Skip to content

Supreme Court Holds that Mere Retention of Property Does Not Violate the Automatic Stay

January 21, 2021

The Supreme Court of the United States on January 14, 2021, issued a decision in the case of City of Chicago v. Fulton that favors creditors in a bankruptcy case. The Court held that a creditor’s “mere retention” of property of the estate post-petition does not violate the automatic stay as an act to exercise control. In its reasoning, the Court determined that § 362(a)(3) prohibits affirmative acts that “would disturb the status quo.” Accordingly, creditors who seize property prior to the bankruptcy filing will not face sanctions for violating the automatic stay by merely retaining control of property. Notably, the debtor still has the right under § 542 to seek turnover of seized property but can no longer argue that such retention is also a violation of the automatic stay.  

In this precedential case, the Supreme Court considered the actions of the City of Chicago in impounding vehicles for failure to pay fines for parking tickets and vehicle infractions. Several of the owners of those impounded vehicles filed Chapter 13 bankruptcy petitions and sought to have the vehicles returned in exchange for payments under the individual plans. However, the City of Chicago refused, and those debtors each filed actions that asserted that the retention of the vehicles was a violation of the automatic stay. The bankruptcy court agreed with the debtors, finding that the City of Chicago was acting to exercise control over the vehicles. The Seventh Circuit affirmed. The Seventh Circuit joined a circuit split on the interpretation of what constitutes an act to exercise control.  

In a unanimous decision, the Supreme Court resolved the circuit split. It explained its reasoning:

The better account of [§§ 542 and 362] is that §362(a)(3) prohibits collection efforts outside the bankruptcy proceeding that would change the status quo, while §542(a) works within the bankruptcy process to draw far-flung estate property back into the hands of the debtor or trustee.  

Thus, while merely retaining seized property would not violate the automatic stay, additional actions such as selling the seized property at a public auction or via private sale would be a violation. Justice Sotomayor, who wrote a concurring opinion, stated that the Supreme Court was not deciding if other provisions in §362(a) may require a creditor to return a debtor’s property. Judge Sotomayor further stated that she was concerned with the slow nature of turnover proceedings and suggested that Congress or the bankruptcy rules committee make changes to ensure a prompt resolution of turnover actions.

This decision should provide comfort to creditors who seized property prepetition and have not yet liquidated the property. There may still be turnover actions to face, but in most scenarios, creditors will be in a better position to request adequate protection provisions in exchange for turning over the property.  

DISCLAIMER: The views and opinions expressed in the article represent the view of the author and not necessarily the official view of Clark Hill PLC. Nothing in this article constitutes professional legal advice nor is intended to be a substitute for professional legal advice.

Subscribe For The Latest

Subscribe

Related

Event

Webinar: Stay Ahead in Privacy and Data Breach Litigation

Join us for an essential update on the dynamic landscape of privacy and data breach litigation. This session will explore the latest trends and emerging challenges, including developments in Pixel litigation, BIPA, GIPA, CIPA, VPPA, standing issues, and critical defense strategies. We’ll analyze recent cases, pivotal rulings, and newly filed lawsuits while providing strategic guidance for litigation and settlement. Gain actionable insights to help you confidently navigate this complex and evolving legal environment confidently.

Don’t miss this opportunity to stay informed and prepared in the evolving field of privacy and data breach litigation.

Explore more
Event

Webinar- Digital Operational Resilience Act (DORA): A Cross-Border Discussion on Incident Response

Join us for an in-depth discussion on how the Digital Operational Resilience Act (DORA), effective January 17, 2025, will transform digital and operational resilience requirements in the financial sector. This session will focus on the specific obligations related to incident response and explore the adjustments businesses should make to their existing programs to achieve compliance.

Explore more
Event

Webinar: AI Year in Review: From State AI Laws and Automated Decision-Making Regulations to the Rise of AI Liability

2024 has been a pivotal year for artificial intelligence, marked by the passage of state AI legislation, the introduction of privacy regulations targeting automated decision-making and profiling, and an uptick in lawsuits challenging businesses’ use of AI tools. This webinar will provide a comprehensive review of the evolving AI landscape, summarizing key enacted laws, exploring emerging legal challenges, and offering actionable strategies for businesses deploying AI technologies.

Explore more