Knowing When to Walk Away
The Supreme Court has ruled unanimously that the “mere retention of property does not violate § 362(a)(3)” of the automatic stay. The decision in City of Chicago, Illinois v. Fulton resolved a circuit split as to whether creditors have an affirmative duty to turn over repossessed property upon a bankruptcy filing (Second, Seventh, Eighth, Ninth, and Eleventh Circuits) or if the retention of property maintains the status quo and a stay violation requires an affirmative act (Third, Tenth, and DC Circuits). The opinion did not resolve the implications of § 362(a)(4) and (6), because the Seventh Circuit had not addressed those sections in its opinion.
The underlying cases involved significant—from $4,000 to $20,000—unpaid parking fines owed by Chapter 13 debtors. The City of Chicago had impounded the vehicles prior to the individual debtors’ bankruptcy filings and refused to return the property upon demand. Four separate bankruptcy judges held the city in contempt for violating the automatic stay by refusing to return the automobiles. The Seventh Circuit upheld these contempt determinations because the city “was not passively abiding by the bankruptcy rules but actively resisting Section 542(a) to exercise control over the debtors’ vehicles.”
Justice Samuel Alito, writing for the Court, began with the applicable statutes. Section 362(a)(3) stays “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(a) provides that “an entity . . . in possession . . . of property that the trustee may use, sell, or lease under section 363 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 combination of “act” and “exercise control” in § 362(a)(3) requires an affirmative act that alters the status quo, and the creditors were in possession of the property as of the bankruptcy filing. The Court identified two problems with Section 362(a)(3) prohibiting the “mere retention of property.” It would render Section 542 superfluous and create contradictions with the exceptions to Section 542 which are not present in Section 362(a)(3). In reversing and remanding the Seventh Circuit’s decision, the Court did not address how Section 542 would operate to put the debtors back in possession of their property.
The opinion also did not address § 362(a)(4) and (6):
(4) any act to create, perfect, or enforce any lien against property of the estate;
(6) any act to collect, assess, or recover a claim against the debtor that arose before the commencement of the case under this title;
The presence of the “any act” language, however, would suggest that “mere retention” would also be insufficient for a violation of the automatic stay under these provisions. But, a creditor could be walking a fine line if the refusal to return the vehicle upon demand was viewed as an act to recover the claim.
After this decision, debtors are not left without a remedy. They can still turn to Section 542 and seek turnover of estate property. This process can be burdensome, and bankruptcy courts—in particular in the Circuits which have been reversed—may need to establish procedures so that debtors can regain possession of their vehicles quickly and efficiently. Creditors may also want to consider whether they want to be involved in such proceedings, or if they want their debtors to be using their vehicles to get to jobs to make payments under the Chapter 13 plans.