City of Chicago, Illinois v. Fulton

STATUTORY INTERPRETATION

Petitioner City of Chicago argues that, according to the text, purpose, and history of the automatic stay imposed by § 362(a)(3) of the Bankruptcy Code (the “Code”), its passive retention of Fulton and others’ vehicles did not violate the stay. Brief for Petitioner, City of Chicago at 16–17. Chicago explains that the automatic stay simply maintains the status quo as of the filing date and that the city could not have violated the stay by refusing to return the vehicles because the vehicles were lawfully repossessed before Fulton and others filed their bankruptcy petitions. Id. Chicago contends that the plain language of § 362(a)(3)—which states that the filing of a bankruptcy petition “operates as a stay” prohibiting “any act to obtain possession of property of the estate or . . . to exercise control over property of the estate” (emphasis added)—supports its conclusion. Id. at 17. Chicago points out that because neither “stay” nor “act” are defined in the Code, they should be understood as they would in both “legal parlance and ordinary English.” Id. at 18. Chicago maintains that “stay” means to prevent any change to the status quo until the court has reached a judgment. Id. at 19. Additionally, Chicago defines “act” as “take action,” which, Chicago continues, does not include passively retaining property repossessed pre-petition because passive retention is a “failure to act.” Id. at 20. Chicago thus asserts that the city’s singular “act” to “exercise control” over Fulton and others’ property was seizing their vehicles, which occurred before the automatic stay was imposed. Id. Therefore, Chicago concludes that the language in § 362(a)(3) only “stays” any “act” taken after the petition date that would “alter the status quo” and does not require affirmative steps to undo lawful pre-petition activities. Id. at 20–21.

Further, Chicago argues that Fulton and others’ interpretation of § 362(a)(3)—requiring Chicago to return their vehicles—is irreconcilable with the central purpose of the automatic stay: to preserve the status quo at the time of filing until a bankruptcy court can resolve the dispute. Id. at 21–22. According to Chicago, returning the vehicles would actually “change the status quo” by worsening the city’s pre-petition position. Id. at 21, 24.

Finally, Chicago asserts that prior to 1984—when Congress added the “to exercise control” language to § 362(a)(3)­—the Code unambiguously did not require creditors to return property that was lawfully repossessed pre-petition. Id. at 25. Chicago contends that because (1) courts do not interpret the Code to alter prior bankruptcy practices without clear congressional intent, and (2) the 1984 amendment’s legislative history suggests that the changes were merely technical in nature, the “to exercise control” language should not be interpreted to expand the automatic stay to require creditors to return property repossessed prior to the filing of a bankruptcy petition. Id. at 27–28.

Respondents Robbin L. Fulton, Jason S. Howard, George Peake, and Timothy Shannon counter that, according to the text, statutory context, and purpose of the automatic stay, Chicago violated the stay when it refused to return property belonging to the bankruptcy estate. Brief for Respondents, Robbin Fulton et al. at 18–19. Fulton and others assert that the ordinary meaning of “exercise control” is “to exercise restraining or directing influence over” and that the ordinary meaning of “stay” is to “stop.” Id. Taken together, Fulton and others conclude that § 362(a)(3) requires Chicago to stop exercising restraining influence over their vehicles, which belong to the respective bankruptcy estates. Id. at 19–20. According to Fulton and others, this conclusion is reinforced by Code language in § 541(a), which envisions that “property of the estate” includes a debtor’s property seized pre-petition, and language in § 542(a), which requires an entity holding “property of the estate” to deliver such property to the Chapter 13 debtor. Id. at 19.

Fulton and others also argue that Chicago’s interpretation of § 362(a)(3) fails for several other reasons. Id. at 21. First, Fulton and others contend that defining “to exercise control” as a singular event makes the language superfluous. Id. at 21–22, 24. Fulton and others assert that because there is a difference between obtaining possession, which occurs once, and exercising control, which is a continuous act, Chicago’s continued control over their vehicles constitutes an act occurring after they filed their bankruptcy petitions, thus violating the automatic stay. Id. at 22. Second, Fulton and others argue that Chicago improperly narrows the definition of “act” by excluding passive possession. Id. at 24. According to Fulton and others, exercising control is an affirmative conduct that violates the stay. Id. at 24–25. Third, Fulton and others argue that Chicago incorrectly relies on a definition of “stay” used in the appellate or injunction setting, which focuses on preserving the status quo, when “stay” really should be understood in its bankruptcy-specific context, where it requires creditors to stop exercising control over debtor’s property. Id. at 26­–29. Fourth, Fulton and others point out that Chicago’s argument that the automatic stay applies only to actions that improve a creditor’s position following the filing of the petition is inconsistent with the purpose of the automatic stay. Id. at 30. Instead, Fulton and others maintain that the stay is meant to “reduce the advantage that some creditors have over others” and that Chicago’s continued control over their vehicles improves its position relative to other creditors. Id. at 30–31.

