The experience of reading a Supreme Court opinion on bankruptcy law is like having a two-year-old in a China shop—you just want them out before they break more stuff.  

The Supreme Court’s stumble through the City of Chicago v Fulton opinion is no exception to this rule.  

The City of Chicago, itself an entity on the brink of filing bankruptcy, was desperate for revenue, so in 2011 the City increased impound lot fees. Many low-income residents soon found it impossible to pay the fees to reclaim their vehicles. 

George Peake, one of the debtors in the case, drove a 2007 Lincoln MKZ 45 miles each day to and from work. When that car was impounded he owed $4,300 in impound fees, so he filed bankruptcy but the City of Chicago refused to release his car until he first paid $1,250. 

 THE AUTOMATIC STAY: 

Section 362(a)(c) of the Bankruptcy Code states that the filing of a petition stays “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.” 

The debtors in Fulton claimed a violation of the stay occurred because the City of Chicago was “exercising control” over their vehicles by refusing to release them. 

The City of Chicago’s attorneys replied that they were not violating the stay since they were taking no affirmative action to change the status quo. Their attorneys argued that mere possession of property seized prior to bankruptcy was not a violation of the stay and that it had not duty to release the vehicles until the courts issued an order requiring a turnover. 

The debtors argued that the City of Chicago had an affirmative duty to release the vehicles once a request for the vehicles was made known. 

THE TURNOVER STATUTE: 

Section 542 of the bankruptcy code requires a creditor to release property as requested by the Trustee or as directed by the Court.   But obtaining a turnover order may take months to accomplish and is expensive, whereas filing a motion for violation of the automatic stay is relatively cheap and fast. 

THE RULING: 

By a unanimous 8-0 vote (Justice Barrett did not participate) the court ruled that the automatic stay of 362(a)(3) did not require the City to turn over the vehicles since the City was merely preserving the status quo.

Justice Alito, writing for the majority, states that if 362(a)(3) requires the City to turn over the impounded vehicles, then the turnover provision of §542 would become superfluous.

  • “Any ambiguity in the text of §362(a)(3) is resolved decidedly in the City’s favor by the existence of a separate provision, §542, that expressly governs the turnover of estate property.
  • “Reading “any act . . . to exercise control” in §362(a)(3) to include merely retaining possession of a debtor’s property would make that section a blanket turnover provision.”
  • “The better account of the two provisions is that §362(a)(3) prohibits collection efforts outside the bankruptcy proceeding that would change the status quo, while §542(a) works within the bankruptcy process to draw far-flung estate property back into the hands of the debtor or trustee.”

Justice Alito reasons that if the automatic stay requires a creditor to  release the vehicle, then the turnover provision of Section 542 is redundant and unnecessary.  For this reason, the automatic stay, according to the Court’s logic, does not require a turnover since “mere possession” is not an action to control.

I believe the Court’s reasoning is flawed and oversimplified.  The debtors in this case were not arguing that the the automatic stay required the turnover of the vehicles. Rather, they argued that the refusal to turn them over constituted a violation of the stay.

The filing of a bankruptcy petition changes the status quo. Mere retention is no longer mere retention–it is a violation.

Imposing penalties on a creditor that refuses to release collateral after a bankruptcy is filed does not make the turnover provision of Section 542 redundant.  Section 362 merely imposes penalties for violating the stay, but it does not actually require the turnover of property.  Section 542 does not impose penalties but can require the turnover of property. The provisions perform distinct but complimentary functions.  One does not obviate the other.

Imposing penalties on creditors that refuse to turnover seized collateral does not make the automatic say a de facto turnover provision (although such penalties will certainly encourage creditors to release collateral).

There will be times when a dispute exists as to the ownership of property, and the turnover provision of 542 addresses those questions, but the automatic stay does not.  The automatic stay of 362 and the turnover provision of 542 serve different but complimentary functions.

