Commentary

January 15th, 2021

Supreme Court Holds that Holding Property Isn’t a Stay Violation

Overview

In 2019, The City of Chicago filed a consolidated appeal with the Seventh Circuit regarding four Chapter 13 bankruptcies, including the Fulton case. Chapter 13 debtors owed between $4,000 and $20,000 in unpaid parking fines. Before bankruptcy, the city impounded their cars. The city refused to release the impounded cars until all fines were paid.

As mentioned in our previous article, while Fulton arises from the impound of a vehicle for unpaid parking tickets, the decision will answer the question dividing the circuits: whether the automatic stay affirmatively requires turnover of lawfully repossessed property in which the debtor holds any interest, or whether creditors with statutory defenses to turnover may assert those defenses and retain possession pending a court order.

Fulton demands the Court address the fundamental meaning of the automatic stay. Is the stay’s purpose maintenance of the status quo, freezing relationships upon a bankruptcy filing, or a command for affirmative action to restore assets to the filing debtor’s estate? If affirmative action is required, exactly when does the obligation arise?

The Result

The bankruptcy court and the Seventh Circuit both held that holding the property constituted a violation of the automatic stay. The potential repercussions were very negative for creditors. Both the impound and potentially every creditor who repossessed a vehicle would be required to turn over the vehicle upon filing. It was also argued that the mere request for the vehicle made the creditor’s refusal an affirmative act violating the stay.

Resolving the split among the circuits, the Supreme Court ruled unanimously, “that mere retention of property does not violate the [automatic stay in] § 362(a)(3).” In essence, it maintains the status quo. The decision also reaffirms that you must read the code comprehensively. Section 542(a), which is the turnover provision and reading 362 to require the release of possession without invoking 542(a) procedures, would make the exceptions to 542(a) and the code provision itself meaningless.

Demands for turnover frequently occur in Chapter 13 bankruptcies, and AIS Law has even faced them in Chapter 7 cases. Creditors will no longer face the dire consequences which can arise from assertions of violation of the automatic stay merely for preserving the status quo and refusing to release a properly repossessed vehicle.  It is important and a reinforcement of the procedures that turnover is not automatically required where 542 exceptions may apply, such as the exception for inconsequential value.  In such cases, debtors must seek turnover, which includes the obligation (if appropriate) of adequate protection.

To read to the full court opinion, click here