Bankruptcy Case Leads to Favorable Ruling for Creditors Holding Property | Woods Rogers PLC
The United States Supreme Court has ruled that mere retention of property does not violate automatic stay in bankruptcy.
As the first quarter of 2021 declines, the United States has reached the first anniversary of the shutdown of domestic businesses due to the Covid-19 pandemic. While many banking experts make predictions about the number of bankruptcies to come, creditors have received a favorable ruling on debtors’ assets in a recent US Supreme Court case.
In mid-January, the United States Supreme Court ruled that a creditor had not violated the automatic stay by refusing to hand over the assets of debtors who had filed for bankruptcy. The decision in this case, City of Chicago v. Fulton (PDF), is generally favorable to creditors holding property of debtors seeking bankruptcy protection.
What are the issues behind the case?
U.S. bankruptcy law temporarily prevents creditors, collection agencies, and others from pursuing debts as soon as the debtor files for bankruptcy. This provision is known as automatic stay and applies to individuals and businesses in all chapters of the Bankruptcy Code. The automatic stay protects the interests of the debtor by prohibiting “any act aimed at obtaining possession of the property of the debtor. [bankruptcy] estate or property of the estate or exercise control over the assets of the estate.(Emphasis added.)
In previous case law, creditors who did not immediately hand over the assets of a bankrupt debtor risked damages or penalties for violation of the automatic stay.
What were the facts of the case?
In the Fulton case, the city of Chicago impounded motor vehicles when the vehicle owners did not pay the fines. When some of these vehicle owners filed for Chapter 13 bankruptcy, they asked the city to return their vehicles under the automatic stay provisions of the Bankruptcy Code.
What was the court ruling?
The court ruled that the possession of property, in this case the City’s continued possession of the impounded vehicles after the bankruptcy cases began, did not violate the automatic stay since the City did not take positive action. with regard to those vehicles which would disrupt the Status Quo. The Court also found that the debtors’ arguments would create conflicts between the automatic stay provision and other provisions of the Bankruptcy Code.
In general, this means that the automatic stay only applies to affirmative acts that modify the status quo. Therefore, a creditor who simply owns the property of a debtor who files for bankruptcy may have some influence over the debtor and other creditors. More importantly, the court ruling only covers passive possession of property. A creditor who holds property during bankruptcy can still be held liable for a violation of the automatic stay if it takes action beyond mere retention.