close error phone search menu email event angle-down angle-right plus minus twitter facebook pinterest google-plus linkedin angle-left angle-up youtube location-marker
Supreme Court Recently Decided that Passive Retention of Property Does Not Violate Section 362(a)(3) of the Bankruptcy Code Image

Supreme Court Recently Decided that Passive Retention of Property Does Not Violate Section 362(a)(3) of the Bankruptcy Code

Posted by:

The United States Supreme Court recently resolved a circuit split in City of Chicago, Illinois v. Fulton, __ U.S. __, 141 S. Ct. 585 (2021) and determined that a creditor does not violate the automatic stay under section 362(a)(3) of the bankruptcy code if it retains property seized prior to a debtor’s bankruptcy petition. When a debtor files for bankruptcy a bankruptcy estate is immediately created which includes all legal or equitable interests of the debtor. Another immediate benefit of bankruptcy the debtor enjoys is the automatic stay which prohibits creditors from collecting prepetition debts outside the bankruptcy process, with limited exceptions. Section 362(a)(3) of the bankruptcy code specifically provides that a creditor may not obtain possession of property of the bankruptcy estate or exercise control over such property. Instead, the creditor is required to turn over all bankruptcy estate property to the trustee.

In City of Chicago v. Fulton, the city of Chicago impounded several debtors’ vehicles and thereafter the debtors filed a Chapter 13 bankruptcy petition requesting that the city turnover their vehicle. In each debtors’ case, the city refused to turn over the vehicles and the bankruptcy court continued to hold that the city’s refusal was a violation of the automatic stay for exercising control over property of the bankruptcy, and the Seventh Circuit affirmed those decisions. However, other circuit courts had made the opposite decision creating a circuit split; thus, the Supreme Court granted certiorari. Notably, the Eighth Circuit was one of the circuits that held a creditor’s passive retention of property of the bankruptcy estate is a violation of the automatic stay under section 362(a)(3)—which is now reversed by City of Chicago v. Fulton.

Ultimately, the Supreme Court determined that a creditor does not violate the automatic stay, and more specifically section 362(a)(3) of the bankruptcy code, if it retains property it seized prior to the debtor’s bankruptcy petition. The Supreme Court reasoned that a violation of section 362(a)(3) requires an affirmative act to exercise control or possession of property of the bankruptcy estate and passive retention of property does not fall within an “affirmative act.” Thus, when a debtor files for bankruptcy and a creditor is in possession of property of the bankruptcy estate at the time of petition, the creditor need not turn over the property to the trustee under section 362(a)(3). But the Supreme Court decision is narrow and only applicable to section 362(a)(3). Accordingly, the implication of the decision is yet to be determined because passive retention of property of the bankruptcy estate may violate other provisions of the bankruptcy code, as pointed out in Justice Sotomayor’s concurrence.

In her concurrence, Justice Sotomayor agreed with the majority opinion but concurred to underscore the fact that the Court’s decision was only applicable to section 362(a)(3) of the bankruptcy code. She provided that a creditor might still violate other provisions of the bankruptcy code if it retains property it seized prior to the debtor’s bankruptcy filing, depending upon the particular circumstances and facts of a case. As such, a creditor will still want to be cautious when deciding to retain property after a debtor files for bankruptcy and should always analyze other bankruptcy provisions, particularly other provisions of section 362(a), when deciding whether it will turn over property to the trustee.

This information is general in nature and should not be construed as tax or legal advice.