Bankruptcy Stay Allows Holding Impounded Cars, Justices Say (2)

Creditors in possession of legally seized debtors’ assets are not automatically required to return them to their owners who then file for bankruptcy, the US Supreme Court has ruled.

Decision Chicago vs. Fulton, judges on Thursday overturned a Seventh Circuit ruling that Chicago had violated the automatic suspension created by car owners’ bankruptcy filings when the city refused to immediately return cars impounded before bankruptcy for parking or breaches. the circulation.

The 8-0 decision, which could have changed the practices of finance companies and municipalities across the United States, settles a dispute between federal appellate courts.

The Third, Tenth and District of Columbia circuits found that creditors who simply retained possession of the seized property were not violating the stay. But the Second, Seventh, Eighth, Ninth and Eleventh Circuits have declared the detention of seized property a “prohibited act to exercise control over the property” of the bankruptcy estate.

The “most natural reading” of the bankruptcy code is that it “prohibits affirmative acts that would disrupt the status quo of estate ownership at the time the bankruptcy petition was filed,” wrote Judge Samuel A. Alito in an opinion joined by seven other judges.

Judge Sonia Sotomayor wrote a concurring opinion to point out that the judges did not decide whether other paragraphs of the automatic stay law could still require a creditor to return the assets of the repossessed debtor if the creditor holds them in the. purpose of extracting payment.

Justice Amy Coney Barrett, who was not at the Supreme Court when she heard oral argument in October 2020, was not involved in the decision.

“This decision ensures that there will be fewer unnecessary Chapter 13 bankruptcies, especially fraudulent filings,” the city of Chicago said in a statement Thursday. He had argued that individuals were unduly filing bankruptcy for the sole purpose of recovering their impounded vehicles.

‘Something more’

For creditors to violate the automatic stay, they must engage in “something more than just retaining power,” Alito said, referring to section 362 (a) (3) of the bankruptcy code. An “act” forbidden to creditors may in some cases include an omission or failure to act after the debtor filed for bankruptcy, but that did not apply to Chicago holding impounded vehicles, he said. .

A ruling to the contrary would make another section of the bankruptcy code “largely superfluous,” he wrote, referring to section 542. This provision allows a bankruptcy estate to recover real estate held by a third party.

In his agreement, Sotomayor noted that Section 362 (a) prohibits creditors from an “act to collect a debt”. This section could be interpreted as requiring creditors to return the repossessed property, despite the High Court ruling on Thursday that owning the car per se is not a “prohibited act to exercise control” over it, he said. she declared.

“The ramifications of the case go far beyond the context of parking tickets,” said Melissa Jacoby, professor of bankruptcy law at the University of North Carolina at Chapel Hill.

Impact of the decision

The city of Chicago said it has created a payment plan program to help citizens write off or reduce their auto-related debts.

Chicago’s case against Fulton may require additional proceedings. The High Court ruling returns the case for consideration of other possible grounds that could determine that the city violated the bankruptcy stay. The validity of the city’s lien claims remains uncertain, said attorney David Kuney, who co-wrote an amicus brief with the car’s owner.

“I don’t know if Chicago is celebrating, because if a court finds that the property holdback is a collection action, there is still a stay violation,” Kuney said.

“The court never addressed the existential problem – the threat to the functioning of bankruptcy with a balance between creditors and debtors,” Kuney said, citing the example of a large bankrupt airline trying to take over a fleet. capture.

Bankruptcy courts could offer a fast-track process for a debtor to recover the repossessed property while ensuring that the secured creditor has adequate protection, Kuney said.

But the ruling could also create a new courthouse race, prompting debtors whose cars risk filing for bankruptcy before a city creditor or impostor can seize them, Jacoby said.

“Bankruptcy was never meant to be a way to get a car back for parking tickets,” she said.

The case is Chicago vs. Fulton, United States, n ° 19-357, 1/14/21.

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