US Supreme Court Clarifies Automatic Stay Rule Applicable to Retention of Debtor Property

Most financial institutions are well aware of the automatic stay in bankruptcy and have processes in place to avoid the harsh penalties that could accompany a violation. On January 14, 2021, a unanimous* United States Supreme Court handed down a ruling discussing an alleged violation of the stay and clarified the obligations of creditors in possession of a debtor’s property at the time the debtor files a petition for bankruptcy protection.

 The facts of the case were straightforward. The City of Chicago had impounded a number of vehicles belonging to individuals who had failed to pay fines or committed other infractions. After the City had taken possession of the vehicles, those individuals filed for bankruptcy protection and argued that the automatic stay compelled the City to return the vehicles to them. The City disagreed and refused to return the vehicles. The bankruptcy court hearing the case determined that each instance of the City’s refusal constituted a violation of the automatic stay.

 The United States Supreme Court, however, agreed with the City’s position and reversed the decisions of the bankruptcy court, holding that the “mere retention of estate property after the filing of a bankruptcy petition does not violate [section] 362(a)(3) of the Bankruptcy Code.” Section 362(a)(3) prohibits the act of any entity, after the filing of a bankruptcy petition, “to obtain possession of property of the estate or of property from the estate or to exercise control over property of the estate.” The Court determined that a “natural reading” of the statute prohibited only “affirmative acts that would disturb the status quo as of the time of the filing of a bankruptcy petition.” Because the status quo was that the debtors were not in possession of their vehicles, the City did not run afoul of bankruptcy law by refusing to return them in this instance.

We believe this case should provide a “safe harbor” for creditors in the City of Chicago’s position and for lenders who have repossessed collateral prior to the filing of a bankruptcy petition. However, the Court’s opinion is narrow. Justice Sotomayor wrote a concurring opinion to “emphasize that the Court has not decided whether and when [section] 362(a)’s other provisions may require a creditor to return a debtor’s property.” Creditors, therefore, should still be wary of other potential violations of the automatic stay by retaining collateral following the filing of a bankruptcy petition.

 The Court’s full opinion in City of Chicago, Illinois v. Robert L. Fulton, et al., can be found here.

For more information on this topic, email or call Pat Autry or Clint Buck, attorneys with Branscomb Law, at pautry@branscomblaw.com, cbuck@branscomblaw.com, or (210) 598-5400.

*The newly-appointed Justice Amy Coney Barrett did not participate in the consideration or decision of the case.