After a debtor files for bankruptcy, is a creditor required to turn over property of the bankruptcy estate to the debtor or trustee under the Bankruptcy Code’s automatic stay provision if the creditor lawfully possessed the property before bankruptcy was initiated and only passively possesses the property afterwards?
This case asks the U.S. Supreme Court to determine whether an entity that passively possesses a debtor’s property must turn over that property to the bankruptcy estate under the Bankruptcy Code’s automatic stay provision. Petitioner City of Chicago argues that the automatic stay provision requires debtors and creditors to maintain the status quo as of the petition date, which, among other things, means that creditors cannot take actions to control property of the estate. Chicago maintains that passive possession does not constitute action. Further, Chicago asserts that because the automatic stay freezes the status quo, debtors must seek a court order compelling the turnover of property lawfully repossessed pre-petition. Respondents Robbin L. Fulton and others counter that the automatic stay language plainly requires that all the debtor’s property be transferred to the trustee or debtor and that passive retention is an act of restraint in violation of the automatic stay. Additionally, Fulton and others contend that the turnover duty is mandatory and does not require a court order. The outcome of this case has important implications on debtors’ and creditors’ bankruptcy rights, public safety, and the financial well-being of debtors and local governments.
Questions as Framed for the Court by the Parties
Whether an entity that is passively retaining possession of property in which a bankruptcy estate has an interest has an affirmative obligation under the Bankruptcy Code’s automatic stay, 11 U.S.C § 362, to return that property to the debtor or trustee immediately upon the filing of the bankruptcy petition.
In 2016, Petitioner City of Chicago (“Chicago”) amended its municipal code so that “[a]ny vehicle impounded by [Chicago] or its designee shall be subject to a possessory lien in favor of [Chicago] in the amount required to obtain release of the vehicle.” In Re Fulton at 920. Following this amendment, Chicago refused to return impounded vehicles to their owners if the owners had initiated bankruptcy proceedings, including in the following four cases. Id.
On December 24, 2017, Chicago impounded Robbin L. Fulton’s vehicle because Fulton had a prior citation for driving with a suspended license. Id. at 921. Fulton then filed for Chapter 13 bankruptcy in the U.S. Bankruptcy Court for the Northern District of Illinois, Eastern Division (the “Bankruptcy Court”). Id. Fulton argued that Chicago must return her vehicle or face sanctions because the U.S. Court of Appeals for the Seventh Circuit (the “Seventh Circuit”) held in Thompson v. General Motors Acceptance Corp. that 11 U.S.C. § 362—which imposes an automatic stay that prevents creditors from collecting on debts during a bankruptcy proceeding—requires a creditor in possession of a debtor’s vehicle to return the vehicle. Id. Chicago countered that Fulton owed the city $11,831.20 and that Chicago’s municipal code gave Chicago a possessory lien on Fulton’s vehicle to secure the debt, making Chicago a secured creditor. Id. Chicago contended that because it was a secured creditor, it did not have to return Fulton’s vehicle because it was excepted from the automatic stay under § 362(b)(3), which permits actions by a secured creditor to perfect a security interest. Id. The Bankruptcy Court found for Fulton and ordered Chicago to return Fulton’s vehicle. Id. Chicago’s motion seeking a stay pending appeal was rejected by the U.S. District Court for the Northern District of Illinois (the “District Court”), and Chicago returned Fulton’s vehicle. Id.
On January 8, 2018, Chicago impounded Timothy Shannon’s vehicle because of Shannon’s unpaid parking tickets. Id. Shannon then filed for Chapter 13 bankruptcy in the Bankruptcy Court, classifying Chicago as an unsecured creditor. Id. Initially, Chicago claimed that Shannon owed the city $5,600 and did not object to its classification. Id. However, after Shannon sought the return of his vehicle, Chicago claimed that the city was actually a secured creditor and was holding Shannon’s vehicle to secure his debt. Id. Accordingly, Chicago argued that it was excepted from the automatic stay under §§ 362(b)(3) and (b)(4), the latter of which generally permits a governmental unit to continue an action to enforce its regulatory and police power. Id. On September 7, 2018, the Bankruptcy Court ruled that the exceptions did not apply and ordered Chicago to return Shannon’s vehicle, reasoning that Chicago’s passive retention of the vehicle violated the automatic stay. Id.
