United States Supreme Court Sharpens the Contours of the Automatic Stay

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The City of Chicago found itself at the Supreme Court of the United States.  The City had refused to accede to demands by debtors in bankruptcy to turn over the debtors’ impounded cars which, at least prima facie, belonged to the debtors’ estates. The bankruptcy court was apprised of the City’s refusal, and disagreed so strenuously as to find the City in violation of the Bankruptcy Code’s automatic stay.  No mere slap on the wrist, violations of the automatic stay allow an injured debtor to “recover actual damages, including costs and attorneys’ fees, and in appropriate circumstances…punitive damages.”

The United States Court of Appeals for the Seventh Circuit agreed that the City’s refusal to turn over impounded cars violated the automatic stay.  Federal courts of appeal were split on the question of whether merely retaining property of a debtor violated the automatic stay, and the Seventh Circuit fell on the side of finding a violation: indeed in this case it had found that by retaining the debtors’ cars after the debtors had declared bankruptcy, the City acted “to exercise control over” the debtors’ property and, thereby, had violated the automatic stay.

The Supreme Court granted certiorari to hear the case, and in reversing the Seventh Circuit held that § 362(a)(3) of the Code’s automatic stay provisions is not violated merely by keeping property of the debtor.  The Court evaluated what the words of § 362(a)(3)’s automatic stay mean and compared that provision with § 542 of the Code which more directly governs turnover of property that belongs to debtors’ estates.  It held that violative acts should actually be actions (or omissions, in appropriate circumstances), and that an act to exercise one’s power over estate property means something more than merely having that power.  Moreover, the Court believed § 542 and its exceptions to expressly govern when property must be turned over to a debtor’s estate, and believed further than § 542 would become superfluous – or worse would be contradicted by another provision of the same Code – if the automatic stay was broadened to require immediate turnover on pain of actual and exemplary damages. 

Of course, refusing to return a debtor’s property to its bankruptcy estate can be like walking a minefield.  Justice Sotomayor’s concurring opinion was clear in reminding us that other provisions of § 362 could support stay violations (the Court had only evaluated subsection (a)(3) of § 362 after all), and Sotomayor cited In re Kuehn as an example where “a university’s refusal to provide a transcript to a student-debtor ‘was an act to collect a debt’ that violated the automatic stay.”  Ultimately (as Sotomayor also noted), § 542’s requirements to turn over estate property remain in place even if violation of § 542 is not simultaneously a violation of the automatic stay, and the Court had given no opinion on how bankruptcy courts can enforce § 542.

The Supreme Court’s sharper outline of what makes an automatic stay violation certainly should not be interpreted as free rein to keep debtors’ property and demand cash in lieu.  The Code, precedent case law, and bankruptcy courts’ local rules govern the springs and levers of how a creditor holding a debtor’s property best interacts with a debtor under bankruptcy protection.  In your particular case, your attorney can review the facts and advise you on how best to proceed.  

**the opinion of the Court is City of Chicago v. Fulton, 592 U.S. ___ (2021).  The slip opinion can be found here.

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