Opinion analysis

A narrow win for creditors

On Thursday, the Supreme Court’s opinion in City of Chicago v. Fulton clarified that creditors do not violate the Bankruptcy Code’s automatic stay if they passively retain a debtor’s property after the debtor files for bankruptcy protection. The automatic stay is the provision of the Bankruptcy Code that halts all collection activity to allow the bankruptcy proceeding to unfold without creating a race among creditors.

The city of Chicago, like many municipalities, impounds cars for nonpayment of fines and fees. After their cars were impounded and they sought bankruptcy protection, Robbin Fulton, Jason Howard, George Peake and Timothy Shannon argued that the automatic stay in 11 U.S.C. § 362(a)(3) required the city to return the cars. The city refused, claiming that the debtors needed to use the Bankruptcy Code’s turnover provisions in 11 U.S.C. § 542(a) to request their cars back. The difference between the two provisions is one of timing and convenience. If Section 362 is the operative provision, merely filing a bankruptcy petition would create an obligation for Chicago to return the vehicles to the debtors. If Section 542 is the operative provision, the debtors may need to initiate an adversary proceeding — a mini lawsuit within the bankruptcy case — to obtain their cars.

As several amici noted, and as Justice Sonia Sotomayor explained in her concurrence, these impoundment policies deprive the vehicle owners of the transportation essential to earning the money they need to pay down the fines and fees they owe. For debtors, the timing matters. Although this policy presents many urgent issues, the question before the court in this case was quite narrow. Both Justice Samuel Alito’s opinion for a unanimous court and Sotomayor’s concurrence emphasized that the holding is limited to the question of whether Chicago violated Section 362(a)(3) by passively retaining the debtors’ cars. Indeed, in Shannon’s case, the city had demanded payment as a condition for releasing his car. The opinion explains that, since the court of appeals did not reach that issue, the Supreme Court would not opine on it. In other words, it is possible that the city’s policy with respect to impounded cars does violate the Bankruptcy Code, but its passive retention of a vehicle after its owner files a bankruptcy petition is not by itself a violation of Section 362(a)(3).

Writing for the 8-0 court (Justice Amy Coney Barrett took no part in the case, as it was argued in October before she joined the bench), Alito started with the text. In pertinent part, Section 362(a)(3) provides that “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” violates the automatic stay. Relying on Webster’s Third New International Dictionary, the opinion explains that “to exercise” in Section 362(a)(3) means “to bring into play” or “make effective in action.” At oral argument, the justices had steered the discussion toward the “metaphysics” of the act/omission distinction – Chicago argued that not returning the cars was an omission, not an action – in several places. That distinction reappeared in the opinion, as Alito explained that “saying that a person engages in an ‘act’ to ‘exercise’ his or her power over a thing communicates more than merely ‘having’ that power.”

Alito then explained that the case was overdetermined: “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.” Section 542 dictates that entities holding debtors’ property “shall deliver to the trustee … such property or the value of such property unless such property is of inconsequential value or benefit to the estate.” The court identified three reasons why this provision required them to conclude that Chicago’s vehicle retention policy did not violate the automatic stay.

First, the debtors’ reading of Section 362 would render Section 542 “largely superfluous.” Although the statute might add procedural details, the court concluded that such a reading would be “a small amount of work for a large amount of text.”

Second, Alito found the debtors’ reading of Section 362 to contradict Section 542, because the latter exempts property “of inconsequential value or benefit to the estate,” and the former contains no such exemption. While the debtors had argued that Section 362 should be read to include Section 542’s exception, the court found “no textual basis” for doing so.

Finally, Alito looked at the history of amendments to the statute. Congress added the phrase “to exercise control over property of the estate” in 1984. The debtors argued that this amendment allowed them to use Section 362 to enforce Section 542, but the court did not buy that argument. The opinion explains that, “[h]ad Congress wanted to make §362(a)(3) an enforcement arm of sorts for §542(a), the least one would expect would be a cross-reference to the latter provision.” This last argument might be unrealistic given the Bankruptcy Code’s history of slapdash amendments (the 2005 amendments infamously inserted a hanging paragraph in a key provision).

Alito’s opinion contains no surprises following the argument. Even justices sympathetic to debtors, notably Sotomayor, could not read the text to support their argument.

The most interesting part of the ruling is Sotomayor’s concurrence, in which she yet again reveals herself to be the conscience of the court. Taking nearly as much space as the opinion itself, her concurrence explains not only why impoundment rules are bad policy, but also why debtors need their cars returned quickly. Digging into the facts of Peake’s case, she explained that “the City jeopardized Peake’s ability to make payments to all his creditors, the City included”. Ultimately though, Sotomayor concluded that “[i]t is up to the Advisory Committee on Rules of Bankruptcy Procedure to consider amendments to the Rules that ensure prompt resolution of debtors’ requests for turnover under §542(a), especially where debtors’ vehicles are concerned.”