## Facts

- Norman Cordle sold insurance for the Farmers Insurance Group of Companies (Farmers) under an “appointment contract.”
- The appointment contract provided that, if the contract were terminated, Farmers would make certain payments to Cordle under the contract’s termination provisions.
- Cordle borrowed roughly $50,000 from Farmers Insurance Credit Union (the credit union) and granted the credit union a security interest in the appointment contract.
- The credit union perfected its security interest.
- In March 1995, Cordle filed a Chapter 7 bankruptcy petition.
- After filing, Cordle terminated the appointment contract and instructed Farmers to pay the amounts due under the termination provisions directly to the credit union to repay the loan.
- Farmers requested a payoff demand from the credit union, and the credit union provided a demand of about $47,000, despite having notice of the bankruptcy before receiving Farmers’ request.
- Farmers paid the credit union approximately $47,000 postpetition.
- The Chapter 7 trustee demanded that the credit union turn over the $47,000 as estate property and represented that the credit union’s rights in the funds would be preserved in the bankruptcy case.
- The credit union refused turnover and instead sought relief from the automatic stay, asking the bankruptcy court to confirm that it could retain the funds; the trustee sought a ruling that the credit union’s retention violated the stay and warranted sanctions.
- The bankruptcy court ruled against the credit union and imposed sanctions; the credit union appealed to the Bankruptcy Appellate Panel (BAP) for the Ninth Circuit.

## Issues

1. Whether the postpetition termination-related payment derived from the debtor’s appointment contract was property of the estate under 11 U.S.C. § 541, even though it was subject to the credit union’s perfected security interest.
2. Whether the credit union’s postpetition retention of the $47,000, after notice of the bankruptcy and the trustee’s demand, constituted an “act to exercise control” over estate property in violation of 11 U.S.C. § 362(a)(3), as opposed to a dispute governed by turnover under 11 U.S.C. § 542.
3. Whether sanctions under former 11 U.S.C. § 362(h) (now § 362(k)) could be imposed on the credit union for a willful violation based on its refusal to turn over the funds while seeking court authorization to retain them.

## Decision

- The BAP reversed the bankruptcy court’s ruling that the credit union willfully violated the automatic stay by retaining the $47,000.
- The BAP held that, in this context, the trustee’s demand for the funds raised a turnover dispute that should be resolved through bankruptcy procedures (including turnover and adequate protection), rather than by treating the creditor’s retention as a sanctionable stay violation.
- Because the BAP found no basis for stay-violation sanctions on these facts, it vacated the fee-and-cost award entered under former § 362(h) and remanded for further proceedings consistent with its opinion.

## Legal Principles

- Contract rights existing at the petition date, and postpetition payments traceable to those rights, can constitute property of the estate under § 541, even when encumbered by a valid, perfected lien.
- A perfected security interest does not remove collateral from the estate; it generally gives the creditor a lien interest that is addressed through the bankruptcy case (including adequate protection and lien-recognition procedures).
- The automatic stay and the turnover statute serve different functions: § 362 restrains collection and enforcement acts, while § 542 supplies a mechanism for obtaining property for administration, subject to the creditor’s rights and protections provided by the Code.
- Sanctions under former § 362(h) require a stay violation; where the creditor’s conduct is treated as a turnover dispute to be resolved by court order rather than as an act barred by § 362(a), sanctions are not appropriate on that theory alone.
- When a secured creditor has a colorable, perfected claim to disputed funds and seeks judicial determination of its right to retain them, the dispute is ordinarily handled through the court’s adjudication of turnover, lien validity, and adequate protection rather than through punitive remedies for stay violations.

## Conclusion

In re Cordle involved a Chapter 7 trustee’s effort to recover about $47,000 in postpetition termination-related payments made by Farmers to a credit union holding a perfected security interest in the debtor’s appointment contract. Although the trustee demanded turnover and offered to preserve the lien, the credit union retained the funds and asked the court to confirm its right to do so. On appeal, the Ninth Circuit BAP reversed the bankruptcy court’s sanctions order, treating the matter as a turnover-and-lien dispute to be resolved through bankruptcy procedures rather than as a willful automatic-stay violation warranting damages under former § 362(h).


In re Cordle, 187 B.R. 1 (1995)