Repossessions after Fulton v. City of Chicago

FULTON’S AFTERMATH

RETURN OF VEHICLES AFTER FILING CHAPTER 13

What do Chapter 13 Practitioners Need to Know?

By Nathan E. Curtis and Peter Francis Geraci, Geraci Law L.L.C.

           Debtors who are not current in mortgage or vehicle payments may file for Chapter 13 relief and propose to cure arrears, and force creditors to accept future payments. Mortgage creditors must give multiple notices before taking real estate away from a debtor, but vehicle creditors are allowed to repossess vehicles by towing them away, often with no notice, in the dead of night. “Self-help” repossession is embedded in state court law. It is undoubtedly a horrible feeling to come outside from your home or work to discover that your car is gone. Was it stolen? Repossessed? Impounded? Depending on where the debtor lives, more often than not it would be one of the latter two. The good news used to be that depending on the law in your Circuit, a vehicle creditor was required to return your car to you, allowing you in most cases to continue to work to make the payments under your plan. Until now.

On January 14, 2021 the Supreme Court issued its decision in City of Chicago v. Fulton et. al. 592 U.S. ____ (2021).Siding with the minority Circuits, the Court reversed the Seventh Circuit's In re Fulton, 926 F.3d 916 (7th Cir. 2019) holding that passively retaining a vehicle already in a creditor’s possession was not an “act” to “exercise control” as stated in 11 U.S.C. § 362(a)(3), and therefore was not a violation of the automatic stay.

What is the impact on Chapter 13 practice, particularly in those Circuits that required a creditor to return a vehicle in their possession pursuant to Section 362(a)(3)? Chapter 13 practitioners are urged to examine this decision more closely, because the holding in Fulton is quite narrow: “We hold only that mere retention of estate property after the filing of a bankruptcy petition does not violate Section 362(a)(3) of the Bankruptcy Code.” (emphasis added). As the Court noted, one of the underlying bankruptcy cases at the Seventh Circuit also found the City of Chicago to have violated Sections 362(a)(4) and (a)(6), and while those claims were briefed, since they were not ruled on by the Seventh Circuit, they were also excluded from this decision. City of Chicago v. Fulton et. al., 592 U.S. ____ at 7 n. 2.[1]

Nor did the opinion rule on whether § 542(a) requires a creditor to turn over personalty to a debtor upon request or whether it must be done pursuant to a court order. Id. at 7. Despite the Court’s ruling, these other sections of the Bankruptcy Code indicate that creditors must be wary of refusing to release property.

Does retention of a vehicle after notice of filing violate Section 362(a)(4)?

The application of Section 362(a)(4) is somewhat limited. Under Section 362(a)(4), a creditor is stayed from “any act to create, perfect, or enforce any lien against property of the estate.” This would primarily apply to situations in which a lien was imposed or recorded post-petition, but it can also apply to municipal entities such as the City of Chicago that have possessory liens. Of course, the argument for a creditor is that the Supreme Court already held that passive retention is not an act. But the Court’s opinion only holds that in regards to Section 362(a)(3): 

We do not maintain that these terms definitively rule out the alternative interpretation adopted by the court below and advocated by respondents. As respondents point out, omissions can qualify as “acts” in certain contexts, and the term “ ‘control’ ” can mean “ ‘to have power over.’ ” Thompson v. General Motors Acceptance Corp., 566 F. 3d 699, 702 (CA7 2009) (quoting Merriam-Webster’s Collegiate Dictionary 272 (11th ed. 2003)).

Id. at 4.

The issue for a creditor with a possessory lien, such as the City of Chicago, is that their retention of the vehicle appears to be a clear violation of Section 362(a)(4). One of the City’s arguments was that it had to retain possession of the vehicle in order to maintain the perfection of its lien. In re Fulton, 926 F.3d at 928. It is that very argument that proves a violation of Section 362(a)(4). Since possessory liens are generally perfected and/or enforced by retaining possession of the property, there is no other “act” that the statute can refer to for a possessory lien, and therefore the retention of the property is a violation of Section 362(a)(4).

Does retention of a vehicle after notice of filing violate Section 362(a)(6)?

