## Facts

- Jason Herbst (debtor) executed a security agreement granting Talmer Bank & Trust (bank) a security interest in certain personal property and authorizing the bank, upon default, to repossess and sell the collateral to satisfy the debt.
- After Herbst defaulted, the bank filed a replevin action in Wisconsin state court seeking possession and sale of the collateral.
- The state court entered a default judgment providing the bank was entitled to possess and sell specified collateral and authorizing issuance of a writ of replevin.
- Acting under the writ, the bank repossessed five items of equipment on December 8, 2011, and placed them with an auction house.
- As of the bankruptcy filing, the equipment had not been sold or otherwise disposed of, and there was no contract for disposition.
- On February 29, 2012, Herbst filed a Chapter 13 bankruptcy petition, triggering the automatic stay.
- The bank refused to return the equipment after the filing, asserting that its prepetition seizure and the state-court replevin judgment meant the equipment was not property of the bankruptcy estate.
- Herbst filed a motion in the bankruptcy court (captioned as a motion for contempt and for return of property) alleging the bank’s continued possession violated the automatic stay and requesting turnover and damages, including attorney’s fees and punitive damages.

## Issues

1. Whether equipment repossessed prepetition under a Wisconsin replevin judgment and writ, but not yet sold or otherwise disposed of, remained property of the estate under 11 U.S.C. § 541.
2. Whether the bank’s postpetition refusal to return the repossessed equipment constituted an “act … to exercise control over property of the estate” in violation of 11 U.S.C. § 362(a)(3), and what relief was appropriate.

## Decision

- The court held the repossessed equipment was property of the estate because Herbst retained sufficient rights in the collateral on the petition date, including redemption rights, since no disposition had occurred.
- The court held the bank’s continued postpetition retention of the equipment constituted exercising control over estate property and therefore violated the automatic stay under § 362(a)(3).
- The court ordered the bank to return (turn over) the equipment to the estate.
- The court addressed the debtor’s request for contempt and monetary relief under the standards governing willful stay violations, including potential recovery of actual damages and attorney’s fees if proven.

## Legal Principles

- Property of the estate under 11 U.S.C. § 541 includes all legal and equitable interests the debtor holds at the commencement of the case; state law defines the debtor’s interest, but federal bankruptcy law determines whether that interest becomes estate property.
- A prepetition seizure of collateral transfers possession but does not necessarily transfer ownership; until a secured party disposes of collateral or completes a process that cuts off the debtor’s rights, the debtor may retain interests (including redemption rights) that enter the bankruptcy estate.
- Under Seventh Circuit law (including Thompson v. GMAC, LLC), a secured creditor’s passive retention of estate property repossessed prepetition is an exercise of control prohibited by § 362(a)(3) once the bankruptcy case is filed.
- United States v. Whiting Pools supports turnover of property seized prepetition when the debtor retains ownership interests that become estate property; the Bankruptcy Code’s turnover and adequate-protection scheme replaces creditor self-help once the petition is filed.
- A secured creditor that believes it needs protection must seek relief in the bankruptcy court (such as adequate protection or stay relief) rather than keep possession of estate property after the filing.

## Conclusion

In In re Herbst, the bankruptcy court held that Talmer Bank’s prepetition replevin seizure did not remove the equipment from the Chapter 13 estate because the collateral had not been sold and the debtor retained redemption and related rights; under Seventh Circuit authority, the bank’s continued postpetition retention of the equipment violated § 362(a)(3), requiring turnover and leaving the bank potentially liable for stay-violation damages upon proof.


In re Herbst, 469 B.R. 299 (2012)