Supreme Court: Creditor retention of vehicle after bankruptcy filing does not violate automatic stay

The “automatic stay” is imposed when someone files a bankruptcy case. Sec. 362(a)(3) prohibits “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.” [Emphasis added.] If the person filing bankruptcy owns a vehicle on the date of the bankruptcy filing, it becomes property of the estate when the case is filed. I have been a bankruptcy attorney for 37 years, and it has always been the rule that if a creditor repossessed a car prior to the bankruptcy but it had not disposed of it, the creditor had to return the car to the debtor once the bankruptcy case was filed. This is particularly true in Chapter 13 cases where a repayment plan has been filed and the vehicle is insured.

In January 2021, the Supreme Court issued an opinion in City of Chicago v. Fulton which held that “passive retention” of a vehicle does not constitute exercising control. The court held that the statute requires an “affirmative” act and simple “passive retention” of the car was not an affirmative act. In this case, the City impounded the vehicle for traffic violations, but the legal issues are the same for a creditor who repossesses a vehicle for non-payment of the car note. The opinion doesn’t address some of the actual facts, but in most big cities, cars that are impounded are held in an impound lot with a fence and police or security staff. That doesn’t sound like mere “passive retention” to me, but I’m not going to quibble with the Supreme Court about the meaning of “passive.”

In the final paragraph of the opinion, the court stated:
“Though the parties debate the issue at some length, we need not decide how the turnover obligation in §542 operates. Nor do we settle the meaning of other subsections of §362(a). We hold only that mere retention of estate property after the filing of a bankruptcy petition does not violate §362(a)(3).”

The “other subsections” of §362(a) mentioned in the opinion are §362(a)(4) and (6). 362(a)(4) operates as a stay of “any act to create, perfect, or enforce any lien against property of the estate.” [Emphasis added.] 362(a)(6) operates as a stay of “any act to collect, assess, or recover a claim against the debtor that arose before the commencement of the case under this title.” [Emphasis added.]

The Supreme Court remanded the Chicago v. Fulton case to the 8th Circuit Court of Appeals by order dated April 12, 2021, to consider whether passive retention of property of the estate violates §362(a)(4) or (6). Although the Supremes remanded for further consideration, I believe the opinion on 362(a)(3) tells us the answer. Section 362(a)(3) prohibits “any act.” Section 362(a)(4) and (a)(6) also prohibit “any act.” It is a basic rule of statutory construction that a word used in a statutory scheme has the same meaning anywhere it is used in that statutory scheme. (the phrase “any act” is not just used elsewhere in thee Bankruptcy Code, it is used in various subsections of the same section. [By the way, (a)(5) also contains the “any act” language.]

In dissent, Justice Sotomayor addresses the practical realities of asserting claims under §542(a) rather than §362(a). Section 542(a) provides:
“Except as otherwise provided in subsection (c) or (d) of this section, an entity, other than a custodian, in possession, custody, or control, during the case of property that the trustee may use, sell, or lease under section 363 of this title, or that the debtor may exempt under section 522 of this title, shall deliver to the trustee, and account for, such property or the value of such property, unless such property is of inconsequential value or benefit to the estate.” [Emphasis added.]

The practical reality is that §542 requires an adversary proceeding, which requires a filing fee and a request for a temporary restraining order which only lasts 10 days. There must be a hearing on a temporary injunction and a bond may be required. If the creditor wants to draw the process out, it depends on how much patience the judge has with the stall tactics. (I would suggest that FRBP 9011 comes into play, but that is a question for another day.)

Section 542(a) requires the creditor to “deliver to the trustee” the property in question, which raises other practical issues. If the car has been claimed as exempt, the trustee is not going to want to have any part in this process – the trustee is not going to be paid anything for participating and will simply deliver the car to the debtor who (hopefully) will make the plan payments and all of this fuss will be a waste of everyone’s time, effort, and money.

Congress could fix this with a simple amendment to §362 but that is unlikely. I suspect that Bankruptcy Courts around the country will address this through standing orders or local rules that will probably work, but uniformity would be in all parties best interests.

Michael Baumer

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by Michael Baumer