Analyzing the Supreme Court’s Decision in City of Chicago v. Fulton

On January 14, 2021, the United States Supreme Court handed down their decision in City of Chicago v. Fulton, No. 19-357, 2021 WL 125106 (Jan. 14, 2021). The question before the Court was whether an entity violates §362(a)(3) by retaining possession of a debtor’s property after a bankruptcy petition is filed. 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. 
​
Until this decision, the majority position held by the Second, Seventh, Eighth, Ninth, and Eleventh Circuits was that the automatic stay prohibited a creditor’s passive retention of property seized before a bankruptcy case began.  Weber v. SEFCU (In re Weber), 719 F.3d 72, 81 (2d Cir. 2013); Thompson v. General Motors Acceptance Corp., 566 F.3d 699  (7th Cir. 2009), Knaus v. Concordia Lumber Co. (In re Knaus), 889 F.2d 773, 775 (8th Cir. 1989); California Emp’t Dev. Dep’t v. Taxel (In re Del Mission Ltd.), 98 F.3d 1147, 1151 (9th Cir. 1996); Motors Acceptance Corp. v. Rozier (In re Rozier), 376 F.3d 1323, 1324 (11th Cir. 2004). 

In contrast, the minority view sustained by the Third, Tenth and D.C. Circuits, had held that a creditor did not violate the automatic stay by failing to return property seized pre-bankruptcy, and that questions concerning a creditor’s obligations to surrender such assets were instead governed exclusively by Section 542(a).  In re Denby-Peterson, 941 F.3d 115, 125-126  (3d Cir. 2019); WD Equip., LLC v. Cowen (In re Cowen), 849 F.3d 943, 950 (10th Cir. 2017); United States v. Inslaw, Inc., 932 F.2d 1467, 1474 (D.C. Cir. 1991) . 
The facts of the case are rather simple. The City of Chicago impounded respondent’s vehicle for failure to pay fines for motor vehicle infractions. Each respondent filed a Chapter 13 bankruptcy petition and requested that the City return his or her vehicle. The argument was that the mere retention of the vehicles, which is considered property of the bankruptcy estate, violated §362(a)(3) which prohibits “any act to obtain possession of property of the estate or of property from the estate or to exercise control over property of the estate.” 

Writing for the majority, Justice Alito engaged in a textual analysis by finding that taken together, the most natural reading of the terms “stay”, “act” and “exercise control” is that §362(a)(3) prohibits affirmative acts that would disturb the status quo of the estate property as of the time when  the bankruptcy was filed. The Court also analyzed the language in Section 542(a) which states: “[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 522 of 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 Court found that reading §362(a)(3) to cover retention would create two serious problems. First, it would render the central command of §542(a) largely superfluous. Second, it would render the commands of §362(a)(3) and §542 contradictory. Instead, the Court found 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. Furthermore, the majority found that the 1984 amendment, which added the phrase regarding exercise of control, simply extended the stay to acts that would change the status quo with respect to intangible property and acts that would change the status quo with respect to tangible property without “obtaining” such property. 

Justice Sotomayor, who issued a concurring opinion, engaged in a more pragmatic approach. She stated that regardless of whether the City’s policy of refusing to return impounded vehicles satisfies the letter of the Code, it hardly comports with its spirit. As an example she stated that after a driver is assessed a fine and is unable to pay, the balance balloons and late fees accrue. The driver is unable to get to work in order to fund the Chapter 13 plan. 

Interestingly, Justice Sotomayor did state that the Court has not decided whether and when §362(a)’s other provisions may require a creditor to return a debtor’s property. She found that any gap in this Court’s ruling should be addressed by rule drafters and policymakers. She urged Congress to offer a statutory fix.