Local governments victorious in U.S. Supreme Court case involving impounded vehicles and bankruptcy proceedings
Jan 19, 2021
The court’s opinion in City of Chicago, Illinois v. Fulton overturns an earlier ruling by the U.S. Court of Appeals for the Seventh Circuit previously highlighted by the League of California Cities.
The ruling is good news for local governments. The “automatic stay” provision of the Bankruptcy Code states that a bankruptcy petition “operates as a stay, applicable to all entities, of … any act to obtain possession of property … or to exercise control over property of the estate.” The debtor in this case argued that this meant that the city was required to immediately return an impounded vehicle once the bankruptcy petition was filed.
The Supreme Court disagreed with the debtor’s interpretation. The Court held that “mere retention” of a debtor’s property after a bankruptcy petition is filed doesn’t violate the automatic stay. According to Justice Alito, “the most natural reading of … ‘stay,’ ‘act,’ and ‘exercise control’ — is that [the automatic stay provision] prohibits affirmative acts that would disturb the status quo of estate property as of the time when the bankruptcy petition was filed.”
In a concurring opinion, Justice Sotomayor agreed that “the city’s policy of refusing to return impounded vehicles satisfies the letter of the code,” but noted that “it hardly comports with its spirit.” Justice Sotomayor opined that the city may have violated a number of other provisions of the Bankruptcy Code, and that “bankruptcy courts are not powerless to facilitate the return of debtors’ vehicles to their owners.”
With the automatic stay issue now resolved, the case will be remanded back to the lower courts for further proceedings.
Cal Cities will continue to provide updates on important developments in the case. In the meantime, cities who have questions about how the Supreme Court ruling may impact their city are encouraged to consult with their city attorney.
The ruling is good news for local governments. The “automatic stay” provision of the Bankruptcy Code states that a bankruptcy petition “operates as a stay, applicable to all entities, of … any act to obtain possession of property … or to exercise control over property of the estate.” The debtor in this case argued that this meant that the city was required to immediately return an impounded vehicle once the bankruptcy petition was filed.
The Supreme Court disagreed with the debtor’s interpretation. The Court held that “mere retention” of a debtor’s property after a bankruptcy petition is filed doesn’t violate the automatic stay. According to Justice Alito, “the most natural reading of … ‘stay,’ ‘act,’ and ‘exercise control’ — is that [the automatic stay provision] prohibits affirmative acts that would disturb the status quo of estate property as of the time when the bankruptcy petition was filed.”
In a concurring opinion, Justice Sotomayor agreed that “the city’s policy of refusing to return impounded vehicles satisfies the letter of the code,” but noted that “it hardly comports with its spirit.” Justice Sotomayor opined that the city may have violated a number of other provisions of the Bankruptcy Code, and that “bankruptcy courts are not powerless to facilitate the return of debtors’ vehicles to their owners.”
With the automatic stay issue now resolved, the case will be remanded back to the lower courts for further proceedings.
Cal Cities will continue to provide updates on important developments in the case. In the meantime, cities who have questions about how the Supreme Court ruling may impact their city are encouraged to consult with their city attorney.