Case Summary By: Alex R. Hess, of Alex R. Hess Law Group
On January 14, 2021, the Supreme Court issued an 8-0** decision that changes when a debtor can expect to receive his or her car back upon filing a Chapter 13 bankruptcy. It also provides a new standard when determining automatic stay violations for creditors in the possession of collateral/Debtor’s personal property. In short, Fulton provides a new interpretation as to the “status quo” positions of debtor and creditor, in addition to altering a motor vehicle custodian’s obligations to the estate upon the filing of a Chapter 13 bankruptcy. Practically speaking, this decision is a major change for consumer debtor’s practitioners and changes the answer to the often-asked question from a Debtor client: Once my bankruptcy case is filed, how soon do I have to wait until they release my car back to me?
I. New Automatic Stay Violation Standard.
The Bankruptcy Court found that the City’s refusal to turn over the Debtor’s vehicle once a Chapter 13 petition was filed was a willful violation of the automatic stay. The Seventh Circuit Court of Appeals affirmed. The Supreme Court in Fulton reversed, and in doing so, altered the stay violation standard: [T]he language of §362(a)(3) implies that something more than merely retaining power is required to violate the disputed provision. Id. at p. 4. By application of this proposition, the Court’s holding issues a new standard for an automatic stay violation:
We hold only that mere retention of estate property after the filing of a bankruptcy petition does not violate §362(a)(3) of the Bankruptcy Code.
II. Facts and Concurrence Analysis.
Fulton is an easily readable decision and concurrence that highlights good policy reasons to help debtors, but unfortunately the holding provides little to no help for debtors. The respondent finds himself with his motor vehicle in City of Chicago impound for unpaid parking and red-light tickets. Though respondent lived in Chicago, he relied upon his vehicle in order to get to and from work in Joliet, Illinois, a 45-mile trip each way. Justice Sotomayor points out in her concurrence two important points: (1) having a car is essential to maintaining employment in this case; and (2) not releasing the car to Debtor upon the bankruptcy filing put his Chapter 13 in jeopardy because he could not get to and from work, may then be unable to earn income and, consequently, ineligible to be a Chapter 13 debtor. Justice Sotomayor recognizes the importance of a Chapter 13 debtor maintaining employment, retaining possession of his property and thus being able to fund a Chapter 13 repayment plan. Lastly, Justice Sotomayor couches her policy goals in a fundamental principal of Bankruptcy: all creditors are to be treated equally. As the Justice reasons: “By denying [Respondent] access to the vehicle he needed to commute to work, the City jeopardized his ability to make payments to all his creditors, the City included.” Concur. p. 2 (Sotomayor, J.) (emphasis on all appears in Justice Sotomayor’s concurrence).
Despite these reasons and general policies that support immediately releasing a vehicle to the Debtor upon filing a Chapter 13 petition, Justice Sotomayor recognizes the importance of creditor’s interests that condition return upon adequate protection needed to protect all creditors, similar to the policy of allowing the Debtor to work to pay back all creditors. By way of demonstrating that a creditor has “adequate protection” before turnover, Justice Sotomayor suggests that perhaps a “debtor may need to demonstrate that her car is sufficiently insured.” Concur. p. 4. Proving adequate insurance on secured property or important estate assets (property and casualty insurance for a home, or motor vehicle insurance) is already a requirement in the U.S. Bankruptcy Court District of Massachusetts for each Chapter 13 case. However, given this suggestion by Justice Sotomayor, it may now be considered good practice to file evidence of motor vehicle insurance immediately upon the filing if debtor’s counsel is then tasked with turnover of the Debtor’s motor vehicle as part of the need for filing.
III. The 8-0 Majority Decision and Analysis.
Unlike Justice Sotomayor’s concurrence, the majority decision provides a much more sterile and straightforward analysis of the bankruptcy code verbiage relying on the plain meaning rule and legislative intent in determining what will be the new “status quo.” Both the Bankruptcy trial court and Circuit Court held that the City’s refusal to release the Debtor’s car was, in fact, a violation of the automatic stay. Prior to Fulton, most bankruptcy practitioners might also take that position, that a refusal to release property of the estate upon the filing of a Chapter 13 filing was a willful violation of the automatic stay provision. But that’s not the case anymore.
At the filing of the Fulton Chapter 13 bankruptcy, Debtor’s car was in Chicago impound for $5,393.27 in tickets and fees. Fulton, 592 U.S. at p. 2 (Sotomayor, J. concurring). According to Justice Alito writing for the majority, the automatic stay provision prohibits “any act” to “exercise control” over the property of the estate. Id. at p. 2. “Taken together, the most natural reading of these terms” prohibits affirmative acts that would disturb the status quo of estate property as of the petition date. Id. When the Court breaks down the words to their plain meaning, it finds the following:
An “act” is something done or performed citing Black’s Law Dictionary;
To “exercise” means “to bring into play” or “make effective in action” citing Webster’s Dictionary.
