Chicago v. Fulton

Whether an entity that is passively retaining possession of property in which a bankruptcy estate has an interest has an affirmative obligation under the Bankruptcy Code’s automatic stay, 11 U.S.C § 362, to return that property to the debtor or trustee immediately upon the filing of the bankruptcy petition.

Respondent was driving with a suspended license and his car was impounded by Petitioner. Respondent later filed a Chapter 13 petition and demanded the return of the vehicle as well as sanctions for violating the stay. The case was consolidated with several others involving the same issue of an impounded vehicle in a bankruptcy proceeding. The bankruptcy court held that failure to return the vehicle violated automatic stay and the United States Court of Appeals for the Seventh Circuit affirmed. The courts of appeals are divided on the issue. The Seventh Circuit as well as several others hold that the automatic stay in § 362 requires creditors to turn over repossessed property of the debtor as soon as the debtor files for bankruptcy. The remaining courts have found that creditors with statutory defenses to turning over the property may assert them and retain the property pending an order of the bankruptcy court. Petitioners argue that the Seventh Circuit is mistaken in its holding and that the statute only prohibits affirmative acts to exercise control and not the passive act of retaining property that is already possessed by the creditor. Petitioner argues that holding otherwise renders the turnover provision of the Bankruptcy Code superfluous. Moreover, Petitioner argues that the holding below contravenes the text and purpose of the Bankruptcy Code.