General

Supreme Court Rules on the Applicability of the Automatic Stay to Property Seized Before Bankruptcy

Until recently in Nebraska, a creditor was in violation of Section 362(a)(3) of the automatic stay in bankruptcy if it lawfully seized property of the debtor before the debtor filed bankruptcy but did not return the property to the debtor or trustee after the bankruptcy and continued to “exercise control” over such property. 

This changed on January 14, 2021 when the United States Supreme Court published its ruling in the case of City of Chicago, Illinois v. Fulton.  In this case, the Supreme Court held that the mere retention of bankruptcy estate property after the filing of a bankruptcy petition does not violate the automatic stay provision of the Bankruptcy Code which prohibits an act to exercise control over property of the bankruptcy estate.

In the Fulton case, the City of Chicago (“City”) impounded the vehicles of various individuals for failure to pay fines for vehicle infractions. Many of these individuals filed Chapter 13 bankruptcy petitions and requested that the City return the impounded vehicles. The City refused.

The bankruptcy court and the Seventh Circuit Court of Appeals held that the City’s refusal to return the vehicles constituted an “act to exercise control” over property of the bankruptcy estate and thus violated the automatic stay provision. The City appealed to the Supreme Court.

The Supreme Court overruled the Court of Appeals.  Specifically, the Supreme Court reasoned that:

• Section 542 of the Bankruptcy Code, entitled “Turnover of Property of the Estate” (the “Turnover Statute”), sets forth a general requirement that parties should turnover property of the bankruptcy estate, and that this general command would not be necessary if the automatic stay provision already required parties to turnover property of estate.  Courts resist construing a statute in a way that would render language in another statute unnecessary.
• The Turnover Statute provides exceptions to the general requirement that parties turnover property of the estate.  Therefore, if the automatic stay required property of the estate to be turned over in all instances, with no exceptions, then this would conflict with the Turnover Statute. 

However, the Supreme Court did not answer a number of questions regarding a creditor’s obligation to turnover property of the estate:

• The Supreme Court did not decide whether and when provisions of the automatic stay other than Section 362(a)(3) may require a creditor to return a debtor’s property.  So, while the ruling in the Fulton case significantly reduces the risk that a refusal to return property of the bankruptcy estate will be deemed a violation of the automatic stay, creditors need to assess whether such action may be deemed a violation of the automatic stay under other provisions of Section 362(a).
• The Supreme Court did not address how the Turnover Statute operates, and how bankruptcy courts should enforce a creditor’s separate obligation to turn over estate property to the debtor or trustee.
• The Supreme Court’s decision also raises questions as to how it impacts other pre-bankruptcy remedies such as wage garnishments, account freezes, inventory foreclosures, and other creditor actions.

Hopefully, answers to these questions will be addressed in future cases or through changes in the applicable bankruptcy laws. If you have any questions relating to this ruling or when an obligation to turn over property of a bankruptcy estate arises, please feel free to contact Sam King.

Mon Jan 25, 7:58pm