On January 14, 2021, the Supreme Court of the United States decided City of Chicago, Illinois v. Fulton. Therein, the Court considered whether the City of Chicago’s tacit retention of automobiles impounded prepetition for failure to pay outstanding parking fines amounted to “any act . . . to exercise control over property” under section 362(a)(3) of the Bankruptcy Code. The Court, in an 8-0 opinion authored by Justice Samuel Alito, held that “mere retention of property” does not violate the automatic stay.
Fulton came to the Court on writ of certiorari as a consolidated bankruptcy appeal from the Seventh Circuit. Below, the Seventh Circuit held that the City of Chicago violated the automatic stay by refusing to release impounded vehicles owned by Chapter 13 debtors because such retention amounted to an exercise of “control” over property of the bankruptcy estates. In re Fulton, 926 F.3d 916 (7th Cir. 2019). In each instance, the city impounded the debtor’s car prepetition and refused to release it postpetition. In so holding, the Seventh Circuit cemented a “circuit split” with, among other courts, the Third Circuit, which held in a 2019 case that passive retention over a vehicle repossessed prepetition does not amount to a violation of the automatic stay and, therefore, the creditor in possession of the property was not compelled to turn it over to the bankruptcy estate. In re Denby-Peterson, 941 F.3d 115 (3d Cir. 2019). The Court’s Fulton decision decided the split in favor of the position espoused by the Third Circuit.
In reaching its conclusion, the Court homed in on the terms “stay,” “act” and “exercise control,” as each appears in section 362(a)(3) of the Bankruptcy Code. Focusing on common usage, the Court defined “stay” to mean “an order that suspends judicial alteration of the status quo,” “act” to mean “something done or performed . . . ; a deed,” and “exercise control” to mean “to put in practice or carry out some action.” “Taken together,” the Court explained, “the most natural reading of these terms—‘stay,’ ‘act,’ and ‘exercise control’—is that § 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.” Ultimately, the Court held that, at the confluence of these three terms, section 362(a)(3) “halts any affirmative act that would alter the status quo as of the time of the filing of a bankruptcy petition.”
The Court provided additional reasoning in support of its holding, offering:
(i) in some instances, an omission can constitute an “act,” so as to trigger this analysis of section 362(a)(3), and
(ii) the existence of section 542 of the Bankruptcy Code (entitled “Turnover of property to the estate”) indicates that any ambiguity in section 362(a)(3) is “resoled decidedly in the City’s favor.”
Insofar as omissions that qualify as “acts,” the Court opined that “something more than merely retaining power is required to violate” section 362(a)(3), and that this “something more” may be accomplished by establishing an omission as an “act . . . to exercise control over property.” Regarding section 362(a)(3)’s interplay with section 542, the Court reasoned that, if section 362(a)(3) were to require an entity “affirmatively to relinquish control of the debtor’s property at the moment a bankruptcy petition is filed,” such an interpretation would render the provision that specifically governs turnover (section 542) mere surplusage.
Finally, the Court paid credence to the history of sections 362 and 542 of the Bankruptcy Code. Citing the Bankruptcy Amendments and Federal Judgeship Act of 1984, Justice Alito concluded that, “[h]ad Congress wanted to make § 362(a)(3) an enforcement arm of sorts for § 542(a), the least one would expect would be a cross-reference to the latter provision, but Congress did not include such a cross-reference or provide any other indication that it was transforming § 362(a)(3).” At bottom, the Court held that the automatic stay does not compel return of property seized, impounded, or otherwise taken prepetition—at least in the context of Chapter 13 bankruptcies—but rather that mere retention of property postpetition does not violate section 362 of the Bankruptcy Code.
In practice, the Court’s decision in Fulton provides great clarity to how entities that repossess vehicles of insolvent borrowers prepetition should operate upon a debtor’s filing for bankruptcy relief. Under the Court’s reading of section 362 of the Bankruptcy Code, a party in possession of a repossessed vehicle sitting idly in a garage, lot or other facility or place is not compelled to turn the vehicle over to the trustee as a consequence of the debtor’s bankruptcy petition. Instead, turnover must be ordered by the bankruptcy court. In other words, creditors merely in possession of vehicles that were repossessed before bankruptcy was filed are under no obligation to hand the keys over to the debtor or trustee until the presiding bankruptcy court says to do so in an order under section 542 of the Bankruptcy Code.
Creditors should nonetheless remain careful with seized property and watch for potential requirements of other Bankruptcy Code provisions as well as any further legislative developments in this area. We will continue to provide additional information and guidance as necessary.
Author Corinne Brennan is a partner in the bankruptcy and restructuring department at Klehr Harrison.