Another look at City of Chicago vs Fulton, et al and the “mere retention” of Estate Property and the Automatic Stay

The filing of a petition under the Bankruptcy Code automatically “creates an estate” that, with some exceptions, comprises “all legal or equitable interests of the debtor in property as of the commencement of the case.” 11 U. S. C. §541(a). Section 541 is intended to include within the estate any property made available by other provisions of the Bankruptcy Code. Section 542 is one such provision, as it provides that an entity in possession of property of the bankruptcy estate “shall deliver to the trustee, and account for” that property. The filing of a petition also automatically “operates as a stay, applicable to all entities,” of efforts to collect prepetition debts outside the bankruptcy forum, §362(a), including “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,” §362(a)(3). Here, each respondent filed a bankruptcy petition and requested that the city of Chicago (City) return his or her vehicle, which had been impounded for failure to pay fines for motor vehicle infractions. In each case, the City’s refusal was held by a bankruptcy court to violate the automatic stay.  The Seventh Circuit affirmed, concluding that by retaining possession of the vehicles the City had acted “to exercise control over” respondents’ property in violation of §362(a)(3).

Held: The mere retention of estate property after the filing of a bankruptcy petition does not violate §362(a)(3) of the Bankruptcy Code.  Under that provision, the filing of a bankruptcy petition operates as a “stay” of “any act” to “exercise control” over the property of the estate.  Taken together, the most natural reading of these terms is that §362(a)(3) prohibits affirmative acts that would disturb the status quo of estate property as of the time when the bankruptcy petition was filed. Respondents’ alternative reading would create at least two serious problems. First, reading §362(a)(3) to cover mere retention of property would render §542’s central command—that an entity in possession of certain estate property “shall deliver to the trustee . . . such property”—largely superfluous, even though §542 appears to be the provision governing the turnover of estate property. Second, respondents’ reading would render the commands of §362(a)(3) and §542 contradictory. Section 542 carves out exceptions to the turnover command. Under respondents’ reading, an entity would be required to turn over property under §362(a)(3) even if that property were exempt from turnover under §542. The history of the Bankruptcy Code confirms the better reading. The Code originally included both §362(a)(3) and §542(a), but the former provision lacked the phrase “or to exercise control over property of the estate.” When that phrase was later added by amendment, Congress made no mention of transforming §362(a)(3) into an affirmative turnover obligation. It is unlikely that Congress would have made such an important change simply by adding the phrase “exercise control,” rather than by adding a cross-reference to §542(a) or some other indication that it was so transforming §362(a)(3).
City of Chicago v. Fulton SCOTUS 141 S,Ct. 585 January 2021