Recent Developments in Bankruptcy Litigation 2022


Dustin P. Smith

Hughes Hubbard & Reed LLP
One Battery Park Plaza
New York, NY 10004
(212) 837-6126
[email protected]

Michael D. Rubenstein

Liskow & Lewis APLC
1001 Fannin Street, Suite 1800
Houston, TX 77002
(713) 651-2953
[email protected]

§ 1.1. Supreme Court

City of Chicago vs. Fulton, 141 S. Ct. 585 (2021). In the case before the Court, the City of Chicago impounded the debtors’ vehicles for failure to pay fines. The debtors then filed chapter 13 bankruptcy cases. Following the filing of the cases, the debtors requested that the city return the vehicles. The city refused and the bankruptcy court held that those refusals each constituted a violation of the automatic stay. The Seventh Circuit affirmed and held that “by retaining possession of the debtors’ vehicles after they declared bankruptcy,” the city had violated section 362(a) of the Bankruptcy Code by exercising control over the debtors’ property. The Supreme Court granted certiorari “to resolve a split in the Courts of Appeals over whether an entity that retains possession of the property of a bankruptcy estate violates § 362(a)(3).”

The Court began its analysis by noting that the filing of a bankruptcy petition has certain immediate consequences. The first is that it is the creation of an estate that, with limited exceptions, includes all of the debtor’s legal or equitable interests and property as of the commencement of the case. The Court noted that a second automatic consequence of the filing of a bankruptcy petition, again with certain limited exceptions, is that the petition operates as a stay of all efforts to collect from the debtor outside of the bankruptcy case. Among the many efforts prohibited by the state is “any act in possession of property of the estate or of property from the estate or to exercise control over property of the estate.” Justice Alito, writing for the Court, concluded that the language used in section 362(a)(3) suggests that simply retaining possession of estate property does not violate the stay. The Court noted that the stay bars “any act” to exercise control over property of the estate. The Court concluded that the most natural reading of the statutory language was to prohibit affirmative acts that would disturb the status quo of estate property as of the time of the bankruptcy filing. The Court further concluded that any ambiguity in the language of the Bankruptcy Code would be resolved in the non-debtor’s favor because of section 542. That provision, entitled “Turnover of Property to the Estate,” provides for the delivery of estate property to the trustee. Interpreting the automatic stay to cover mere retention of property would, in the Court’s analysis, create two problems. First, it would render section 542 largely superfluous, which would be contrary to basic principles of statutory interpretation. Moreover, this alternative reading of the automatic stay would render the automatic stay and the turnover provisions contradictory. The Court reached this conclusion because section 542 has exceptions for, inter alia, the turnover of inconsequential property. Reading section 362 as the debtors urged would have the automatic stay commanding turnover of property, when the more specific turnover provision would not. Accordingly, the court held that the mere retention of estate property after the filing of a bankruptcy petition does not violate the automatic stay.

In a concurring opinion, Justice Sotomayor emphasized that the Court did not decide whether and when the automatic stay’s other provisions might require a creditor to return a debtor’s property. Justice Sotomayor also noted that the Court did not address how bankruptcy courts should go about enforcing the commands of section 542(a), and that the city’s conduct could very well violate one or …

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