conversion claim), writ denied sub nom., Ex parte Pierce, 

373 So.2d 1115

 (Ala.1979). In a

diversity conversion case, the former Fifth Circuit echoed verbatim these common-law principles.

See Thompson v. Ford Motor Credit Co., 

550 F.2d 256

, 258 (5th Cir.1977) (reversing jury verdict

in favor of debtor on her automobile-conversion claim because "[u]pon default title and the right to

possession pass to the [secured] creditor" under Alabama law).

       Most of these opinions purport to reconcile their outcomes with Alabama's version of Article

9 of the Uniform Commercial Code (U.C.C.), which governs "any transaction (regardless of its

form) which is intended to create a security interest in personal property." Ala.Code § 7-9-102(a)

(1993); see Thompson, 550 F.2d at 258 & n. 1; Robertson, 384 So.2d at 1123-24; Pierce, 373

So.2d at 1115. Being unable to locate any authority to the contrary, we find significant the state

courts' continued reliance on the common law of conversion after the Alabama legislature adopted

the U.C.C. in 1965. See Ala.Code § 7-9-102(a) note (1993). Indeed, the state judiciary has had

ample time and opportunity to reconcile the law in debtors' favor if it so desired. See Ala.Code §

7-9-505(1) (referencing the law of conversion in discussing secured creditors' duties to dispose

timely the repossessed personalty). Both the Lewises and the bankruptcy court in Turner list many

logical reasons why a debtor upon default should lose only his or her right to possess the secured


                                                  6
personalty. See Turner, 

209 B.R. at 564-68

. Nevertheless, their view as to what Alabama's law

should be simply does not comport with what the law is. Accordingly, we conclude that, at the

commencement of the Lewises' second Chapter 13 case, Elgin Lewis did not retain title, possession

or any other functionally equivalent ownership interest in the repossessed automobile.

        Although Elgin Lewis lacked title to or possession of the automobile at the commencement

of the second Chapter 13 case, it is undisputed that he retained a right of redemption pursuant to

Ala.Code § 7-9-506.6 Thus, our second concern is whether his redemption interest under state law

was sufficient to render the automobile "property of the estate" under federal law. In the context of

real property, a prior panel of this court recently stated that Alabama's statutory right of redemption

is "a right that becomes property of the bankruptcy estate under the broad definition provided in

Bankruptcy Code section 541." Commercial Fed. Mortgage Corp. v. Smith (In re Smith), 

85 F.3d

1555

, 1558 (11th Cir.1996); see also Jim Walter Homes, Inc. v. Saylors (In re Saylors), 

869 F.2d

1434

, 1437 (11th Cir.1989) (citing Wragg v. Federal Land Bank of New Orleans, 

317 U.S. 325

, 

63

S.Ct. 273

, 

87 L.Ed. 300

 (1943)). Finding no reason not to extend this principle to personal property,

we readily conclude that Elgin Lewis's statutory right of redemption in the automobile became


   6
    The redemption statute provides as follows:

               At any time before the secured party has disposed of collateral or entered into a
               contract for its disposition under [Ala.Code § 7-9-504] or before the obligation
               has been discharged under [Ala.Code § 7-9-505(2) ] the debtor or any other
               secured party may unless otherwise agreed in writing after default redeem the
               collateral by tendering fulfillment of all obligations secured by the collateral as
               well as the expenses reasonably incurred by the secured party in retaking, holding
               and preparing the collateral for disposition, in arranging for the sale, and to the
               extent provided in the agreement and not prohibited by law, his reasonable
               attorneys' fees and legal expenses.

       Ala.Code § 7-6-506 (1993).

                                                  7
"property of the estate" under 

11 U.S.C. § 541

(a)(1) at the commencement of the case. As such, the

Lewises' Chapter 13 estate, through the trustee, could exercise or "use" this right just as Elgin Lewis

could have. See 

11 U.S.C.A. §§ 301

, 302, 323(a), 541(a), 542(a).

        We are not convinced, however, that the mere existence of the estate's ability to redeem the

automobile renders the automobile itself "property of the estate," at least to the extent that it should

be turned over pursuant to 

11 U.S.C. § 542

(a). In accordance with state law, one must take certain

affirmative steps to change the otherwise dormant right to redeem repossessed collateral into a

meaningful ownership interest. As relevant to this case, the trustee had to "tender[ ] fulfillment of

all [secured] obligations" plus expenses to exercise the estate's right of redemption. Ala.Code § 7-9-

506; cf. Commercial Federal, 

85 F.3d at 1557, 1558, 1561

 (reversing the bankruptcy court's denial

of the mortgagee's motion for relief from the automatic stay where the debtor filed a Chapter 13

petition after the foreclosure sale and the plan proposed simply to reinstate his mortgage payments,

and holding that Alabama's statutory right of redemption "cannot be modified under a Chapter 13

plan, and ... must be exercised as dictated under Alabama law by making a lump sum payment

within one year of the foreclosure sale that includes the principal, interest and other charges under

the mortgage"). But cf. National City Bank v. Elliott (In re Elliott), 

214 B.R. 148

, 150, 152-53

(Bankr.6th Cir.1997) (affirming the bankruptcy court's order to turn over a automobile where the

confirmed Chapter 13 plan provided for "payments over the life of the plan" to the secured creditor,

even though the debtor lacked title or possession and Ohio's redemption statute mirrored that of

Alabama's). At the time of their adversary proceeding, the Lewises' proposed Chapter 13 plan

merely tendered to Hall Motors sixty-two cents on the dollar in return for Elgin Lewis's continued

use of the automobile. Such proposal offered no indication to Hall Motors that the estate had chosen


                                                   8
to exercise its right of redemption, that is, to "fulfill" Elgin Lewis's secured obligation plus expenses

in accordance with Alabama law. See Ala.Code § 7-9-506.7 Nor could the Lewises plausibly

convince us that the proposal adequately protected Hall Motors's ownership and possessory interests

in the automobile. See 

11 U.S.C.A. § 363

(e); Capital Factors, 

1 F.3d at 1160

. Accordingly, we

hold that the Lewises' bankruptcy estate's only interest in the repossessed automobile—a bare right

of redemption—failed to render the automobile "property of the estate" under 

11 U.S.C. § 541

(a)(1)

and subject to turn-over under 

11 U.S.C. § 542

(a).8

        For the foregoing reasons, we affirm the district court's reversal of the judgment of the

bankruptcy court.

        AFFIRMED.




   7
    In fact, we note that Elgin Lewis expressed an intent to "reaffirm" his secured debt
(discharge the original debt and propose a new one) rather than to "redeem" the automobile
(resume the original debt). See 

11 U.S.C.A. §§ 524

(c), 722 (West 1993 & Supp.1997).
   8
    Our holding reconciles with United States v. Whiting Pools, Inc., 

462 U.S. 198

, 

103 S.Ct.
2309

, 

76 L.Ed.2d 515

 (1983). Unlike the IRS tax levy and seizure in Whiting, the repossession
in this case effectively transferred "ownership in the property" from the debtor to the creditor.
See 

462 U.S. at 209

, 

103 S.Ct. at 2315-16

.

                                                   9