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The Supreme Court Holds That Passive Retention Of Estate Property Does Not Violate The Automatic Stay, But Stay Tuned . . .

By unanimous opinion, the United States Supreme Court in City of Chicago, IL v. Fulton, 592 U.S. ___ 2021 (January 14, 2021), held that the City of Chicago’s retention of debtors’ vehicles impounded for unpaid fines for motor vehicle infractions did not constitute a violation of the Automatic Stay under 11 U.S.C. § 362(a)(3). Several debtors, whose vehicles had been impounded by the City of Chicago, had filed chapter 13 bankruptcy cases and requested that their vehicles be returned to them. Each of the bankruptcy courts determined that the City’s refusal to return the vehicles constituted a violation of the Automatic Stay (11 U.S.C. § 362(a)(3)). The Seventh Circuit Court of Appeals affirmed, holding that, by retaining possession, the City acted to “exercise control over” the vehicles in violation of § 362(a)(3). In a very narrow analysis, the Supreme Court vacated the lower court decisions in concluding that the City’s act of retaining the vehicles did not disrupt the status quo necessary to cause a violation of § 362(a)(3).

A violation of the Automatic Stay does not necessarily constitute turnover of estate property.

Justice Alito, who delivered the opinion, pointed to the distinctions between §§ 362(a)(3) and 542(a). Section 542(a) requires, with a few exceptions, that a person or entity in possession of property of the estate deliver such property to the trustee. Section 362 imposes a stay against any acts to preserve estate assets by prohibiting creditors from pursuing claims against estate property. In particular, § 362(a)(3) prohibits “any act to obtain possession of property of the estate . . . or to exercise control over property of the estate.” Justice Alito concludes that the operative words of § 362(a)(3) are “stay”, “act” and “exercise control”, and that the natural reading of these terms is to prohibit the affirmative acts that would disturb the status quo of the estate property as of the filing date. The Court found that § 362(a)(3), in and of itself, does not require the turnover of estate property as that would render § 542(a) superfluous.

The better account of the two provisions is that §362(a)(3) prohibits collection efforts outside the bankruptcy proceeding that would change the status quo, while §542(a) works within the bankruptcy process to draw far-flung estate property back into the hands of the debtor or trustee.

In limiting its ruling to whether the City had violated § 362(a)(3), the Court stated: “We hold only that mere retention of estate property after the filing of a bankruptcy petition does not violate §362(a)(3) of the Bankruptcy Code.”

Justice Sotomayor concurs but suggests the Court could have given further guidance.

Justice Sotomayor concurred by agreeing with the Court’s opinion but adding that the Court did not address other Code sections that the City may have violated or would have compelled release of the vehicles.

[W]hen a creditor has taken possession of a debtor’s property, § 362(a)(3) does not require the creditor to return the property upon the filing of a bankruptcy petition. I write separately to emphasize that the Court has not decided whether and when § 362(a)’s other provisions may require a creditor to return a debtor’s property. . . . Nor has the Court addressed how bankruptcy courts should go about enforcing creditors’ separate obligation to “deliver” estate property to the trustee or debtor under §542(a).

The turnover process under § 542(a) needs to be adjusted.

Justice Sotomayor went on to explain that a vehicle may be very important to a chapter 13 debtor who would need transportation to get to work. Chapter 13 requires a debtor to have regular income and if that is interrupted by the debtor not having access to a vehicle, a debtor may be denied the ability to achieve a fresh start. She further points out that the Court left open the possibility of relief under § 542(a), which requires turnover of property belonging to the estate, however, such turnover would likely be accompanied by a demand for adequate protection pursuant to § 363(e). Another drawback may be that the process of obtaining turnover under § 542(a) can be costly and slow. While some courts allow turnover to be accomplished by the filing of a motion, the Bankruptcy Rules provide that the process governed by the filing of an adversary proceeding, the resolution of which can take about 100 days or more. Such a cost and delay would be prejudicial to a chapter 13 debtor in need of transportation.

Justice Sotomayor concludes by suggesting that it is up to the Advisory Committee on Rules of Bankruptcy Procedure or Congress to consider amendments to ensure the prompt resolution of turnover matters.

In Conclusion.

Once again, the Supreme Court has issued a very narrow ruling and isolated an issue, thus leaving debtors and creditors in limbo by cryptically suggesting that other statutes may provide for the relief sought by the various chapter 13 debtors, even though some of those debtors may have raised such issues below. It would seem likely that the debtors’ motivation in bringing their actions was to recover their vehicles and not to seek sanctions or obtain a declaration that the City had violated the Automatic Stay. Because the lower court decisions focused primarily on finding that the City violated § 362(a)(3), the Supreme Court limited its ruling on the same, but did remand the case back for further proceedings. Depending on the staying power of the debtors, it is likely that on remand, the debtors may attempt to get the bankruptcy court to focus on § 542(a) and/or other subsections of § 362 as alternative means of accomplishing the goal of recovering their vehicles. Stay Tuned!
For now, however, it appears that one who is in possession of estate property prior to the filing of a bankruptcy case will not be liable for violating the Automatic Stay by passively retaining such property pursuant to § 362(a)(3), but watch out if a debtor has the basis to allege a violation under another subsection of § 362.

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