On June 1, 2018, Chicago impounded George Peake’s vehicle for unpaid fines. Id. Peake filed for Chapter 13 bankruptcy in the Bankruptcy Court on June 9, 2018. Id. Chicago claimed that Peake owed the city $5,393.27 and that Chicago had a possessory lien on Peake’s vehicle, making Chicago a secured creditor. Id. Accordingly, Chicago refused to return Peake’s vehicle. Id. After Peake filed a motion for turnover, the Bankruptcy Court ordered Chicago to return Peake’s vehicle or face sanctions, holding that because the exceptions under §§ 362(b)(3) and (b)(4) did not apply, retaining the vehicle violated the automatic stay. Id. at 922. Chicago complied with the Bankruptcy Court’s order after the District Court rejected the city’s motion for an emergency stay. Id.
On August 9, 2017, Chicago impounded Jason S. Howard’s vehicle for unpaid parking tickets. Id. Howard filed for Chapter 13 bankruptcy on August 22, 2017 and claimed that Chicago was an unsecured creditor. Id. Chicago argued that Howard owed the city $17,110.80 and that the city did not have to release his vehicle until Howard paid his debt in full. Id. The Bankruptcy Court found that Chicago was not exempt from the automatic stay and had to return Howard’s vehicle. Id. On appeal, Howard’s case was dismissed, and Chicago ultimately disposed of Howard’s vehicle. Id. Despite the dismissal, the Bankruptcy Court noted that Chicago had violated the automatic stay by retaining Howard’s vehicle, for which the city was sanctioned. Id.
Chicago appealed the Bankruptcy Court’s decision in each case, and the Seventh Circuit consolidated all the appeals into a single case. Id. On appeal, Chicago argued that Thompson should be overruled and that the automatic stay should not apply to the seized vehicles because (1) the debtors did not have a possessory interest in their vehicles at the time that they filed for bankruptcy, (2) Chicago was only passively retaining the property, and (3) the stay requires creditors to maintain the status quo as of the filing date. Id. at 925. The Seventh Circuit, however, affirmed the Bankruptcy Court’s decision in all four cases, holding that under Thompson, Chicago’s passive retention of the vehicles constituted an act to “exercise control” over the vehicles, thus violating the automatic stay. Id.
Petitioner City of Chicago argues that, according to the text, purpose, and history of the automatic stay imposed by § 362(a)(3) of the Bankruptcy Code (the “Code”), its passive retention of Fulton and others’ vehicles did not violate the stay. Brief for Petitioner, City of Chicago at 16–17. Chicago explains that the automatic stay simply maintains the status quo as of the filing date and that the city could not have violated the stay by refusing to return the vehicles because the vehicles were lawfully repossessed before Fulton and others filed their bankruptcy petitions. Id. Chicago contends that the plain language of § 362(a)(3)—which states that the filing of a bankruptcy petition “operates as a stay” prohibiting “any act to obtain possession of property of the estate or . . . to exercise control over property of the estate” (emphasis added)—supports its conclusion. Id. at 17. Chicago points out that because neither “stay” nor “act” are defined in the Code, they should be understood as they would in both “legal parlance and ordinary English.” Id. at 18. Chicago maintains that “stay” means to prevent any change to the status quo until the court has reached a judgment. Id. at 19. Additionally, Chicago defines “act” as “take action,” which, Chicago continues, does not include passively retaining property repossessed pre-petition because passive retention is a “failure to act.” Id. at 20. Chicago thus asserts that the city’s singular “act” to “exercise control” over Fulton and others’ property was seizing their vehicles, which occurred before the automatic stay was imposed. Id. Therefore, Chicago concludes that the language in § 362(a)(3) only “stays” any “act” taken after the petition date that would “alter the status quo” and does not require affirmative steps to undo lawful pre-petition activities. Id. at 20–21.
Further, Chicago argues that Fulton and others’ interpretation of § 362(a)(3)—requiring Chicago to return their vehicles—is irreconcilable with the central purpose of the automatic stay: to preserve the status quo at the time of filing until a bankruptcy court can resolve the dispute. Id. at 21–22. According to Chicago, returning the vehicles would actually “change the status quo” by worsening the city’s pre-petition position. Id. at 21, 24.
