SCOTUS Rules That Automatic Stay is Not Violated by Pre-Petition Taking of Property

Robert N. Loughran - Associate
Jan 26 2021

SCOTUS RULES THAT AUTOMATIC STAY IS NOT VIOLATED BY PRE-PETITION TAKING OF PROPERTY


On January 14, 2021, the United States Supreme Court issued an 8-0 ruling in the case of City of Chicago v. Fulton et al. ("Fulton") addressing the issues of whether the mere retention of a vehicle taken prior to a Chapter 13 filing was a violation of the automatic stay under 11 U.S.C. § 362. The Court unanimously held that retention of a vehicle did not violate section 362(a)(3) of the Bankruptcy Code, which expressly prohibits entities from "exercising control over property of the estate" after a petition is filed.


In Fulton, the City of Chicago's practice was to impound vehicles identified as having overdue parking tickets. Many Chicago residents would subsequently file bankruptcy under Chapter 13 and request that the City immediately return their vehicles or face a motion for sanctions under section 362 of the Bankruptcy Code. The City refused to return the vehicles, and in each case, a bankruptcy court held that the City's actions were in violation of the automatic stay. In a consolidated action, the Court of Appeals affirmed all judgments against the City, stating "by retaining possession of the debtors' vehicles after they declare bankruptcy" the City had acted "to exercise control over" the property in violation of § 362(a)(3). This was also the view in Texas and the rest of the area comprising the Fifth Circuit. See In re Zaber, 223 B.R. 102,105 (Bankr. N.D. Tex. 1998).


Under § 362(a)(3), the filing of the bankruptcy petition acts as a stay that prevents any "act" to "exercise control" over the debtor's property. Thus, it prevents any affirmative act, such as collection efforts, that disturb the status quo of the bankruptcy estate at the time of the filing. However, in a situation such as the one addressed in Fulton, the property has already left the possession of the bankruptcy estate, and therefore continued possession is not an "act".


While the Fulton decision only opines on the meaning of § 362(a)(3) as it relates to the mere retention of property, the Court did suggest that a debtor's proper recourse in such a situation is in the form of a turnover action under section 542 of the Bankruptcy Code - the purpose of which is to return property that has left the estate back to the debtor or trustee. Furthermore, the Court did not touch on whether the City's retention of the vehicle combined with a demand for payment was in violation of §§ 362(a)(4) and (a)(6).


In conclusion, the Court's unanimous decision in Fulton changes the landscape for creditors who have repossessed vehicles or other collateral prior to bankruptcy. However, the Court does suggest that debtors have additional remedies in the Bankruptcy Code to regain control of their vehicles should they find themselves in such a situation.


Robert Loughran

Associate