In Fulton, the Supreme Court ruled that the City of Chicago did not violate the automatic stay under Section 362(a)(3) by refusing to return impounded cars immediately after the owners filed chapter 13 petitions. In the absence of affirmative action, the Court said that “the mere retention of estate property” is no violation of Section 362(a)(3). City of Chicago v. Fulton, 141 S. Ct. 585, 589 (Sup. Ct. Jan. 14, 2021).
While saying that Section 362(a)(3) only “prohibits affirmative acts that would disturb the status quo of estate property,” the Court did not rule on whether the city’s actions or inaction might have violated subsections (a)(4), (a)(6) or (a)(7) of Section 362(a). Id. at 590. To read ABI’s report on Fulton, click here.
In an opinion on December 6, Bankruptcy Judge Timothy A. Barnes of Chicago held that Fulton by itself did not compel dismissal of a class action where the plaintiffs alleged that refusing to release their impounded cars after a chapter 13 filing violated subsections (a)(4), (a)(6) or (a)(7) of Section 362(a) and Section 542(a). The cars had been impounded for failure to pay parking fines.
The Complaint Amended After Fulton
Before the Supreme Court ruled in Fulton, chapter 13 debtors had filed the class action in a Chicago bankruptcy court alleging that the retention of their cars violated subsections (a)(3), (a)(4), (a)(6) or (a)(7) of Sections 362(a) and Section 542(a).
Before Fulton came down, the plaintiffs were on solid ground, because the Seventh Circuit had held that passively holding estate property after filing violated subsection (a)(3) as “control” over estate property.
While Fulton was winding its way to the Supreme Court, Judge Barnes put the class action on hold. After Fulton, the plaintiffs filed an amended complaint that deleted claims under (a)(3). The city nonetheless filed a motion to dismiss the entire complaint based on the notion that Fulton barred all stay violation claims.
Judge Barnes disagreed about dismissing the entire complaint. However, he did dismiss claims for punitive damages.
Fulton Isn’t Controlling
“The Court in Fulton,” Judge Barnes said, “made clear that its ruling was limited to section 362(a)(3).”
Alluding to the dissent by Justice Sotomayor, who emphatically said that the decision didn’t imply the result under other subsections, Judge Barnes said that “Fulton does not expressly nor impliedly foreclose the Plaintiffs’ claims under sections 362(a)(4), (6) and (7), as a matter of law.”
Judge Barnes went on to say that “Fulton also left open the possibility that inaction combined with other facts might nonetheless violate the automatic stay.”
Possible Violations of Subsections (a)(4) and (a)(6)
Judge Barnes found possible violations of subsections (a)(4) and (a)(6). The former prohibits “an act” to enforce a lien, while (a)(6) prohibits “an act” to collect a claim against a debtor.
Explaining his reticence to dismiss the complaint, Judge Barnes amplified the allegations in the complaint. The complaint alleged that the city had demanded “upfront” payments before releasing the cars and retained the cars to perfect a lien.
If taken as true, Judge Barnes said the allegations made “plausible claims” for violations of subsections (a)(4) and (a)(6).
Claim Under Subsection (a)(7) Dismissed with Leave to Replead
Subsection (a)(7) prohibits setoff.
Judge Barnes said that the plaintiff had alleged there was a setoff, but “without support that the City’s actions constituted a setoff.” The plaintiffs, he said, “must show that a setoff in violation of that section took place.” He found “no statutory or case law supporting the conclusion that mere possession of an estate property is a setoff. In fact, the case law that does exist is in the contrary.”
Judge Barnes went on to analyze Citizens Bank v. Strumpf, 516 U.S. 16, 19 (1995), where the Supreme Court held that a bank’s “administrative hold” on a debtor’s bank account did not violate the stay. The creditor must have intent to offset the debt “permanently” before there is a stay violation.
As written, the complaint did not state an (a)(7) claim and warranted dismissal. However, Judge Barnes gave the plaintiff leave to replead because he could “hypothesize a set of facts consistent with the allegations of the Complaint that might establish the requisites for a claim under section 362(a)(7).”
Section 542(a) Claim Survives
The class complaint contained a claim under Section 542(a), which provides that anyone in possession of estate property “shall deliver” that property to the trustee.
The city moved to dismiss, contending there is no obligation to turn over estate property absent compulsion in an adversary proceeding. The city also argued that its affirmative defense based on the right to adequate protection required dismissal.
Judge Barnes called both arguments “problematic.”
The city’s allegation about no requirement to turn over absent an adversary proceeding was “specious,” Judge Barnes said. It “flies in the face of the express language of section 542(a).” He cited the Collier treatise for the idea that the section is self-executing.
Ruling on the affirmative defense based on adequate protection was “premature,” Judge Barnes said, because the motion to dismiss looks to the complaint as written.
Judge Barnes denied the motion to dismiss the Section 542(a) claim.
Punitive Damages Claim Dismissed with Prejudice
The class complaint sought punitive damages, but the plaintiffs were up against Section 106(a)(3).
Notwithstanding the waiver of sovereign immunity, which permitted the complaint in the first place, the subsection allows a “judgment awarding a money recovery [against a governmental unit], but not including an award of punitive damages.”
Since Section 106(a)(3) was controlling, Judge Barnes dismissed the claim for punitive damages with prejudice, because no repleading could cure the statutory prohibition.
Stay tuned for the results of a motion for summary judgment.
In Fulton, the Supreme Court ruled that the City of Chicago did not violate the automatic stay under Section 362(a)(3) by refusing to return impounded cars immediately after the owners filed chapter 13 petitions. In the absence of affirmative action, the Court said that “the mere retention of estate property” is no violation of Section 362(a)(3). City of Chicago v. Fulton, 141 S. Ct. 585, 589 (Sup. Ct. Jan. 14, 2021).
While saying that Section 362(a)(3) only “prohibits affirmative acts that would disturb the status quo of estate property,” the Court did not rule on whether the city’s actions or inaction might have violated subsections (a)(4), (a)(6) or (a)(7) of Section 362(a). Id. at 590. To read ABI’s report on Fulton, click here.
In an opinion on December 6, Bankruptcy Judge Timothy A. Barnes of Chicago held that Fulton by itself did not compel dismissal of a class action where the plaintiffs alleged that refusing to release their impounded cars after a chapter 13 filing violated subsections (a)(4), (a)(6) or (a)(7) of Section 362(a) and Section 542(a). The cars had been impounded for failure to pay parking fines.