October 30th, 2020

City of Chicago v. Fulton – A Summary of the Supreme Court Argument

The future obligations of secured creditors holding pre-petition repossessions are about to receive definitive directives from the Supreme Court arising from City of Chicago v. Fulton, et al (19-357) (“Fulton”) argued before the Court on October 13, 2020.  While Fulton arises from the impound of a vehicle for unpaid parking tickets, the decision will answer the question dividing the circuits; whether the automatic stay affirmatively requires turnover of lawfully repossessed property in which the debtor holds any interest, or whether creditors with statutory defenses to turnover may assert those defense and retain possession pending a court order. 1

Fulton demands the Court address the fundamental meaning of the automatic stay. Is the stay’s purpose maintenance of the status quo, freezing relationships upon a bankruptcy filing, or a command for affirmative action to restore assets to the filing debtor’s estate? If affirmative action is required, exactly when does the obligation arise?

The purpose of this article is to explore the arguments made before the Court in light of the probing questions of the Justices. The arguments pitted two provisions of the Bankruptcy Code 11 U.S.C. §362(a)(3), the stay prohibiting an act to obtain or  “exercise control ” over assets of the bankruptcy estate against 11 U.S.C. §542 (a), the turnover provision.  The bankruptcy stay §362 is self-executing. Actions in violation of its prohibition are punishable by significant sanctions.  In contrast the requirement to turnover property is subject to exceptions.  Turnover in light of an asserted exception requires the filing of an adversary procedure by the debtor or trustee and turnover may be conditioned on a grant of adequate protection of the secured creditor’s interests.

Fulton reached the Court after the Seventh Circuit upheld the bankruptcy court’s finding that refusal to return a vehicle, after a request, by the debtor, transformed passive retention into an affirmative act of exercising control.  Respondents argued that upon a debtor’s request, an affirmative obligation arose to return the vehicle or face the substantial sanction of stay violation.  Under this logic, the turnover provision of §542(a) becomes little more than a reaffirmation of the a duty arising under the stay.

Appellant, City of Chicago, joined by the Assistant to the Solicitor General, Department of Justice, as an amicus curiae, reiterated prior holdings of the Court in Strumpf2 that the §362(a)(3) stay cannot be interpreted to require affirmative action by the plain meaning of the word “stay”.  Section 362 is meant to stop or freeze the relationships of debtor and creditors and maintain the status quo.  The only self-executing language in §362 prohibits rather than requires action.  Rather, Appellant argued §542(a) provides the appropriate mechanism to require return of an asset properly repossessed pre-petition.

Fundamental to a decision as evidenced by the questions raised by the Justices is whether the 1984 amendment to §362(a)(3) which added the phrase “exercise control” to the provision triggered an affirmative obligation.  It is noteworthy that Respondents actually stopped short of asserting this language created a true self-executing interpretation requiring immediate return of the impounded vehicle upon filing of a petition.  Rather they argued that the triggering event was a debtor’s request for return.  Refusal to return, refusal to take action, Respondent argued, was the exercising control. Yet, nothing in §362(a) even hints at inclusion or exclusion of such a demand.

Further, City of Chicago argued that considering the sanctions for a stay violation, it is difficult to believe Congress intended to extract that price merely for a refusal to capitulate to what might well be an exception to turnover under §542(a).  Among those exceptions is that property of inconsequential value to the estate need not be returned.  As §542 provides the mechanisms and exceptions to turnover, it represents the more specific provisions in the statutory scheme and would prevail over §362 in interpreting the turnover obligation.3

Fulton arose in a Chapter 13, a consumer reorganization.  Respondents and the Justices also probed the practical impact of a creditor’s rights to file a motion for relief to recover a vehicle pursuant to §362 against the time and expense of the adversary proceeding required by the debtor in the face of an asserted exception to §542(a).  Respondents argued, the additional time and expense of §542 proceedings threatened the potential for success in a reorganization. The City of Chicago countered that such an interpretation would foster frivolous filings simply to procure vehicles or attempt to leverage damages for stay violations absent any intent to reorganize.

The question remains whether the ultimate decision will be influenced by policy considerations. Clearly there is no trigger in the language of §362 translating an action by the debtor, that request for a vehicle’s return, into affirmative conduct by a creditor.  Such an interpretation would subject the creditor to sanctions for failure to act, an interpretation that seems directly contradicted by the term “stay” as well as the language describing “an act” to “exercise control”.

1Five appellate courts including the Seventh Circuit from which Fulton arises have addressed the issue with five including the Seventh Circuit requiring immediate turnover, one has required turnover proceedings as the prerequisite where defenses exist and another has adopted the later position by clear implication.

2Citizens Bank of Maryland v. Strumpf( 1995) 516 U.S. 16, 21.

3Citing RadLAX Gteway Hotel, LLC v. Amalgamated Bank,(2012) 566 U.S. 639, 640.