In its much-discussed decision, City of Chicago v. Fulton, 141 S. Ct. 585 (2020), the Supreme Court ruled that the City of Chicago (“City”) was not in violation of Section 362(a)(3) of the Bankruptcy Code for failing to release an impounded car to a debtor in bankruptcy. Section 362(a)(3) imposes an automatic stay over “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.” According to the Supreme Court, a violation of this section requires some affirmative act beyond mere retention of a debtor’s property. Secured creditors applauded the decision as it shed some light on factors to consider when deciding whether to return property of their bankrupt borrowers that may have been impounded, seized or otherwise have come into their possession prior to bankruptcy. The Supreme Court, however, limited its ruling to the particular section before it (Section 362(a)(3)), and did not address potential automatic stay violations set forth in other sections, including Sections 362(a)(4), (6) and (7), of the Bankruptcy Code.[1] Whether the reasoning in Fulton applies to these other sections remains an open question, but one that may soon be answered.
In Cordova et al. v. City of Chicago, Case No. 19-00684 (Dec. 6, 2021), the Bankruptcy Court for the Northern District of Illinois denied, in part, the City’s motion to dismiss claims brought by a putative class of plaintiffs whose automobiles were not released by the City upon the commencement of their bankruptcy cases. The Plaintiffs asserted that the City’s failure to release the estate property constituted a stay violation of sections 362(a)(4), (6) and (7) (having amended their complaint after the Fulton ruling). The Plaintiffs also sought a ruling that the City violated section 542(a) by failing to turnover estate property. In its motion to dismiss, the City argued that that stay violations under the sections 362(a)(4), (6) and (7) required an affirmative act, seeking to extend the reasoning of Fulton regarding section 362(a)(3). Regarding the turnover count, the City argued that it was not faced with an adversary proceeding to compel turnover and there is no express obligation to return bankruptcy estate property under Section 542(a).
While an affirmative act may be required to “exercise control,” that phrase is found nowhere in the sections before the Court in Cordova. Section 362(a)(4) protects a debtor against “any act to create, perfect, or enforce any lien against property of the estate….” The Court noted that the Bankruptcy Code defines lien as a “charge against or interest in property to secure payment of a debt or performance of an obligation.” Id. at 10-11. The City did not appear to dispute that its interest in each Plaintiff’s vehicle constituted a lien (although recognizing that the nature and/or validity of such liens might be in dispute). Section 362(a)(6) provides a shield from “any act to collect, assess, or recover a claim against the debtor that arose before the commencement of the case….” The Court recognized that this section applies to debtors and not property but posited that the failure to return property of the estate might be deemed an “act to collect” a debt in certain instances. Id. at 11. With respect to both sections, the Plaintiffs alleged that the City demanded advance payments in connection with the release of any vehicle and that it held the vehicles in an effort to perfect its liens. Accordingly, the Court allowed those claims to proceed. Section 362(a)(7) offers protection from “the setoff of any debt owing to the debtor that arose before the commencement of the case under this title against any claim against the debtor….” In order to prevail, a plaintiff must establish each of the elements of a setoff. The Court found that the Plaintiffs failed to plead facts necessary to do so and dismissed this cause of action, but with a right to replead. Id. at 12. In doing so, the Court did not rule out that the City’s actions may be deemed to constitute a setoff.
The Court also allowed the Plaintiffs’ claims under section 542(a) to proceed. The Court pointed out that Section 542(a), “is self-executing, and does not require that the trustee take any action or commence a proceeding or obtain a court order to compel the turnover.” Id. at 24 (citations omitted). The Court noted that the City had a statutory obligation to return the vehicles, notwithstanding the failure of the Plaintiffs to commence an adversary proceeding. If the City has defenses to these claims, it will have to litigate to present them. Id.
The Court’s decision was guided, not only by the express limitations of Fulton, but also the context of the matter at hand (i.e., debtors facing financial hardships and may need their vehicles to recover and that they may have no other recourse). The Court explained: “[w]hat this court can do is what it does here, refuse to adopt in the context of a motion to dismiss a reading of Fulton that is so expansive that it eliminates clear and obvious remedies against recalcitrant creditors.” Id. at 20. Secured creditors (and other contract counterparties) of many stripes will eagerly await the ultimate ruling on the Plaintiffs’ complaint to learn if the comfort they took from Fulton was premature.
[1] In her concurrence in Fulton, Justice Sotomayor specifically points out that “I write separately to emphasize that the Court has not decided whether and when [section] 362(a)’s other provisions may require a creditor to return a debtor’s property.” Id. at 592 (Sotomayor, J., concurring)