The Supreme Court of the United States on January 14, 2021, issued a decision in the case of City of Chicago v. Fulton that favors creditors in a bankruptcy case. The Court held that a creditor’s “mere retention” of property of the estate post-petition does not violate the automatic stay as an act to exercise control. In its reasoning, the Court determined that § 362(a)(3) prohibits affirmative acts that “would disturb the status quo.” Accordingly, creditors who seize property prior to the bankruptcy filing will not face sanctions for violating the automatic stay by merely retaining control of property. Notably, the debtor still has the right under § 542 to seek turnover of seized property but can no longer argue that such retention is also a violation of the automatic stay.
In this precedential case, the Supreme Court considered the actions of the City of Chicago in impounding vehicles for failure to pay fines for parking tickets and vehicle infractions. Several of the owners of those impounded vehicles filed Chapter 13 bankruptcy petitions and sought to have the vehicles returned in exchange for payments under the individual plans. However, the City of Chicago refused, and those debtors each filed actions that asserted that the retention of the vehicles was a violation of the automatic stay. The bankruptcy court agreed with the debtors, finding that the City of Chicago was acting to exercise control over the vehicles. The Seventh Circuit affirmed. The Seventh Circuit joined a circuit split on the interpretation of what constitutes an act to exercise control.
In a unanimous decision, the Supreme Court resolved the circuit split. It explained its reasoning:
The better account of [§§ 542 and 362] is that §362(a)(3) prohibits collection efforts outside the bankruptcy proceeding that would change the status quo, while §542(a) works within the bankruptcy process to draw far-flung estate property back into the hands of the debtor or trustee.
Thus, while merely retaining seized property would not violate the automatic stay, additional actions such as selling the seized property at a public auction or via private sale would be a violation. Justice Sotomayor, who wrote a concurring opinion, stated that the Supreme Court was not deciding if other provisions in §362(a) may require a creditor to return a debtor’s property. Judge Sotomayor further stated that she was concerned with the slow nature of turnover proceedings and suggested that Congress or the bankruptcy rules committee make changes to ensure a prompt resolution of turnover actions.
This decision should provide comfort to creditors who seized property prepetition and have not yet liquidated the property. There may still be turnover actions to face, but in most scenarios, creditors will be in a better position to request adequate protection provisions in exchange for turning over the property.