Bankruptcy & Creditors' Rights Alert

RETAINING POSSESSION OF A VEHICLE DOES NOT VIOLATE THE AUTOMATIC STAY - CHICAGO V. FULTON

The Supreme Court of the United States recently offered some clarity on one of the many issues creditors face when a borrower, customer, or member files bankruptcy: what to do with collateral that has already been repossessed. Although other provisions of the Bankruptcy Code may impose different obligations, the Supreme Court has now held that mere retention of property does not violate the automatic stay under Bankruptcy Code § 362(a)(3).

In Chicago v. Fulton, Case No. 19-357, the City of Chicago impounded Ms. Fulton’s car after her failure to pay certain fines and costs related to traffic offenses. Ms. Fulton filed bankruptcy and requested that the City release the car from impound. The City refused, and the bankruptcy court held that the City’s refusal violated the Bankruptcy Code’s automatic stay prohibiting “any act... to exercise control over property” of the bankruptcy estate. § 362(a)(3). The appellate courts affirmed the holding, agreeing that the City’s refusal violated the automatic stay, but the Supreme Court reversed, ruling that the automatic stay had not been violated.

The Supreme Court held that merely retaining possession does not violate the stay because “the most natural reading” of the statute’s operative terms — “stay,” “act,” and “exercise control”— “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.” Slip Op. at 3. In addition, the court relied on the existence of a separate Bankruptcy Code section addressing turnover of property of the estate, § 542. The court held that § 542’s central command to turn over certain property to the bankruptcy trustee “would be surplusage if § 362(a)(3) already required an entity affirmatively to relinquish control of the debtor’s property at the moment a bankruptcy petition is filed.” Slip Op. at 5. Therefore, the court held that passive retention of possession of the car does not violate § 362(a)(3).

While the Supreme Court’s ruling is good news for creditors, it should not be taken too expansively, and creditors should always exercise extreme caution after a borrower, customer or member files bankruptcy, including seeking legal advice from an attorney. The court’s decision is limited to § 362(a)(3) (exercising control over property). It did not address § 362(a)(4) (prohibiting any act to create, perfect, or enforce any lien against property of the estate) or § 362(a)(6) (prohibiting “any act to collect, assess, or recover a claim against [a] debtor” that arose prior to bankruptcy proceedings).

Keys to Remember

Always remember, whenever a borrower, customer, or member files any bankruptcy, regardless of whether it is a Chapter 7, 11, 12, or 13, the automatic stay is imposed by law. This stay operates as an injunction preventing all creditors from taking any action whatsoever to collect the debt or obtain possession of any property in the possession of the debtor, because to do so violates one of the fundamental purposes of bankruptcy – to provide the debtor with a breathing spell from creditor actions.[1] The automatic stay applies regardless of whether you have a lien on the collateral or have a lease or some other rent-to-own contractual arrangement.

A violation of the automatic stay constitutes contempt of a court order, which may result in the bankruptcy court ordering you to pay substantial damages to the debtor. These damages can include the attorneys’ fees incurred by the debtor in bringing the violation to the court’s attention and punitive (or punishment) damages, in addition to whatever actual damages the debtor may be able to establish. The punitive damages awarded by the court can be even higher if multiple violations occur in the same case or in a series of cases.

Any efforts to collect on the outstanding debt should occur only through the filing of a proof of claim in the Bankruptcy and/or through contacting the debtor’s bankruptcy counsel. If those efforts are unsuccessful, an appropriate pleading should be filed with the bankruptcy court. In situations where the debtor’s counsel is unresponsive or the debtor has filed the case on their own, without counsel, contact an attorney to assist you. No contact should be made to the debtor directly.

Also, note that any provision in your contract with a bankruptcy debtor that purports to apply when and/or because the borrower, customer, or member filed bankruptcy is likely unenforceable by operation of the Bankruptcy Code. Do not rely on any such provisions without contacting an attorney.

If you have any questions or would like to discuss the impact of this significant new opinion, please contact Dennis Lewandowski at (757) 624.3252 or dtlewand@kaufcan.com or Clark Belote at (757) 624.3109 or cjbelote@kaufcan.com.

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[1] Under most circumstances, in a Chapter 13 bankruptcy the automatic stay can even apply to co-debtors liable on the debt who have not filed bankruptcy.