Finally, Chicago asserts that prior to 1984—when Congress added the “to exercise control” language to § 362(a)(3)—the Code unambiguously did not require creditors to return property that was lawfully repossessed pre-petition. Id. at 25. Chicago contends that because (1) courts do not interpret the Code to alter prior bankruptcy practices without clear congressional intent, and (2) the 1984 amendment’s legislative history suggests that the changes were merely technical in nature, the “to exercise control” language should not be interpreted to expand the automatic stay to require creditors to return property repossessed prior to the filing of a bankruptcy petition. Id. at 27–28.
Respondents Robbin L. Fulton, Jason S. Howard, George Peake, and Timothy Shannon counter that, according to the text, statutory context, and purpose of the automatic stay, Chicago violated the stay when it refused to return property belonging to the bankruptcy estate. Brief for Respondents, Robbin Fulton et al. at 18–19. Fulton and others assert that the ordinary meaning of “exercise control” is “to exercise restraining or directing influence over” and that the ordinary meaning of “stay” is to “stop.” Id. Taken together, Fulton and others conclude that § 362(a)(3) requires Chicago to stop exercising restraining influence over their vehicles, which belong to the respective bankruptcy estates. Id. at 19–20. According to Fulton and others, this conclusion is reinforced by Code language in § 541(a), which envisions that “property of the estate” includes a debtor’s property seized pre-petition, and language in § 542(a), which requires an entity holding “property of the estate” to deliver such property to the Chapter 13 debtor. Id. at 19.
Fulton and others also argue that Chicago’s interpretation of § 362(a)(3) fails for several other reasons. Id. at 21. First, Fulton and others contend that defining “to exercise control” as a singular event makes the language superfluous. Id. at 21–22, 24. Fulton and others assert that because there is a difference between obtaining possession, which occurs once, and exercising control, which is a continuous act, Chicago’s continued control over their vehicles constitutes an act occurring after they filed their bankruptcy petitions, thus violating the automatic stay. Id. at 22. Second, Fulton and others argue that Chicago improperly narrows the definition of “act” by excluding passive possession. Id. at 24. According to Fulton and others, exercising control is an affirmative conduct that violates the stay. Id. at 24–25. Third, Fulton and others argue that Chicago incorrectly relies on a definition of “stay” used in the appellate or injunction setting, which focuses on preserving the status quo, when “stay” really should be understood in its bankruptcy-specific context, where it requires creditors to stop exercising control over debtor’s property. Id. at 26–29. Fourth, Fulton and others point out that Chicago’s argument that the automatic stay applies only to actions that improve a creditor’s position following the filing of the petition is inconsistent with the purpose of the automatic stay. Id. at 30. Instead, Fulton and others maintain that the stay is meant to “reduce the advantage that some creditors have over others” and that Chicago’s continued control over their vehicles improves its position relative to other creditors. Id. at 30–31.
Finally, Fulton and others argue that Chicago’s legislative history arguments are misplaced. Id. at 32. Fulton and others contend that, where the statutory language is clear, referring to pre-Code practice is unnecessary as a method of statutory construction. Id. at 31–32. Nevertheless, Fulton and others point out that the 1984 amendment that added the “to exercise control” language was intended to “prohibit conduct above and beyond obtaining possession,” suggesting that Congress intended to include “conduct by creditors who seized an asset pre-petition.” Id. at 33.
WHEN IS THE TURNOVER DUTY TRIGGERED?
