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Retention of Property by a Non-Debtor Is Not A Violation of the Automatic Stay

| Mar 11, 2021 | Firm News |

In City of Chicago, Illinois v. Fulton et al., Case No. 19-357 (January 14, 2021), the Supreme Court held that 11 U.S.C. § 362(a)(3) does not require a non-debtor return property in the non-debtor’s possession to the debtor.

The automatic stay, which is codified in 11 U.S.C. § 362, begins once the bankruptcy petition has been filed and immediately stops most civil lawsuits filed against the debtor and most collection actions being taken against the debtor’s property by a creditor, collection agency, or government entity. In City of Chicago, the city impounded each debtors’ vehicle for failure to pay fines for motor vehicle infractions. Each debtor filed a Chapter 13 bankruptcy petition and requested that the city return their vehicle. The city refused, and in each case a bankruptcy court held that the city’s refusal violated the automatic stay. The Seventh Circuit Court of Appeals affirmed all of the judgments of the lower courts, concluding that by retaining possession of the debtors’ vehicles after they declared bankruptcy, the city had acted to exercise control over the debtors’ property in violation of 11 U.S.C. § 362(a)(3). The Supreme Court granted certiorari to resolve a circuit split regarding whether an entity that retains possession of the property of a bankruptcy estate violates the automatic stay under 11 U.S.C. § 362(a)(3).

Ultimately, the Supreme Court held that 11 U.S.C. § 362(a)(3) does not require a non-debtor to return property in the non-debtor’s possession to the debtor. The Court provided a two reasons for its holding. First, 11 U.S.C. § 362(a)(3) states that the filing of a bankruptcy petition operates as a “stay” of “any act” to “exercise control” over property of the estate. The most natural reading of these terms leads to the understanding that 11 U.S.C. § 362(a)(3) prohibits affirmative acts that would disturb the status quo of estate property when the bankruptcy petition was filed. 11 U.S.C. § 362(a)(3) implies that mere retention of property does not violate this code section. Any ambiguity in the language of 11 U.S.C. § 362(a)(3) can be resolved by 11 U.S.C. § 542(a) which governs the turnover of estate property. Second, reading 11 U.S.C. § 362(a)(3) to cover mere retention of property would render 11 U.S.C. § 542 superfluous and contradictory. 11 U.S.C. § 542 was created to be the primary bankruptcy provision governing turnover of estate property, not 11 U.S.C. § 362(a)(3). Thus, reading 11 U.S.C. § 362(a)(3) as a turnover provision would render 11 U.S.C. § 542 moot, frustrating the purpose for which it was created.

Therefore, under 11 U.S.C. § 362(a)(3), a non-debtor is not required to return property that is in the non-debtor’s possession to the debtor. If a debtor wants to recover property held by a non-debtor, they would need to initiate an adversary proceeding under 11 U.S.C. § 542. This is important for practitioners to keep in mind, particularly since adversary proceedings typically take longer and cost more than automatic stay enforcement motions.

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