In a major setback for debtors, the Supreme Court sided with creditors when it concluded that “mere retention of property does not violate §362(a)(3).” City of Chicago v. Fulton, 592 U.S. ___, No. 19-357 (S.Ct. Jan. 14, 2021).
The City of Chicago impounded debtor’s vehicles for failure to pay traffic fines prompting them to file chapter 13 cases.
Section 362(a)(3) stays: “any act to obtain possession of the property of the estate or of property from the estate or to exercise control over property of the estate.”
Relying on Section 362(a)(3), the debtors sought the return of the vehicles arguing that once they filed for bankruptcy, the City’s retention of the vehicles violated the automatic stay.
The bankruptcy courts and in a consolidated hearing the Seventh Circuit agreed with debtors and ruled that retention of the vehicles constituted an exercise of control over property of the estate within the meaning of section 362(a)(3). In re Fulton, 926 F. 3d 916 (7th Cir. 2019).
On appeal to the Supreme Court the Court found its definition of “stay” in Nken v. Holder, 556 U. S. 418, 429 (2009), as “suspend[ing] judicial alteration of the status quo.”
As a result, the Court concluded: “that §362(a)(3) halts any affirmative act that would alter the status quo as of the time of the filing of a bankruptcy petition.”
The Court found that simply having the power to do something but not doing it, is not an “act,” for purposes of section 362(a)(3).
The Court also found that reading the automatic stay as requiring turnover would render section 542(a) unnecessary.
Section 542(a) provides: “[A]n entity, other than a custodian, in possession, custody, or control, during the case, of property that the trustee may use, sell, or lease under section 363 of this title, or that the debtor may exempt under section 522of 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 better account of the two provisions 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.”
Second, 542(a)’s exception for turnover of property of inconsequential value to the estate would be rendered meaningless if section 362(a)(3) were to require turnover of any property held by a creditor.
Turning to the history of section 362, the Court noted that had Congress intended to create an affirmative turnover requirement to that section, it would have done so in more certain terms.
The Court vacated and remanded.
Justice Sotomayor concurrence was notable in highlighting the plight of the debtors.
Justice Sotomayor pointed out that while allowed by law depriving a chapter 13 debtor of transportation necessary to employment, creates a vicious cycle of increasing debt with decreasing ability to repay it.