           The potential applications of Section 362(a)(6) are far broader. Under Section 362(a)(6), a creditor is precluded from “any act to collect, assess, or recover a claim against the debtor that arose before the commencement of the case under this title.” This prevents a creditor from demanding payment to release a vehicle after it has been impounded or repossessed. A demand for payment in exchange for releasing a vehicle cannot be construed as anything other than an “act”.

Is a creditor that has taken possession of property of the estate required to return it to the debtor through the operation of three sections of the Code?

1.        Section 542(a) requires the creditor to deliver property to the trustee if the property has value or benefit to the estate, and if the property is a type that the trustee could use, sell or lease under Section 363.

2.        Section 1303 gives the debtor the rights and powers of the trustee

3.        Section 1306(b) requires the debtor to remain on possession of property of the estate.

These sections work together to bring property back to the debtor. See In re Weber, 719 F. 3d 72, 76 (2nd Cir. 2013).

There is a split of authority as to whether Section 542 (a) is self-executing.

After the Fulton decision, the single biggest question to be answered concerns the operation of Section 542(a): is it self-executing? Similar to the split that existed in interpreting Section 362(a)(3) prior to Fulton, there is a difference of opinion in determining the operation of Section 542(a). The majority opinion is that Section 542(a) requires the creditor to deliver the property in its possession to the debtor upon the filing of the petition and notice having been given to the creditor. See In re Fulton, 926 F. 3d 916 (7th Cir. 2019), In re Weber, 719 F. 3d 72 (2nd Cir. 2013), In re Del Mission Ltd., 98 F. 3d 1147 (9th Cir.1996), In re Knaus, 889 F. 2d 773 (8th Cir. 1989). The minority opinion holds that there must be an order entered by the bankruptcy court, with a further split as to whether a turnover proceeding should be brought via motion or adversary. See In re Denby-Peterson, 941 F. 3d 115 (3rd Cir. 2019). After a careful review of both case law and the statutory language, the true answer lies somewhere in-between.

           The seminal case in interpreting Section 542(a) is United States v. Whiting Pools, Inc. 462 U.S. 198 (1983). In Whiting Pools, the Court held that Section 542(a) “requires an entity (other than a custodian) holding any property of the debtor that the trustee can use under § 363 to turn that property over to the trustee.[2] United States v. Whiting Pools, Inc. 462 U.S. at 205 (emphasis added). This holding is supported by the plain language of Section 542(a):

Except as 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. 11 U.S.C.  § 542(a) (emphasis added).

           The use of the word “shall” in a statute indicates a requirement to do something, whereas the use of “may” implies discretion. Kingdomware Techs., Inc. v. United States, 136 S.Ct. 1969, 1977 (2016). When a statute distinguishes between “may” and “shall,” it is generally clear that “shall” imposes a mandatory duty. Id. Other provisions of the Code further support the idea that Section 542(a) requires a creditor to release property to the debtor. For example, Section 1306(b) states “[e]xcept as provided in a confirmed plan or order confirming a plan, the debtor shall remain in possession of all property of the estate.” 11 U.S.C. § 1306(b) (emphasis added). The Bankruptcy code does not define the term “remain.” When a term is undefined in a statute, a court gives it its ordinary meaning. Hall v. United States, 132 S.Ct. 1882, 1887 (2012). Merriam-Webster defines “remain” as “to stay in the same place or with the same person or group; to continue unchanged.”[3] Consequently, in order for property of the estate to remain in the debtor’s possession (which, again, is mandatory), it must first be in the debtor’s possession, requiring the creditor to release it.

           Opponents of this position bring up the exceptions to Section 542(a), arguing that if the turnover is mandatory, then creditors who may have a defense to the turnover would still have to turn over the property. This is true, but it was the same argument made by the United States in Whiting Pools, arguing that they did not have to release property unless they were provided adequate protection first. That argument failed:

At the secured creditor's insistence, the bankruptcy court must place such limits or conditions on the trustee's power to sell, use, or lease property as are necessary to protect the creditor. The creditor with a secured interest in property included in the estate must look to this provision for protection, rather than to the nonbankruptcy remedy of possession.

