Supreme Court of the United States Holds That 11 USC 362(A)(3) Does Not Impose an Affirmative Duty to Return Lawfully Seized Property

The Supreme Court of the United States issued an opinion in City of Chicago v. Fulton. The Court was asked to decide whether mere retention of property seized prepetition violated section 362(a)(3) of the automatic stay. Writing for a unanimous court, Justice Alito held that “mere retention of property [seized prepetition] does not violate” the automatic stay.‍

Fulton involved claims by four bankruptcy debtors who sought damages under 362(k) for a willful stay violation. In all cases, the city of Chicago had impounded the debtors’ vehicles under a City ordinance allowing them to do so when the debtors had certain unpaid fines relating to the vehicle (e.g. parking tickets, safety violations, etc.). In all cases, the vehicles were impounded prepetition, and in all cases, the debtors made demands for the vehicles’ returns, which the City declined. Both the bankruptcy courts and Seventh Circuit agreed that 363(a)(3) created in Creditors an affirmative duty to return otherwise lawfully seized property once the debtor filed a bankruptcy petition.

In reversing the bankruptcy court and Seventh Circuit holdings, Judge Alito stressed that section 542 contained a more express turnover requirement, along with several exceptions to those requirements. Importantly, section 542 contains a detailed procedure involving a motion to turnover estate property, objection periods, etc. Holding that 363(a)(3) created an affirmative duty to return property without first going through section 542 (which none of the debtors did) effectively writes section 542 out of the bankruptcy code.

While this opinion has direct application to creditors whose liens are secured by an automobile repossessed or returned voluntarily prepetition, it applies equally to all creditors who have taken control of a debtor’s property lawfully prepetition. In those cases, clients are advised to work with local counsel to monitor for a section 542 turnover motion and to cite City of Chicago v. Fulton in response to any informal or formal attempt to seek sanctions under 362(k) that were not preceded by a 542 motion.  You can read the opinion in full here.

Please note that Ted Cahill is an MDK Alumni member.