Simon PLC Attorneys & Counselors – January 2021 Memorandum
IS POSSESSION 9/10 OF THE LAW? CALL YOUR LAWYERS BEFORE RELEASING THAT CAR
Bloomfield Hills, Michigan – On January 14, the Supreme Court of the United States released its opinion in City of Chicago, Illinois v. Fulton et al., 592 U.S. ____ (2021). In an 8-0 opinion (Justice Barrett did not participate), the Court examined whether a creditor violates the automatic stay in bankruptcy if it merely possesses a debtor’s property at the time that debtor files for protection under Chapter 13 of the Bankruptcy Code. The Court held that such mere possession does not constitute “exercising control” of the property in a narrow but important decision. The Court’s opinion can be found here: https://www.supremecourt.gov/opinions/20pdf/19-357_6k47.pdf
The City of Chicago had impounded vehicles for unpaid fines and traffic infractions, and upon Chapter 13 filings by Fulton and other respondents, the City refused to return the vehicles. Prior to this decision, the prudent practice of creditors holding vehicles (usually repossessed, awaiting auction) was to return the vehicle to the debtor once notified of a Chapter 13 petition. That is because 11 USC §362 establishes an automatic stay against any action against the debtor or property of the bankruptcy estate once a petition is filed. As we will conclude at the end of this discussion, that may still be appropriate, but be sure to consult counsel before doing so.
Accompanying Section 362’s other prohibitions against any post-petition collection activity, the language of Section 362(a)(3) provides that the filing of a petition, with limited exceptions, “operates as a stay, applicable to all entities, of— * * * * any act to obtain possession of property of the estate or of property from the estate or to exercise control over property of the estate.” 11 USC §362(a)(3). The Supreme Court has now clarified what exercising control includes.
Justice Alito, writing for the Court, explores the textual interpretation of whether “mere possession” constitutes “exercising control,” and the effects of “affirmative acts” and “omissions.” He notes that this would not have been an issue prior to a 1984 amendment to Section 362, when the words “or to exercise control over property of the estate” were added to the statute. He also observes that Congress, in 1984, did not cross-reference Section 542, an entire section of the Bankruptcy Code devoted to turnover of property of the estate, which the Court agrees is the operable provision.
The referenced statute provides as follows:
Except as provided in subsection (c) or (d) of this section, an entity, other than a custodian, in possession, custody, or control, during the case, of property that the trustee may use, sell, or lease under section 363 of this title, or that the debtor may exempt under section 522 of this title, shall deliver to the trustee, and account for, such property or the value of such property, unless such property is of inconsequential value or benefit to the estate.
11 USC §542(a).
A bankruptcy trustee can file a motion to compel a debtor to turnover property, but a request for turnover under Section 542 from a creditor or almost any other entity must be made by adversary proceeding, or the commencement of litigation within the bankruptcy case. Fed. R. Bankr. P. 7001(1). In her concurring opinion, Justice Sotomayor laments that this process may take too long for debtors to recover their vehicles, and points out that one court has interpreted the requirement as automatic under Section 542 even without an order, and that others are permitting the requests to be made by motion. She explains that the wait for an adversary proceeding to conclude can be long, particularly when the debtor needs transportation to get to work. Her solution is to suggest fast-tracked turnover proceedings or amended rules or legislation.
Both Alito and Sotomayor acknowledge that there were additional grounds under Section 362 that lower courts used to find the City of Chicago in violation of the automatic stay, but they were not addressed by the Supreme Court. There are prohibitions against acts to collect, enforce, and perfect obligations included under the umbrella of the automatic stay, and there could be other acts taken by the City of Chicago—beyond merely holding on to the vehicles—that violated the stay.
Which gets us back to creditors, who would be wise to consult counsel before returning a vehicle to a Chapter 13 debtor. Any action beyond mere possession, such as selling or threatening to sell the vehicle, or demanding payment, could violate the automatic stay and exceed the scope of Chicago v. Fulton. Depending entirely on the facts of your case, there may be grounds to seek relief from the automatic stay (including, by way of example only, that the vehicle is not insured or the creditor is not otherwise adequately protected). A prompt motion for relief may, under certain circumstances, be able to beat an action for turnover. See the note below regarding legal advice, and please note that a motion for relief is not a proper alternative to an objection to confirmation if you do not agree with your treatment under a Chapter 13 Plan.
When you receive that Chapter 13 notice, and you have possession of the debtor’s vehicle, call us at Simon PLC Attorneys & Counselors before you do anything else, including return the vehicle. We will be happy to review the facts of your specific case so you can take the correct actions under the Bankruptcy Code, as interpreted recently by the Supreme Court. After all, possession may indeed be 9/10 of the law.
N.B. Not Legal Advice: Please contact us if you would like to discuss the facts and circumstances of your specific matter. Simon PLC Attorneys & Counselors expressly disclaims all liability in respect to actions taken or not taken based on any or all the contents of this memorandum. The information contained herein may not reflect current legal developments and is provided without any knowledge as to the recipient’s location, industry, identity or specific circumstances. No recipients of this content, clients or otherwise, should act, or refrain from acting, on the basis of any content included in this memorandum without seeking the appropriate legal or other professional advice on the particular facts and circumstances at issue from an attorney licensed in the jurisdiction for which the recipient’s legal issue(s) involve. The application and impact of relevant laws varies from jurisdiction to jurisdiction, and our attorneys do not seek to practice law in states, territories and foreign countries where they are not properly authorized to do so.