Chicago v. Fulton

The retention of estate property, post-bankruptcy filing, does not violate §362(a)(3) of the Bankruptcy Code because that provision is a "stay" of "any act" to "exercise control" over the assets of the estate which refers to affirmative acts disrupting the status quo of property.

Respondents filed for bankruptcy, however, the city of Chicago (City) refused to return their vehicles which were impounded for failing to satisfy fines regarding vehicle infractions. The bankruptcy court held that when the City refused to return the cars, the City “exercised control over” Respondents’ assets which violated §362(a)(3). The Seventh Circuit agreed. The Court held that §362(a)(3) of the Bankruptcy Code was not violated by the City when it refused to return Respondents’ assets because the City did not exercise any affirmative act when the bankruptcy petitions were filed. The Court reasoned that §362(a)(3) does not cover mere retention because that would render §542 superfluous and §362(a)(3) and §542 would contradict each other by mandating property be turned over regardless if such property was exempt. Further, the City’s retention of the property was not an “act” because the property was already in the control of the City rather than the City disturbing the status quo post-bankruptcy filing. VACATED and REMANDED.