In the much-discussed decision of City of Chicago v. Fulton [1], the Supreme Court ruled that a creditor’s continued retention of estate property that was seized pre-petition does not violate the automatic stay under § 362(a)(3) [2] of the Bankruptcy Code. Yet the majority opinion and Judge Sotomayor’s concurrence emphasized that the Court’s ruling was limited to § 362(a)(3). The Court left open the possibility that continued retention of an estate property may violate provisions of the automatic stay other than § 362(a)(3).
In Cordova v. City of Chicago, [3] Hon. Timothy A. Barnes of the U.S. Bankruptcy Court for the Northern District of Illinois provided a partial answer to the question that was left open by the Court. In a motion to dismiss by the defendant City of Chicago (the “City”), Judge Barnes rejected the City’s argument that the Court’s decision in Fulton forecloses claims under other provisions of the automatic stay, as a matter of law. As a result, the plaintiffs’ claims under § 362(a)(4) [4] and (6) [5] survived. [6]
Background of Cordova v. City of Chicago
In Cordova, the plaintiffs were residents of Chicago who had their vehicles impounded by the defendant, City of Chicago (“the City”), for unpaid vehicle-infraction fines between 2016 and 2019. At that time, the controlling law in the Seventh Circuit dictated that a creditor’s continued passive retention of an asset after a debtor’s filing of bankruptcy constitutes an act to exercise control in violation of § 362(a)(3). [7] As a result, the plaintiffs in Cordova filed chapter 13 bankruptcies and requested the return of their vehicles by the City.
The City refused because it was actively challenging the propriety of the controlling law, including the litigation in Fulton. The plaintiffs filed a complaint against the City alleging the City’s violation of § 362(a)(3). In response, the City requested, and the bankruptcy court granted, a stay pending an outcome of the City’s challenges in the higher courts.
In January 2021, the Court delivered a narrow win to the City’s challenges. In Fulton, the Court narrowly reversed Thompson, ruling that a creditor’s continued retention does not violate § 362(a)(3). In doing so, the Court relied heavily on the statutory interpretation of § 362(a)(3) and ruled that violation of § 362(a)(3) requires an affirmative act. Yet the Court expressly limited its ruling to § 362(a)(3), and Justice Sotomayor’s concurrence explicitly raised the possibility that passive retention may still violate the automatic stay under provisions other than § 362(a)(3).
In light of the Supreme Court’s ruling, the plaintiffs in Cordova amended their complaint alleging violation of § 362(a)(4) and (6). The City filed a motion to dismiss, arguing that the Court’s decision in Fulton forecloses claims under § 362(a)(4) and (6) as a matter of law.
Holding in Cordova v. City of Chicago
Judge Barnes denied the City’s motion to dismiss, which argued that Fulton forecloses claims under § 362(a)(4) and (6). First, Judge Barnes emphasized the Court’s explicit language limiting its decision to § 362(a)(3). In doing so, he rejected the City’s argument that the Court’s statutory interpretation of § 362(a)(3) applies equally to provisions of the automatic stay other than § 362(a)(3). He observed that the Court in Fulton interpreted the combination of three key terms: “stay,” “act” and “to exercise control.” However, the term “to exercise control” is unique to § 362(a)(3), and this produced a different combination of words potentially leading to a different interpretation.
Second, even if the City’s allegation that violation of the automatic stay requires an affirmative act was true, it was not dispositive of the issue. Judge Barnes suggested that the City’s inaction, combined with other facts, might nonetheless violate the automatic stay. For example, in Fulton, Judge Sotomayor cited to a Seventh Circuit case, In re Kuehn, [8] and left open the possibility that the City’s refusal to relinquish the vehicles could violate the automatic stay. In Kuehn, the Seventh Circuit court ruled that a university violated § 362(a)(6) when it refused to provide a transcript to a debtor because its motive for doing so was to collect on the debtor’s pre-petition debt. Similarly, Judge Barnes suggested that the City’s refusal could be to collect on the debtor’s pre-petition debt. [9] The relevant municipal code allowed for other lienholders to obtain the release of the vehicles by simply paying the towing costs, while the debtors were required to pay the entire debt. This raised the potential that the City’s refusal to release the vehicle was to collect on the debtor’s pre-petition debt in violation of § 362(a)(6).
Furthermore, in In re Radcliffe, [10] the Seventh Circuit had also determined that a fund violated § 362(a)(6) when it mailed a debtor notifying that the debtor’s pension benefits would be offset against the debt owed to the fund. The Seventh Circuit stated that a unilateral action taken by a creditor against the debtor without the court’s approval amounted to a violation of § 362(a)(6). Similarly, the City’s unilateral request for upfront payments as a precondition for the return of the vehicles, in the absence of a court order, could amount to a violation of § 362(a)(6).
Third, Judge Barnes emphasized that the City’s interpretation would leave the debtors with virtually no immediate remedy. If Fulton were to foreclose all other automatic stay violation claims, the debtors’ only remedy would be to bring an extended adversary proceeding under § 542(a). Considering the time-sensitive nature of the bankruptcy cases, and the Bankruptcy Code’s reflection of that nature, [11] Judge Barnes ruled that it would run contrary to the stated goals of the Bankruptcy Code to foreclose all other remedies under the automatic stay provision.
Going Forward
It remains to be seen how the court will decide on the claims’ merits, but the ruling is significant for two reasons. The first reason is that it provides a preliminary guide on points that could become an issue in cases involving similar claims. The second reason is that Judge Barnes’ reliance on not just the statutory language of the Bankruptcy Code but on the context of the situation the debtors are in suggests taking a broader perspective in approaching the issue.
[1] City of Chicago v. Fulton, 141 S. Ct. 585 (2021).
[2] 11 U.S.C. § 362(a)(3). This provision prohibits “any act to ... exercise control over the estate property.”
[3] Cordova v. City of Chicago (In re Cordova), 19-00684 (Bankr. N.D. Ill. Dec. 6, 2021).
[4] 11 U.S.C. § 362(a)(4). This provision prohibits “any act to ... enforce any lien against property of the estate.”
[5] 11 U.S.C. § 362(a)(6). This provision prohibits “any act to collect ... a claim against the debtor that arose before the commencement of [a debtor’s bankruptcy].”
[6] The complaint also alleged violation of § 362(a)(7), turnover obligation under § 542(a), request for punitive damages and request for class certification. All of the claims survived except the request for punitive damages, but this article will limit its discussion to § 362(a)(4) and (6), because the issue of whether Fulton forecloses the automatic stay violation claims is limited to § 362(a)(4) and (6).
[7] See Thompson v. GMAC LLC, 566 F.3d 699, 703 (Bankr. N.D. Ill. 2009) (“[A]ct of passively holding onto an asset constitutes ‘exercising control’ over it, and such action violates section 362(a)(3) of the Bankruptcy Code.”).
[8] In re Kuehn, 563 F.3d 289 (7th Cir. 2009).
[9] See Cordova at 17 (discussing Judge Thorne’s analysis in In re Peake, 588 B.R. 811, 820 (Bankr. N.D. Ill. 2018)).
[10] In re Radcliffe, 563 F.3d 627, 630 (7th Cir. 2009).
[11] See Cordova at 17 (citing In re Vitreous Steel, 911 F.2d 1223, 1232 (7th Cir. 1990)).