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Supreme Court rules that mere retention of property does not violate §362(a)(3)

On January 14, 2021, the Supreme Court issued a unanimous decision holding that if a creditor has taken possession of a debtor’s property, section 362(a)(3) of the Bankruptcy Code does not require the creditor to return the property when the debtor subsequently files a bankruptcy petition.  The decision does not address whether other provisions of §362(a) might require a creditor to return a debtor’s property. However, it did confirm that §362(a)(3) does not create an affirmative return obligation.

In City of Chicago v. Fulton, the Court reversed a series of bankruptcy court decisions, which had been affirmed by the Seventh Circuit, holding the City of Chicago in violation of the automatic stay when it refused to return impounded vehicles that were owned by four Chapter 13 debtors.  The decision, written by Justice Samuel Alito, said that §362(a)(3) prohibits affirmative acts that would disturb the status quo at the time the bankruptcy petition is filed.  

The debtors contended that the City was exercising control over the vehicles by not turning them over because an exercise of control over property included retaining possession, especially after a demand for return.  But the Court held “that mere retention of property does not violate §362(a)(3)."

In one of the cases, the bankruptcy court did find that the City had also violated §§362(a)(4) and (a)(6) by retaining the debtor’s vehicle and demanding payment. However, the Supreme Court did not reach that issue since it was not addressed by the Court of Appeals.  See, id. at n.2.

Although these were Chapter 13 cases, the Court’s interpretation of §362(a)(3) would apply equally in cases under other chapters of the Bankruptcy Code.

Justice Alito delivered the opinion of the Court, in which Chief Justice Roberts and Justices Thomas, Breyer, Sotomayor, Kagan, Gorsuch, and Kavanaugh joined.  Justice Sotomayor filed a concurring opinion. Justice Barrett took no part in the consideration or decision of the case.  

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restructuring & insolvency, bankruptcy

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