Michigan Bankruptcy Blog

Supreme Court Holds that “Mere Retention” of Estate Property After Bankruptcy Filing Doesn't Violate the Automatic Stay

On January 14, 2021, the U.S. Supreme Court decided City of Chicago, Illinois v. Fulton (Case No. 19-357, Jan. 14, 2021), a case which examined whether merely retaining estate property after a bankruptcy filing violates the automatic stay provided for by §362(a) of the Bankruptcy Code. The Court overruled the bankruptcy court and U.S. Court of Appeals for the Seventh Circuit in deciding that mere retention of property does not violate the automatic stay.

Case Background

The City of Chicago (the “City”) impounded respondents’ vehicles for failure to pay fines for motor vehicle infractions. Thereafter, each respondent filed a Chapter 13 bankruptcy petition and requested the return of their vehicle. The City refused to return the vehicles, and the bankruptcy court in each case found the City’s refusal to be a violation of automatic stay. The Seventh Circuit affirmed, concluding that by retaining possession of the debtors’ vehicles after they declared bankruptcy, the City had acted “to exercise control over” the debtors’ property in violation of the automatic stay.

The Supreme Court took up the case and, in an opinion written by Justice Alito, ruled that “merely retaining possession of estate property does not violate the automatic stay.”

Analysis

The Court began its analysis by examining the language of §362(a)(3) of the Bankruptcy Code. The Court stated that such language “suggests that §362(a)(3) prohibits affirmative acts that would disturb the status quo of estate property as of the time when the bankruptcy petition was filed.” It explained that the language of §362(a)(3) “implies” (but does not explicitly state) that something more than the mere retention of property is required to violate the automatic stay.

The Court went on to clarify that any ambiguity in the text of §362(a)(3) was resolved by §542 of the Bankruptcy Code, which governs the turnover of estate property to the trustee. This provision requires an entity in possession, custody, or control of estate property to deliver to the trustee, and account for, such property or the value of such property. There are two exceptions to §542, which include: (i) transfers of estate property made from one entity to another in good faith without notice or knowledge of the bankruptcy petition and (ii) good-faith transfers to satisfy certain life insurance obligations.

The Court explained that if §362(a)(3) prohibited the mere retention of property, it would create “at least two serious problems.”

First, a requirement that an entity affirmatively relinquishes control of the debtor’s property at the moment a bankruptcy petition is filed would render §542 superfluous.

Second, it would render the dictates of §362(a)(3) and §542 contradictory. In particular, §542 creates exceptions to the turnover command and does not mandate turnover of property of inconsequential value. On the other hand, if respondents’ reading of the statute was adopted, §362(a)(3) would require immediate turnover of all of the debtor’s property.

The Court concluded that it would be an “odd construction” of the automatic stay provision “to require a creditor to do immediately what §542 specifically excuses.” Further, the Court explained that the Bankruptcy Code’s statutory history confirms that §362(a)(3) and §542 are meant to co-exist, not conflict with one another.

The Court held that “mere retention of estate property after the filing of a bankruptcy petition does not violate §362(a)(3) of the Bankruptcy Code.” It remanded the case for further proceedings consistent with the opinion.

If you have any questions about the implications of this case, or bankruptcy issues in general, please contact Patricia Scott at 517.371.8132 or at pscott@fosterswift.com.

Categories: Case Law Updates, Chapter 13, U.S. Supreme Court