February 3, 2021 - A secured creditor's mere retention of property repossessed prior to the debtor's bankruptcy petition is not an act to exercise control over property of the bankruptcy estate in violation of the Bankruptcy Code's automatic stay provision, according to a recent opinion by the U.S. Supreme Court in City of Chicago, Illinois v. Fulton, 141 S. Ct. 585 (2021).
The Court's opinion resolves a circuit split as to whether a secured creditor's failure to return property (i.e. vehicles repossessed prior to bankruptcy) is a violation of the automatic stay, which can result in sanctions and sometimes significant monetary damages.
The Court's opinion is good news for lenders, especially auto lenders, with secured liens in personal property. The Court held that the automatic stay only "prohibits affirmative acts that would disturb the status quo of [bankruptcy] estate property as of the time when the [debtor's] bankruptcy petition was filed
The focus, as a result of the decision, is on maintaining the status quo as of the bankruptcy petition date. Secured creditors must therefore proceed with caution and not take any other affirmative act to exercise or enforce their lien rights in bankruptcy-estate property—for those affirmative actions, seeking and obtaining relief from the automatic stay is still required.
Secured creditors should further exercise caution because the Court only resolved the limited application of 11 U.S.C. § 362(a)(3) regarding the "exercise [of] control over property of the estate." The Court did not address any other subsections of the automatic stay, such as § 362(a)(4) "any act to . . . enforce any lien against property of the estate" and § 362(a)(6) "any act to collect, assess, or recover a claim . . . that arose before the commencement of the case." However, the decision provides secured lenders with significant leverage at the outset of a debtor's bankruptcy filing.
You can view the full Supreme Court opinion here
For more information or questions, please contact any of our bankruptcy law attorneys listed below.Séan P. O'Brienspobrien@gustlaw.com
602.257.7460Gerard R. O'Mearagromeara@gustlaw.com