Do You Need To Return Property Taken Prior To A Bankruptcy Filing? U.S. Supreme Court Decides the Issue in City of Chicago v. Fulton

Do You Need To Return Property Taken Prior To A Bankruptcy Filing? U.S. Supreme Court Decides the Issue in City of Chicago v. Fulton
by Tom Canary

In a much anticipated ruling, the U.S. Supreme Court decided that the mere retention of estate property after the filing of a bankruptcy petition does not violate the automatic stay imposed by 11 U.S.C. §362(d)(3). Newly appointed Justice Barrett did not take part in the consideration of the case, nor the decision. Of the remaining eight Justices, seven joined the majority opinion authored by Justice Alito, while Justice Sotomayor filed a concurring opinion.  In essence, this is a unanimous decision on the issue.  City of Chicago. v. Fulton, Sup.Ct. No. 19-357, 592 U.S. ____, 2021 U.S. LEXIS 496 (Jan. 14, 2021).

The case arose out of multiple bankruptcies where the debtors’ vehicles were impounded by the City of Chicago for failure to pay fines for motor vehicle infractions. Demand was made in each case by the debtors to turn over the property which the City refused. The Bankruptcy Court found and the Seventh Circuit confirmed the City’s refusal was an act to exercise control property belonging to the debtors in violation of automatic stay provision found in §362(a)(3).

On appeal, the U.S. Supreme Court vacated and reversed the decision of the Seventh Circuit and held that mere retention of property does not violate §362(a)(3).  Fulton at *4. The Court found the prohibition of exercising control over property of the estate requires an affirmative act.  Passively refusing to turn over property at the request of the debtor is not tantamount to violating the stay. The Court reached its’ conclusion by separately analyzing the words “stay,” “act,” and “exercise.” Notably, the High Court defined “act” as ‘[s]omething done or performed…; a deed’ and “exercise” as to put in practice or carry out in action.’”  Fulton at *7.

In interpreting these terms, the Court turned to §542(a) of the Bankruptcy Code requiring turnover of property of the estate to a trustee, not to a debtor.  To rule otherwise, the Court opined, would render §542 largely superfluous by requiring turnover at the moment a bankruptcy petition is filed.  Fulton at *8-9.  This would make §362 the chief section requiring turnover contrary to the statutory scheme of the Bankruptcy Code.

Additionally, the Court noted §542 does not mandate turnover. Further, it contains exceptions pertaining to property of inconsequential value or benefit to the estate. Interpreting §362(a)(3) to require turnover in these cases would create a conflict between the two statutes. This is especially true in a Chapter 7 case when the consumer owes more than the vehicle is worth.  The trustee would never request turnover in a case like that. To bootstrap §363(a)(3) to require turnover would be creating an exception to the exception. Adding the language “or to exercise control over property of the estate” to §362(a) in 1984 Amendments to the Bankruptcy Code did not turn the automatic stay statue into an automatic turnover statute.

The majority opinion stated that its decision does not settle the meaning of other subsections of §362(a)(3).  This is the emphasis of Justice Sotomayor’s concurring opinion. Specifically, she addressed§§362(a)(4), (6) which prohibit “any act to create, perfect, or enforce any lien against property of the estate” and “any act to collect, assess, or recover a claim against [a] debtor” that arose prior to bankruptcy proceedings. Fulton at *13.

So, where does this leave us?  It answers the question in Chapter 7 cases where there is no equity in the vehicle for the benefit of the property of the estate over the amount due the creditor and exemptions. Clearly, this falls squarely in the exception found in §542(a).

As to Chapter 13 cases, the vehicle can be vital to the success of the plan. Turnover may be warranted, but as Justice Sotomayor notes: “The debtor, in turn, must be able to provide the creditor with “adequate protection” of its interest in the returned property, §363(e); for example, the debtor may need to demonstrate that her car is sufficiently insured…and the debtor’s secured creditor, for its part, receives “adequate protection [to] replace the protection afforded by possession.”  Fulton at *16 [citations omitted]. If a motion for turnover is made, this ruling should require the debtor to provide proof of full coverage insurance with the lienholder as the loss payee.  Whether that may also include repossession, storage, and other related costs is likely to be a court-by-court decision.

It is expected that debtors’ attorneys will attempt to achieve this same end by a different means —  namely by use of 11 U.S.C. §§362(a)(4) [act to create, perfect or enforce a lien] and (a)(6) [act to collect , assess or recover a claim]. While Fulton may have not provided the entire answer, it at least give creditor’s more leverage than they had prior to this decision.

Keith D. Weiner & Associates, L.P.A. remains committed to protecting the rights of our valued clients.  We will continue to monitor how this decision impacts the courts in which we practice ad we will keep you apprised of any updates. If you have any questions regarding this case, please reach out to the firm’s bankruptcy group at [email protected].