For debtors, a key benefit of bankruptcy is the automatic stay in Section 362 of the Bankruptcy Code which is effective immediately upon filing the bankruptcy petition. Although nuanced in its application, broadly speaking the bankruptcy automatic stay stops all collection and enforcement efforts against the debtor and property of the bankruptcy estate. The automatic stay is a critical protection for debtors because it provides the breathing room necessary to help debtors obtain a fresh financial start. But does a creditor violate the automatic stay simply by keeping property of the debtor that it lawfully held prior to the bankruptcy filing? The U.S. Supreme Court recently addressed this question in City of Chicago, Illinois v. Fulton, 141 S. Ct. 585 (2021). The Supreme Court, taking the minority view, unanimously held that a creditor’s passive retention of the debtor’s property does not violate Section 362(a)(3) of the Bankruptcy Code. SCOTUS’ ruling resolved a split among the circuit courts. Previously five circuit courts of appeal (Second, Seventh, Eighth, Ninth and Eleventh) had held that a creditor’s passive retention of a debtor’s property violated the automatic stay, while only two circuit courts (Third and Tenth) along with the District of Columbia had held that such passive retention did not violate the automatic stay.
In Fulton, the City of Chicago had impounded four debtors’ cars for failing to pay fines for motor vehicle infractions. The debtors subsequently filed chapter 13 bankruptcy petitions and sought return of their vehicles arguing that the City’s retention was an unlawful violation of the automatic stay. When the City refused to return the debtors’ vehicles, the bankruptcy court ruled that the City of Chicago had violated the automatic stay and issued sanctions against the City. The key issue was whether the City’s passive retention was an act “to exercise control over” the debtors’ property in violation of Section 362(a)(3) of the Bankruptcy Code. In holding that it was not, SCOTUS used the rules of statutory construction to find that the plain meaning of Section 362(a)(3) required an affirmative act that disturbed the status quo of estate property. Because the City was holding the vehicles prepetition, merely retaining them was not an affirmative act that disturbed the status quo in violation of the automatic stay. The Supreme Court also found that Section 362(a)(3) did not require mandatory turnover of the vehicles because Section 542 is the specific provision of the Bankruptcy Code governing turnover that would be rendered superfluous if Section 362(a)(3) also imposed a turnover requirement. The Court’s holding was limited to Section 362(a)(3). It did not address whether the same result would ensue under Sections 362(a)(4) and 362(a)(6) of the Bankruptcy Code.
Whether you are a debtor, co-debtor or creditor, determining whether an action violates the automatic stay requires competent advice from a knowledgeable bankruptcy attorney. If you believe your property or collateral may be affected by the bankruptcy automatic stay, let me help you decide what your next steps should be.
