CITY OF CHICAGO V. FULTON : CASE SUMMARY

The USA Supreme Court in City of Chicago v. Fulton 592 U.S. 154 (2021) unanimously held that mere retention of property seized before the filing of a bankruptcy petition does not violate § 362(a)(3)’s automatic stay.

FACTS OF THE CASE

The City of Chicago impounded vehicles owned by several individuals because of unpaid fines for traffic violations. After their vehicles were impounded, the owners filed petitions under Chapter 13 of the Bankruptcy Code.

The debtors demanded that the City immediately return the vehicles, arguing that the City’s continued possession of the cars after the bankruptcy filing violated the automatic stay under § 362(a)(3) of the Bankruptcy Code.

The City refused to return the vehicles unless the debtors complied with certain conditions, leading to litigation over whether merely retaining possession of seized property constitutes a stay violation.

ISSUE BEFORE THE SUPREME COURT

The issue before the Supreme Court was whether a creditor violates § 362(a)(3) of the Bankruptcy Code merely by retaining possession of property that was lawfully seized before the bankruptcy petition was filed.

FINDINGS OF THE SUPREME COURT

Justice Samuel A. Alito Jr. delivered the opinion of the Court. The  Supreme Court observed  that Section 362(a)(3) prohibits affirmative acts to obtain possession of, or exercise control over, estate property.  Simply maintaining possession of property already lawfully seized before bankruptcy is not an affirmative act. Reading § 362(a)(3) to require immediate turnover would effectively make the turnover provisions of § 542 largely superfluous.

Congress created separate turnover mechanisms in the Bankruptcy Code, indicating that automatic turnover is not required merely because a bankruptcy petition has been filed. The Court emphasized that it was deciding only the interpretation of § 362(a)(3) and did not address whether other provisions of the Bankruptcy Code might require turnover.

The Supreme Court reversed the decisions of the lower courts and held that the City’s retention of the vehicles did not violate the automatic stay under § 362(a)(3).

The Supreme Court laid down the principle that  a creditor does not violate § 362(a)(3) of the Bankruptcy Code merely by retaining possession of property that was lawfully seized before the bankruptcy filing. Passive retention is not an “act” to exercise control over estate property.

SIGNIFICANCE OF THE JUDGMENT

City of Chicago v. Fulton is one of the most important recent Supreme Court decisions concerning the automatic stay. The decision clarified the scope of § 362(a)(3). It limited the circumstances in which creditors can be sanctioned for retaining property seized pre-petition. It distinguished the automatic stay from the Bankruptcy Code’s turnover provisions. It shifted many turnover disputes into proceedings under § 542 rather than automatic-stay litigation.

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Mukesh Suman is a lawyer and legal author based at Delhi, India. He has extensive experience in insolvency and bankruptcy matters. He also provides legal support services to USA based bankruptcy lawyers. Mukesh can be approached at mukesh_suman@outlook.com or +91 9717864570.