In re Fulton: Not The Last Word Under § 362(a) Or § 542(a)! (Cordova v. City of Chicago)

City of Chicago (photo by Marilyn Swanson)

By: Donald L Swanson

The U.S. Supreme Court, in its Fulton v. City of Chicago opinion, let Chicago off the automatic stay hook for holding onto impounded vehicles owned by Chapter 13 debtors.

But Fulton is not the last word on that subject.

The new opinion is Cordova, et al. v. City of Chicago, Case No. 19-0684 in the Northern Illinois Bankruptcy Court (issued December 6, 2021, Doc. 154).

Background

Plaintiffs in the Cordova lawsuit are Chicago residents who had their vehicles impounded by the City for unpaid traffic fines:

  • After impoundment, each Plaintiff files a chapter 13 bankruptcy and asks the City to return their impounded vehicles;  
  • The City refuses; and
  • Instead, the City demands a lump-sum payment, often over $1,000, and treatment of its claim in debtor’s plan as fully secured—in exchange for returning a vehicle.

For debtors who cannot afford the lump-sum payment, the City continues to retain their vehicles.

When Plaintiffs/debtors file the Cordova lawsuit, the City’s actions are violating the automatic stay (under Seventh Circuit rulings);

  • specifically the violation is of § 362(a)(3), which prohibits any act “to exercise control over property of the estate”; and 
  • the Seventh Circuit has declared that “the act of passively holding onto an asset constitutes ‘exercising control’ over it, and such action violates § 362(a)(3) of the Bankruptcy Code.”

However, the US Supreme Court subsequently rules otherwise in its Fulton case: it says that more than retaining possession is required for a 362(a)(3) violation, because debtors have a separate remedy against the City under § 542(a).

Amended Complaint

So, Plaintiffs/debtors amend their complaint to allege that the City’s refusal to turn over the vehicles violates, (i) other automatic stay provisions, namely § 362(a)(4), (6) and (7), and (ii) turnover requirements in § 542(a).

The Amended Complaint asks for three types of relief for such violations:

  1. Recovering actual damages, attorney’s fees, costs of litigation, and an accounting for the value of Plaintiffs’ loss of property;
  2. Recovering punitive damages, because of the City’s scheme to alleviate a budgetary crisis by liquidating debtor vehicles; and
  3. Certifying debtors’ claims as a class action. 

Dismissal Motion

The City files a Motion to dismiss all claims in the Amended Complaint for failing to state a claim upon which relief can be granted.  Debtors oppose the Motion.

Here’s how the Bankruptcy Court addresses each of the claims, under the City’s Motion to dismiss.

—362(a)(4)

§ 362(a)(4) prohibits “any act to create, perfect, or enforce any lien against property of the estate.”  Debtors’ vehicles qualify as property of their estates.

To violate § 362(a)(4), the City must have created, perfected or enforced a lien against the vehicles.  The City’s interest in each of debtors’ impounded vehicles does qualify as a lien.

The essential question under 362(a)(4) is whether the City’s continued possession is an act to create, perfect, or enforce that lien. 

The Amended Complaint does state a claim for violation of 362(a)(4), and the City will bear a heavy burden on its defense of this claim.

—362(a)(6)

§ 362(a)(6) prohibits “any act to collect, assess, or recover a claim against the debtor that arose before the commencement of the case.” 

Since 362(a)(6) expressly applies to debtors, not to assets, some courts hold that purely in rem actions do not violate it.  However, even when property is involved, a creditor’s actions can still be against the debtor personally. 

The Seventh Circuit, for example, holds that a university violated § 362(a)(6) by refusing to provide a transcript to a student in bankruptcy who still owed tuition. That’s because the university had no reason to deny the student’s request, other than collecting the student’s debt. 

Here, a prepetition debt exists from debtors to the City. It remains for the Plaintiffs/debtors to show that the City’s acts are directed against the debtors and whether the City’s acts amount to an “act to collect, assess, or recover a claim.”

Nevertheless, the Amended Complaint does state a claim for violation of 362(a)(6).

—362(a)(7)

§ 362(a)(7) prohibits “the setoff of any debt owing to the debtor that arose [prepetition] . . . against any claim against the debtor.” 

There are four elements for a setoff: 

  1. a decision to effectuate a setoff;
  2. some action accomplishing setoff;
  3. a recording of the setoff; and 
  4. the creditor’s intention that the setoff be permanent. 

A party arguing a setoff violation under 362(a)(7) must prove all four elements.

There is no case law to support the proposition that holding possession of the vehicles qualifies as a setoff.  Accordingly, this claim is dismissed from the Amended Complaint, without prejudice to further amendment.

—542(a) Turnover

§ 542(a) requires that anyone who has “possession, custody, or control” of bankruptcy estate property, during the bankruptcy, must deliver that property to the trustee and “account for” such property or its value, “unless such property is of inconsequential value or benefit to the estate.” 

By its express terms, 542(a) is self-executing and does not require any action or commencement of a proceeding or court order.

A trustee must prove three elements to establish a turnover obligation: 

  1. the property belongs to the estate;
  2. an entity had control or possession of the property during the bankruptcy case; and 
  3. the property is of consequential value or benefit to the estate. 

In a Chapter 13, there is a another question: does the Chapter 13 debtor accede to the rights of a trustee under § 542(a)?  This is an open question that will need to be resolved.

While reserving that issue, the Court rules that the Amended Complaint does state a claim for violation of 542(a).

Punitive damages and Sovereign immunity

The Bankruptcy Code says, in  §106, that sovereign immunity is abrogated as to a governmental unit for purposes of § 362 and § 542.

But, § 106 clarifies that, while a Court may issue an award against a governmental unit, it may not do so as to “an award of punitive damages.”

Accordingly, the punitive damages request is dismissed with prejudice.

Class Certification

Debtors request certification of their claims as a class action.

Class certification is an unsettled issue here.  Accordingly, the court will set a deadline for a motion to certify the class and for briefing thereon. 

Fulton’s Effect on Debtors’ Claims

In Fulton, the Supreme Court holds that “the language of 362(a)(3) implies that something more than merely retaining possession is required to violate the disputed provision.” 

The City argues that the reasoning in Fulton should be applied to all of the other claims under § 362(a) and that all such claims should be dismissed.

The Bankruptcy Court declines to adopt such reasoning because: 

  • Fulton is limited by its own terms to § 362(a)(3);
  • the City may have committed other acts in violation of the automatic stay; and 
  • the City’s interpretation leaves debtors with virtually no immediate remedy and creditors with no remedy at all.

As Justice Sotomayor says in her Fulton concurrence, “I write 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 says that causes of action under § 362(a)(4) and (6) may require the return of a debtor’s property, despite the Court’s ruling on § 362(a)(3).

The Fulton majority agrees, recognizing that the exercise of control might qualify as “acts” in certain contexts and expressly notes the limited nature of its determinations as follows: 

  • “Nor do we settle the meaning of other subsections of 362(a)”; and
  • “We hold only that mere retention of estate property after the filing of bankruptcy petition does not violate 362(a)(3).”

Conclusion

Obviously, Fulton is not the final word on the City of Chicago’s obligations to Chapter 13 debtors, regarding impounded vehicles in its possession.

It will be interesting to see how all this turns out!

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

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