The Bankruptcy Protector

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 Cases

Four 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 Split

The 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 postponed until October as a result of the coronavirus pandemic.

The Statute Demanded the Result

Justice Alito laid out the pertinent statutes. Primarily, section 362(a)(3) stays “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.” In the lower courts, the debtors relied on that section, but not exclusively.

With some exceptions, section 542(a) provides that “an entity . . . in possession . . . of property that the trustee may use, sell, or lease under section 363 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.”

Justice Alito said that the case turned on the “prohibition [in section 362(a)(3)] against exercising control over estate property.” He said the language “suggests that merely retaining possession of estate property does not violate the automatic stay.”

To Justice Alito, “the most natural reading” of the words “stay,” “act” and “exercise control” mean that Section 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.” He found a “suggestion” in the “combination” of the words “that §362(a)(3) halts any affirmative act that would alter the status quo as of the time of the filing of a bankruptcy petition.”

Justice Alito said that words in section 362(a)(3) by themselves did not “definitively rule out” the result reached in the Seventh Circuit. “Any ambiguity” in that section, he said, “is resolved decidedly in” Chicago’s favor by section 542.

In view of section 542, Justice Alito said that reading Section 362(a)(3) to proscribe “mere retention of property” would create two problems.

First, a broad reading of Section 362(a)(3) would “largely” render section 542 “superfluous.” Second, it would make the two sections contradictory. Where section 542 has exceptions, Section 362(a)(3) has none.

Justice Alito observed that the prohibition against “control” over estate property was added to Section 362 in the 1984 amendments. “But transforming the stay in §362 into an affirmative turnover obligation would have constituted an important change,” he said.

It “would have been odd for Congress to accomplish that change by simply adding the phrase ‘exercise control,’ a phrase that does not naturally comprehend the mere retention of property and that does not admit of the exceptions set out in §542,” Justice Alito said.

Justice Alito interpreted the 1984 amendment to mean that it “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 ‘obtain[ing]’ such property.”

Justice Alito ended his decision by noting what the opinion did not decide. The ruling did not “settle the meaning of other subsections of §362(a)” and did “not decide how the turnover obligation in §542 operates.”

“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.” Justice Alito vacated the Seventh Circuit’s judgment and remanded for further proceedings.

Justice Sotomayor’s Concurrence

Justice Sotomayor said she wrote “separately to emphasize 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 said that the “the City’s conduct may very well violate one or both of these other provisions,” referring to subsections 362(a)(4) and (6).

In her six-page concurrence, Justice Sotomayor noted that the Court had not “addressed how bankruptcy courts should go about enforcing creditors’ separate obligation to ‘deliver’ estate property to the trustee or debtor under §542(a).”

Although Chicago’s conduct may have satisfied “the letter of the Code,” she said that the city’s policy “hardly comports with its spirit.” She went on to explain why returning a car quickly is important so a debtor can commute to work and make earnings to pay creditors under a chapter 13 plan.

“The trouble” with Section 542, Justice Sotomayor said, is that “turnover proceedings can be quite slow” because they entail commencing an adversary proceeding. She ended her concurrence by saying that either the Advisory Committee on Rules or Congress should consider amendments “that ensure prompt resolution of debtors’ requests for turnover under §542(a), especially where debtors’ vehicles are concerned.”

Observations

Significantly, the Court did not rule on whether debtors could achieve the same result under subsections (4) and (6) of section 362(a), which prohibit an act to enforce a lien on property and an act to recover a claim.

In one of the cases before the Supreme Court, the bankruptcy court had relied on those other subjections in ruling for the debtor. The Supreme Court did not address subsections (4) and (6) because the Seventh Circuit did not reach those issues.

Consequently, debtors might resurrect a victory either through speedy procedures under section 542 or a favorable interpretation of subsections (4) and (6). Reliance on the other subsections may not prevail given how Justice Alito would not permit section 362 to perform all of the work of section 542.

It is noteworthy how Justice Alito was skeptical that Congress would make major changes in a statute by using only a few words. At the same time, the Supreme Court has been reluctant in recent years to give importance to legislative history. Since legislative history might not succeed in altering the Supreme Court’s view of the law, Congress evidently needs to attach bells and whistles to an amendment meant to change the law.