Supreme Court Finds Mere Retention of Debtor’s Personal Property Does Not Violate the Automatic Stay

By Roger Cox *

 

The Headline

            The United States Supreme Court recently held that retention of a Debtor’s impounded personal property by the City of Chicago did not constitute a violation of the Automatic Stay found at Section 362 of the Bankruptcy Code.  This should resolve a split among Circuit level court regarding whether a creditor’s mere retention of bankruptcy estate property (in the absence of other, affirmative action) violates the automatic stay.

The Case

City of Chicago v. Fulton, 592 U.S. _____, 141 S.Ct. 585 (2021).

The Facts

            The Fulton case arose from four separate bankruptcy cases.   In each case, the City of Chicago had impounded a Debtor’s vehicle due to unpaid fines for motor vehicle infractions.  Each Debtor filed a voluntary Chapter 13 case, and requested return of the vehicle. 

            The City refused to return the vehicles, and the bankruptcy court sanctioned the City for violating Section 362’s automatic stay.  This was affirmed by the 7th Circuit, which joined an apparent majority of Circuit courts, affectively finding that the City had acted “to exercise control over property of the estate, violating the automatic stay.”  The lower court also referenced Section 542(a) of the Bankruptcy Code, which generally mandates that a person in possession of estate property must deliver such property to the Trustee. 

The Supreme Court’s Disposition

            A unanimous Supreme Court reversed the 7th Circuit.  In Justice Alito’s opinion, the Court reasoned that the Automatic Stay effectively prohibits only “affirmative acts” that would otherwise alter the status quo.  That would not include mere retention of property.  The Court further found that Section 362 and Section 542 do not effectively act in tandem to create an affirmative obligation to turn over estate property.  Note, however, that the Court expressly declined comment on Section 542’s turnover dynamics.

Our Take

            This is an admittedly narrow decision, and it does not address other aspects of Section 362 or 542.  There may be other actions that a creditor takes, for example, while in possession of estate property that could cross the line and constitute an affirmative action to collect a debt.  Therefore, creditors must still exercise due care when faced with this situation.

            On the other hand, this may resolve, at least in the initial phase of a case, the dilemma faced by many creditors under the previous split in Circuit authority.  Arguably, this could allow for some breathing room to address issues like adequate protection and other issues of concern to secured creditors when forced to surrender property back to a debtor.  The possessory mechanic’s lien claimant and others similarly situated may also find at least some short term relief. 

            In our view, however, additional steps to dispose of any property caught up in such a situation may well implicate the Automatic Stay.  Therefore, creditors in such a position are well advised to seek appropriate relief from the bankruptcy court, as quickly as reasonably possible.  This would include at a minimum, seeking relief from the Automatic Stay before taking any further steps to dispose of the property.

 

 

*Roger Cox is the author of Cox’s Texas Creditors Rights Laws Annotated (Thomson Reuters 2019-21), and a former contributor to the SMU Law Review.  He is Board Certified in Business Bankruptcy Law, Commercial Real Estate Law, and Farm & Ranch Real Estate Law by the Texas Board of Legal Specialization.  Underwood has offices in Amarillo, Austin, Fort Worth, Lubbock, and Pampa. This article is for general and academic information only and is not intended as legal advice or as a specific position asserted on behalf of any existing or future client of the firm.