held in City of Chicago v. Fulton that a creditor does not violate the automatic stay by merely retaining possession of the debtor’s property aſter a bankruptcy filing. Te automatic stay under 11 U.S.C. § 362 of the Bankruptcy Code prohibits most collection activity once someone has filed for bankruptcy. If a creditor has taken possession of collateral immediately before the filing of a bankruptcy case, the courts were split on whether the collateral needed to be immediately returned to the debtor. Te Fulton case resolved that split in favor of the creditor.
In Fulton, the City of Chicago routinely impounded vehicles owned by drivers with outstanding parking tickets and other fines. Te city refused to release the impounded vehicles aſter the owner of the vehicle filed bankruptcy. Te U.S. Court of Appeals for the 7th Circuit held that the city’s retention of the vehicles violated the
automatic stay. Te Supreme Court disagreed and reversed.
Te Supreme Court first focused on Section 362(a) (3), which states that an “act to obtain possession of property of the estate or to exercise control over property of the estate” violates the automatic stay. Te dispute centered on whether the city exercised “control” over the vehicles by merely retaining them. Te Supreme Court reasoned that merely holding property does not change the status quo as it existed when the bankruptcy petition was filed. Te Supreme Court concluded that the language of Section 363(a) (3) required a creditor to do something more than simply possess debtor’s property. In order to violate the stay, the court held a creditor must take some affirmative actions against the debtor or the property.
Te Supreme Court’s decision does not give creditors carte blanche to deal with property of
the estate. A creditor in possession of the debtor’s property would clearly violate the automatic stay if it attempted to sell the property and apply the proceeds to the pre- bankruptcy debt without seeking relief from the stay from the court. Furthermore, the Supreme Court confirmed that a creditor may be compelled to turnover of the debtor’s property under Section 542 (a) of the Bankruptcy Code during the bankruptcy process.
Where does this leave secured creditors? Creditors will no longer have to immediately surrender property in their possession to the debtor to avoid liability for violating the automatic stay. Te debtor or trustee will need to seek turnover of the property under Section 542 of the Bankruptcy Code through the bankruptcy court process, such as filing an adversary proceeding or motion. So long as the creditor merely possesses the property and takes no
action to change the status quo as it existed on the filing date, creditors will not be in violation of the automatic stay. Creditors still must seek relief from the stay if they want to foreclose on the property or receive adequate protection of their interest in the property. Te Supreme Court also emphasized that its decision in Fulton was consistent with Citizens Bank of Maryland vs. Strumpf, 516 U.S. 16 (1995), which permits a bank to freeze the debtor’s deposit account aſter a bankruptcy filing while the creditor moves for relief from stay to complete a setoff and apply account funds to any outstanding loan.
restructuring and bankruptcy years of experience representing lenders facing all types of bankruptcy and business creative solutions that achieve the best possible recovery of a is an MBA associate member.
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