Today the Supreme Court released its decision in City of Chicago vs. Fulton and ruled 8 – 0 that the City did not violate the automatic stay where it held on to a vehicle repossessed pre-petition: “ We hold only that mere retention of estate property after the filing of a bankruptcy petition does not violate §362(a)(3) of the Bankruptcy Code.” Thus, it is now clear that the passive retention of repossessed property after a bankruptcy filing does not violate the automatic stay. This decision does not change the existing law applicable in Florida under In re Kalter, which also allows creditors to retain possession under a different theory.
In Fulton, the city of Chicago (City) impounded vehicles for failure to pay fines for parking or other vehicle infractions. The debtors filed Chapter 13 and requested the City return the vehicle. The City refused, and the bankruptcy court held that the City’s refusal violated the automatic stay. The Court of Appeals affirmed and found that by retaining possession of the debtors’ vehicles after they declared bankruptcy, the City had acted “to exercise control over” respondents’ property in violation of §362(a)(3). In re Fulton, 926 F. 3d 916 (CA7 2019)
The Supreme Court focused on the language used in §362(a)(3) and agreed with the City’s argument that this provision focuses on maintaining the status quo when a bankruptcy case is filed. The Court, citing Webster’s Third New International Dictionary, found the terms “stay,” “act,” and “exercise control” “suggests that merely retaining possession of estate property does not violate the automatic stay. . . the most natural reading of these terms … is 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.”
The Court acknowledged the Bankruptcy Code has a separate provision – Section 542 – which deals with turning over estate property. The Court noted that the existence of §542 makes clear that the text of §362(a)(3) does not require a creditor to automatically turn over or surrender collateral (which would essentially render §542 superfluous). The Court also recognized that debtors have the ability to ask the Court to compel turnover of a vehicle under §542, but stated § 542 is still subject to the requirement that the debtor or trustee provide adequate protection to the creditor to obtain turnover and possession.
For more information contact Kelley Kronenberg Partner, Dennis LeVine.
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