U.S. Supreme Court Resolves Issue of Automatic Stay and Passive Retention of Debtor’s Property

U.S. Supreme Court Resolves Issue of Automatic Stay and Passive Retention of Debtor’s Property

Circuit Courts have been discussing on the issue that whether an entity violates automatic stay as provided by Section 362 (a) (3)[1] by retaining debtor’s property after the bankruptcy petition is filed. Ending the confusion among circuit courts, the U.S. Supreme Court, on January 14, 2021, passed an opinion on the same in Chicago v. Fulton[2].

As per Section 362[3], an automatic stay is triggered as soon as the bankruptcy proceeding commences. The objective of automatic stay is to give the debtor a buffer time from its creditors, which include stay on collection efforts, foreclosures and any other action which a creditor might take against the debtor. Further, vide Section 362 (a) (3), stay is applicable to all entities and any action “to exercise control over property of the estate”.

In the matter of Chicago v. Fulton, an appeal before the U.S. Supreme Court came after a series of cases against City of Chicago for impounding vehicles for various parking and driving related infractions, as per M.C.C. § 9-92-080(f). The vehicle is impounded to be kept as collateral for the motorist’s debt to the city. The respondents were motorists whose vehicles had been impounded and who had filed Chapter 13 bankruptcy petitions for retrieving their vehicles. The respondents claimed that retention of their vehicles by the City was in violation of automatic stay under Section 362 (a) (3).[4] The Seventh Circuit held that the City was in violation of the automatic stay and the retention of the vehicles constituted “exercise of control”.[5] The ruling was in consistence with its earlier rulings as well as rulings of Second[6], Eight[7] and Ninth[8] Circuits. However, it was in contradiction with Tenth Circuit’s view. Upon appeal, U.S. Supreme Court granted certiorari to resolve the difference of opinion among the circuit.

In order to resolve the issue, the Supreme Court reversed the ruling of Seventh Circuit and adopted the Tenth’s Circuit position, and held that “mere retention of property does not violate Section 362 (a) (3)”. To reach this conclusion, the Court firstly considered the plain language of the impugned provision. The Court stated that a raw reading of the provision included only “affirmative acts that would disturb the status quo of estate property as of the time when the bankruptcy petition was filed”. Also, act means “something done or performed…; a deed”, which leads to the meaning that in order to trigger the automatic stay provision an affirmative act is required, and a mere passive retention is insufficient. Further, it considered Section 362 (a) (3)’s relationship to Section 542[9], which provides for a “turnover”. It opined that reading turnover under Section 362 would render Section 542 superfluous. Further, if turnover is read into Section 362 (a) (3), then it would lead to contradictions with Section 542 as the latter provision provides certain exceptions to the turnover requirement that are not given under Section 362 (a) (3). Lastly, the Court considered the history of the provision. It was noted that until 1984, the phrase “or to exercise control over property of the estate” was not added to Section 362 (a) (3). The Court opined that it would have been “odd” for Congress to convert it into a turnover provision by simply adding “to exercise control”. It was further clarified that Congress did not introduce any cross-reference with existing turnover provision under Section 542 and Section 362 (a) (3). And therefore, the Court concluded that it was the intention of Congress to only add affirmative action which would change the status quo of the property.

The U.S. Supreme Court’s judgment has multifaceted implications. Firstly, although the judgment was delivered in relation to impounded vehicles; however, the analysis would also be applicable to a situation where a creditor retains debtor’s property as collateral. Also, based upon the decision, creditor would not be liable to give up possession of debtor’s property, immediately upon filing of the bankruptcy petition. Secondly, the Court’s conclusion that turnover is governed by Section 542 and not Section 362 (a) (3), is favorable for creditors as Section 542 provides certain exceptions against the turnover. Lastly, the decision had provided little comfort to the creditor by declaring that they won’t be in violation of Section 362 (a) (3) for retaining possession of debtor’s property. However, it is still ambiguous whether such retention would violate other provision of the Code such as Section 362 (a) (6)[10] which stays “to collect…or recover a claim against the debtor”.

[1] 11 U.S.C. § 362 (a)(3)

[2] City of Chicago, Illinois v. Fulton, No. 19-357, 2021 WL 125106 (U.S. Jan. 14, 2021)

[3] 11 U.S.C. § 362

[4] In re Fulton, 926 F.3d 916 (7th Cir. 2019)

[5] Id.

[6] In re Weber, 719 F.3d 72, 79 (2d Cir. 2013)

[7] In re Knaus, 889 F.2d 773 (8th Cir. 1989).

[8] In re Del Mission Ltd., 98 F.3d 1147 (9th Cir. 1996).

[9] 11 U.S.C. § 542

[10] 11 U.S.C. § 362(a)(6)