2021 begins on a high note for creditors with the release of the U.S. Supreme Court’s opinion on City of Chicago v. Fulton where the Court provided clarification on the automatic stay and control of the bankruptcy estate’s property.
When a bankruptcy petition is filed, §362(a) automatic stay goes into effect which prevents creditors from taking actions against the bankruptcy estate’s property including exercising control over the property during the ongoing petition. In City of Chicago v. Fulton, Fulton faced the dreaded Chicagoan experience of getting her car towed and impounded because of vehicle citations. Fulton then filed a bankruptcy petition. She requested that the City return her car, but the City took a bold stance on refusing to return the vehicle. The lower courts considered this move a direct violation of the well-known automatic stay and the rules against exercise of control over an estate’s property.
In the January 2021 opinion, the U.S. Supreme Court stepped in to provide guidance as to whether the stay was violated. After analysis, the Court determined that the meaning of “stay” “act” and “exercise control” of §362(a)(3) is that it “prohibits affirmative acts that would disturb the status quo of estate property as of the time when the bankruptcy petition was filed.” City of Chicago v. Fulton et al. The Court ruled in favor of City of Chicago and decided that the City did not violate §362(a)(3) by merely retaining the vehicle in this case.
What does the Supreme Court’s opinion mean for creditors?
The good news for creditors is that passively holding on to property after a debtor files for bankruptcy will not be considered a violation of the stay. If the creditor is merely trying to maintain the status quo to hold on to such property, then the creditor is clear of possible violations that may exist under §362(a)(3). However, creditors should still approach this with caution because a thin line exists between passive and affirmative actions of control that could lead to a violation.