In City of Chicago, Illinois v. Fulton, No. 19-357, 2021 WL 125106, at *1 (U.S. Jan. 14, 2021), the United States Supreme Court considered the issue of whether the mere retention of estate property after the filing of a bankruptcy petition violates section 362(a)(3) of the Bankruptcy Code. Reversing the Seventh Circuit and resolving a split among the circuits, the Supreme Court ruled unanimously on January 14, 2021 “that mere retention of property does not violate the [automatic stay in] § 362(a)(3).”
Writing for the unanimous Court, Justice Alito said that section 362(a)(3) “prohibits affirmative acts that would disturb the status quo of estate property.” He left the door open for a debtor to obtain somewhat similar relief under the turnover provisions of section 542.
In a concurring opinion, Justice Sotomayor wrote separately to explain how a debtor may obtain the same or similar relief under other provisions of the Bankruptcy Code.
The Chicago Parking Ticket CasesFour cases went to the Seventh Circuit together. The chapter 13 debtors owed between $4,000 and $20,000 in unpaid parking fines. Before bankruptcy, the city had impounded their cars. Absent bankruptcy, the city will not release impounded cars unless fines are paid.
After filing their chapter 13 petitions, the debtors demanded the return of their autos. The city refused to release the cars unless the fines and other charges were paid in full.
The debtors mounted contempt proceedings in which four different bankruptcy judges held that the city was violating the automatic stay by refusing to return the autos. After being held in contempt, the city returned the cars but appealed.
The Seventh Circuit upheld the bankruptcy courts, holding “that the City violated the automatic stay . . . by retaining possession . . . after [the debtors] declared bankruptcy.” The city, the appeals court said, “was not passively abiding by the bankruptcy rules but actively resisting Section 542(a) to exercise control over the debtors’ vehicles.” In re Fulton, 926 F.3d 916 (7th Cir. June 19, 2019).
The Circuit SplitThe Second, Seventh, Eighth, Ninth and Eleventh Circuits impose an affirmative duty on creditors to turn over repossessed property after a bankruptcy filing.
The Third, Tenth and District of Columbia Circuits held that the retention of property only maintains the status quo. For those circuits, a stay violation requires an affirmative action. Simply holding property is not an affirmative act, in their view.
The City of Chicago filed a certiorari petition in September 2019. To resolve the circuit split, the Supreme Court granted certiorari in December 2019. Argument was originally scheduled to be held in April 2020 but was...
