Corvette on display at the Paris Motor Show on Oct. 13, 2008. Photo: Shutterstock

Joy Denby-Peterson likely didn't know her yellow Chevrolet Corvette would be a catalyst for shaping how bankruptcy cases are handled. But a federal appeals court case involving the car proved just that.

In an issue of first impression, the U.S. Court of Appeals for the Third Circuit tackled the question of whether a car dealership violated the law by not immediately returning Denby-Peterson's repossessed 2008 Corvette after she filed for bankruptcy.

Denby-Peterson argued that the dealership's refusal to return the car violated the automatic stay provided for in the U.S. Bankruptcy Code, which halts creditors' attempts to collect once bankruptcy is declared.

But was that case in Denby-Peterson's bankruptcy?

"We answer in the negative," Judge Julio Fuentes wrote in the court's opinion Monday, "and thus join the minority of our sister courts—the Tenth and D.C. Circuits—in holding that a secured creditor does not have an affirmative obligation under the automatic stay to return a debtor's collateral to the bankruptcy estate immediately upon notice of the debtor's bankruptcy because failure to return the collateral received pre-petition does not constitute 'an[] act … to exercise control over property of the estate.'"

Denby-Peterson purchased the Corvette in 2016 at Pine Valley Motors in Berlin, according to Fuentes. After the car was repossessed, Denby-Peterson filed a motion for turnover in the bankruptcy court, which ordered the return of the Corvette but denied her request for sanctions. U.S. District Judge Noel Hillman of the District of New Jersey affirmed.

Denby-Peterson appealed, but the Third Circuit upheld ruling below.

"Here, a post-petition affirmative act to exercise control over the Corvette is not present. The creditors repossessed the Corvette before Denby-Peterson had filed for bankruptcy," Fuentes said. "Accordingly, pre-bankruptcy petition, the creditors had possession and control of the Corvette, and post-bankruptcy petition, the creditors merely passively retained that same possession and control.

He added, "Although the creditors exercised control over the Corvette by keeping it in their possession after learning of the bankruptcy filing, the requisite postpetition affirmative 'act … to exercise control over' the Corvette is not present in this case."

Fuentes said Congress didn't intend for the statute to prohibit creditors' passive retention of property seized prior to the filing of bankruptcy.

"Both the Federal Rules of Bankruptcy Procedure and the text of the turnover provision support our conclusion by demonstrating that the debtor's right to turnover is subject to substantive and procedural requirements that must be evaluated by the Bankruptcy Court," Fuentes said. "It is only after the Bankruptcy Court determines whether those requirements are met that the debtor's right to turnover is triggered."

Ellen M. McDowell of McDowell Law represents Denby-Peterson and did not respond to a request for comment.

Pine Valley's attorney, David Snyder, said, "I am happy that the Third Circuit affirmed the lower court's ruling in regard to this matter "