The Supreme Court heard oral argument this morning in City of Chicago v. Fulton, 19-357 (Sup. Ct.), to resolve a circuit split and decide whether the automatic stay requires a creditor to turn over repossessed property immediately after the debtor files a chapter 13 petition.
Based on questions by the justices, the outcome may turn on whether a creditor who merely maintains the status quo by retaining repossessed property has exercised control over estate property in violation of Section 362(a)(3). The subsection prohibits “any act . . . to exercise control over property of the estate.”
The Second, Seventh, Eighth, Ninth and Eleventh Circuits impose an affirmative duty on creditors to turn over repossessed property after a filing.
The Third, Tenth and District of Columbia Circuits have held that the retention of property only maintains the status quo. For those three circuits, a stay violation requires an affirmative action. Simply holding property is not an affirmative act, in their view.
In Fulton, the Supreme Court is reviewing a decision from the Seventh Circuit. Upheld in the Court of Appeals, the bankruptcy judges in Chicago have been requiring the City of Chicago to turn over cars automatically that had been impounded for unpaid parking fines. To read ABI’s discussion of the Seventh Circuit decision, click here.
Eugene Wedoff argued on behalf of the debtor in the Supreme Court. Mr. Wedoff is a former bankruptcy judge in Chicago and a recent past president of ABI. Craig Goldblatt of Wilmer Cutler Pickering Hale & Dorr LLP in Washington, D.C., argued for the City of Chicago. Assistant to the Solicitor General Colleen E. Roh Sinzdak argued for the U.S. government on Chicago’s side.
The Chicago Parking Ticket Cases
Four cases went to the Seventh Circuit together. The chapter 13 debtors owed between $4,000 and $20,000 in unpaid parking fines. Before bankruptcy, the city had impounded their cars. Absent bankruptcy, the city will not release impounded cars unless the fines are paid.
After filing their chapter 13 petitions, the debtors demanded the return of their autos. The city refused to release the cars unless the fines and other charges were paid in full.
The debtors mounted contempt proceedings in which four different bankruptcy judges held that the city was violating the automatic stay by refusing to return the autos. After being held in contempt, the city returned the cars but appealed.
The Seventh Circuit upheld the bankruptcy courts, saying the outcome was ordained by the circuit’s controlling precedent in Thompson v. General Motors Acceptance Corp., 566 F.3d 699 (7th Cir. 2009). The appeals court said it had already rejected the city’s contention that “passively holding the asset did not satisfy the Code’s definition of exercising control.” The circuit court noted that Congress amended Section 362 in 1984 by adding subsection (a)(3) and making the automatic stay “more inclusive by including conduct of ‘creditors who seized an asset pre-petition,’” citing U.S. v. Whiting Pools Inc., 264 U.S. 198, 203-204) (1983).
Applying Thompson, the Seventh Circuit held “that the City violated the automatic stay . . . by retaining possession . . . after [the debtors] declared bankruptcy.” The city, the appeals court said, “was not passively abiding by the bankruptcy rules but actively resisting Section 542(a) to exercise control over the debtors’ vehicles.” In re Fulton, 926 F.3d 916 (7th Cir. June 19, 2019). To read ABI’s report on Fulton, click here.
The Supreme Court granted certiorari in December. The case was originally scheduled for argument in April but was postponed in view of the pandemic.
Oral Argument
Holding oral arguments virtually has changed the format. Rather than a free-for-all, where justices ask questions whenever they wish, the format now only allows each justice to ask questions for a few minutes each in order of seniority. The time limits on each justice sometimes do not allow them to pursue issues thoroughly.
For the city, Mr. Goldblatt immediately defined the automatic stay as freezing the status quo as of the filing date. In response to a question by Chief Justice John G. Roberts, Jr., he said that exercising “control” only pertains to acts that change the status quo.
The Chief Justice responded by asking whether the city’s refusal to return a car on request turned inaction into action. In the same vein, Justice Brett M. Kavanaugh said that “ordinary language” suggests that holding property is exercising control.
Justice Sonia Sotomayor and others focused on the practical aspects of the Court’s eventual ruling. She and others noted that requiring the debtor to initiate an adversary proceeding would significantly delay and add expense to the debtor’s ability to regain possession of an auto. When his time to speak arrived, Mr. Wedoff said that delay could prevent a debtor from working and subsequently collapse a chapter 13 case, injuring creditors who wouldn’t receive payments.
Justice Sotomayor mentioned cases finding an automatic stay violation if a college refuses to turn over a transcript unless tuition is paid. She suggested that ruling for Chicago would overrule those cases. Similarly, Justice Elena Kagan said that holding onto property unless fines are paid sounds like a prohibited stay violation.
Raising a different but related question, Justice Neil M. Gorsuch inquired as to why holding a car wasn’t a violation of Section 362(a)(6) as an act to collect a prepetition debt.
Mr. Wedoff had an equally rocky reception when his time came to speak. The Chief Justice asked why the procedure was not governed by Section 542 and whether the creditor would lose its rights under Section 542 if required to turn over property immediately under Section 362. Like the Chief Justice, Justice Stephen G. Breyer expressed concern that a creditor might lose rights by turning over a car immediately.
Among the justices, questions from Justice Thomas most clearly indicated how he might come out. He said he had a “problem” in seeing how holding onto a car was an exercise of control.
Justice Samuel A. Alito might also be in the city’s camp. Simply adding the notion of “control” in the 1984 amendments seemed to him like an “oblique” way to make a major change in the scope of the automatic stay.
As one of the first cases argued in the new term that began this month, the Court may issue a decision sometime after the new year.
The Supreme Court heard oral argument this morning in City of Chicago v. Fulton, 19-357 (Sup. Ct.), to resolve a circuit split and decide whether the automatic stay requires a creditor to turn over repossessed property immediately after the debtor files a chapter 13 petition.
Based on questions by the justices, the outcome may turn on whether a creditor who merely maintains the status quo by retaining repossessed property has exercised control over estate property in violation of Section 362(a)(3). The subsection prohibits “any act . . . to exercise control over property of the estate.”
The Second, Seventh, Eighth, Ninth and Eleventh Circuits impose an affirmative duty on creditors to turn over repossessed property after a filing.
The Third, Tenth and District of Columbia Circuits have held that the retention of property only maintains the status quo. For those three circuits, a stay violation requires an affirmative action. Simply holding property is not an affirmative act, in their view.
In Fulton, the Supreme Court is reviewing a decision from the Seventh Circuit. Upheld in the Court of Appeals, the bankruptcy judges in Chicago have been requiring the City of Chicago to turn over cars automatically that had been impounded for unpaid parking fines