After Chicago v Fulton: Not Only Cars

Chicago v Fulton automatic stay and turnover cases are not just about cars

After Chicago v Fulton: Not Only Cars

A Survey of Fulton Rulings and a Weakened Automatic Stay

Intro: What is a Fulton ruling?

When Chicago v Fulton (In re Fulton), 141 S Ct. 585 (Sup Ct, 2021) was first decided by the Supreme Court, there was a consensus among bankruptcy attorneys that the erosion of the automatic stay with regard to turnover was only about cars. That is, Fulton was a narrow ruling that was only about impounded vehicles seized prepetition, and wouldn’t really impact or weaken the automatic stay otherwise. Two years on, that turns out not to be the case.

June 2023 Update: the following list has been updated to include cases citing Fulton and the automatic stay through the midpoint of 2023.

What “Exercise Control” Meant Before Chicago v. Fulton

Prior to Fulton, many courts around the United States held that the filing of a bankruptcy petition compelled a party to return to debtor property taken for the purposes of collections prepetition. This forced return was under the power of the automatic stay of 11 USC 362, specifically section (a)(3). That portion of the statute “stays” or prohibits “any act … to exercise control over property of the estate.” Prior to 2021, it was common for courts to hold that property taken prepetition but held postpetition was “exercising control” of it and in violation of the stay.

Locally here in the Ninth Circuit, an example of a pre-Fulton exercise control case was In re Del Mission Ltd., 98 F.3d 1147 (9th Cir, 1996). There, the appellate court held, “we conclude that the State’s knowing retention of the disputed taxes violated the automatic stay.” Id. at 1152. After Fulton, Del Mission is no longer good law.

A Chicago v Fulton battle over automatic stay and turnover
A Chicago v Fulton battle over automatic stay and turnover

What SCOTUS Ruled in Chicago v. Fulton

Fulton reversed the law of many courts, including here in the Ninth Circuit. The Supreme Court held that “mere retention of estate property after the filing of a bankruptcy petition does not violate § 362(a)(3) of the Bankruptcy Code.” Id. at 592. It ruled that it to be a stay violation, it would take “affirmative acts that would disturb the status quo of estate property as of the time when the bankruptcy petition was filed.” Merely holding onto something doesn’t do that.

Deep Dive on the Automatic Stay

What is a post-Fulton case or Fulton ruling

The Chicago v Fulton case was about the city of Chicago seizing and impounding vehicles prepetition for motor vehicle infractions and to collect fines, then refusing to turn over the vehicle upon the bankruptcy filing per 362(a)(3). Post-Fulton, courts are now finding that any property, not just a car, seized prepetition can be “merely retained” without finding a violation of the automatic stay. Two years later, this is a quick survey to see how courts are ruling on this issue now.

First Circuit

Milk. In re Vaqueria Las Martas, 638 BR 482 (1st Cir BAP, 2022). Not a typical automatic stay and turnover case, this Chapter 12 involves a loan for a couple of million dollars secured by thousands of gallons of milk. Fulton came into the picture because of the reference in it to filing an adversary proceeding for turnover under Section 542. Interestingly, at page 499, the 1st Circuit BAP found that the Supreme Court in Fulton “decided the issue narrowly,” but it was referring to the turnover process, not the Fulton ruling itself.

Bank accounts – “beyond the status quo” In re Educational Technical College, Case No. 21-02392 (EAG) (Bankr Ct, Puerto Rico, 2022). Here, the bankruptcy court found that the allegations against creditor rise above the level set in Fulton and Stuart (discussed below) when it misled debtor, took contradictory positions, used vexatious litigation tactics, and delayed things unnecessarily.

Second Circuit

Setoff. In re Arcapita Bank, 648 BR 489 (Bankr Ct, SDNY 2023). Like Margavitch, bank had seized funds prepetition. Here, though, the bank executed a setoff postpetition, which the bankruptcy court found altered the status quo. “But BisB did more than merely retain funds of Arcapita that were already in its possession. Rather, BisB actively executed a postpetition setoff of debts between itself and Arcapita, and continued to maintain that setoff. Indeed, the exercise of a setoff is explicitly covered by Section 362(a)(7), a distinct statutory section that was not applicable in the Fulton case.” Id. at 502.

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Third Circuit

Bank accounts. In re Margavitch, Case No. 5:19-05353-MJC (Bankr Ct, MD Penn, 2021). Margavitch was one of the first turnover rulings on the issue to come out after Chicago v. Fulton was decided. It involved a pre-petition attachment lien, and the creditor took no action to withdraw it once the case was filed. The Court held, citing Fulton, that a stay violation requires an affirmative act that disrupts the status quo of estate property on the date the petition was filed. Further, the Margavitch court ruled, “passive maintenance of its valid pre-petition attachment lien in no way changed the status quo and therefore, did not constitute a violation of §362(a)(2).”

Bank accounts. In re Kipps, Case No. 5:19-01662-MJC, (Bankr Ct, MD Penn, 2022). The same judge who decided Margavitch decides another bank account case, and reaches the same conclusion.

