U.S. Supreme Court Rules on Property Seized Pre-Bankruptcy Petition

Automatic Stay Not Violated by Retention of Property Seized Before Filing

The United States Supreme Court recently held that 11 U.S.C. § 362(a)(3), a provision of the automatic stay of the U.S. Bankruptcy Code, does not require creditors to take affirmative steps to return property that was seized before the filing of a debtor’s bankruptcy petition. City of Chicago, Illinois v. Fulton, 2021 WL 125106, ____ U.S. ____ (Jan. 14, 2021).

In Fulton, “the city of Chicago (City) impounded each respondent’s vehicle for failure to pay fines for motor vehicle infractions.” (Slip Op. at 2). Each respondent later filed a Chapter 13 bankruptcy petition and, in some form or fashion, requested that the City return their vehicle. The City refused, and the relevant bankruptcy courts held that such refusals were improper and violated §362(a) as that the filing of a bankruptcy petition “operates as a stay, applicable to all entities,” on “any act to obtain possession of property of the estate or of property from the estate or to exercise control over the estate.” The Seventh Circuit, in an Opinion consolidating the cases of the vehicle owners, affirmed the findings of the bankruptcy courts, finding that the continued possession of the vehicles by the City constituted the “exercise [of] control over” property in a matter prohibited by the stay provision.

The Supreme Court unanimously (with Justice Barrett not participating) reversed the Seventh Circuit, holding that “the mere retention of estate property after the filing of a bankruptcy petition” does not violate the stay provision of the Bankruptcy Code. (Slip Op. at 4). In so doing, the Court’s majority opinion, authored by Justice Alito, examined the plain language of the stay provision and found that the automatic stay “halts any affirmative act that would alter the status quo as of the time of the filing of a bankruptcy petition[,]” and that the language of the provision “implies that something more than merely retaining power is required to violate” the automatic stay. Id. (emphases added). The Court also found that this reading of §362(a)(3) was further supported in the context of §542 of the Bankruptcy Code (“the turnover provision”), which governs the turnover of estate property to the bankruptcy trustee, along with certain exceptions to its obligations. Were the stay provision interpreted to require the return of certain property to the debtor after the filing of the bankruptcy, the turnover provision would be superfluous and operate in conflict with the requirements of the stay provision.

It should be noted, however, that the Supreme Court concluded its decision by stating that the Court “need not decide how the turnover obligation in §542 operates[, nor] settle the meaning of other subsections of §362(a)”. (Slip Op. at 7). Furthermore, Justice Sotomayor’s concurring opinion in this matter suggests that there are additional questions that must be resolved in this area, such as “when [a creditor] may sell impounded cars” after a bankruptcy filing, and that “any gap left by the Court’s ruling today is best addressed by rule drafters and policymakers.” (Concurring Opinion of Sotomayor, J. at 5.)

As such, under the holding of Fulton, creditors can have some comfort that they need not immediately return property seized pre-petition to debtors pursuant to the stay provision of the U.S. Bankruptcy Code. A debtor may nevertheless seek turnover of estate property held by a creditor pursuant to 11 U.S.C. § 542, requiring commencement of an adversary proceeding. Creditors should continue to exercise care with seized property, and should stay attuned to the potential requirements of other Bankruptcy Code provisions and additional possible further developments in this area.

For a copy of the decision, please contact Michael O’Donnell at modonnell@riker.com, Michael Crowley at mcrowley@riker.com, or Andrew Raimondi at araimondi@riker.com.