Categories & Search

Update: Seventh Circuit Revives Fulton Circuit Split

In January, we reported that the Supreme Court had resolved a split among the Circuit Courts of Appeals regarding property seized from a debtor pre-petition, holding that “merely retaining possession of estate property does not violate the automatic stay.”[1]  The underlying dispute in Fulton arose when individual debtors demanded that the City of Chicago return cars that were impounded for non-payment of various municipal parking and traffic violations immediately upon the filing of their bankruptcy petition, while the City maintained that debtors must seek turnover through an adversary proceeding. 

The majority of lower courts to consider the issue, including the Seventh Circuit, had held that creditors could not wait for the debtor to file a motion for turnover under Section 542, and that the failure to return the seized property promptly upon a bankruptcy filing violated Section 362(a)(3) of the Bankruptcy Code.  The Supreme Court’s decision in January, that the retention of seized property pending a turnover motion does not violate the automatic stay, appeared to settle the question. 

But not so fast.  Last week, a three-judge panel of the United States Court of Appeals for the Seventh Circuit, on remand from the Supreme Court, determined that further proceedings in the Bankruptcy Court are required to determine whether the City’s retention of the impounded vehicles violated Sections 362(a)(4) or (a)(6) of the Bankruptcy Code, notwithstanding that the Supreme Court’s decision in January forecloses a finding that the City had violated Section 362(a)(3).[2]  The Court relied heavily on Justice Sotomayor’s concurrence in Fulton:

With respect to applicability of § 362(a)(4) and (a)(6), the Supreme Court declined to “settle the meaning of other subsections of § 362(a).”  In her concurrence, Justice Sotomayor agreed with the majority that the City had not violated § 362(a)(3) but “wrote separately to emphasize that the Court had not decided whether and when § 362(a)’s other provisions may require a creditor to return a debtor’s property.  Nor had the Court addressed how bankruptcy courts should go about enforcing creditors’ separate obligation to ‘deliver’ estate property to the trustee or debtor under 11 U.S.C. § 542(a).”  Consistent with the majority opinion, this logic does not foreclose an adverse finding against the City, on other grounds. As the concurrence notes, “the City's conduct may very well violate one or both of these other provisions.”[3]

The logic of the Supreme Court’s holding in Fulton – that the “acts” prohibited by Section 362(a)(3) are “affirmative acts,” and that reading an affirmative duty to return seized property into that section would render the commands of Section 542 superfluous – would appear to apply with equal force to Sections 362(a)(4) and (a)(6).  Accordingly, notwithstanding the compelling policy concerns articulated in Justice Sotomayor’s concurrence, we are not optimistic that debtors will find relief on this issue under any other subsection of the Bankruptcy Code.  The problem requires a legislative solution. 

[1] City of Chi. v. Fulton, __ U.S. __, 141 S. Ct. 585, 589 (2021). 

[2] Section 362(a)(3) prohibits “(3) 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,” while subsections (4) and (6) prohibit “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.

[3] In re Fulton, 2021 U.S. App. LEXIS 10322, at *6 (7th Cir. Apr. 12, 2021) (internal citations omitted). Justice Sotomayor’s concurrence in Fulton also focused on the practical problems of requiring a turnover action, which requires an adversary proceeding that may take a considerable amount of time to resolve, for debtors who need their cars to get to work and earn a living.  Fulton, 141 S. Ct. at 592 (Sotomayor, J., concurring).