Finally, Fulton and others argue that Chicago’s legislative history arguments are misplaced. Id. at 32. Fulton and others contend that, where the statutory language is clear, referring to pre-Code practice is unnecessary as a method of statutory construction. Id. at 31–32. Nevertheless, Fulton and others point out that the 1984 amendment that added the “to exercise control” language was intended to “prohibit conduct above and beyond obtaining possession,” suggesting that Congress intended to include “conduct by creditors who seized an asset pre-petition.” Id. at 33.

WHEN IS THE TURNOVER DUTY TRIGGERED?

Chicago asserts that interpreting § 362(a)(3) to require a secured creditor to immediately return repossessed property upon the filing of a bankruptcy petition renders superfluous the protections offered to secured creditors by § 542(a) of the Code. Brief for Petitioner at 35. Although § 542 permits debtors to seek the return of property seized, prior to the imposition of the automatic stay, by secured creditors, Chicago explains that there are exceptions, such as when the seized property is of inconsequential value or the debtor plans to use, sell, or lease the property once it is returned. Id. at 33–35. Chicago contends that these exceptions will be rendered meaningless if § 362(a)(3) is interpreted to mandate the return of property seized pre-petition. Id. Further, Chicago claims that § 542(a)’s turnover provision is not self-executing. Id. at 37. Instead, Chicago points out that numerous statutory conditions must be satisfied before the § 542(a) turnover duty is triggered. Id. According to Chicago, the turnover duty is mandatory only after a bankruptcy court determines that the conditions are satisfied and a turnover is warranted. Id. This determination, Chicago continues, is made after a debtor “commence[s] a [turnover] proceeding or obtain[s] a court order.” Id. at 36. Chicago concludes that, absent a court order mandating turnover, a secured creditor does not exercise control in violation of the automatic stay by passively retaining property. See id. at 35. To support its argument, Chicago cites legislative history and case law that suggests that turnovers under § 542 must result from an adversary proceeding, not simply the filing of a bankruptcy petition. Id. at 39–40.

Fulton and others counter that a plain reading of § 542(a) supports the conclusion that the turnover provision is self-executing and does not depend on a court order. Brief for Respondents at 34. Fulton and others argue that § 362(a) and § 542(a) work together, as § 362 protects what § 542 identifies as bankruptcy estate property, and that Chicago’s flawed interpretation would disrupt this connection. Id. at 48. Fulton and others contend that § 542(a)’s mandate that creditors “shall deliver” (emphasis added) repossessed property to the debtor is unambiguous and that Chicago makes three mistakes in interpreting this language. Id. at 34­–35. First, Fulton and others maintain that Chicago misinterprets the word “shall” as if Congress used the word “may,” even though, as established by the Court, “when Congress uses ‘shall’ in connection with an action, it means that the action is mandatory.” Id. at 35–36. Second, Fulton and others contend that Chicago is reading requirements into § 542(a) that have no textual basis because there is no mention in the statute that a court order is required to trigger the turnover duty. Id. at 36–37. Third, Fulton and others assert that if Congress had wanted to make an exception in § 542(a) so that a secured creditor could keep seized property until there were a court order requiring otherwise, Congress would have made such an exception explicit, evidenced by the other explicit exceptions in §§ 542(c) and (d). Id. at 38. Additionally, Fulton and others cite 47 Code provisions like § 542(a) that all interpret “shall” as mandating an action, even without a court order. Id. at 39–40. Fulton and others also argue that the defenses available to creditors in § 542(a) are intended as protections that eliminate the need for the creditor to withhold seized property from the bankruptcy estate. Id. at 41–42.