Supreme Court Rules That Passive Retention Does Not Violate Stay

 The Supreme Court decided that a creditor which passively retains possession of estate property does not "exercise control" over such property in violation of 11 U.S.C. Sec. 362(a)(3). The Court viewed the word "exercise" to require active measures.  Case No. 19-357, Chicago v. Fulton (1/14/21), which can be found here.

In the Fulton case, the City of Chicago impounded the Debtor's vehicle over failure to pay fees. The Debtors (there were multiple consolidated cases) filed chapter 13 and demanded return of their vehicles. The City refused. The Seventh Circuit held that the refusal to relinquish possession was a violation of the automatic stay.

Ruling from Judge Webster

Alas, the Supreme Court read some dictionary definitions and ruled against the Debtors. After consulting Webster's New International Dictionary, the Court found that the words "act," "exercise" and "control" as used in Sec. 362(a)(3) were all words connoting action. The Court found 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." Opinion at 4. Thus, if the City had placed a boot on the Debtor's car prior to bankruptcy and left it there after filing, there would be no violation. However, if the City placed the boot on the car after the filing date, that would be a change in the status quo. 

The Court did not reach the issues of how Sec. 542 would apply to the situation or whether the City's actions could have violated another subsection of Sec. 362.

The Tears of Justice Sotomayor

Justice Sotomayor wrote a sympathetic concurrence. She stated that "I agree that, as used in §362(a)(3), the phrase “exercise control over” does not cover a creditor’s passive retention of property lawfully seized prebankruptcy." She held out the hope that other provisions might apply.

I write separately to emphasize that the Court has not decided whether and when §362(a)’s other provisions may require a creditor to return a debtor’s property. Those provisions  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. §§362(a)(4), (6).

She also noted that while the Court's result "satisfies the letter of the Code, it hardly comports with its spirit." She pointed out the difficulty in filing a turnover action which often must be done by adversary proceeding which takes an average of one hundred days. She recognized that:

(W)ithout their vehicles, many debtors quickly find themselves unable to make their Chapter 13 payments. The cycle thus continues, disproportionately burdening communities of color, see Brief for American Civil Liberties Union et al. as Amici Curiae 17, and interfering not only with debtors’ ability to earn an income and pay their creditors but also with their access to childcare, groceries, medical appointments, and other necessities.

She concluded with a call to action. 

Ultimately, however, any gap left by the Court’s ruling today is best addressed by rule drafters and policymakers, not bankruptcy judges. It is up to the Advisory Committee on Rules of Bankruptcy Procedure to consider amendments to the Rules that ensure prompt resolution of debtors’ requests for turnover under §542(a), especially where debtors’ vehicles are concerned. Congress, too, could offer a statutory fix, either by ensuring that expedited review is available for §542(a) proceedings seeking turnover of a vehicle or by enacting entirely new statutory mechanisms that require creditors to return cars to debtors in a timely manner.

What It Means

This case is a benefit for small, unsophisticated creditors who might not know what to do when faced with a demand from a bankruptcy debtor. The ruling also helps creditors dealing with bad actors. For example, if a creditor repossessed a vehicle after the debtor was arrested for driving drunk and without a license or insurance, it might feel reluctance to give the car back. In Circuits which followed the Seventh Circuit rule, the creditor would need to file an emergency motion to annul the automatic stay in order to retain possession. While this encourages creditors to maintain a relationship with a competent bankruptcy lawyer, it is still burdensome.

On the other hand, the burden to the debtor who is not a bad actor and who needs the vehicle to get to work at a factory making Covid-19 vaccines, there is a definite burden.

The Supreme Court's coy ruling that, well Sec. 362(a)(3) doesn't work, but maybe you could try something else is not very satisfying.  

Justice Sotomayor has the right idea. What is needed is an efficient, expedited procedure for good debtors to get their cars back and for good creditors to receive clear direction as to their obligations. I predict that this will bubble up in the form of local rules until the national rules committee or Congress finds a fix.