On January 14, 2021, the U.S. Supreme Court issued an opinion addressing a split among circuit courts on whether an entity violates Section 362(a)(3) of the Bankruptcy Code’s automatic stay provision by passively retaining possession of a debtor’s property after a bankruptcy petition is filed. Section 362(a)(3) prohibits “any act . . . to exercise control over property” of the bankruptcy estate. 11 U.S.C. § 362(a)(3).1 This “automatic stay” provision is automatically triggered once a bankruptcy case is commenced, and is intended to give the debtor a breathing spell from its creditors, including from any collection efforts, foreclosures, and other actions creditors may take against a debtor’s property. The question here was whether the automatic stay provision in Section 362(a)(3) is also applicable to property already in the creditor’s possession at the time of the bankruptcy filing. In a unanimous2 decision authored by Justice Samuel Alito, the Supreme Court held that mere retention of estate property after the filing of a bankruptcy petition does not violate Section 362(a)(3). City of Chicago, Illinois v. Fulton, No. 19-357, 2021 WL 125106 (U.S. Jan. 14, 2021).
The Supreme Court’s decision provided at least some comfort to creditors that they are unlikely to be considered in violation of the stay under Section 362(a)(3) or incur related damages liability by merely passively retaining debtor property, including collateral, already in their possession. However, the decision did leave open the possibility that retention of debtor property could violate other provisions of the automatic stay under some circumstances, such as where retention is used as leverage to “collect . . . or recover a claim against the debtor.” See 11 U.S.C. § 362(a)(6).
The decision also helped clarify the relationship between the Bankruptcy Code’s automatic stay provision (Section 362) and its express “turnover” provision (Section 542) by establishing that only Section 542, and not Section 362(a)(3), imposes an obligation to turn over debtor property to the debtor’s bankruptcy estate. This clarification is favorable to parties in possession of debtor property, because turnover under Section 542 includes exceptions and usually entails the commencement of an adversary proceeding and an opportunity to present defenses, which would not necessarily be available if turnover were required automatically under Section 362(a)(3).
BACKGROUNDThe Chicago v. Fulton appeal arose out of a series of cases in which the City of Chicago impounded vehicles for various parking- and driving-related infractions. The Chicago Municipal Code provides that any vehicles so impounded “shall be subject to a possessory lien in favor of the City in the amount required to obtain release of the vehicle.” M.C.C. § 9-92-080(f). The Municipal Code therefore effectively makes the impounded vehicles collateral for the motorists’ debt to the City.
The Respondents were motorists whose vehicles the City had impounded pursuant to the Municipal Code, and who filed Chapter 13 bankruptcy petitions in an effort to retrieve their vehicles based on the theory that the City’s retention of the vehicles would violate Section 362(a)(3) of the Bankruptcy Code’s automatic stay provision. The Seventh Circuit sided with the motorists and held that the City’s retention of their vehicles constituted an “exercise of control” that violated Section 362(a)(3). See In re Fulton, 926 F.3d 916 (7th Cir. 2019). This holding was consistent with the Seventh Circuit’s own prior precedent3 and with the “majority” position espoused by the Second,4 Eighth,5 and Ninth Circuits.6
In 2017, however, the Tenth Circuit had adopted an opposite, “minority” position, holding that “only affirmative acts to gain possession of, or to exercise control over, property of the estate violate § 362(a)(3).” In re Cowen, 849 F.3d 943, 950 (10th Cir. 2017).
The Supreme Court granted certiorari to resolve this circuit split.
OPINION OF THE COURTIn its unanimous decision, the Supreme Court reversed the Seventh Circuit and embraced the Tenth Circuit’s “minority” position by holding that “mere retention of property does not violate §362(a)(3).” To reach this conclusion, the Supreme Court employed an array of classic tools of statutory interpretation, considering first the plain language of Section 362(a)(3), then the relationship of this language in Section 362(a)(3) to other Bankruptcy Code provisions, and finally the provision’s history.
Plain Language of Section 362(a)(3)
With respect to the plain language of Section 362(a)(3), the Court consulted both general (Webster’s) and legal (Black’s) dictionaries, as well as case law, to conclude that the most natural reading is that Section 362(a)(3) prohibits only “affirmative acts that would disturb the status quo of estate property as of the time when the bankruptcy petition was filed.” The Court noted in particular that the term “act” generally means “[s]omething done or performed . . . ; a deed,” suggesting that an affirmative act is needed to trigger Section 362(a)(3) and that mere passive retention is insufficient.
The Supreme Court did note some potential ambiguity in Section 362(a)(3)’s language, however. It acknowledged, for example, that omissions can qualify as “acts” in certain contexts, and that the term “control” can sometimes mean to passively “have power over.”
Relationship between Section 362(a)(3) and Section 542
To help resolve this ambiguity, the Supreme Court next considered Section 362(a)(3)’s relationship to the Code’s express “turnover” provision, Section 542.7 The Court concluded that reading Section 362(a)(3) to require affirmative turnover of debtor property would create two problems in relation to Section 542.
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