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

At City of Chicago, Illinois v. Fulton, 592 U.S. ____ (2021), the U.S. Supreme Court maintained that keeping estate property after the filing of a bankruptcy petition does not violate the automatic stay awarded under 11 U.S.C. § 362(a)(3). The Court’s conclusion 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” which, with some exceptions, comprises”all legal or equitable interests of the debtor in property as of the commencement of the case.” Section 541 is meant to include within the home any property made available by other states of the Bankruptcy Code. Section 542 is just one particular provision, as it provides that an entity in possession of property of the bankruptcy property”will send to the trustee, and account for” that property. The filing of a petition additionally automatically”operates as a stay, applicable to all entities,” of attempts to gather prepetition debts outside the bankruptcy principle, §362(a), for example”any act to obtain possession of property of the estate or of property in your 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 automobile infractions. In each instance, 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 keeping ownership of these vehicles the City had behaved”to exercise control within” respondents’ property in violation of §362(a)(3).

Supreme Court’s Decision

Justice Alito delivered the opinion of the Court.

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

The language employed in §362(a)(3) suggests that only retaining ownership of estate property does not violate the automatic stay. Under this provision, the filing of a bankruptcy petition operates as a”stay” of”any action” to”exercise control” over the property of the estate. Taken together, the most natural reading of those terms–“remain,””action,” and”exercise “–is that §362(a)(3) prohibits affirmative acts which could disturb the status quo of property 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 severe issues. To begin with, it discovered that reading §362(a)(3) to cover mere retention of property would render §542’s chief control –that a thing in possession of specific estate property”shall send to the citizenship… such property”–largely superfluous, even though §542 appears to be the provision governing the turnover of estate property. Secondly, the Court found that the respondents’ reading will render the commands of §362(a)(3) and §542 contradictory. As Justice Alito explained, Section 542 carves out exceptions for this turnover command. Under the respondents’ interpretation, an entity could be required to turn over property under §362(a)(3) even if this property were exempt by turnover under §542. According to the Courtthe background of the Bankruptcy Code affirms the reading. The Code originally included both §362(a)(3) and §542(a), however, the prior provision lacked the phrase”or to exercise control over property of the estate.” When that phrase was added by modification, Congress made no reference of altering §362(a)(3) into a optimistic turnover responsibility. It is unlikely that Congress could have made such an important change simply by adding the phrase”exercise management,” rather than by adding a cross-reference to §542(a) or another sign that it was so transforming §362(a)(3).
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