written by Michael Wennerlund
U.S. Supreme Court resolves circuit split over Creditor Retention of Property post-bankruptcy filing
On January 14, 2021, the U.S. Supreme Court issued an opinion in the case of City of Chicago, Illinois v. Fulton, et al., 592 U.S. ____ (2021) which dealt with the interplay between several provisions of the Bankruptcy Code relating to the retention of property of the bankruptcy estate post-bankruptcy that had been retained by the creditor pre-bankruptcy pursuant to lawful process.
The city of Chicago impounded each of the respondents’ vehicle for failure to pay fines for motor vehicle infractions. Each respondent filed Chapter 13 bankruptcy petition and requested that the City return his or her vehicle. The City refused, and in each case a bankruptcy court held that the City’s refusal violated the automatic stay. The Court of Appeals for the Seventh Circuit affirmed all of the judgments in a consolidated opinion.
The principal issue related to the interplay between section 362(a)(3) and 542(a). Section 362(a)—known generally as the “automatic stay” provision of the Bankruptcy Code—provides many subsections that specifically define what actions or omissions by parties in interest to a bankruptcy case constitute violations of the automatic stay. Section 362(a)(3) defines one of those specific actions as “any act to obtain possession of property of the estate or of property from the estate or to exercise control over property of the estate.”
Section 542, entitled “Turnover of Property of the Estate”, provides that “an entity, other than a custodian, in possession, custody, or control, during the case, of property that the trustee may use, sell, or lease under section 363 of this title, or that the debtor may exempt under section 522 of this title, shall deliver to the trustee, and account for, such property or the value of such property, unless such property is of inconsequential value or benefit to the estate.”
The Respondents, whose cars were retained by the City, argued principally that section 362(a)(3) in and of itself would impose the duty for all creditors to turnover estate property after receiving proper notice of the bankruptcy petition filing and their failure to do so would constitute a violation of the automatic stay. The City argued conversely that section 362(a) should be afforded only a narrow reading confined solely to actions taken beyond mere retention of estate property so that section 542 would not be rendered essentially superfluous.
The Court, after examining the language of both code provisions and a discussion of statutory construction and alleged overlap between statutes, made several holdings. First, section 362(a)(3) expressly and narrowly prohibits only affirmative acts that would disturb the status quo of estate property as of the time when the bankruptcy petition was filed. Second, in conjunction with the first holding, section 542 would work within the bankruptcy process “to draw far-flung estate property back into the hands of the debtor or trustee.”
Importantly, the Court held that the Respondents’ interpretation of the relevant code provisions was contradictory, pointing out that “in cases where those exceptions to turnover under section 542 would apply, section 362(a)(3) would command turnover all the same…Respondents would have us resolve the conflicting commands by engrafting §542’s exception onto §362(a)(3), but there is no textual basis for doing so.”
Practically speaking, this holding is simultaneously narrow and wide as it relates to the immediate aftermath of a debtor’s bankruptcy filing. It is narrow in the sense that the Court held that motions or adversary proceedings for turnover of estate property that is merely being retained after being repossessed under lawful pre-bankruptcy process, by itself, cannot be the basis for turnover of the property. Conversely, it is widely reaching in that estate property that is merely being retained after being repossessed under lawful pre-bankruptcy process, by itself, cannot likewise be the legal justification for imposing damages and attorney fee awards under section 362(k)(1) against creditors for said possession.
Creditors will still have to turnover estate property to the debtor and/or the estate after a proper motion for turnover brought pursuant to section 542, but importantly this case clarifies that the creditor’s mere continued possession of the property does not constitute a violation of the automatic stay; and most importantly, the money damages and attorney fee awards that would accompany such a finding.
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