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Bankruptcy, the Automatic Stay and Repossessed Property: Effects of City of Chicago v. Fulton

In its first opinion of 2021, the United States Supreme Court resolved a disputed issue in bankruptcy law regarding the automatic stay and its effect on repossessed property. This article is meant to deconstruct the Supreme Court’s opinion in City of Chicago v. Fulton, 592 U.S. ___ (2021) and explain what it means for debtors. 

The purpose of bankruptcy is to provide a debtor a “fresh start” while resolving the collective action problem, the problem of the creditors pulling apart the debtor’s assets to pay off multiple debts. One of the primary tools to protect the debtor after filing for bankruptcy is the automatic stay. The automatic stay, described by §362 of the Bankruptcy Code, has the effect of preventing creditors from seeking enforcement of their security interests against the debtor. In simpler terms, the automatic stay stops creditor conduct like (a) collection calls from debt collectors, (b) auto loan creditors repossessing a vehicle, and (c) mortgage holders foreclosing on a home. As described by the Supreme Court, “[t]he automatic stay serves the debtor’s interests by protecting the estate from dismemberment, and it also benefits creditors as a group by preventing individual creditors from pursuing their own interests to the detriment of the others.” Fulton, 592 U.S. ___, 2 (2021). 

Under the Bankruptcy Code, the automatic stay takes effect at the time a bankruptcy petition is filed. §362(a). Further, the automatic stay prevents “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.” §362(a)(3). This statute is meant to prevent creditors from repossessing property, like a car, after a debtor has filed bankruptcy. In some Circuit Courts of Appeal, including the Ninth Circuit (which includes Oregon), this prohibition from “exercis[ing] control over property of the estate” also meant that a creditor who had control of property could not retain the property without “exercising control” over it. Instead, the creditor would be required to turn over that property to the bankruptcy trustee. 

To clarify this further, imagine if you have a car loan and the bank you got the loan from has the right to repossess your car if you default. COVID-19 hits, you fall behind on all of your bills, and you default on your car loan. The bank has been contacting you relentlessly to get you to pay the loan, and you start working with an attorney to file for bankruptcy. While you are preparing the paperwork, the bank exercises the repossession clause of the loan and takes your car. You then file bankruptcy as soon as possible. Under the old rule, the bank would be required to return your car because of the automatic stay. If the bank refused to return your car but did nothing with it—meaning they didn’t sell it or lease it out to anyone, they only retain possession of the car—then, under the old rule, they would still violate the automatic stay and could owe you punitive damages for retaining the car. 

The U.S. Supreme Court in Fulton expressly rejects this old rule. The court in Fulton examines a scenario in which a creditor repossessed the debtor’s car before the debtor filed for bankruptcy, just like the hypothetical above. While the Court expressly avoids discussing what type of conduct is prohibited by the holder of repossessed property, the Court holds that §362(a)(3) does not mean that the repossessed property must be returned to the debtor to be part of the bankruptcy estate. Rather, “mere retention of property does not violate §362(a)(3) [the automatic stay].” Instead, the Court asserts, §362(a)(3) “prohibits affirmative acts that would disturb the status quo of estate property as of the time when the bankruptcy petition was filed.” 592 U.S. ___, 3 (2021). The Court further explains that §542 of the Code governs the return of property in a bankruptcy case and thus the automatic stay should not have the effect of returning property. According to the Supreme Court, interpreting §362 under the Ninth Circuit’s rule would make §542 “surplusage.” 

Returning to our hypothetical, the new rule means that, if your car is repossessed before you file for bankruptcy, the automatic stay does not require that the bank return your car to you. Instead, §362(a)(3) does not punish the bank for merely retaining the car. 

Now, this does not mean that the bank could sell your car after you file for bankruptcy if it repossessed the car before you filed. The Court in Fulton expressly refused to discuss whether selling the car would violate the automatic stay. Instead, other provisions under §362(a) would likely prevent selling the car after repossession.

Now, what does this mean for debtors?

What this means for debtors is that it is even more important to file a bankruptcy petition in time—and before having your property repossessed. Before this case, you usually got your car back from the bank quickly once you filed for bankruptcy; now, the automatic stay does not help you get your car back. There are other processes in the Bankruptcy Code to get the car back, but those processes take much longer and are more costly. This could mean you don’t have a car for weeks or even months while the bankruptcy court follows the necessary procedure to get you your car back. If you owe more than your car is worth, there is no guarantee that you would ever get your car back, as it may be difficult to demonstrate that the specific vehicle is “necessary” for the success of your plan.

If you have been considering filing for bankruptcy and are concerned about getting your car repossessed, give our office a call. Let us help you figure out the best plan of action so that you can get your life back on track and get a fresh start.