This very question was recently addressed by the United States Supreme Court in a case entitled City of Chicago, Illinois v. Fulton, 592 U. S. ____ (2021), 140 S.Ct. 680 (2021). In this case, the Supreme Court held that a creditor’s refusal to return impounded vehicles back to the owners who had recently filed for bankruptcy was not a violation of the automatic stay under 11 U.S.C. § 362(a)(3).

In Fulton, the City of Chicago impounded multiple vehicles after the owners of those vehicles failed to pay various fines relating to vehicle infractions. After the vehicles were impounded, numerous owners filed for bankruptcy and demanded that the City return their vehicles because not doing so was a violation of the automatic stay.

Under the U.S. Bankruptcy Code, once a petitioner files for bankruptcy, property of the estate receives protection in accordance with the automatic stay under § 362(a)(3) which prohibits “any act to obtain possession of property of the estate or of property from the estate or to exercise control over property of the estate.”  Id.

Relying on the language, “to exercise control over property of the estate,” the Plaintiff vehicle owners argued that the City of Chicago exercised control of their impounded vehicles by not immediately returning them after Plaintiffs filed for bankruptcy.

In its analysis, the Supreme Court noted that according to the language used in § 362(a)(3), a creditor does not violate the automatic stay by merely retaining property after the petitioner’s bankruptcy is filed—something more is required.

Provided that 11 U.S.C. § 542(a) is the normal turnover provision in the Code, the Supreme Court determined that an automatic forfeiture of retained property under § 362(a)(3) would render § 542(a) meaningless and “reduced to a footnote.”  Id.

As such, the Supreme Court concluded that the superior interpretation is that § 362(a)(3) prohibits collection efforts after bankruptcy proceedings have commenced, but that it does not require creditors to return property of the estate retained prior to the bankruptcy filing. The Supreme Court, however, did not give creditors carte blanche but instead limited the creditor’s rights by holding that a creditor may only refuse to return the property so long as they do not disturb the ability of the courts to conduct the bankruptcy proceedings with respect to estate property.  Id.

Author: Michael J. Mellgren

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