SCOTUS Rules Retaining Bankruptcy Debtor’s Property Doesn’t Violate Automatic Stay

In City of Chicago, Illinois v. Fulton, 592 U.S. ____ (2021), the U.S. Supreme Court held that retaining estate property after the filing of a bankruptcy petition does not violatethe automatic stay granted under 11 U.S.C. § 362(a)(3). The Court’s decision was unanimous.

Facts of the Case

The filing of a petition under the Bankruptcy Code (11 U.S.C. §541(a)) automatically “creates an estate” that, with some exceptions, comprises “all legal or equitable interests of the debtor in property as of the commencement of the case.” Section 541 is intended to include within the estate any property made available by other provisions of the Bankruptcy Code. Section 542 is one such provision, as it provides that an entity in possession of property of the bankruptcy estate “shall deliver to the trustee, and account for” that property. The filing of a petition also automatically “operates as a stay, applicable to all entities,” of efforts to collect prepetition debts outside the bankruptcy forum, §362(a), including “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,” §362(a)(3).

In each case before the Court, the respondent filed a bankruptcy petition and requested that the city of Chicago (City) return his or her vehicle, which had been impounded for failure to pay fines for motor vehicle infractions. In each case, the City’s refusal was held by a bankruptcy court to violate the automatic stay. The Seventh Circuit Court of Appeals affirmed, concluding that by retaining possession of the vehicles the City had acted “to exercise control over” respondents’ property in violation of §362(a)(3).

Supreme Court’s Decision

The Supreme Court vacated the lower court judgment, holding that the mere retention of estate property after the filing of a bankruptcy petition does not violate §362(a)(3) of the Bankruptcy Code. Justice Alito delivered the opinion of the Court.

According to the Court, the plain text of the Bankruptcy Code supports its decision. As Justice Alito explained:

The language used in §362(a)(3) suggests that merely retaining possession of estate property does not violate the automatic stay. Under that provision, the filing of a bankruptcy petition operates as a “stay” of “any act” to “exercise control” over the property of the estate. Taken together, the most natural reading of these terms—“stay,” “act,” and “exercise control”—is 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.

The Court further concluded that the respondents’ alternative reading would create at least two serious problems. First, it found that reading §362(a)(3) to cover mere retention of property would render §542’s central command—that an entity in possession of certain estate property “shall deliver to the trustee . . . such property”—largely superfluous, even though §542 appears to be the provision governing the turnover of estate property. Second, the Court found that the respondents’ reading would render the commands of §362(a)(3) and §542 contradictory. As Justice Alito explained, Section 542 carves out exceptions to the turnover command. Under the respondents’ interpretation, an entity would be required to turn over property under §362(a)(3) even if that property were exempt from turnover under §542. According to the Court, the history of the Bankruptcy Code confirms the better reading. The Code originally included both §362(a)(3) and §542(a), but the former provision lacked the phrase “or to exercise control over property of the estate.” When that phrase was later added by amendment, Congress made no mention of transforming §362(a)(3) into an affirmative turnover obligation. It is unlikely that Congress would have made such an important change simply by adding the phrase “exercise control,” rather than by adding a cross-reference to §542(a) or some other indication that it was so transforming §362(a)(3).