In City of Chicago v. Fulton, No. 19-357 (U.S. Jan. 14, 2021) the Supreme Court of the United States reversed a series of lower court rulings finding that the City of Chicago did not violate the bankruptcy code’s automatic stay provision when it refused to return vehicles to Chapter 13 debtors that had been impounded prior to the debtors’ filing bankruptcy.
When a debtor files a petition for bankruptcy, the Bankruptcy Code protects the debtor’s interests by imposing an automatic stay on efforts to collect prepetition debts outside the bankruptcy forum. Those prohibited efforts include “any act . . . to exercise control over property” of the bankruptcy estate.
In Fulton, the City of Chicago had impounded each debtor’s vehicle for failure to pay fines for motor vehicle infractions. Each debtor filed a Chapter 13 bankruptcy petition and requested that the City return his or her vehicle. The City refused, and in each case the bankruptcy court held that the City’s refusal violated the automatic stay. The Seventh Circuit Court of Appeals affirmed all of the judgments in a consolidated opinion concluding that “by retaining possession of the debtors’ vehicles after they declared bankruptcy,” the City had acted “to exercise control over” debtors’ property in violation of the stay. The United States Supreme Court granted certiorari to resolve a split within the Circuits on the precise issue as to whether an entity violates the automatic stay by retaining possession of a debtor’s property after a bankruptcy petition is filed.
The Supreme Court held that merely retaining the property does not violate the automatic stay.
First, the Supreme Court looked to the language of §362(a)(3) that the filing of the petition operates as a “stay” of “any act” to “exercise control” over the property of the estate. Taken together, the most natural reading of those terms is that this section prohibits affirmative acts that would disturb the status quo as of the time the bankruptcy petition is filed. Thus, the Supreme Court found the language of §362(a)(3) to mean that something more than merely retaining possession is required to violate the stay.
Next, the Supreme Court looked to §542 of the Code, which provides that an entity in possession of property of the bankruptcy estate “shall deliver to the trustee, and account for” that property and carves out certain exceptions to the turnover obligation. Reading §362(a)(3) to cover the mere retention of property would create two issues. First, it would render §542’s command to “deliver to the trustee…such property” largely superfluous, even though §542 is the provision governing the turnover of property. Second, it would render the commands of §362(a)(3) and §542 contradictory as it would require an entity to turn over property under §362(a)(3) even if that property were exempt from turnover under §542.
Finally, the Supreme Court looked to the history of the Code to support its decision. The Code, it noted, originally included both §362(a)(3) and §542(a), but the former provision lacked the phrase “or to exercise control over property of the estate.” When that phrase was later added by amendment, Congress made no mention of transforming §362(a)(3) into an affirmative obligation to turn over property. The Supreme Court found it unlikely that Congress would have made such an important change simply by adding the phrase “exercise control,” rather than by adding a cross-reference to §542(a) or some other indication that it was so transforming §362(a)(3). For all of these reasons, the Supreme Court held that the City had not violated the automatic stay by retaining possession of the vehicles after the filing of the bankruptcy petitions.Download Related Document