With these definitions, the Court finds that the automatic stay “halts any affirmative act that would alter the status quo as of the time of the filing of a bankruptcy petition.” Fulton, 592 U.S. at p. 4.
IV. Potential Future Litigation and Conclusion.
Fulton’s immediate effect will embolden creditors that possess motor vehicles, or perhaps even more broadly, collateral, to refuse turnover absent proof of insurance, demanding adequate protection, or perhaps simply take the position that holding onto the collateral it possessed prior to the bankruptcy filing is simply the status quo of the case and not an automatic stay violation. The practical effect is a pitfall for debtors that seek a fresh start and file a bankruptcy in order to get their property back in order to carry out the terms of a Chapter 13 reorganization plan. While Fulton may provide additional protection to creditors, it provides a burden to a Debtor bar as it may require debtor’s counsel to provide additional documents, negotiate with an obstinate creditor, and work harder for turnover at the beginning of a case. Where a creditor refuses to turnover Debtor’s car at the beginning of a Chapter 13 filing, the proceeding is facing the prospect of failure. As Justice Sotomayor reasons, debtors may require a vehicle to commute to and from work, not to mention family obligations (e.g. drop off and pick the kids up from school, grocery shopping, taking care of an elderly parent, etc.). Without a car, a debtor may face the prospect of missing work, losing hours at work, and ultimately being fired for lack of reliable transportation. The effects of this may be felt disproportionally in “at will” employment states like Massachusetts, where low-income and hourly-wage workers are most at risk for being replaced and/or fired.
What does the future of bankruptcy litigation hold after Fulton? Fulton involves a municipal impound lot, and fines/fees for unpaid parking and red-light tickets. Municipalities are permitted to ticket, tow, and impound vehicles for statutory and ordinance violations. The same is not true for private tow companies, non-municipal entities, or secured creditors (companies) simply holding collateral. Possession is not nine-tenths of the law, despite the adage. Property belongs to the estate upon the filing of a bankruptcy petition and creation of the estate. The opening line of Fulton emphasizes this: The filing of a petition under the Bankruptcy Code automatically “creates an estate” that, with some exceptions, comprises “all legal or equitable interests of the debtor in property as of the commencements of the case.” Fulton, 592 U.S. ____ (2021), (Syllabus).
Fulton may unintentionally increase the amount of turnover litigation, whether it be Debtor filing a motion for turnover or a Trustee filing an adversary proceeding to recover estate property from an unrelenting creditor. While the Court addresses these potential consequences, Justice Sotomayor, in an example of judicial restraint, identifies the parties responsible to remedy this:
Ultimately, however, any gap left by the Court’s ruling today is best addressed by rule drafters and policymakers, not bankruptcy judges. It is up to the Advisory Committee on Rules of Bankruptcy Procedure to consider amendments to the Rules that ensure prompt resolution of debtors’ requests for turnover under §542(a), especially where debtors’ vehicles are concerned. Congress, too, could offer a statutory fix, either by ensuring that expedited review is available for §542(a) proceedings seeking turnover of a vehicle or by enacting entirely new statutory mechanisms that require creditors to return cars to debtors in a timely manner.
Fulton, 592 U.S. at pp. 3-4 (Sotomayor, J. concurring).
The Bankruptcy Courts are already operating at capacity, and we have yet to truly see the fallout from COVID-19 business closures and individual petitions once CARES Act, unemployment and other assistance programs dry up or are discontinued. Beginning some Chapter 13 filings with turnover litigation is not ideal for the court, Trustee or debtor’s counsel. Moreover, it would be doubly disappointing to see Debtors being fired from gainful employment simply because an impound lot refuses to return the Debtor’s vehicle in reliance upon Fulton. Holding hostage a debtor’s vehicle could have considerable consequences on the outcome of a debtor’s Chapter 13 case. Whether we see an increase in litigation from the debtors’ side or the Trustee’s side, it still leaves the debtor asking “Dude, where’s my car?”
*“Dude, Where’s My Car?” is a 2000 film starring Ashton Kutcher and Seann William Scott on an adventure to find their lost car.
**Concurrence written by Sonia Sotomayor. Justice Amy Coney Barrett did not assume her seat until October 27, 2020, after oral arguments in this case were heard on October 13, 2020, and thus did not participate in this decision.