CHRISTIAN DE LA OSA—On January 14, 2021, the United States Supreme Court decided City of Chicago, Illinois v. Fulton. In a unanimous decision, the Supreme Court held that “mere retention” of property of the estate after a bankruptcy petition has been filed does not violate the Bankruptcy Code’s “automatic stay.” At first glance, this decision may seem like a small victory for creditors. Creditors can now avoid immediately turning over property of the estate to a bankruptcy trustee without the repercussions of having violated the Bankruptcy Code’s “automatic stay.” However, the Supreme Court’s holding is a narrow one. Although creditors cannot violate the automatic stay by holding onto a debtor’s property, the “automatic stay” still prevents creditors from foreclosing on the property. On a deeper level, the Supreme Court’s holding creates an inconvenient roadblock for debtors striving to achieve the coveted “fresh start” that the Bankruptcy Code is designed to provide.
A brief introduction to some of the pillars of the Bankruptcy Code is crucial to understanding the importance of the Supreme Court’s decision. When a bankruptcy petition is filed, an “estate” is automatically created. Furthermore, the bankruptcy estate is comprised of “all legal or equitable interests of the debtor in property.” Simply put, the bankruptcy estate is comprised of most of the debtor’s assets. The most significant protection that the Bankruptcy Code affords to debtors is § 362(a), which is more commonly known as the “automatic stay.” The “automatic stay” prevents creditors from taking affirmative steps to collect the amounts owed to them or from seizing the debtor’s property outside of a bankruptcy proceeding. The “automatic stay” thus protects the debtor’s assets, and benefits all creditors because it prevents one creditor from collecting debts at the expense of other creditors. Lastly, § 542(a) of the Bankruptcy Code requires any entity possessing property of the estate to turn the property over to the estate’s trustee. In order to initiate the turnover of property under § 542(a), a debtor must do so through a bankruptcy proceeding and demonstrate that the creditor’s interest in the property is adequately protected. In the vehicle context, a debtor can show that the creditor’s interest in the vehicle is adequately protected by insuring the vehicle.
In City of Chicago, Illinois v. Fulton, the Supreme Court grappled with the practical meanings of § 362(a) and § 542(a). The Supreme Court had to determine which provision controlled, and ultimately, whether the creditor or debtor would bear the burden of returning property to the estate. In the present case, two debtors had failed to pay several fines imposed by the city of Chicago for “motor vehicle infractions.” Consequently, the city impounded the debtors’ vehicles. Each debtor subsequently filed a “Chapter 13 bankruptcy” and demanded return of their vehicles; however, the city refused. In a creditor-friendly ruling, the Supreme Court ruled that § 362(a) only prevented “affirmative acts” by creditors to recover property of the estate, and that simply holding onto the debtor’s property after a bankruptcy petition has been filed does not violate the “automatic stay.” The Supreme Court reasoned that if merely retaining a debtor’s vehicle was a violation of the “automatic stay,” the “central command of § 542a [would be rendered] largely superfluous,” and § 362(a) and § 542(a) would contradict one another. On the surface, the Court unanimously decided a relatively simple issue of statutory construction and still provided debtors with a means to reacquire their vehicles (i.e., § 542(a)). Although debtors have an alternative pathway to their vehicle, that journey will not be a quick and smooth one.
As Justice Sotomayor notes in her concurring opinion, debtors are now faced with an uphill climb towards achieving a fresh start. Justice Sotomayor stressed how the Supreme Court failed to address when § 362(a) or § 542(a) would require a creditor to return a debtor’s property. Moreover, the situation presented in City of Chicago, Illinois v. Fulton occurs frequently. Since 2011, the city of Chicago has seized close to 50,000 motor vehicles as a result of unpaid infractions. Justice Sotomayor also notes that “[d]rivers in low-income communities across the country face similar vicious cycles.” Following the Supreme Court’s ruling in City of Chicago, Illinois v. Fulton, debtors now need to navigate a bankruptcy proceeding and adequately protect their creditors in order to reacquire their property pursuant to § 542(a). However, debtors, who are typically in a poor financial situation, may neither be in a position to insure their vehicles and adequately protect their creditors, nor have the patience or assets to wait out a prolonged bankruptcy proceeding. Given the frequency with which vehicles are impounded, numerous debtors in low-income communities will struggle to quickly reacquire their vehicles, which may often be the debtors’ most valuable assets. The vehicles may not only represent a substantial portion of a debtor’s net worth, but they also are the means through which debtors get to and from their jobs. Without easy access to work, a debtor’s already distressing financial situation may become worse.
Thus, now the significance of the Supreme Court’s decision comes to fruition. Debtors were left with a less than efficient means to reacquire their vehicles, and thus, placed in an inopportune predicament. The Supreme Court may have unanimously decided a straightforward statutory construction issue; however, the Court has now shifted the burden to debtors to reacquire their vehicles. This predicament may ultimately lead to debtors losing their jobs, which would make a Chapter 13 repayment plan and fresh start more difficult to achieve. This situation debtors are now faced with is especially inconvenient given the expected surge in bankruptcies sparked by the COVID-19 pandemic. What will happen to bankruptcy debtors in low-income communities who need to get to work, but have impounded cars? How will financially distressed debtors escape this bind? Will the newly elected members of Congress enact debtor-friendly revisions to § 362(a) and § 542(a)? Only time will tell.