The Supreme Court finally settled a long-standing question as to whether a creditor is required to return property of a debtor after bankruptcy has been filed. The answer is that a creditor can continue to retain possession over property of the debtor and such retention is not in violation of the automatic stay. This is in spite of the majority of federal circuit courts ruling otherwise, including the Seventh Circuit Court of Appeals, which was reversed by virtue of the Supreme Court’s unanimous decision in City of Chicago v. Robert L. Fulton.
In summary, the Supreme Court ruled that mere retention of a Debtor’s property was not a violation of the automatic stay as such retention was labeled as a “passive retention.” Instead, the Supreme Court distinguished passive retention from “affirmative acts that would disturb the status quo” at the time of the bankruptcy filing, which does constitute a violation of the automatic stay.
In Fulton, the City impounded the vehicles of four debtors for nonpayment of fines and fees under the Chicago Municipal Code. The City did nothing more than refuse to return the vehicles. The Debtors filed bankruptcy and requested that the City return their vehicles. When the City refused, each debtor argued that failure to return their vehicle violated the automatic stay. In each case, the Seventh Circuit Court of Appeals ruled that the City of Chicago’s failure to turn over the repossessed vehicles was a violation of the automatic Stay. The Supreme Court reversed.
The Supreme Court’s View
The focus of the opinion was not only on the automatic stay provision regarding an act to obtain possession of property but also the turnover provision. The Supreme Court stated that if a creditor were required to return property of the debtor under the automatic stay provision, the turnover statute under the Bankruptcy Code would be rendered superfluous.
Of note is that the Supreme Court’s decision could be read narrowly because the Supreme Court did not decide whether other provisions of the automatic stay statute applied requiring a creditor to return a debtor’s property. Fulton focused on Section 362(a)(3) which pertains to “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.”
Arguably, if other provisions of the automatic stay statute were involved, the Supreme Court may have ruled differently. For instance, other automatic stay provisions may impact the turnover provision. Also, the automatic stay statute prohibits any act to create, perfect, or enforce any lien against property of the estate and further prohibits any act to collect, assess, or recover a prepetition claim. These issues were not raised.
Nevertheless, the Supreme Court did resolve the question of whether a creditor has to return repossessed property of the Debtor. The answer is no, so long as such retention is passive. Now, for the Debtor to repossess property taken by a creditor, the Debtor must now file an adversary proceeding under the turnover statute as opposed to simply relying on the automatic stay provision.
Though this case involved Chapter 13 debtors, the decision likely has implications for Chapter 7 and 11 debtors as well since at the very least, debtors will now have to bring adversary proceedings under section 542 to recover property retained by a creditor.