On January 14, 2021, the Supreme Court unanimously held in City of Chicago v. Fulton that a creditor’s passive retention of a debtor’s property does not violate section 362(a)(3) of the Bankruptcy Code. The Court’s 8-0 decision (Justice Barrett did not participate in the consideration or decision of the case) may have the unintended effect of increasing bankruptcy costs and making it more difficult for individual debtors to achieve a “fresh start”.
I. Background
When a bankruptcy case is filed, certain Bankruptcy Code sections take immediate effect and have a significant impact on a debtor’s property. First, section 541(a)(1) creates the bankruptcy estate, which is comprised of “all legal or equitable interests of the debtor in property.” This includes any property made available to the estate by other provisions of the Bankruptcy Code. One such other provision is section 542, which governs the turnover of property to the debtor’s estate. Section 542 commands that, with certain exceptions, any entity in possession of a debtor’s property shall deliver the property to the debtor.
Second, a bankruptcy petition operates as an automatic stay, preventing, in relevant part, “any act to obtain possession of property of the estate…or to exercise control over property of the estate.” 11 U.S.C. § 362(a)(3). The automatic stay is one of the fundamental elements of the bankruptcy system: it protects the debtor’s assets from unilateral creditor actions during the bankruptcy case and maintains the status quo. Continue Reading
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