The United States Supreme Court is the highest court in the country, so when it takes up a bankruptcy case, everyone pays attention. This year, in City of Chicago v. Fulton, the Supreme Court is tasked with determining what parties in possession of a debtor’s property are to do with that property if the debtor files for bankruptcy. As the case name suggests, it involves the Windy City to our South, meaning the lower court whose opinion is being reviewed, the Court of Appeals for the Seventh Circuit, also handles cases from Wisconsin. This makes this case particularly interesting to us since the Supreme Court will critique the decision-making done by judges the Hanson & Payne team may appear before.
Who Gets The Keys?
The case is actually a consolidation of four different cases. In all the cases, the city of Chicago impounded a vehicle because the owner failed to pay a fine or fee, typically related to a traffic violation. In such situations, the city is allowed by law to sell off the car if it is not reclaimed by the owner within a certain period of time. In each of these four cases, the various owners filed for bankruptcy after their car was impounded, but before the point where the city could have sold the car. Each owner demanded the city return their vehicle.
The question before the Court is what the city is supposed to do with the cars after the owner has filed for bankruptcy. And more broadly, what any party that possesses property owned by someone who has filed for bankruptcy is supposed to do with that property.
Chicago’s obligations to the debtors turn on how two provisions of the Bankruptcy Code interact. The first is the automatic stay in § 362, which pauses all collection activity against debtors to prevent creditors from racing to consume debtors’ assets before any relief can occur. With a few exceptions, § 362 stays collection activity automatically when the debtor files for bankruptcy protection. Creditors who continue collection activity after the stay is in place risk sanctions.
Here, the debtors argue that § 362(a)(3) required Chicago to return the cars to them as soon as the stay went into effect. This provision bars two kinds of conduct: “any act” either to “obtain possession of property of the estate or of property from the estate” or to “exercise control over property of the estate.” The debtors argue that passively retaining property impounded before bankruptcy is an “act” to “exercise control over property of the estate.” The U.S. Courts of Appeals for the 2nd, 8th, 9th, 11th and now the 7th Circuits have adopted this reading of § 362(a)(3).
The city argues that the analysis of its obligation to return the cars to the debtors cannot stop at § 362(a)(3). Instead, they argue that § 542(a) governs. Section 542(a) provides that “an entity … in possession, custody, or control, during the case, of property that the trustee may use, sell, or lease … shall deliver to the trustee … such property or the value of such property unless such property is of inconsequential value or benefit to the estate.”
The city argues that the “shall deliver” language is not self-executing. Rather, as the U.S. Courts of Appeals for the 10th and District of Columbia Circuits have held, it is an obligation to turn over the property if and when the trustee files an adversary proceeding seeking the property.
Figuring out which section of the Bankruptcy Code is controlling, in this case, means the Court will determine which is more important — protecting bankruptcy filers from debt collection actions, or the rights of creditors.
What Happens Next?
The Court heard oral arguments in the case in October. Unless something out of the ordinary happens (and it might, oral arguments, in this case, were delayed because of the COVID-19 pandemic) we expect the Court to issue an opinion by the end of June 2021.
The Hanson & Payne team is keeping a close eye on this case. The Supreme Court’s opinion may impact anyone who is holding property owned by a bankruptcy filer. It may also signal lower courts to put a thumb on the scale in favor of either debtors or creditors when multiple sections of the bankruptcy code are at play. Whatever happens, we will be ready to apply the Court’s ruling in our clients’ cases.