The city of Chicago impounds vehicles where debtors have three or more unpaid fines. In this case, the city impounded Robbin Fulton’s vehicle for this reason. Fulton then filed for bankruptcy and asked the city to turn over her vehicle, but the city refused.
Fulton claimed the Bankruptcy Code’s “automatic stay” provision requires the city to immediately return the vehicle even without payment of the outstanding tickets. The federal Court of Appeals for the Seventh Circuit (which has appellate jurisdiction over the federal district courts in Illinois, Indiana and Wisconsin) agreed.
The “automatic stay” provision of the Bankruptcy Code provides 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.”
In a previous case decided in 2009, Thompson v. General Motors Acceptance Corp., the Seventh Circuit concluded that “exercise control” includes holding onto an asset and isn’t limited to “selling or otherwise destroying the asset.” So, the court reasoned in this case, the City of Chicago “exercised control” over Fulton’s car in violation of the automatic stay by not returning it after she filed the bankruptcy petition.
The Seventh Circuit next concluded that the bankruptcy stay becomes effective immediately upon filing the petition, without the debtor bringing a “turnover action.” Another section of the Bankruptcy Code requires the creditor to request “adequate protection” of its interest in property subject to a bankruptcy petition. According to the Seventh Circuit in Thompson: “[I]f a creditor is allowed to retain possession, then this burden is rendered meaningless—a creditor has no incentive to seek protection of an asset of which it already has possession.”
The City of Chicago asked the Seventh Circuit to overturn Thompson but the court refused. The United States Supreme Court will now make the final decision.
Briefing on the merits of the case will now commence, and it can be expected that the Supreme Court will issue an opinion in the case by the end of its term in late June or early July, when it recesses for the summer.