How Is Refusing A Turnover Request Not “Exercising Control Over”? (City of Chicago v. Fulton)

By: Donald L Swanson

So . . . I’m reading through the transcript of oral arguments at the U.S. Supreme Court on City of Chicago v. Fulton (Case No. 19-357) from October 13, 2020. 

The first thing that jumps out at me, three pages in, is this: there is no early question from Justice Ruth Bader Ginsburg!  That’s striking . . . and a bit jarring . . . because, in every prior transcript of oral arguments I’ve read, Justice Ginsburg jumps-in almost immediately with a question for the first presenter.

And I realize that’s she’s truly gone.  And that this is the first transcript I’ve read since her passing.  

[ . . . moment of silence . . . ]

 Merits of the Arguments

Ok . . . now I’ve finished reading the transcript—and must confess to some puzzlement.  How can the Justices have difficulty with this idea:

• that a creditor’s refusal of a debtor’s request for turnover of an impounded car is an act to “exercise control over” the car?

A Common Understanding

I’ve practiced for decades under that “exercise control over” provision in § 362(a)(3) and have heard many practitioners discuss it.  And the common understanding has always been that refusing a request for delivery is most definitely an “exercise of control.”  How can it possibly be anything else?

The common understanding is also, under § 362(a)(3), that a creditor’s response to a debtor’s request for delivery must be prompt action!  And the action must be either, (i) surrendering possession, or (ii) filing a motion for relief from stay, with a request for expedited hearing (which shifts “control” to the Court).

There’s no opportunity for stalling.  There is no time for a mediation.  The creditor must act . . . and must act immediately!

Fulton’s Argument

The opening argument from Fulton’s counsel, a former Bankruptcy Judge, seems spot-on:

“MR. WEDOFF: . . . These cases present a single question: May a creditor stop a Chapter 13 debtor from recovering property that the creditor seized before the bankruptcy filing if the debtor does not have a court order directing the return? For three reasons, reflected in the Court’s questions today, the creditor may not prevent recovery of the property.

First, the automatic stay in Section 362(a)(3) of the Bankruptcy Code provides that a creditor may not act to exercise control over a debtor’s property. The critical language is “exercise control.” Unlike action to obtain possession of property, a future event that the stay also prohibits, exercising control over property is ongoing action, and the stay expressly stops it.

Second, the automatic stay works together with the turnover provision in Section 542(a) of the code, which commands that any party holding estate property shall deliver it to the trustee or debtor. This provision operates automatically, with no requirement that the debtor obtain a court order mandating compliance.

Third, the automatic stay and the turnover provision support a major purpose of the Bankruptcy Code: to place all estate property under the court’s jurisdiction and allow the trustee or debtor to control the property from the outset of the case.”

Going Nowhere?

It appears from the Justices’ questions that the Justices, generally, aren’t buying Fulton’s argument—the votes aren’t there to adopt it.

A § 362(a)(6) Alternative?

Justice Gorsuch may have come to the rescue, with an alternative focus on § 362(a)(6), which prohibits “any act to collect . . . or recover a claim against the debtor.”  Here are a couple examples of what Justice Gorsuch said on the subject in questioning counsel for separate parties:

• JUSTICE GORSUCH:  . . . Why isn’t Chicago’s conduct a violation of 362(a)(6)?  . . .  why isn’t what you just described an act to collect on a debt . . . to seize the property and either get payment from the debtor or to use the property to collect on the debt by selling it?
• JUSTICE GORSUCH: Let say that we thought your [Fulton’s] argument under (a)(3) was unsuccessful. Have you preserved an (a)(6) argument? Is it something that could be remanded for consideration?

This § 362(a)(6) alternative makes perfect sense.  Hopefully, Justice Gorsuch can get traction for it with other Justices — but doesn’t (a)(6) simply create the same result that other Justices are rejecting from three subsections earlier?

A “Motion” Under § 542 Alternative?

An alternative idea raised by Justice Sotomayor is this: allowing debtors to initiate turnover proceedings under § 542 by motion, rather than by the lengthy process of an adversary proceeding.  This alternative approach also makes some sense—but it still places the burden of action on the debtor and is no guaranty of a prompt result.

Here’s an example of exchange on this point between Justice Sotomayor and Fulton’s counsel:

“JUSTICE SOTOMAYOR: And you believe a motion instead of an adversary proceeding would be adequate to get the property back by the debtor?

MR. WEDOFF: . . . yes, because the motion can be brought to enforce the automatic stay. So, absolutely.

JUSTICE SOTOMAYOR: No, I’m not talking about the automatic stay. I’m talking about under 542 . . . Could the debtor make a motion?

MR. WEDOFF: The debtor could make a motion under 105(a) to enforce Section 362(a)(3) and Section 542(a), yes.”

Conclusion

It appears, from their questions, that the Justices as a group aren’t buying Fulton’s “exercise control over” argument under § 362(a)(3).

But a couple alternatives proposed by Justices Gorsuch and Sotomayor may help.  It will be interesting to see what happens from here.

** If you find this article of value, please feel free to share. If you’d like to discuss, let me know.