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Supreme Court Holds That A Non-Debtor Retaining A Debtor’s Property Does Not Exercise Control Over the Property in Violation of the Automatic Stay

In January 2020, we analyzed a split among the Circuit Courts regarding whether a non-debtor holding a debtor’s property on the petition date has an affirmative obligation under section 362(a)(3) of the Bankruptcy Code to return that property to the debtor immediately following the filing of the bankruptcy petition. Automatically upon a debtor’s filing its bankruptcy petition, section 362(a)(3) stays “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.” As discussed in our 2020 article, various courts of appeal have wrestled with whether the words “exercise control over property of the estate” encompass a non-debtor’s retention of property in its possession at the beginning of the debtor’s bankruptcy case. If the answer to this question is “yes,” then a debtor need not take any action to bring estate property into its possession and can file a motion to enforce the automatic stay if a party does not promptly return the estate property. If the answer is “no,” however, then a debtor will need to employ other means to compel the return of its property.

Last week, in City of Chicago, Illinois v. Fulton, the Supreme Court answered this question by ruling that section 362(a)(3) does not require a non-debtor to return to the debtor property in the non-debtor’s possession. Citing the text and statutory history of sections 362(a)(3) and 5421 of the Bankruptcy Code, the Court reversed the Court of Appeals for the Seventh Circuit on the grounds that the circuit court incorrectly concluded that the City of Chicago violated section 362(a)(3) when it refused to return several individual debtors’ vehicles that it had impounded before the filing of their bankruptcy petitions due to the debtors’ failures to pay fines. The Court instead held that section 542 of the Bankruptcy Code governs turning over a debtor’s property and is the provision through which a debtor should seek such return of its property from a non-debtor.

Read the full article

Weil, Gotshal & Manges LLP by Alejandro Bascoy, Robert Lemons, Robert Niles-Weed, Zack Tripp. Published January 20, 2021.

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