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Supreme Court: Mere Retention Of Property Does Not Violate Bankruptcy Automatic Stay

Resolving a split amongst the Circuit Court of Appeals, the United States Supreme Court recently held that retaining possession of a debtor’s property after a bankruptcy filing does not violate the automatic stay of 11 U.S.C. 362. The case is City of Chicago v. Fulton, 592 U.S. ___ (2021). At issue was the City of Chicago’s impounding and retention of vehicles for failure to pay parking and other fines. Individuals filed bankruptcy and demanded that the City turnover their impounded vehicles. The City refused. The Seventh Circuit Court of Appeals held that the City’s failure to turnover the vehicles was a violation of the automatic stay, 11 U.S.C. 362(a)(3), reasoning that retaining possession after a bankruptcy was filed was an act to exercise control over a debtor’s property. The Supreme Court vacated the Seventh Circuit’s decision, holding that the proper reading of Section 362 is a prohibition against affirmative acts that would disturb the status quo of bankruptcy estate property as of the bankruptcy petition date. And, an affirmative act requires something more than retention of possession.

The Court expressly refused to decide how the turnover obligation under Section 542 operates. In so doing, the Court arguable left open the door for debtors to seek turnover of the impounded vehicles from the City.

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