United States v. Whiting Pools, Inc. 462 U.S. at 204. As the Court noted, the creditor must take an action for the bankruptcy court to make a determination whether the debtor must relinquish the property to the creditor, but the property should be returned to the debtor first.

Is the requirement to “deliver” of Section 542 different than the ability to “recover” of Section 550, and if debtor must bring a turnover action, may it be by motion?

In the event that a court decides that a turnover action must be brought by the debtor, rather than having Section 542(a) take effect automatically, the remaining question to be answered is whether such action should be brought by adversary or if it can be brought by motion. Those who believe an adversary is required, base that assertion on Federal Rule of Bankruptcy Procedure 7001(1), which states that “a proceeding to recover money or property” is to be brought as an adversary. This ignores the fact that the term “recover” is not found anywhere in Section 542. Instead, “deliver” is used. However, “recover” is used repeatedly in Section 550 regarding the trustee’s ability to recover property after a transfer has been avoided.

           By including specific language in one section of a statute but omitting that language in another section, it is presumed that Congress was doing so intentionally. Russello v. United States, 464 U.S. 16, 23 (1983). The court will “refrain from concluding here that the differing language in the two subsections has the same meaning in each. We would not presume to ascribe this difference to a simple mistake in draftsmanship.” Id. By using both “recover” and “deliver” in the Code[4], it is clear that they cannot be given the same meaning. Again, neither term is defined in the Code, so we must again look to the ordinary meaning of the words. Merriam-Webster defines “recover” as “to get back: regain.”[5] Distinctly, “deliver” is defined as “take and hand over to or leave for another : convey.”[6]

           When applying the definitions to their use in the code, “recover” is used when the trustee is attempting to regain property from someone who should not have it in their possession. Deliver is used when someone who is rightfully in possession of property is required to convey it to someone else. Furthermore, assigning these meanings to these terms complies with the goal of providing a fresh start to the debtor. Deliver conveys more urgency, such as a debtor needing to get their vehicle back to comply with their Chapter 13 plan, whereas recover appears to be less urgent, which would allow for an adversary proceeding to be brought and ruled upon.

Enforcement of Section 542(a) and practical applications of the Fulton decision

           Assuming that Section 542(a) does require a creditor to release property in its possession to the debtor, how can the debtor ensure compliance? Answering this question depends on whether the creditor is in violation of Sections 362(a)(4) or (a)(6). If there is a stay violation then the possibility of sanctions remains pursuant to Section 362(k). Unfortunately, until courts begin issuing decisions on what would constitute a stay violation, it will be difficult to determine. For now, from a practical standpoint, a debtor would be best served to file a motion to compel turnover under Section 542(a) along with a motion for sanctions. This allows the bankruptcy court to order the creditor to release the property, and still make a determination as to whether the refusal to do so was in violation of the stay.

Conclusion

           At first glance, the Fulton decision appears to enable secured creditors to retain possession of property that was repossessed or impounded prior to the filing of the Chapter 13. But a further detailed review shows this is not necessarily the case. Chapter 13 debtors’ attorneys should be aware of the fact that this was an extremely narrow holding and there are still avenues to force creditors to return property to the debtors.

[1] Since the matter was remanded back to the Seventh Circuit, it is expected that the Court of Appeals will now rule on whether the City of Chicago violated either Section 362(a)(4) or (a)(6).

[2] Or as indicated supra, to the debtor in a Chapter 13 proceeding.

[3]  Remain, Dictionary, Merriam-Webster, https://www.merriam-webster.com/dictionary/remain, (accessed January 25, 2021). Remain: "to stay in the same place or with the same person or group: to continue unchanged."

[4] Additionally, both terms are used in the Federal Rules of Bankruptcy Procedure.

[5] Recover, Dictionary, Merriam-Webster, https://www.merriam-webster.com/dictionary/recover, (accessed January 25, 2021). Recover: “to get back: regain.”

[6] Deliver, Dictionary, Merriam-Webster, https://www.merriam-webster.com/dictionary/deliver, (accessed January 23, 2021). Deliver: “take and hand over to or leave for another : convey.”