In re Fulton

In re Fulton

The recent U.S. Supreme Court decision in City of Chicago, Illinois v. Robbin L. Fulton (Chicago v. Fulton) clarifies for creditors whether inaction on the part of the creditor constitutes a violation of the “stay” put in place by a debtor’s bankruptcy filing. While on the surface the decision seems to change something debtors’ attorneys have relied on for years, in practice it may not cause many waves.

In Chicago v. Fulton, Fulton, the debtor, filed a Chapter 13 bankruptcy and requested that the City of Chicago (The City), the creditor, turn over debtor’s vehicle. Debtor’s vehicle was being held by the city for failure to pay fines for motor vehicle related infractions. The City refused to turn over the vehicle. The bankruptcy court found that this was a violation of the bankruptcy stay under §362(a)(3). The Court of Appeals affirmed this reading of the statute. However, the Supreme Court vacated the decision, finding that §362(a)(3) required the stay to be violated by an act, and that merely continuing to hold property that had already been taken was not enough to constitute an act that exercised control over the property.

Justice Alito points out that two things happen when a bankruptcy is filed: an estate is created out of the property of the debtor, and a stay is put in place to prevent post-bankruptcy petition filing attempts at collection on prepetition debt by creditors. The estate defines what property is under the control of the bankruptcy court, while the stay both protects debtors from dealing with creditors outside of the court and ensures no one creditor is unjustly enriched by continued collection activity. Alito argues that the bankruptcy stay and §362(a)(3) are about protecting the debtor when action is taken outside of the bankruptcy case, while rules governing the bankruptcy estate, and specifically §542 on the turnover of property, ensures that property within the control of the court is properly handled. He also points out that, were §362(a)(3) to control turnover of estate property, there would be little to no reason for §542 to exist, making it superfluous and violating the canon of construction (or rule of legal interpretation) against surplusage. This rule says courts should avoid interpreting a statute in a way that renders other statutes within the same code unnecessary. Here, both statutes are in the larger bankruptcy code, so they should be read in a way that makes them both necessary.

Additionally, the opinion points out that §542 specifically exempts property “of inconsequential value or benefit to the estate” from turnover. If failure to turn over property generally was a violation of the bankruptcy stay, then this exemption would still result in a violation of the bankruptcy stay.

Finally, the opinion points out that the phrase “to exercise control over property of the estate” that was added to §362(a)(3) is significantly newer than the original text of that statute, and newer than §542. Alito points out that it is unlikely that this added phrase was intended to entirely rework the meaning of the bankruptcy stay and the process for turning over estate property. Had Congress wished to change the way the code operated, they would have embarked on a much larger reworking, or at the very least included a cross-reference to §542 in the new language.

At the end of the unanimous opinion, Justice Alito declines to interpret how §542 is to operate, and declines to rule on other subsections of §362. Justice Sotomayor follows the unanimous opinion with her own concurring opinion, emphasizing that the court has not ruled on §542 or the rest of §362, and that the City’s conduct, while not a violation of §362(a)(3), is a violation of the spirit of the statute.

Sotomayor makes the argument that many attorneys have made: that by retaining the car, the City has harmed not just a debtor seeking relief under a Chapter 13, a bankruptcy intended to allow

debtors to keep their property, but also the other creditors who may receive payment under the plan. Most debtors need their cars to go to work and thus make income to fund their Chapter 13 plan.

Sotomayor also goes into more detail about the uses of §542(a) and how various courts have used it to help debtors receive speedy turnover. §542(a) requires someone in possession of property of the estate to turnover that property to the trustee. While under the rules of bankruptcy procedure, most actions to recover property should be treated as “adversary proceedings,” some courts have stepped in with regards to §542(a). Adversary proceedings often take a long amount of time (Sotomayor states it is an average of 100 days with regards to turnover proceedings), so some courts have made the provision automatic in their district, while others allow turnover by motion alone. Others may expedite hearings in adversary proceedings regarding turnover of vehicles to ensure the debtors do not need to wait more than is necessary. However, ultimately Sotomayor calls on policy makers to create an expedited option within the rules of procedure to prevent undue burden on the debtor.

While some courts have relied on §362(a)(3) to compel turnover of vehicles in Chapter 13 bankruptcies, it is obvious that not every court was using this avenue, and solutions have been found outside of this statute. It is now up to bankruptcy attorneys to advocate for one of the options brought up by Justice Sotomayor, and on bankruptcy judges to take the dicta in her concurring opinion to heart when ruling. Many judges have already successfully found a way to ensure debtors are quickly reunited with their vehicles upon filing bankruptcy, and that creditors are protected despite the speedy return, such as by requiring proof of adequate insurance. The concurring opinion cites case law that can be used if your district does not already have alternatives in place.

The most important part of this ruling is that until your district or judge puts an expediting process in place or the Advisory Committee on Federal Bankruptcy Procedure changes the rules of procedure, a debtor may have to wait longer for the return of their vehicle than they did before. However, §542 does still require the return of estate property, and while creditors may try to drag their feet, it is unlikely most judges will let them stall for long, and sanctions might be appropriate.

The debtor in a chapter 13 case may be able to file a motion to enforce §542 in many jurisdictions as the debtor in possession and then work out an arrangement with the trustee to take possession of the property by agreed order if there is any confusion as to the remedy that is sought. Counsel should be creative in attempting to offer solutions to the court that will help resolve these issues. As Justice Sotomayor points out, it is in the best interests of everyone involved that a debtor has access to their vehicle, and it is inline with the spirit of the code that the vehicle is return promptly.

If you have any questions about this article or any other consumer bankruptcy issues please feel free to reach out to one of our bankruptcy attorneys in Wichita, Topeka, Lawrence, or Overland Park.