Posted Wed, Jan 20th 2021 9:48 am by Danielle D’Onfro
On Thursday, the Supreme Court’s opinion in the City of Chicago v. Fulton case made it clear that creditors are not violating the bankruptcy law’s automatic residence if they passively retain a debtor’s property after the debtor files for bankruptcy protection. The automatic stay is the determination of the bankruptcy code, which stops all debt collection activities so that the bankruptcy process can unfold without a race between creditors.
The city of Chicago, like many other communities, has confiscated cars for failure to pay fines and fees. After their cars were confiscated and filed for bankruptcy protection, Robbin Fulton, Jason Howard, George Peake and Timothy Shannon argued that the automatic stay in 11 USC Section 362 (a) (3) required the city to return the cars. The city refused, claiming that debtors would have to use the sales provisions of the Bankruptcy Act in 11 USC Section 542 (a) to reclaim their cars. The difference between the two provisions is the timing and expediency. If Section 362 is the operational provision, the mere filing of bankruptcy would create an obligation for Chicago to return the vehicles to the debtors. If Section 542 is the operational provision, debtors may need to initiate an objection process – a mini-bankruptcy lawsuit – to preserve their cars.
As noted by several amici, and as Justice Sonia Sotomayor stated in their approval, these seizure policies deprive vehicle owners of the transportation necessary to earn the money they need to pay the fines and fees they owe. Timing is important for the debtor. Although this policy raises many urgent questions, the question before the court in this case was quite narrow. Both Judge Samuel Alito’s submission to a unanimous court and Sotomayor’s consent emphasized that the involvement was limited to whether Chicago violated Section 362 (a) (3) by passively keeping the debtors’ cars . Indeed, in Shannon’s case, the city had requested payment as a condition of his car being released. The opinion explains that the Supreme Court would not comment on it because the appellate court did not answer this question. In other words, it is possible that the city’s policy regarding seized cars could violate the bankruptcy code, but passive custody of a vehicle after the owner has filed for bankruptcy is not in itself a violation of Section 362 (a) (3) ).
Alito wrote for the 8-0 court (Judge Amy Coney Barrett was not involved in the case, as was argued before joining the bank in October) and started texting. In a relevant section, Section 362 (a) (3) provides that “any act to gain possession of the property of the estate or property of the estate or to exercise control over the property of the estate” violates automatic residence. Citing Webster’s third new international dictionary, the opinion states that “exercising” in Section 362 (a) (3) means “putting into play” or “making effective in action”. At one hearing, the judges had drawn the discussion in several places to the “metaphysics” of the distinction between action and omission – Chicago argued that failing to return the cars was an omission, not an act – in several places. This distinction reappeared in the statement when Alito stated that “to say that a person is doing an“ act ”in order to exercise their power over something is more than just having that power.
Alito then stated that the case was overdetermined: “Any ambiguity in the text of Section 362 (a) (3) will be resolved in favor of the city through the existence of a separate provision, Section 542.” According to Section 542, companies that have debtor assets own, “deliver to the trustee … this property or the value of this property, unless such property has an unimportant value or use for the property”. The court identified three reasons why that provision forced them to conclude that Chicago’s vehicle retention policy does not violate auto-residence.
First, the debtors’ reading of Section 362 would make Section 542 “largely superfluous”. Although the law could add procedural details, the court concluded that such a reading would be “a small amount of work for a large amount of text”.
Second, Alito found that the debtors’ reading of section 362 contradicted section 542 as the latter exempts property “of unimportant value or benefit to the estate” and the former does not include such exemption. While the debtors had argued that Section 362 should be read to include the exception to Section 542, the court found “no textual basis” for it.
Finally, Alito looked at the history of the statute changes. In 1984, Congress added the phrase “exercise control over the property of the estate”. Debtors argued that this change allowed them to use Section 362 to enforce Section 542, but the court did not buy that argument. The opinion states that “[h]Congress wanted to make §362 (a) (3) something of an enforcement arm for §542 (a). The least one would expect would be a cross-reference to the latter provision. “This last argument might be unrealistic given the history of the bankruptcy law with slapdash amendments (the 2005 amendments added a hanging paragraph in an important provision).
Alito’s opinion contains no surprises after the argument. Even judges sympathetic to debtors, especially Sotomayor, could not read the text to support their argument.
The most interesting part of the verdict is Sotomayor’s consent, in which she reveals herself to be the conscience of the judgment. Their approval takes up almost as much space as the opinion itself, explaining not only why confiscation rules are bad policies, but also why debtors need to return their cars quickly. Delving into the facts of Peake’s case, she stated that “the city was jeopardizing Peake’s ability to make payments to all of its creditors, including the city”. Ultimately, however, Sotomayor concluded that “[i]It is up to the Advisory Committee on Insolvency Proceedings to consider changes to the rules that will ensure a swift resolution of debtors ‘sales requests under Section 542 (a), particularly with respect to debtors’ vehicles. “
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Danielle D’Onfro, Opinion Analysis: A Slight Win For Creditors,
SCOTUSblog (January 20, 2021, 9:48 a.m.), https://www.scotusblog.com/2021/01/opinion-analysis-a-narrow-win-for-creditors/