By: Donald L Swanson
The new U.S. Supreme Court’s bankruptcy opinion is City of Chicago, Illinois v. Fulton, et al., Case No. 19-357, issued January 14, 2021.
Facts and Ruling
Here’s how the Supreme Court summarizes the facts of the case and its ruling.
- In the case before us, the city of Chicago impounds each respondent’s vehicle for failure to pay fines for motor vehicle infractions.
- Each respondent files a Chapter 13 bankruptcy petition and requests that the City return his or her vehicle—the City refuses, and in each case a bankruptcy court holds that the City’s refusal violates the automatic stay.
- The Court of Appeals affirms all of the judgments in a consolidated opinion, concluding that “by retaining possession of the debtors’ vehicles after they declared bankruptcy,” the City has acted “to exercise control over” respondents’ property in violation of §362(a)(3). [Fn. 1]
- We granted certiorari to resolve a split in the Courts of Appeals over whether an entity that retains possession of the property of a bankruptcy estate violates §362(a)(3).
- We now vacate the judgment below.
And here is a summary of the Supreme Court’s rationale:
- The language used in § 362(a)(3) (i.e., “exercise control over property of the estate”) suggests that merely retaining possession of estate property does not violate the automatic stay.
- Any ambiguity in the text of § 362(a)(3) is resolved decidedly in the City’s favor by the existence of a separate provision, § 542, that expressly governs the turnover of estate property.
- Had Congress wanted to make § 362(a)(3) an enforcement arm of sorts for § 542(a), the least one would expect would be a cross-reference to the latter provision, but no such cross-reference exists.
What the Court DID NOT Decide
The conclusion of the Supreme Court’s majority opinion clarifies that it is only resolving the § 362(a)(3) issue involving “exercise control over property of the estate”: “We hold only that mere retention of estate property after the filing of a bankruptcy petition does not violate §362(a)(3).”
Additionally, the conclusion of the majority opinion identifies the following issues that remain unresolved.
–§ 542 turnover
“We need not decide how the turnover obligation in §542 operates.”
–Other subsections of § 362(a).
“Nor do we settle the meaning of other subsections of §362(a).” In its footnote 2, the majority opinion specifies:
- “In respondent Shannon’s case, the Bankruptcy Court determined that by retaining Shannon’s vehicle and demanding payment, the City also had violated §§362(a)(4) and (a)(6)”;
- “Shannon presented those theories to the Court of Appeals, but the court did not reach them”: and
- “Neither do we.”
Sec. 362(a)(4) prohibits, “any act to create, perfect, or enforce any lien against property of the estate.”
Sec. 362(a)(6) prohibits, “any act to collect, assess, or recover a claim against the debtor that arose before the commencement of the case.”
At oral arguments Justice Gorsuch raised the § 362(a)(6) issue twice:
- 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?
Justice Sotomayor issues a concurring opinion that addresses unresolved issues. What follow’s is a summary of her concurring opinion.
–Other § 362(a) & § 542(a) Provisions
She writes 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.
Those provisions stay “any act to create, perfect, or enforce any lien against property of the estate” and “any act to collect, assess, or recover a claim against [a] debtor” that arose prior to bankruptcy proceedings. §§362(a)(4), (6). The City’s conduct may very well violate one or both of these other provisions. The Court does not decide one way or the other.
Nor has the Court addressed how bankruptcy courts should go about enforcing creditors’ separate obligation to “deliver” estate property to the trustee or debtor under § 542(a).
The City’s policy of refusing to return impounded vehicles “hardly comports with” the spirit of the Bankruptcy Code.
For a Chapter 13 bankruptcy to succeed, the debtor must continue earning an income so he can pay his creditors. For many, having a car is essential to maintaining employment and paying creditors, the City of Chicago included.
Drivers in low-income communities face vicious cycles:
- A driver is assessed a fine she cannot immediately pay; the balance balloons as late fees accrue; the local government seizes the driver’s vehicle, adding impounding and storage fees to the growing debt; and the driver, now without reliable transportation to and from work, finds it all but impossible to repay her debt and recover her vehicle.
- Such drivers may turn to Chapter 13 bankruptcy for a “fresh start.” But without their vehicles, many debtors quickly find themselves unable to make their Chapter 13 payments.
- The cycle thus continues, disproportionately burdening communities of color and interfering not only with debtors’ ability to earn an income and pay their creditors but also with their access to childcare, groceries, medical appointments, and other necessities.
–§ 542(a) Considerations
The Court leaves open the possibility of relief under §542(a), which requires:
- any “entity” to turn over “property” belonging to the bankruptcy estate; and
- the debtor must be able to provide the creditor with “adequate protection” of its interest in the returned property, such as demonstrating that her car is sufficiently insured.
In this way, §542(a) maximizes value for all parties involved in a bankruptcy: The debtor is able to use her asset, which makes it easier to earn an income; the debtor’s unsecured creditors, in turn, receive timely payments from the debtor; and the debtor’s secured creditor, for its part, receives “adequate protection [to] replace the protection afforded by possession.”
The trouble with §542(a), however, is that turnover proceedings can be quite slow, requiring what is essentially a full civil lawsuit and commonly taking 100 days—that’s a long time to wait for a creditor to return your car, when you need it to get to work.
Some courts have adopted strategies to hurry things along: one bankruptcy court has held that §542(a)’s turnover obligation is automatic even absent a court order, while other courts permit debtors to seek turnover by simple motion on adequate notice to the creditor.
However, any gap left by the Court’s ruling is best addressed by rule drafters and policymakers, not bankruptcy judges:
- It is up to the Advisory Committee on Rules of Bankruptcy Procedure to consider amendments to the Rules that ensure prompt resolution of debtors’ requests for turnover under §542(a), especially where debtors’ vehicles are concerned;
- Congress, too, could offer a statutory fix, either by ensuring that expedited review is available for §542(a) proceedings seeking turnover of a vehicle or by enacting entirely new statutory mechanisms that require creditors to return cars to debtors in a timely manner.
- Nothing in today’s opinion forecloses these alternative solutions. With that understanding, I concur.
Well, then . . . it looks like one issue may be resolved by City of Chicago, Illinois v. Fulton, but a variety of related issues have only just begun.
It will be interesting to see how this plays out.
Footnote 1. 11 U.S.C. § 362(a)(3) provides: “(a) . . . a petition filed under section 301, 302, or 303 of this title, . . . operates as a stay, applicable to all entities, of— . . . (3) any act . . . to exercise control over property of the estate.”
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