SCOTUS Finds Retention of Property Is Not Exercise of Control

Posted by NCBRC - January 18, 2021

In an unhappy start to the new year, the Supreme Court resolved a long-festering issue in favor of creditors when it found that “mere retention of property does not violate §362(a)(3).” City of Chicago v. Fulton, 592 U.S. ___, No. 19-357 (S.Ct. Jan. 14, 2021).

Here, a number of chapter 13 debtors entered bankruptcy after the City of Chicago impounded their vehicles for failure to pay traffic fines. In their separate cases, the debtors sought return of the vehicles arguing that once they filed for bankruptcy, the City’s retention of the vehicles violated the automatic stay. The bankruptcy courts in each case agreed with the debtors. In a consolidated opinion, the Seventh Circuit found that retention of the vehicles constituted an exercise of control over property of the estate within the meaning of section 362(a)(3). It affirmed. In re Fulton, 926 F. 3d 916 (7th Cir. 2019).

Section 362(a)(3) stays: “any act to obtain possession of property of the estate or of property from the estate or to exercise control over property of the estate.”

On appeal to the Supreme Court the Court directed its attention to the meaning of “stay,” “any act,” and “exercise control.” The Court found its definition of “stay” in Nken v. Holder, 556 U. S. 418, 429 (2009), as “suspend[ing] judicial alteration of the status quo.” Black’s Law Dictionary defines an “act” as “[s]omething done or performed . . . ; a deed.” Finally, the Court found that to “exercise” means “to bring into play” or “make effective in action. . . .And to ‘exercise’ something like control is ‘to put in prac­tice or carry out in action.’”

Based on these definitions, the Court concluded: “that §362(a)(3) halts any affirma­tive act that would alter the status quo as of the time of the filing of a bankruptcy petition.” Though the Court agreed with the general principle that omissions can constitute “acts” it found that simply having power to do something but not doing it, is not an “act,” for purposes of section 362(a)(3).

The Court was further persuaded by the impact the debtors’ reading of section 362(a)(3) would have on section 542(a). Section 542(a) provides: “[A]n entity, other than a custodian, in possession, cus­tody, or control, during the case, of property that the trustee may use, sell, or lease under section 363 of this title, or that the debtor may exempt under section 522of this title, shall deliver to the trustee, and account for, such property or the value of such property, unless such property is of inconsequential value or benefit to the estate.”

In light of this provision, the Court found that reading section 362(a)(3) to require a creditor to return property to the debtor would create two significant problems. First, if section 362(a)(3) required a creditor to turn over property merely upon the filing of bankruptcy, section 542(a)’s broad turnover provision would be rendered superfluous. Such interpretation would shift the weight of turnover away from the express turnover provision—542—to the stay provision. “The better account of the two provisions 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.” Second, if section 362(a)(3) were to require turnover of any property held by a creditor, that section would contradict section 542(a)’s exception for turnover of property of inconsequential value to the estate. Thus, section 362(a)(3) would require what section 542 explicitly excuses.

Turning to the history of section 362, the Court noted that, while sections 362(a)(3) and 542(a) existed prior to 1984, it was not until the 1984 amendments that Congress added language to the former about the exercise of control over estate property. The Court opined that had Congress intended to create an affirmative turnover requirement to that section, it would have done so in more certain terms.

The Court vacated and remanded.

Justice Sotomayor filed a concurring opinion in which she agreed with the overall conclusion that section 362(a)(3)’s “exercise control” does not impose a requirement on creditors to turnover property under the automatic stay. She wrote separately to emphasize that the Court did not decide whether other provisions of section 362(a), such as (a)(4) and (6), which “stay, among other things, ‘any act to create, perfect, or enforce any lien against property of the estate’ and ‘any act to collect, assess, or recover a claim against [a] debtor’ that arose prior to bankruptcy proceedings,” impose affirmative obligation to return a debtor’s property.

Justice Sotomayor went on to argue that the City’s refusal to return the debtors’ impounded vehicles, while perhaps in compliance with the letter of the law, were at variance with its spirit. Justice Sotomayor pointed out that depriving a chapter 13 debtor of transportation necessary to employment, creates a vicious cycle of increasing debt with decreasing ability to repay it. The practical effect of such cycles is disproportionate impact on citizens of color. She noted, however, that section 542(a) provides a way to avoid this situation by allowing a court to require “an entity” to turnover the vehicle while requiring the debtor to establish adequate protection such as insurance.

Fulton SCt Jan 2021


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