US Supreme Court: City of Chicago Did Not Violate Automatic Stay by Refusing to Return Impounded Vehicles
On January 14, 2021, the Supreme Court ruled that "mere retention" of estate property after the filing of a bankruptcy petition does not violate the automatic stay as set forth in section 362(a)(3) of the Bankruptcy Code.
In the case before the Court, City of Chicago, Illinois v. Fulton, 592 U.S. ____ (2021), the City of Chicago (the City) impounded the vehicles of each of the respondents for failure to pay fines for motor vehicle infractions. Each respondent subsequently filed a Chapter 13 bankruptcy petition and requested the return of his or her vehicle from the City, but the City refused.
In the bankruptcy court, the respondents claimed that the City's continued possession of the vehicles violated the "automatic stay" imposed upon the filing of a bankruptcy petition, and specifically, section 362(a)(3) of the title 11 of the United States Code (Bankruptcy Code). Section 362(a)(3) prohibits "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." 11 U.S.C. § 362(a)(3) (emphasis added). Property of the bankruptcy estate includes "all legal or equitable interests of the debtor in property as of the commencement of the case" and is established automatically upon the filing of a bankruptcy petition. 11 U.S.C. § 541. The bankruptcy court held that the City's continued possession of the vehicles violated the automatic stay. The Seventh Circuit Court of Appeals affirmed concluding that the City had "exercise[ed] control over" estate property by retaining possession of the vehicles, and the City petitioned for Supreme Court review.
The Supreme Court held that mere possession of property of the estate does not violate the automatic stay under section 362(a)(3). In analyzing the language of the statute, the Court placed emphasis of the use of the word "act" in section 362(a)(3) and reasoned that its use, along with the use of "stay" and "exercise" in the provision, conveys that 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." In other words, merely retaining a vehicle that was impounded before the filing of the bankruptcy petition was not an affirmative act, and thus, the stay did not apply.
The Court further noted that the language of the statute was clear when interpreted in conjunction with section 542 of the Bankruptcy Code, which governs the turnover of estate property. Section 542 provides an entity "in possession, custody, or control . . . of property . . . [of the estate] . . . shall deliver to the trustee, and account for, such property . . ." 11 U.S.C. § 542. The Court concluded that interpreting section 362(a)(3) to cover the mere retention of property of the estate would render the key provisions of section 542 largely superfluous by making section 362(a)(3) essentially a blanket turnover provision. The Court further reasoned that such a blanket turnover provision under section 362(a)(3) would contradict certain exceptions to the turnover of property which are carved out from section 542.
Of note, the Court did not address or rule on the meaning of other subsections of the automatic stay—namely, sections 362(a)(4) and section 362(a)(6), which address acts concerning liens over property of the estate and acts to collect or recover claims against a debtor.1 Nor did the Court decide how section 542 should operate in terms of the mechanics of turning over property of the estate. Indeed, in a concurring opinion, Justice Sotomayor expressly stated that "the Court has not decided whether and when [section] 362(a)'s other provisions may require a creditor to return a debtor's property" and mentioned sections 362(a)(4) and (6), specifically. She also mentioned the possibility of relief to debtors under section 542, noting that bankruptcy judges have power to return property of the estate to debtors.
© Arnold & Porter Kaye Scholer LLP 2021 All Rights Reserved. This Advisory is intended to be a general summary of the law and does not constitute legal advice. You should consult with counsel to determine applicable legal requirements in a specific fact situation.