U.S. Supreme Court Allows Repossessing Secured Lender to Hold Collateral Pending Bankruptcy Stay

A secured lender's "mere retention of property [after a pre-bankruptcy–repossession] does not violate" the automatic stay provision [§362(a)(3)] of the Bankruptcy Code (Code), held a unanimous U.S. Supreme Court on Jan. 14, 2021. City of Chicago v. Fulton, 141 S. Ct. 585, 589 (Jan. 14, 2021). Reversing the Seventh Circuit's affirmance of a bankruptcy court judgment holding a secured lender in contempt for violating the automatic stay, the Court resolved "a split" in the Circuits. Id. The Second, Eighth and Ninth Circuits had agreed with the Seventh Circuit. See, e.g., In re Weber, 719 F.3d 72, 79 (2d Cir. 2013) (by retaining possession of collateral, lender "was 'exercising control' over" debtor's property). But the Third, D.C., and Tenth Circuits, had reached the right result in other cases. In re Denby-Peterson, 941 F.3d 115 (3d Cir. 2019) (secured creditor has no "affirmative obligation under the automatic stay to return a debtor's [repossessed] collateral" to estate "immediately upon notice" of debtor's bankruptcy filing); In re Cowen, 849 F.3d 943, 950 (10th Cir. 2017) (only "affirmative acts" to take "possession of, or to exercise control over" debtor's property "violate" automatic stay); United States v. Inslaw, Inc., 932 F.2d 1467, 1474 C.D.C. Cir. 1991) ("Nowhere in [Code §362(a)] is there a hint that it creates an affirmative duty …."). As shown below, the Supreme Court effectively held that the Code's automatic stay provides no automatic turnover of a lender's collateral. The Code's turnover provision (§542) is also not automatic.

Relevance

The Circuit split here had generated a raft of scholarly debate. See, e.g., Ralph Brubaker, Turnover, Adequate Protection, and the Automatic Stay (Part I): Origins and Evolution of the Turnover Power, 33 Bkrtcy. L. Ltr. No. 8 (Aug. 2013); Ralph Brubaker, Turnover, Adequate Protection, and the Automatic Stay (Part II): Who Is "Exercising Control" Over What, 33 Bkrtcy. L. Ltr. No. 9 (Sept. 2013); Eugene R. Wedoff, The Automatic Stay Under §362(a)(3)—One More Time, 38 Bkrtcy. L. Ltr. No. 7 (July 2018); Ralph Brubaker, Turnover, Adequate Protection, and the Automatic Stay: A Reply to Judge Wedoff, 38 Bkrtcy. L. Ltr. No. 11 (Nov. 2018). The overarching issue is whether the automatic stay in Code §362(a)(3) is a self‑contained and self‑executing injunctive turnover order.

Facts

The four debtors in Fulton repeatedly violated the City of Chicago's traffic laws. When the debtors failed to pay the resulting fines, the City impounded their vehicles, giving the City a possessory lien on the vehicles securing its claim for the delinquent fines. Each of the debtors responded by filing Chapter 13 bankruptcy petitions. In each case, the bankruptcy court held that the automatic stay affirmatively required the City to return the debtors' vehicles without the need for any turnover proceedings. The Seventh Circuit affirmed, after consolidating the four appeals by the City. It reasoned that, by retaining possession of the vehicles lawfully impounded before bankruptcy, the City was engaging in an "act … to exercise control" over estate property, in violation of the stay (§362(a)(3)). The court affirmed orders directing turnover of the debtors' cars and imposed monetary sanctions.