AFFECT ON NEBRASKA CASE LAW:

  • In re Griger, Nebraska Case No. 97-80017  Nissan Motor Acceptance repossessed debtor’s vehicle 7 days before Chapter 13 petition was filed. Nissan refuses to release the vehicle until the debtors pay the costs of repossessing the vehicle and the cost of transporting the vehicle back to Nebraska.  Judge Mahoney ruled that: “A willful violation of the automatic stay is not only triggered by malfeasance; nonfeasance on the part of a creditor may also be considered a willful violation of the stay under appropriate circumstances.
  • In re Sandra Mae Hoyle, Neb. Bkr. 96:701 (Bankr. D. Neb. 1996) (Mahoney, J.) (A judgment creditor must take affirmative action to obtain release of garnished funds). While a creditor is not under a time limit in returning property, a creditor must return the property within a reasonable period of time.”
  • In re Hill, Nebraska Bankruptcy Case 92-82086 : 11 U.S.C. §362 “prohibits actions against property of the debtor after a bankruptcy petition is filed. It does not require any notice by the debtor or court order. The injunction of Section 362 of the Bankruptcy Code is automatic. In re Knaus, 889 F.2d 773, 775 (8th Cir. 1989).”
  • Judge Mahoney imposed sanctions for failing to release the repossessed vehicle: “This creditor kept control of the vehicle notwithstanding the fact that it had received information, including a copy of an Eighth Circuit case, In re Knaus, which directed a return of property seized post-petition. The creditor did not consult an attorney but simply let the debtors stew until this Court, at a hearing scheduled on an emergency basis, specifically ordered the turnover of the property. The actions of this creditor are “appropriate circumstances” under which punitive damages can and should be assessed.”

All of these Nebraska cases are now thrown into question.  Do creditors have affirmative duties to release collateral or garnishments after a bankruptcy is filed?

NEW PROBLEMS EMERGING FROM COURT RULING:

Emboldened by the Supreme Court’s neutering of the automatic stay, creditors are now refusing to stop collection activities in a variety of settings.

  • Margavitch vs. Southlake Holding LLC:  In this case the creditor refused to issue a release of a garnishment of funds held in the debtor’s bank account.  There creditor said is was taking no action and there mere retention of the garnished funds was not a violation of the automatic say. The creditor claimed it was merely preserving the status quo.  The Pennsylvania bankruptcy court agreed and ruled no violation of the stay occurred.
  • Mark E. Stuart vs. City of Scottsdale.  The Ninth Circuit Bankruptcy Appellate Panel rules that no violation of the stay occurs due to mere retention of repossessed vehicles.

What about wage garnishments? Is it a violation of the stay to merely allow a wage garnishment approved by a court before the bankruptcy is filed to continue? Is there an affirmative duty of the creditor to release the garnishment?

I have no doubt the Supreme Court would say that is different, but why? How is it different? The creditor is taking no “action” to continue the garnishment, rather the creditor has set a process in motion that continues to garnish future paychecks.

What “action” has a creditor committed by not releasing the wage garnishment? Obviously, the creditor has taken no action, and that is the problem.  If you buy into the concept that the automatic stay may compel a creditor to take affirmative action in some cases, then Justice Alito’s logic completely unravels.  Why does a creditor that takes no action of any kind after a bankruptcy is filed be required to take affirmative steps to stop a wage garnishment process, but a creditor that maintains a process or retaining vehicles does not? The logic is flawed.

It is inaccurate to say the City of Chicago is “merely retaining” the vehicle.  Retention itself is a process, just like a continuing wage garnishments is a process.  Both require effort.

The Supreme Court has opened up a can of worms and a decade of litigation will now take place to figure out what the automatic stay actually stops.

 

Image courtesy of Flickr and Dave Nakayama

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Photo of Sam Turco Sam Turco

I was born and raised in Omaha, Nebraska, the 3rd of six children.  We grew up in the meat packing district of South Omaha.  I graduated from Omaha Central High School 1985.

 My wife, Kathy, and I are raising 3 children.   Outside of…

I was born and raised in Omaha, Nebraska, the 3rd of six children.  We grew up in the meat packing district of South Omaha.  I graduated from Omaha Central High School 1985.

 My wife, Kathy, and I are raising 3 children.   Outside of work, I spend a lot of time escorting children to sporting events while trying to sneak in a long bicycle ride on the weekends.

Areas of Practice
  • 100% Bankruptcy Law
Litigation Percentage
  • 5% of Practice Devoted to Litigation
Bar Admissions
  • Nebraska, 1992
  • Iowa
  • U.S. District Court District of Nebraska, 2010
  • U.S. Tax Court