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January 25, 2021

Not So Fast! US Supreme Court Puts the Brakes on Lower Courts' Bankruptcy Rulings for City of Chicago's Vehicle Takings

On January 14, 2021, the US Supreme Court issued a dramatic ruling reversing a slew of lower court rulings, upending precedent from the Second Circuit Court of Appeals, and finding that the City of Chicago did not violate provisions of the US Bankruptcy Code when it refused to return impounded cars owned by Chapter 13 debtors. The City of Chicago impounded the vehicles because the debtors failed to pay their parking ticket fines. After impoundment, each debtor filed a Chapter 13 bankruptcy petition and requested that the city return their vehicles to them. The city refused to do so, and the lower bankruptcy courts held that the city’s refusal violated the automatic stay set forth in Section 362(a)(3) of the Bankruptcy Code, which prevents entities from exercising control over estate property.

Justice Samuel Alito, who drafted and delivered the opinion of City of Chicago v. Robbin L. Fulton in a text-based analysis, articulated the issue before the court: “The question in this case is whether an entity violates that prohibition [Section 362(a)(3) of the Bankruptcy Code] by retaining possession of a debtor’s property after a bankruptcy petition is filed.” Justice Alito ruled that there are multiple reasons why the city’s actions did not constitute a violation of that specific section of the Bankruptcy Code.

First, Justice Alito held that the clear language of Section 362 indicates that just holding onto estate property does not violate the stay and that “something more than just retaining power is required to violate the disputed provision.” Here, the city simply holding onto the vehicles was not enough to constitute a violation of § 362(a)(3) of the code. The court further held that some affirmative action would have to be taken for the city to violate the automatic stay.

Second, the city was already in passive possession of the vehicles, and Section 362(a)(3)  of the Bankruptcy Code does not require a possessor of property to take affirmative actions to go out of their way and return the property to the owner.

Third, Justice Alito analyzed Congress’s intent in drafting the applicable section of the Bankruptcy Code. He observed that, if Congress had wanted to include a requirement that entities turn over property of a debtor’s estate (in this specific case, their vehicles), then they would have written it as such, but they did not. He pointed out: “…transforming the stay in § 362 into an affirmative turnover obligation would have constituted an important change…Congress did not include such a cross-reference or provide any other indication it was transforming § 362(a)(3).”

In vacating the decision of the Seventh Circuit Court of Appeals, Justice Alito concluded that: “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 made it clear that this decision was applicable specifically under § Section 362(a)(3), and did not have any bearing on other subsections of 362 or Section 542 [turnover] in general. In her concurring opinion, Justice Sotomayor reasoned that, as a practical matter, allowing entities to hold onto a debtor’s possessions would make it even more difficult for individuals to begin to pay back sums owed and take themselves out of their original predicament and, therefore, jeopardizing an individual’s bankruptcy “fresh start”. “One hundred days [average duration of turnover proceedings] is a long time to wait for a creditor to return your car, especially when you need that car to get to work so you can earn an income and make your bankruptcy-plan payments.” 

While the Court’s ruling was issued in a consumer case, it has a wider application to any situation where a creditor is in possession of a debtor’s assets and is a victory for secured creditors, giving them increased leverage in a bankruptcy case. Creditors in such a position should find comfort in the court’s ruling but should still also carefully analyze whether any action it may take runs afoul of other provisions of the Bankruptcy Code, including the other automatic stay sections or the turnover provisions of Section 542. Thus, secured creditors would be best served to act promptly, with the bankruptcy court’s approval, to obtain control of a debtor’s property that is in their passive possession on the date of the bankruptcy filing.

If you have any questions regarding this alert, please contact Jeff Dove, Restructuring, Bankruptcy & Creditors’ Rights Practice Area co-chair, at jdove@barclaydamon.com; Janice Grubin, Restructuring, Bankruptcy & Creditors’ Rights Practice Area co-chair, at jgrubin@barclaydamon.com; Elizabeth Vulaj, associate, at evulaj@barclaydamon.com, or another member of the firm’s Restructuring, Bankruptcy & Creditors’ Rights Practice Area.

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