Skip to content

Supreme Court Holds that Mere Retention of Property Does Not Violate the Automatic Stay

January 21, 2021

The Supreme Court of the United States on January 14, 2021, issued a decision in the case of City of Chicago v. Fulton that favors creditors in a bankruptcy case. The Court held that a creditor’s “mere retention” of property of the estate post-petition does not violate the automatic stay as an act to exercise control. In its reasoning, the Court determined that § 362(a)(3) prohibits affirmative acts that “would disturb the status quo.” Accordingly, creditors who seize property prior to the bankruptcy filing will not face sanctions for violating the automatic stay by merely retaining control of property. Notably, the debtor still has the right under § 542 to seek turnover of seized property but can no longer argue that such retention is also a violation of the automatic stay.  

In this precedential case, the Supreme Court considered the actions of the City of Chicago in impounding vehicles for failure to pay fines for parking tickets and vehicle infractions. Several of the owners of those impounded vehicles filed Chapter 13 bankruptcy petitions and sought to have the vehicles returned in exchange for payments under the individual plans. However, the City of Chicago refused, and those debtors each filed actions that asserted that the retention of the vehicles was a violation of the automatic stay. The bankruptcy court agreed with the debtors, finding that the City of Chicago was acting to exercise control over the vehicles. The Seventh Circuit affirmed. The Seventh Circuit joined a circuit split on the interpretation of what constitutes an act to exercise control.  

In a unanimous decision, the Supreme Court resolved the circuit split. It explained its reasoning:

The better account of [§§ 542 and 362] is that §362(a)(3) prohibits collection efforts outside the bankruptcy proceeding that would change the status quo, while §542(a) works within the bankruptcy process to draw far-flung estate property back into the hands of the debtor or trustee.  

Thus, while merely retaining seized property would not violate the automatic stay, additional actions such as selling the seized property at a public auction or via private sale would be a violation. Justice Sotomayor, who wrote a concurring opinion, stated that the Supreme Court was not deciding if other provisions in §362(a) may require a creditor to return a debtor’s property. Judge Sotomayor further stated that she was concerned with the slow nature of turnover proceedings and suggested that Congress or the bankruptcy rules committee make changes to ensure a prompt resolution of turnover actions.

This decision should provide comfort to creditors who seized property prepetition and have not yet liquidated the property. There may still be turnover actions to face, but in most scenarios, creditors will be in a better position to request adequate protection provisions in exchange for turning over the property.  

DISCLAIMER: The views and opinions expressed in the article represent the view of the author and not necessarily the official view of Clark Hill PLC. Nothing in this article constitutes professional legal advice nor is intended to be a substitute for professional legal advice.

Subscribe For The Latest

Subscribe

Related

Event

2024 Cybersecurity and Data Privacy Laws Summit Chicago

This event will include a panel discussion with expert industry leaders, offering a deep dive into the most pressing issues and advancements in AI and data privacy laws. You’ll gain critical knowledge and explore the implications of AI in legal and privacy domains so you can update your practices to reflect the highest standards of data stewardship.

Explore more
Event

WEBINAR: The Race to 2024: Politics and Social Media in the Workplace and Employer Rights.

Over the last several years, employers have seen and continue to see increased political activities from their employees at work and on social media platforms, including on business-related social media platforms, like LinkedIn. Managing employee expression causes unique challenges for employers and HR professionals, and in a General Election year, these challenges are likely to increase as the Presidential race, and other races, heat up.

Explore more
Event

Webinar: A Cookieless Future and Promise of PETs: A Primer on Privacy Enhancing Technologies

This webinar will explore PETs – we will define what they are, what problems PETs exist to address, and emerging PET standards including the National Institute of Standards and Technology (NIST) draft guidance on how to evaluate PET effectiveness. We will provide specific PET use cases and discuss how PETs may be utilized to address the phase out of third party cookies by certain browsers for purposes of targeted advertising.

Explore more