Insight The Justices are Set to Answer a Question that has Divided the Circuit Courts of Appeal: Do Creditors Violate the Automatic Stay by Passively Retaining a Debtor’s Property?

Can a creditor keep a vehicle, or other property, it lawfully repossessed or took possession of before the debtor-owner files bankruptcy? The Supreme Court of the United States will soon address this issue, which has divided the Circuit Courts of Appeal, in City of Chicago, Illinois v. Fulton, 19357 (Sup. Ct.). The oral argument for Fulton is now re-set for October 13, 2020, after being postponed in April.

The automatic stay (11 U.S.C. § 362) is the powerful, self-executing, omnipresent, flashing stop sign for all creditors when a debtor filing for bankruptcy. Upon filing the bankruptcy petition the automatic stay goes into effect (automatically) to stay all acts and proceedings against the debtor and the debtor’s property. Actions in violation of the automatic stay are void—not voidable—and a willful disregard for the automatic stay can bring the offending party liability for damages the debtor incurred and, possibly, punitive damages. The automatic stay is a complex (it has over 6,000 words) and frequently litigated statute with far reaching implications for debtors and creditors alike. The Supreme Court has addressed this statute several times, and indeed, even this year, it issued an opinion in Ritzen Group, Inc. v. Jackson Masonry, LLC holding that an order denying relief from the automatic stay is a final, appealable order.

A Quick Look at the Statute

The focus for the Justices in Fulton will be on 11 U.S.C. § 362(a)(3), which in relevant part provides when a debtor files for bankruptcy, this act “operates as a stay . . . of . . . any act to obtain possession of property of the estate . . . or to exercise control over property of the estate.” So, what happens if a creditor already has possession of the debtor’s property before the bankruptcy and is only retaining said property? Does it have to give it back if the debtor still holds an interest in the property?

Fulton Presents the Issue

For context, the facts of Fulton involve several, consolidated bankruptcy cases wherein Chicago impounds vehicles of individuals who have multiple parking infractions. Debtors in the cases then file for Chapter 13 bankruptcy protection (individual reorganization chapter of the Bankruptcy Code) and they seek return of their vehicles. The City then refuses to return them, and the debtors file motions for a determination that Chicago was in violation of the automatic stay for failing to give back the vehicles.
In Fulton the Bankruptcy Court for the Northern District of Illinois had no trouble with these facts in concluding that Chicago was indeed in violation of the automatic stay and ordering the City to return the vehicles. That is so because the Court of Appeals for the Seventh Circuit (the appellate court with binding authority over Chicago bankruptcy courts) had already ruled that it was a violation of the automatic stay to passively retain property of the debtor in Thompson v. General Motors Acceptance Corp., 566 F.3d 699 (7th Cir. 1999). Chicago then appealed to the Seventh Circuit Court of Appeals the consolidated cases in Fulton and asked the Circuit Court to overrule Thompson. In Fulton, at the Seventh Circuit, the Judges on the panel declined Chicago’s invitation to overrule Thompson and Chicago has now appealed the issue to the Supreme Court of the United States to resolve a Circuit Court of Appeals split on this issue.

Majority and Minority Holdings of the Circuit Courts of Appeal

As stated, in Fulton, the Supreme Court is asked to resolve a dispute between the intermediate appellate courts on this issue. The Circuit Courts of Appeal that have addressed this issue have split into a “majority” holding and a “minority” holding.
Courts in the majority hold like the Seventh Circuit did in Thompson that passively retaining the debtor’s property upon a bankruptcy filing violates the automatic stay based on the plain language of 11 U.S.C. § 362(a)(3), its legislative history, and the turnover provision of the Code found at 11 U.S.C. § 542, which requires the return of property to a debtor’s estate upon the filing of the case. The Circuit Courts who have so held include the Second, Seventh, Eighth, Ninth, and Eleventh circuits. Notably, for our Idaho readers, the Ninth Circuit (appellate court with binding authority over Idaho bankruptcy courts, among many other Western States bankruptcy courts) is in the majority to require creditors to return debtor’s property.

Courts in the minority hold that it is not a violation of the automatic stay to retain property of the debtor because this act merely preserves the status quo. Moreover, the courts in this group find that the automatic stay only prohibits creditors from taking an affirmative act to exercise control over the property. Courts in the minority are the Third, Tenth, and the District of Columbia circuits.

Conclusion

We will be on the lookout for the Supreme Court’s decision in Fulton, which has the potential to change how creditors in Idaho and beyond react to a debtor’s bankruptcy filing after the creditor obtains the debtor’s property.