Chicago asserts that interpreting § 362(a)(3) to require a secured creditor to immediately return repossessed property upon the filing of a bankruptcy petition renders superfluous the protections offered to secured creditors by § 542(a) of the Code. Brief for Petitioner at 35. Although § 542 permits debtors to seek the return of property seized, prior to the imposition of the automatic stay, by secured creditors, Chicago explains that there are exceptions, such as when the seized property is of inconsequential value or the debtor plans to use, sell, or lease the property once it is returned. Id. at 33–35. Chicago contends that these exceptions will be rendered meaningless if § 362(a)(3) is interpreted to mandate the return of property seized pre-petition. Id. Further, Chicago claims that § 542(a)’s turnover provision is not self-executing. Id. at 37. Instead, Chicago points out that numerous statutory conditions must be satisfied before the § 542(a) turnover duty is triggered. Id. According to Chicago, the turnover duty is mandatory only after a bankruptcy court determines that the conditions are satisfied and a turnover is warranted. Id. This determination, Chicago continues, is made after a debtor “commence[s] a [turnover] proceeding or obtain[s] a court order.” Id. at 36. Chicago concludes that, absent a court order mandating turnover, a secured creditor does not exercise control in violation of the automatic stay by passively retaining property. See id. at 35. To support its argument, Chicago cites legislative history and case law that suggests that turnovers under § 542 must result from an adversary proceeding, not simply the filing of a bankruptcy petition. Id. at 39–40.
Fulton and others counter that a plain reading of § 542(a) supports the conclusion that the turnover provision is self-executing and does not depend on a court order. Brief for Respondents at 34. Fulton and others argue that § 362(a) and § 542(a) work together, as § 362 protects what § 542 identifies as bankruptcy estate property, and that Chicago’s flawed interpretation would disrupt this connection. Id. at 48. Fulton and others contend that § 542(a)’s mandate that creditors “shall deliver” (emphasis added) repossessed property to the debtor is unambiguous and that Chicago makes three mistakes in interpreting this language. Id. at 34–35. First, Fulton and others maintain that Chicago misinterprets the word “shall” as if Congress used the word “may,” even though, as established by the Court, “when Congress uses ‘shall’ in connection with an action, it means that the action is mandatory.” Id. at 35–36. Second, Fulton and others contend that Chicago is reading requirements into § 542(a) that have no textual basis because there is no mention in the statute that a court order is required to trigger the turnover duty. Id. at 36–37. Third, Fulton and others assert that if Congress had wanted to make an exception in § 542(a) so that a secured creditor could keep seized property until there were a court order requiring otherwise, Congress would have made such an exception explicit, evidenced by the other explicit exceptions in §§ 542(c) and (d). Id. at 38. Additionally, Fulton and others cite 47 Code provisions like § 542(a) that all interpret “shall” as mandating an action, even without a court order. Id. at 39–40. Fulton and others also argue that the defenses available to creditors in § 542(a) are intended as protections that eliminate the need for the creditor to withhold seized property from the bankruptcy estate. Id. at 41–42.
PROTECTING CREDITORS’ SECURITY INTERESTS VS. PROMOTING DEBTORS’ FRESH START
The United States, in support of Chicago, argues that requiring creditors to relinquish estate property immediately upon the filing of a bankruptcy petition would upend creditor protections and frustrate the purpose of the Code. Brief of Amicus Curiae United States, in Support of Petitioner at 30–33. The United States explains that the Code protects creditors by providing them with “adequate protection” when they are forced to relinquish their possessory rights through turnover. Id. at 30–31. For example, the United States continues, a creditor might receive an insurance policy for a vehicle that the creditor surrenders in case the debtor subsequently damages the vehicle. Id. at 31. Turnover proceedings are necessary to accomplish this protection, Chicago notes, because they afford an opportunity to resolve disputes regarding the provision of adequate protection. Brief for Petitioner at 44. The United States contends that an immediate-release rule would hamstring this protection because creditors would be subjected to monetary sanctions under § 362(k) for possessing property while seeking “adequate protection,” which would have the overall effect of dissuading creditors from invoking their “adequate protection” right. Brief of United States at 31.
The American Civil Liberties Union and others (collectively, “ACLU”), in support of Fulton and others, argue that permitting the passive retention of estate property—especially property essential for gainful employment, like a vehicle—would violate bankruptcy’s goal to grant debtors a “fresh start.” Brief of Amicus Curiae American Civil Liberties Union et al. (“ACLU”), in Support of Respondent at 4, 10–11. The ACLU points out that the bankruptcy process was designed to give debtors a “breathing spell” from creditors, which is reflected by the power of the automatic stay. Id. at 5. Further, the ACLU notes that “the beneficial use of personal property advances rehabilitation from debt,” which is why the turnover provision mandates that estate property be surrendered to the trustee or debtor immediately upon the filing of the petition. Id. at 5–6. Taken together, the ACLU explains, these provisions promote a debtor’s “fresh start” by ensuring that essential property is returned to the debtor so the debtor can maintain employment and earn the income necessary to meet required Chapter 13 monthly payments. Id. at 7. The ACLU explains that requiring “cash-strapped” debtors to commence timely and costly turnover proceedings to regain use of essential property would complicate this “fresh start.” Id.
