BANKRUPTCY CORNER
You Can Hold On to That , Maybe ! An Update
JASON S . RIGOLI
A couple of months ago I wrote an article regarding the Supreme Court decision in City of Chicago v . Fulton , 141 S . Ct . 585 , 208 L . Ed . 2d 384 , 2021 U . S . LEXIS 496 , 2021 WL 125106 ( 2021 ). Since that article , the cases were remanded to the Seventh Circuit , who remanded two of the case for further proceedings based upon the Fulton holding . This article addresses the remand order and the scope and application of Fulton .
City of Chicago v . Fulton
On January 14 , 2021 , the United States Supreme Court resolved a circuit split of whether the mere retention of property after a Bankruptcy violates the automatic stay in 11 U . S . C . § 362 ( a )( 3 ), answering that it does not . City of Chicago v . Fulton , 141 S . Ct . 585 , 208 L . Ed . 2d 384 , 2021 U . S . LEXIS 496 , 2021 WL 125106 ( 2021 ).
The filing of a bankruptcy petition automatically creates an estate containing all of the debtor ’ s “ legal and equitable interests in property ,” with some exceptions , and automatically stays all efforts to collect prepetition debts outside of bankruptcy . See 11 U . S . C . §§ 362 ( a ) and 541 ( a ). See also Fulton , 141 S . Ct . at 589 . The automatic stay 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 .” 11 U . S . C . § 362 ( a )( 3 ). This prohibition is the central issue in dispute in Fulton .
Fulton involved four consolidated appeals out of the 7th Circuit where the City of Chicago refused to turnover vehicles it had impounded , prepetition , for each debtor ’ s failure to pay fines for motor vehicle infractions . Id . at 589 . A split among several circuits emerged in such situations , with some circuits imposing an affirmative duty on the creditor to turn the repossessed property over to the Debtor or the creditor was violating the stay , while other circuits held that the creditors retention was not a violation of the automatic stay .
The Supreme Court found that the plain language of § 362 ( a )( 3 ) requires the creditor to take affirmative steps to exercise control over property of the estate . Id . at 590-592 . Justice Alito writing for the unanimous 8-0
Court stated that “ the most natural reading of the terms – ‘ stay ,’ ‘ act ,’ and ‘ exercise control ’ - is that § 362 ( a )( 3 ) prohibits affirmative acts that would disturb the status quo of estate property as of the time the bankruptcy petition was filed .” Id . at 590 . In retaining the property that had been repossessed prepetition the creditor is maintaining the status quo , which is the mandate of § 362 .
The Seventh Circuit Remand and Scope of Fulton
Fulton is not a death blow for debtors whose property has been repossessed prepetition . The Supreme Court was explicit to note that it was not determining the “ meaning of other subsections of § 362 ( a )[,]” or “ how the turnover obligation in § 542 operates .”
Fulton , at 592 ( Sotomayor , J ., concurring ).
On remand the Seventh Circuit followed the Supreme Court ’ s instruction as to the narrowness of its holding and remanded two of the four cases on appeal to have the bankruptcy court judgments vacated where the debtors only raised a violation under § 362 ( a )( 3 ) but remanded the other two cases on appeal to have the bankruptcy conduct further proceedings to address claims under § 362 ( a )( 4 ) and ( a )( 6 ) and the applicability of § 542 . In re Fulton , 2021 U . S . App . LEXIS 10322 ( 7th Cir . Apr . 21 , 2021 ).
Sections 362 ( a )( 4 ) and ( a )( 6 ) operate as a stay against any act “ to create , perfect or enforce any lien against property of the estate [,]” and “ any act to collect , assess , or recover a claim against the debtor that arose before the commencement of the case under this title [,]” respectively . Neither issue was addressed on appeal when the Seventh Circuit originally found that the City of Chicago violated § 362 ( a )( 3 ) and , therefore did not to reach a decision on §§ 362 ( a )( 4 ) or ( a )( 6 ).
Conclusion
If the lender is unwilling to voluntarily turn the property over , then seeking remedies under other provisions of § 362 such as ( a ) ( 4 ) or ( a )( 6 ) and § 542 would be the next step with the Supreme Court ruling in Fulton .
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The concern here is that in subsections ( a )( 4 ) and ( a )( 6 ), the terms “ stay ” and “ act ” remain “ operative ” words in both subsections and the definitions are not changed from those expressed by Justice Alito in Fulton , 141 S . Ct . at 590 (“ ‘ stay ’ is commonly used to describe an order that “ suspend [ s ] judicial alteration of the status quo ”… “ ‘ act ’ is ‘[ s ] omething done or performed . . . ; a deed .’ ”) ( internal citations omitted ), and unless it is determined that the remaining operative terms in § 362 ( a ) ( 4 ) or ( a )( 6 ) are not satisfied by the retention of property , the outcome will be the same .
Another issue , addressed specifically by Justice Sotomayor in her concurring opinion , is the delay in obtaining turnover where an adversary must be brought , stating that the statistics evidence that the average turnover adversary proceeding last for 100 days . Fulton , 141 S . Ct . at 594 ( Sotomayor , J ., concurring ). Such a delay when dealing with something such as a debtor ’ s vehicle may have a significant impact on a consumer debtor for whom that vehicle is the debtor ’ s only mode of transportation .
Some factors to getting judicial relief in your favor is whether there is equity in the vehicle , the condition of the vehicle , and whether there is insurance required by the loan on the car . If you are not in compliance with the loan or the car is very upside down , you are not likely to prevail over the lender ’ s arguments .
This article submitted by Jason S . Rigoli , Furr and Cohen , P . A ., 2255 Glades Road , Suite 301E , Boca Raton , FL 33431 , jrigoli @ furrcohen . com .
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Argument in Fulton was held on October 13 , 2020 , at which time Just Amy Comey Barrett had not been appointed , therefore , Justice Barrett did not take part in the consideration or decision of the case . Further , Justice Sotomayor issued a concurring opinion .