- Bonial & Associates, P.C.
City of Chicago v. Fulton Supreme Court Decision
The Supreme Court of the United States has handed down their unanimous opinion in the widely anticipated case of City of Chicago, Illinois v. Fulton, et al. The City of Chicago faced sanctions for violations of the automatic stay for refusing to return vehicles impounded after the debtors filed for bankruptcy. The Bankruptcy Court found that the City of Chicago violated the stay when they failed to turn over the vehicles, and the Seventh Circuit Court Appeals upheld the Bankruptcy Court’s ruling. The City of Chicago asked for the Supreme Court to hear the case, and the Supreme Court granted Certiorari.
The opinion is written by Justice Alito, in which all other Justices joined, except Justice Barrett, who took no part in the consideration or decision of the case. Justice Sotomayor wrote a concurring opinion.
The issue in the Supreme Court case was whether any entity violates the automatic stay under Section 362(a)(3)¹ of the Bankruptcy Code by retaining possession of the debtor’s property after a bankruptcy petition is filed. The Supreme Court held that the mere retention of property does not violate Section 362(a)(3). The Court went on to say, “Under that provision, the filing of a bankruptcy petition operates as a ‘stay’ of ‘any act’ to ‘exercise control’ over the property of the estate. Taken together, the most natural reading of these terms is that Section 362(a)(3) prohibits affirmative acts that would disturb the status quo of estate property as of the time when the bankruptcy petition was filed.”
The Supreme Court’s decision resolves a split in the Circuit Courts over whether an entity that retains possession of property of a bankruptcy estate violates Section 362(a)(3). This decision falls in line with rulings from the 3rd Circuit (In re Denby-Peterson, 941 F.3d 115), 10th Circuit (In re Cowen, 849 F.3d 943), and DC Circuit (In re Inslaw, 932 F.2d 1467), which previously held the Bankruptcy Code’s stay provision prohibiting any post-petition act to “obtain possession of property of the estate or of property from the estate or to exercise control over property of the estate” prohibited only affirmative acts to gain possession of, or to exercise control over, estate property, and did not prohibit secured creditors from passively retaining possession of collateral repossessed pre-petition.
Justice Sotomayor’s concurring opinion agreed with the Court’s opinion regarding the fact that “the phrase ‘exercise control over’ does not cover a creditor’s passive retention of property lawfully seized pre-bankruptcy.” She stated, “Hence, when a creditor has taken possession of a debtor’s property, Section 362(a)(3) does not require the creditor to return the property upon the filing of a bankruptcy petition.” Justice Sotomayor explains that her decision to write a separate concurring opinion was in order to emphasize the limited scope of the Court’s opinion. She stressed that there are other issues and circumstances that may require a creditor to return property once a bankruptcy is filed. She also points out that the Supreme Court is not addressing how bankruptcy courts are to go about enforcing creditors’ potential obligation to deliver estate property to the trustee or debtor should that be required under Section 542(a)². Justice Sotomayor, while agreeing that under the letter of the law there was no violation of the stay, notes that the practice of not returning a vehicle “hardly comports with its spirit.” She expressed concern that many debtors need vehicles in order to get to work and make regular income to fund their Chapter 13 Plans. Finally, she outlines that while the decision holds that Section 362(a)(3) does not require creditors to turn over vehicles, “bankruptcy courts are not powerless to facilitate the return of debtors’ vehicles to their owners.” Specifically, debtors still have the ability to file a Motion for Turnover of the vehicle or Adversary, depending on the jurisdiction.
While the practical application of this ruling in jurisdictions that previously had contradictory rulings is yet to be seen, we do know that some are already forming committees of bankruptcy attorneys, trustees, and Judges to compile thoughts, implications, and suggestions for dealing with the decision. We may also see memos and/or standing orders from Bankruptcy Courts outlining procedures for turnovers in light of the decision.
Overall, this opinion is good news for creditors. This decision takes away the fear of sanctions and stay violations when a creditor does not turn over a vehicle that was lawfully repossessed pre petition. It gives the creditor time to determine whether they are adequately protected, and if so, work with the debtor to get their vehicle back, and if not, move for relief from the automatic stay (all without worrying about dealing with sanctions motions). Debtors continue to have recourse to get their vehicle back through a Motion for Turnover or adversary proceedings. We will continue to monitor for updates on the implications of this case as the news of the opinion spreads through the bankruptcy world. However, we wanted to make our clients aware of this very important Supreme Court decision.
If you have questions or concerns, please reach out to me.
Jennifer H. Brown
Bonial & Associates, P.C.
¹ 11. U.S. C § 362(a)(3) reads, “(a) Except as provided by subsection (b) of this section, a petition filed under section 301, 302, 303 of this title, or an application filed under section 5(a)(3) of the Securities Investor Protection Act of 1970, operates as a stay, applicable to all entities, of – (3) any act to obtain possession of property of the estate or of property from the estate or to exercise control over property of the estate.”
² 11 U.S.C. § 542(a) reads “Except as provided in subsection (c) or (d) of this section, an entity, other than a custodian, in possession, custody, or control, during the case, of property that the trustee may use, sell, or lease under section 363 of this title, or that the debtor may exempt under section 522 of this title, shall deliver to the trustee, and account for, such property or the value of such property, unless such property is of inconsequential value or benefit to the estate.”