In City of Chicago v. Fulton, the U.S. Supreme Court held that creditors do not violate the automatic bankruptcy stay when they merely retain property they took before the bankruptcy petition was filed. Now, as this decision has been legal precedent for over a year, stakeholders are beginning to learn how courts are interpreting and applying the Supreme Court’s decision.
The Supreme Court’s Holding in City of Chicago v. Fulton
In Fulton, the city of Chicago seized vehicles of various persons, for unpaid parking tickets. Several of those persons (unrelated) later filed for bankruptcy protection. When each debtor filed for bankruptcy, an automatic stay went into effect. In those cases, the debtors requested the city return their car. The city refused, and each of the debtors filed a contested motion claiming Chicago violated the automatic stay by refusing to return the car. In bankruptcy cases, the automatic stay requires that creditors refrain from taking any further actions to collect on their debts once a bankruptcy petition is filed, among other things.
Several similar cases were consolidated on appeal. In overturning the bankruptcy courts and the Court of Appeals, the Supreme Court ruled in favor of the city of Chicago relying upon a literal reading of federal bankruptcy laws to hold that retaining property that was seized prior to a bankruptcy filing does not constitute an “act” that would violate an automatic stay. As such, the city of Chicago was not immediately obligated to return the debtor’s car. Writing in a separate concurrence, Justice Sonia Sotomayor noted the grave impacts the decision could have on debtors and called on policymakers to institute rules that could alleviate the situation.
Courts have now been left to apply the Supreme Court’s holding in Fulton under various factual scenarios. Debtors continue to file motions alleging violations of automatic stays. In considering the Fulton precedent, courts have had to determine whether the case applies to different factual situations. Even if courts are uncomfortable with what seemed like a harsh ruling (without a car, debtors may not be able to get to work to improve their financial situation), federal bankruptcy courts are obligated to follow Supreme Court precedent.
Courts Have Largely Applied Fulton Without Distinguishing It
Fulton has been applied by courts in numerous instances beyond those involving impounded cars. For example, the Ninth Circuit applied Fulton in allowing a creditor to maintain garnishments of the debtor’s bank accounts that were made prior to the bankruptcy filing. The appeals court used the same logic that the creditor was not required to reverse the status quo that existed right before the automatic stay took effect.
In most Bankruptcy Court cases since the Supreme Court’s holding in Fulton, judges have applied the holding with little question. After all, the Supreme Court’s unanimous decision announced practically a bright-line rule and left little to be doubted.
The Outer Limits of Fulton
However, there have been some outer limits on how far courts have been willing to take the holding in Fulton. For example, one bankruptcy court specifically noted that the Supreme Court in Fulton did not disturb another line of cases that may require someone to take an affirmative action to prevent something from happening. An omission after the automatic stay has gone into effect could be the same as an overt act when it comes to violating the automatic stay.
In that case, a debtor had filed an adversary proceeding (lawsuit within a bankruptcy case) against an attorney who represented a trust that bought the debtor’s property in a foreclosure auction. The debtor filed for bankruptcy protection six days before a previously scheduled eviction proceeding. Between the time of the bankruptcy petition date and the eviction, the debtor’s counsel contacted the attorney for the trust to attempt to repurchase the property. Although the attorney for the trust made one phone call, he did not delay the eviction before it happened post petition. The debtor asserted in the adversary proceeding that the attorney violated the automatic stay by failing to stop the eviction. The attorney argued that the Supreme Court’s holding in Fulton meant that he did not need to do anything to halt the eviction since it was already scheduled.
The bankruptcy court granted a motion for summary judgment in favor of the trust’s attorney, but it disagreed with attorney’s argument that he did not have to do anything based on Fulton. The court distinguished between the failure to take an affirmative action that would maintain the status quo and the failure to take an action that would change the status quo. According to the court, there are still instances in which someone would have an affirmative duty to act in order to avoid violating the automatic stay. Here, the attorney for the trust was not the person with that affirmative duty. Nonetheless, the court cautioned about reading Fulton too broadly to disturb another long line of cases that remains valid law.
The Practical Implications of Fulton
Fulton is one of the Supreme Court’s most consequential bankruptcy decisions in recent years. Applying the “most natural reading” of the federal bankruptcy code, the Supreme Court’s decision makes a debtors’ timing for filing for bankruptcy protection even more important. Debtors may be quicker to file for bankruptcy in situations where they might lose property, while creditors may be less willing to continue to work with debtors, knowing that the debtors may be on the verge of bankruptcy.
If anything, the Supreme Court’s decision in Fulton would encourage a creditor to become more aggressive in repossessing or seizing property when it appears the debtor may be nearing bankruptcy proceedings. Creditors would seemingly have an easier time maintaining the status quo than having to defend an action they took after the bankruptcy petition was filed. Given an expected surge in bankruptcy filings as a potential fresh recession nears, creditors should proactively evaluate accounts to determine whether they should take action. Nonetheless, given the consequences of violating the automatic stay, creditors should consult with an attorney in any close cases.