Business Law

In re Fulton (7th Cir.)

The following is a case update written by Adam A. Lewis, Senior Counsel, Morrison & Foerster LLC, analyzing a recent decision of interest:

SUMMARY

In a simple unsigned Order, in In re Fulton, ___ Fed.Appx. ___, 2021 WL 1345416 (7th Cir. 2021) (“Fulton”), after the United States Supreme Court reversed on appeal and remanded to the United States Court of Appeals for the Seventh Circuit (the “7th Circuit”) four companion cases in which the 7th Circuit had erroneously determined that the City of Chicago’s (the “City”) practice of refusing to release impounded vehicles until the owner paid associated traffic fines violated the automatic stay’s prohibition against exercising control over estate property, the 7th Circuit in turn remanded two of the four cases to the bankruptcy court to determine whether the City’s conduct violated other automatic stay provisions.

Fulton can be found here.

FACTS

In the four cases, the City impounded cars until the owners paid traffic fines. The owners then filed Chapter 13 cases because they needed their cars to make a living and to help fund their Chapter 13 plans. The owners then demanded turnover of the vehicles under Bankruptcy Code (the “Code”) § 542(a) However, the City declined the demands, insisting it would not release the cars until the fines were paid. Each of the debtors then brought proceedings in the bankruptcy court asserting that the City had violated the automatic stay of Code § 362(a). Two of the debtors based their motions only on Code § 362(a)(3), which prohibits “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.” The other two debtors added claims under Code § 362(a)(4) (“ any act to create, perfect, or enforce any lien against property of the estate”) and § 362(a)(6) (“any act to collect, assess, or recover a claim against the debtor that arose before the commencement of the case under this title”). The bankruptcy court found for the debtors, and on appeal, the 7th Circuit agreed that the City had violated § 362(a)(3), so it did not rule on the two debtors’ § 362(a)(4) and § 362(a)(6) theories. In re Fulton, 926 F.3d 916 (7th Cir. 2019), vacated and remanded sub nom. City of Chicago v. Fulton, ––– U.S. ––––, 141 S. Ct. 585, 208 L.Ed.2d 384 (2021).

After granting the City’s petition for a writ of certiorari because of a Circuit split (with the 7th Circuit in the majority), the Supreme Court in an 8-0 opinion vacated and remanded to the 7th Circuit. Based primarily on a linguistic and technical analysis that barely skimmed policy issues, the Supreme Court concluded that merely holding on to a car which the City possessed when the bankruptcy was filed was not an “act” to “exercise control” that had to be “stay[ed]” within the meaning of § 362(a)(3) (although admitting the contrary argument was credible) and that interpreting § 362(a)(3) to make retention of the vehicles a stay violation would transgress the rule of statutory interpretation against construing a statute (in this instance § 362(a)(3)) in a manner that makes another (§ 542(a)) superfluous. Similarly, the Supreme Court argued that the debtors’ interpretation would impermissibly create a conflict between § 542(a)’s express exceptions to turnover and § 362(a)(3)’s prohibition of exercising control over estate property. The Court reached its conclusion in the face of the obvious fact that the City admittedly was retaining the vehicles in order to obtain payment of the debtors’ fines, as well as the policy consideration that the result would undermine a debtor’s ability in many cases to fund a Chapter 13 plan by denying him the use of a vehicle he needed for employment, thereby inhibiting not only the debtor’s financial rehabilitation prospects, but the recovery outlook for his creditors. And on the statutory interpretation issue, one could argue just as well that when one of two possible reasonable interpretations promotes an important public policy while the other undermines it, the former should prevail.

Upon remand from the Supreme Court, the 7th Circuit in turn remanded two of the four cases to the bankruptcy court for further proceedings.

REASONING

In its unpublished brief opinion on remand, Fulton noted that the Supreme Court expressly declined to rule on other possible grounds that the City had violated the automatic stay of § 362(a) and that two of the four debtors in the original appeal to the 7th Circuit had added theories under § 362(a)(4) and § 362(a)(6) that the Circuit had bypassed in its prior opinion. Accordingly, the court remanded the latter two cases to the bankruptcy court to determine whether either of those two sections applied to the City’s conduct.

AUTHORS’ COMMENT

The 7th Circuit did the right thing. There was no undoing the policy damage caused by the Supreme Court’s questionable decision employing a narrow and technical interpretation under § 362(a)(3), so Fulton did the next best thing by all but inviting the bankruptcy court to stigmatize conduct like the City’s under § 362(a)(4) or § 362(a)(6), in effect seizing on Justice Sotomayor’s concurring Supreme Court opinion that all but invited examination of that kind of behavior under other provisions of § 362(a). The 7th Circuit was clearly and justifiably aiming to minimize the damage to public policy inflicted by the Supreme Court decision by doing what it could to confine the effects of that opinion to § 362(a)(3).

These materials were authored by Adam A. Lewis, Senior Counsel, Morrison & Foerster LLC, a member of the ad hoc group, with editorial assistance by Meredith Jury, (bankruptcy judge, C.D. Cal. (Ret.)), a member of the ad hoc group. Thomson Reuters holds the copyright to these materials and has permitted the Insolvency Law Committee to reprint them. This material may not be further transmitted without the consent of Thomson Reuters.

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