Chicago v. Fulton
592 U. S. ____ (2021) (2021)
Premium Feature
Subscribe to Lexplug to listen to the Case Podcast.
Rule of Law:
The mere retention of estate property by a creditor after a debtor files for bankruptcy does not violate the automatic stay provision of 11 U.S.C. §362(a)(3), which prohibits affirmative acts to exercise control over property of the estate.
Facts:
- The City of Chicago (City) impounded vehicles belonging to Robbin L. Fulton and other individuals (respondents) due to their failure to pay fines for various motor vehicle infractions.
- Each respondent subsequently filed a petition for Chapter 13 bankruptcy.
- Upon filing for bankruptcy, each respondent requested that the City return their impounded vehicle.
- The City refused to return the vehicles to the respondents.
Procedural Posture:
- The City of Chicago impounded vehicles from respondents for unpaid motor vehicle fines.
- Respondents each filed Chapter 13 bankruptcy petitions in bankruptcy courts.
- The bankruptcy courts held that the City of Chicago's refusal to return the vehicles violated the automatic stay under 11 U.S.C. §362(a)(3).
- The U.S. Court of Appeals for the Seventh Circuit affirmed the bankruptcy courts' judgments in a consolidated opinion, concluding that the City's retention of vehicles constituted an 'act to exercise control over' respondents’ property in violation of §362(a)(3).
- The City of Chicago (petitioner) sought certiorari from the Supreme Court to resolve a split among the circuit courts on this issue.
Premium Content
Subscribe to Lexplug to view the complete brief
You're viewing a preview with Rule of Law, Facts, and Procedural Posture
Issue:
Does an entity violate 11 U.S.C. §362(a)(3) of the Bankruptcy Code by merely retaining possession of a debtor’s property that was lawfully seized prior to the debtor filing a bankruptcy petition?
Opinions:
Majority - Justice Alito
No, the mere retention of estate property after the filing of a bankruptcy petition does not violate §362(a)(3) of the Bankruptcy Code. The Court reasoned that the most natural reading of the terms “stay,” “act,” and “exercise control” in §362(a)(3) suggests that the provision prohibits affirmative acts that would disturb the status quo of estate property at the time of the bankruptcy filing, rather than imposing an affirmative obligation to turn over property. The Court further noted that interpreting §362(a)(3) to cover mere retention would render 11 U.S.C. §542, which specifically governs the turnover of estate property, largely superfluous and would create contradictions because §542 includes exceptions to turnover not present in §362(a)(3). The legislative history also supports this interpretation; when the phrase “or to exercise control over property of the estate” was added to §362(a)(3) in 1984, Congress did not indicate an intent to transform it into a turnover obligation, which would have been a significant change typically requiring a cross-reference to §542(a).
Concurring - Justice Sotomayor
Justice Sotomayor concurred, agreeing that §362(a)(3) does not cover a creditor’s passive retention of property lawfully seized pre-bankruptcy. However, she emphasized that the Court’s decision was limited to §362(a)(3) and did not address whether other provisions of §362(a) (such as (a)(4) or (a)(6)) or the mandatory turnover obligation under §542(a) might require creditors to return a debtor’s property. She highlighted that the 'fresh start' principle of the Bankruptcy Code, particularly for Chapter 13 debtors, is undermined when essential property like a vehicle is withheld. While §542(a) imposes a turnover duty, she noted that the process can be slow due to requirements for adversary proceedings, suggesting that rule drafters or Congress should consider amendments to ensure prompt resolution of debtors' requests for turnover under §542(a), especially for vehicles needed for employment.
Analysis:
This decision clarifies the scope of the automatic stay under 11 U.S.C. §362(a)(3), establishing a critical distinction between prohibiting affirmative acts that disturb the status quo and imposing an affirmative obligation to return property. By affirming that §362(a)(3) is not a turnover provision, the Court solidifies 11 U.S.C. §542(a) as the primary legal mechanism for debtors or trustees to compel the return of estate property. The ruling may necessitate debtors to proactively initiate turnover proceedings under §542(a) rather than relying solely on the automatic stay, potentially increasing the procedural burden and time for recovering seized assets, especially for essential items like vehicles, as highlighted by the concurring opinion.
