Litigants often say they will take their case to the United States Supreme Court. The Court, however, hears only a few cases annually. A recent case, Fulton v. City of Chicago, 141 S.Ct. 585 (2021), started with a parking ticket and ended with the reversal of more than thirty years of case law on repossessions in a majority of jurisdictions.
In Chicago, parking is an adventure. The City may immobilize and impound the vehicles of owners with unpaid fines. City ordinances give the City a possessory lien, making cars collateral for debts owed to the City. Plaintiff Robbin Fulton had only had her 2015 Kia Soul for three weeks when the City towed and impounded it over an unpaid ticket. Fulton, like three other owners, filed a Chapter 13 bankruptcy case and asked the City to return the car. The City refused unless the debts were fully paid. The owners asked the bankruptcy court to order the City to return their cars and pay them damages for violating the Bankruptcy Code’s automatic stay provision. The stay prohibits the collection of debts that existed before the bankruptcy case, and acts to obtain possession of, or exercise control over, property of the bankruptcy estate, i.e., the debtor’s property when the bankruptcy was filed. The bankruptcy court held that by not returning the cars, the City had violated the stay. On appeal, the Seventh Circuit consolidated the four cases, applied its prior decision, and affirmed the bankruptcy court.
Like the Seventh Circuit, a majority of federal circuit courts including the Eighth Circuit, which includes Arkansas, had found creditors violated the stay by refusing to return repossessed property after the owner had filed bankruptcy. A smaller minority disagreed, finding the stay did not impose an affirmative obligation to return repossessed property. They held that just keeping lawfully repossessed property was not an affirmative act in violation of the stay. The Supreme Court granted review of this question to make federal law uniform: does an entity that merely retains possession of lawfully repossessed property violate the automatic stay? The Court unanimously said “no.”
The Court held that merely retaining lawfully repossessed property did not violate the stay. Justice Alito explained that the stay prohibits affirmative acts to disturb the status quo. To be an “act” to violate the stay, more than just retaining such property was necessary. By examining the turnover provision, a separate Bankruptcy Code section that requires the delivery of estate property to the trustee, he observed two flaws in the debtors’ argument that the stay required return of property. First, if the stay required return, the turnover provision was unnecessary. Second, the turnover provision has exceptions that would never apply, if the stay required return. So, the City’s refusal to return the cars did not violate the stay.
Justice Sotomayor wrote a separate opinion to express three concerns about the ruling. First, it did not answer whether creditors violated other stay provisions to prohibit the collection of prepetition debts or enforce liens against estate property. Second, it imposed a hardship by requiring debtors to file turnover suits to get their cars back and delayed the bankruptcy when a debtor needs a car for everyday life and to work to earn money to fund a reorganization plan. Finally, while creative courts had tried to reduce the delay and eliminate the hardship, the committee that drafts procedural rules or Congress should offer a fix, not the Court.
So, where do things now stand? The Fulton decision invalidates cases in the Eighth Circuit and a majority of jurisdictions. Now, secured creditors may retain possession of collateral lawfully repossessed before bankruptcy, even if the debtors ask for its return. Creditors can now seek adequate protection from the trustee or the debtor in connection with the return of estate property. That tactic is, however, not without risk as Justice Sotomayor observed that other automatic stay provisions may still impose liability.
While most often arising in consumer bankruptcies after an automobile is repossessed, the ruling applies in other bankruptcy cases, too, as the Court’s logic extends to any secured creditors with possession or control over estate property. As a result, secured creditors and debtors alike should expect more disputes and more litigation over these issues. Both will need to promptly consult their bankruptcy counsel when these issues arise, at least until Congress or the Rules Committee accepts Justice Sotomayor’s invitation and provides another solution.
In the meantime, be sure to pay your parking tickets.
Editor’s note: Johnathan Horton is a partner with Wright, Lindsey & Jennings LLP. The opinions expressed are those of the author.