Business Law

City of Chicago, Illinois, vs. Fulton (U.S. Sup. Ct.)

The following is a case summary written by Kathleen A. Cashman-Kramer analyzing In City of Chicago, Illinois, vs. Fulton, et al., ___ S.Ct. ___. Case no. 19-357 (S.Ct. January 14, 2021).

Summary

The United States Supreme Court has reversed the Seventh Circuit’s decision regarding the City of Chicago’s refusal to turn over impounded vehicles to Chapter 13 debtors, finding that the City of Chicago did not violate the automatic stay.  The Court held that the stay does not impose affirmative turnover obligations but preserves the status quo.  To review the opinion, click here.

Factual Background

The facts are simple: vehicles were impounded by the City of Chicago for failure to pay fines for motor vehicle infractions.  After the vehicles were impounded, the individual owners filed chapter 13 petitions and sought return of the vehicles.  The debtors contended  that Chicago’s continued possession, and refusal to turn over the vehicles to the debtors, constituted a violation of the automatic stay under 11 U.S.C. § 362(a)(3).  In all four cases, the bankruptcy court agreed with the debtors, and found that Chicago had violated the automatic stay by refusing to turn over the vehicles.  Chicago appealed, and the Seventh Circuit affirmed the bankruptcy court’s order in a consolidated opinion.  See In re Fulton, 926 F.3d 916 (7th Cir. 2019).  In doing so, the Seventh Circuit specifically found that “by retaining possession of the debtors’ vehicles after they declared bankruptcy,” Chicago had acted “to exercise control over” respondents’ property in violation of Section 362(a)(3).  Id., at 924–925.

The Supreme Court granted Chicago’s petition for certiorari in order to resolve a split among the Second, Third, Seventh, Eighth, Ninth, and Tenth Circuits over whether an entity that retains property seized pre-petition violates Section 362(a)(3).  Id.

Reasoning and Result

Ultimately, the Supreme Court vacated the Seventh Circuit decision, and engaged in a detailed discussion regarding the interplay between Section 362(a)(3) and Section 542.  Specifically, the Court started out by noting that the language of Section 362(a)(3) did not state that merely retaining possession of estate property violated the automatic stay.  It went on to note that the language of Section 362(a)(3) required one to “exercise control” over the property of the estate and, as a result, concluded that Section 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.  Id. at 3.

The Court then went a step further and noted that, while sometimes an “omission” can qualify as act, as the term “control” can mean “to have power over,” it concluded that the language of Section 362(a)(3) “implies that something more than merely retaining power is required to violate the disputed provision.”  Id. at 4.

While not conceding that Section 362(a)(3) was in any way ambiguous, the Court then noted that Section 542 of the Code, which deals with turnover of estate property, supports the Court’s interpretation of Section 362(a)(3).  Specifically, the Court cited to Section 542 as the go-to section for a trustee to obtain from “an entity, other than a custodian, in possession, custody, or control, during the case, of property that the trustee may use, sell, or lease under section 363 of this title” and such entity shall deliver such property to the trustee.  The Court went on to note that there was only one way to reconcile Section 362(a)(3)’s “retention” issue with Section 542’s turnover issue:

First, [respondents’ reading] it would render the central command of §542 largely superfluous. “The canon against surplusage is strongest when an interpretation would render superfluous another part of the same statutory scheme.” Yates v. United States, 574 U.S. 528, 543 (2015) (plurality opinion; internal quotation marks and brackets omitted). Reading “any act . . . to exercise control” in §362(a)(3) to include merely retaining possession of a debtor’s property would make that section a blanket turnover provision. But as noted, §542 expressly governs “[t]urnover of property to the estate,” and subsection (a) describes the broad range of property that an entity “shall deliver to the trustee.” That mandate would be surplusage if §362(a)(3) already required an entity affirmatively to relinquish control of the debtor’s property at the moment a bankruptcy petition is filed.

Id. at 5. 

Second, respondents’ reading would render the commands of §362(a)(3) and §542 contradictory. Section 542 carves out exceptions to the turnover command, and §542(a) by its terms does not mandate turnover of property that is “of inconsequential value or benefit to the estate.” Under respondents’ reading, in cases where those exceptions to turnover under §542 would apply, §362(a)(3) would command turnover all the same. But it would be “an odd construction” of §362(a)(3) to require a creditor to do immediately what §542 specifically excuses. Citizens Bank of Md. v. Strumpf, 516 U.S. 16, 20 (1995). Respondents would have us resolve the conflicting commands by engrafting §542’s exceptions onto §362(a)(3), but there is no textual basis for doing so.

Id. at 6.   

The Court then addressed the addition of the phrase “or to exercise control over property of the estate” that was added by amendment to Section 362(a)(3) in the 1984 amendment.  Specifically, it stated that it believes Congress would have had to do more than simply include the “turnover” provision that the respondents wanted read into Section 362(a)(3) merely by adding the “exercise control” language, it made no such attempt to link Section 362(a)(3) to Section 542(a), which it would have done had it intended to make Section 362(a)(3) an “enforcement arm of sorts” for Section 542(a).  Id. at 6-7.  It concluded that the best and only real way to read and apply both sections consistently was to find that “the 1984 amendment, by adding the phrase regarding the exercise of control, simply extended the stay to acts that would change the status quo with respect to intangible property and acts that would change the status quo with respect to tangible property without “obtain[ing]” such property.”  Id. at 6-7. 

Finally, the Supreme Court concluded that it need not decide any issues regarding the application of Section 542 or any other subsections of §362(a), and made clear that its decision was narrowly tailored to the issue of retention of estate property – possession of which was acquired pre-petition – after the filing of a bankruptcy petition, and that the mere retention was not a violation of the automatic stay.

AUTHOR’S COMMENTARY

Although other bankruptcy practitioners may disagree, I believe that the Supreme Court correctly and succinctly decided the discrete issue before it, and (hopefully) put to rest any differences among the circuits.  The Ninth Circuit decision In re Del Mission Ltd., 98 F.3d 1147 (9th Cir. 1996), cited by the Supreme Court in footnote 1, was a decision that aligned with the Seventh Circuit’s ruling in the underlying case because the Ninth Circuit found that “a creditor’s knowing retention of property of the estate constitutes a violation of’ § 362(a)(3).”  Id. at 1151 [citations omitted].  The facts in Del Mission involved a state taxing agency’s refusal to turn over a tax refund to a bankruptcy trustee.  In short, the Ninth Circuit followed the respondents’ desired interpretation of the “exercise control” language added to Section 362(a)(3) by the 1984 amendments.  Because the Supreme Court rejected this interpretation of “exercise control,” future Ninth Circuit decisions in this regard will no longer be able to rely on Del Mission or similar cases that construed the broader idea of “exercise control.”  Bankruptcy estates and debtors will now bear the cost and burden of obtaining turnover of estate property and the threat of sanctions for violating the stay may no longer be on the table.  This decision is going to also have substantial ramifications for Chapter 7 trustees and will be a big change from the last 24 years of practice under the Del Mission case.

These materials were authored by Kathleen A. Cashman-Kramer, Of Counsel at Sullivan Hill Rez & Engel (Cashman-Kramer@Sullivanhill.com), with editorial contributions from ILC member, Ed Hays of Marshack Hays LLP.

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