ABUSING THE BANKRUPTCY SYSTEM
The National Association of Counties (“NACo”), in support of Chicago, contends that an immediate-release rule would encourage debtors to abuse the bankruptcy system. Brief of Amicus Curiae National Association of Counties (“NACo”), in support of Petitioner at 13. NACo posits that an immediate-release rule will lead to debtors initiating bankruptcy cases only to avoid the fees and fines associated with recovering impounded property, and that these “frivolous” cases will be abandoned after the debtors receive their property. Id. at 13–14. NACo contends that this will increase bad-faith bankruptcy filings, which will crowd already over-crowded court dockets—spreading both the local government’s resources and bankruptcy personnel thin. Id. at 14. According to NACo, these abuses are less likely to occur if there is no immediate-release rule because governments will have an opportunity to assert defenses and “request that the bankruptcy court require the debtor to undertake protective measures when the vehicle is released.” Id.
The National Association of Bankruptcy Trustees (“NABT”), in support of Fulton and others, argues that, although this case concerns Chapter 13 debtors, Chicago’s interpretation of the turnover duty could place Chapter 7 trustees in “no-win” situations. Brief of Amicus Curiae National Association of Bankruptcy Trustees (“NABT”), in Support of Respondents at 13–14. NABT explains that, under Chapter 7, trustees are charged with quickly collecting and selling estate property and distributing the proceeds to creditors. Id. at 13. NABT contends that if trustees had to initiate turnover proceedings to recover passively-held estate property, they would have to choose among the following troublesome options: (1) initiate a potentially cost-prohibitive adversary proceeding, (2) abandon the property, or (3) accept “materially less than the property to which the estate is entitled.” Id. at 18–19. All these options are harmful, NABT continues, because they force the Chapter 7 trustee to accept significantly less value for estate property, which reduces the amount of money for distribution to other “innocent creditors.” Id.
PUBLIC SAFETY VS. PUBLIC FINANCING
NACo, in support of Chicago, contends that if the Court requires the immediate release of vehicles that are lawfully impounded pre-petition, it will preempt local governments’ traffic safety laws, thereby undermining public safety. Brief of NACo at 5, 10. NACo points out that local governments impound vehicles for many reasons, including for parking and traffic offenses, for driving without a license, and for drunk driving. Id. at 5–9. In this regard, NACo continues that impoundment is a “valuable tool” for local governments because it protects the public by ensuring compliance with traffic safety laws and punishing violators. Id. at 8. Therefore, NACo contends, an “immediate-release rule” would jeopardize public safety because it “amounts to a de facto preemption of state and local traffic codes” and would return vehicles to bankruptcy petitioners regardless of the reasons for impoundment. Id. at 10.
The ACLU, in support of Fulton and others, counter that an immediate-release rule would discourage local governments from abusing their authority to bolster their coffers. Brief of ACLU at 10–11. The ACLU explains that parking, traffic, and ordinance violation tickets are a vital source of revenue for local governments. Id. at 16–18. Accordingly, the ACLU argues that government authorities are incentivized to issue a high number of tickets with exorbitant penalties. Id. at 18. To collect on unpaid balances, the ACLU maintains that government authorities resort to punitive practices like vehicle impoundment, which have associated administrative fees that are added to the unpaid balance. Id. at 22. As a result, the ACLU contends that vehicle owners are often unable to pay the balance and resort to Chapter 13 Bankruptcy. Id. at 27. The ACLU suggests that if government authorities know that they must release a debtor’s vehicle when the debtor files for Chapter 13, they might reduce penalties to increase the likelihood of payment or be less likely to impound vehicles to force payments. See id. at 17–18.
- Ronit J. Berkovich & Zoe Essner, Supreme Court Will Tell Us Soon If Creditor Violates Automatic Stay by Passively Retaining Debtor’s Property, Lexology (Jan. 27, 2020).