January 14, 2021

Supreme Court Decides Chicago v. Fulton

On January 14, 2021, the U.S. Supreme Court decided Chicago v. Fulton, holding that mere retention of a debtor’s property after the filing of a bankruptcy petition does not violate the automatic stay provided by §362(a) of the Bankruptcy Code.

The City of Chicago impounded respondents’ vehicles for failure to pay fines for motor vehicle infractions. After their vehicles were impounded, each respondent filed a Chapter 13 bankruptcy petition and requested the return of their vehicle. The City refused, and the bankruptcy court in each case found the City’s refusal to return the vehicle violated the automatic stay. The Court of Appeals for the Seventh Circuit affirmed, holding that by retaining the vehicles after each respondent had declared bankruptcy the City had “exercised control” over respondents’ property in violation of §362(a)(3).

The Supreme Court vacated the judgment and held that “merely retaining possession of estate property does not violate the automatic stay.” First, the Court observed that the statutory language suggests that “§362(a)(3) prohibits affirmative acts that would disturb the status quo of estate property as of the time when the bankruptcy petition was filed.” Second, the Court concluded that any ambiguity in the text of §362(a)(3) was “resolved decidedly” by §542, which requires the turnover of estate property to the trustee and carves out certain exceptions to the turnover obligation. The Court reasoned that if §362(a)(3) prohibited the passive retention of property, it would generate two structural problems within the Bankruptcy Code. That construction would (1) render §542 superfluous because all estate property would be required to be turned over to the debtor immediately upon filing of the petition under §362(a)(3), and (2) generate conflicting commands because §542 specifically excuses some turnovers of property while §362(a)(3) would require immediate turnover of all of the debtor’s property. Third, the Court observed that the statutory history of the Code confirmed that the automatic stay was not intended to operate as an affirmative turnover obligation.

The Court expressly declined to address how the turnover obligation in §542 operates or the meaning of other subsections of §362(a). The Supreme Court remanded the case for further proceedings consistent with the opinion.

Justice Alito delivered the opinion of the Court, in which Chief Justice Roberts and Justices Thomas, Breyer, Sotomayor, Kagan, Gorsuch, and Kavanaugh joined. Justice Sotomayor filed a concurring opinion. Justice Barrett took no part in the consideration or decision of the case.

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