Fourth Circuit

Boat and storage charges. Where creditor retains a boat in drydock storage with a lien pursuant to the Maritime Lien Act, there is no stay violation.  In re Stokes, Bankr Ct., 21-01615-5-JNC, EDNC, 2022). “Further, the dry dock storage continued to be necessary postpetiton for the same reasons, and the automatic stay of 11 U.S.C. § 362(a) does not prevent or stop the accumulation of valid postpetition storage charges.” See a similar ‘necessity’ rationale in In re MTG.

Fifth Circuit

Retention of trucks and equipment after demand – not okay. In re Preferred Ready-Mix (Bankr Ct, 21-33369, SDTX 2022). Here, a state court receiver was unresponsive to letters demanding turnover which were sent postpetition. Debtor filed an adversary for turnover, stay violation, and others. Reducing Fulton literally to a footnote, the bankruptcy court found a violation of the automatic stay: “Furthermore, the Court finds that Berleth did more than just passive retention of estate property, as demand was made.” Then, following to footnote 19, the court wrote, “Here, a demand for turnover was made by plaintiff on November 10, 2021, and the property was not returned until November 20, 2021, and December 6, 2021. The facts differ from the facts in City of Chicago as this adversary was filed, this Court held a trial, and procedural safeguards were followed.” It appears the court is finding a violation of the automatic stay, starting from the date of demand, not the date of the filing of the adversary or order for turnover.

Sixth Circuit

Eviction – “does not maintain the status quo” In re Connor, 641 BR 875, 884  (Bankr. Ct, MDTN 2022). When a creditor who had already foreclosed on debtor’s residence prepetition then evicted debtor postpetition, it was distinguished from Fulton. “…reliance on Fulton is misguided since a post-petition eviction and dispossession of a debtor does not maintain the status quo in the same way as retaining possession of a vehicle repossessed prepetition.” Id. at 884. Note that a stay violation wasn’t found by this court when measuring other legal standards for willfulness and affirmative duty to act.

Administrative hold on bank account and spending funds for the estate. Distinguishing the use of seized funds from a setoff, the court allowed the use of retained funds postpetition to preserve the bankruptcy estate. In re MTG (Bankr Ct   2022). “Rather, Comerica’s only use of the funds was for the benefit of the bankruptcy estate — it used some of the funds to preserve property of the estate by paying utility bills for property that MTG owned. That payment of utility bills may have been a stay violation, but if so, it caused no damage to the bankruptcy estate, as discussed below. Otherwise, Comerica’s mere retention of the DIP funds in the escrow account was not a violation of the automatic stay.”

Seventh Circuit

No cases found yet.

Eighth Circuit

No cases found yet.

Ninth Circuit

Bank accounts. Stuart vs City of Scottsdale (in re Stuart), 632 BR 531 (9th Cir BAP, 2021). Here, Bank of America froze three bank accounts of debtor before he filed bankruptcy. Upon filing, the bank refused to release the frozen funds. The Ninth Circuit BAP held, “Where a creditor has executed a prepetition writ of garnishment against a debtor’s bank account, it is under no affirmative obligation to release the funds and need only maintain the status quo.” Id. at 540. “Because the City immediately asked the state court to stay the case and did nothing to change the status quo that existed when Mr. Stuart filed his bankruptcy petition, it did not violate the automatic stay.” Id. at 544.

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Entering a Court Order. In re Censo, 638 BR 416 (9th Cir BAP, 2022). The Ninth Circuit BAP goes one step further. In Censo, there was a pre-petition lien, and so this seems to be the normal fact pattern. What’s different here is that there was a summary judgment order regarding the lien that was granted postpetition. The 9th Cir BAP found that the order did not change the status quo: “Shellpoint’s lien existed as of the petition date, and the DC Order simply affirmed the validity of the existing lien. It did not affect KAH’s possession or control of the Property. The DC Order thus did not disturb the status quo and did not violate § 362(a)(3).” Id. at 425. The automatic stay provision of 362(a)(1) bars actions against debtor. In Censo, the BAP’s found the “automatic stay inapplicable to lawsuits initiated by the debtor, and a defendant in an action brought by the debtor may defend itself in that action without violating the automatic stay.” Id. at 424.

Court action taken in defense. In re Lee, Case No. 13-11850-gs (Bankr Ct, Nevada, 2022). Debtors reopened their fourth bankruptcy case, which was previously dismissed, to file lawsuits. In response, the creditor brought a motion, and the bankruptcy court ruled, citing Censo, that the automatic stay doesn’t apply to state court actions commenced by the debtors.

Withholding a passport. In re Bronson, Case No. 20-30704-thp11 (Bankr Ct Oregon, 2022). In this case, there were allegations that creditor withheld debtor’s passport to collect unpaid child support. The bankruptcy court addressed the issue as to whether a stay violation occurred regarding the passport, but found there was not enough factual evidence to make a ruling.

Tenth Circuit

No cases found yet.

Eleventh Circuit

Continuing garnishment – “altered the status quo” – Wage garnishment order seized funds prepetition, but creditor allowing it to continue postpetition didn’t maintain the status quo and violated the automatic stay. In re Namen, Case No 3:22-bk-02272-BAJ (Bankr Ct, MDFL, 2023). “The instant case is clearly distinguishable from Fulton because the continued post-petition garnishments materially altered the status quo.” The court also distinguished the 9th Circuit’s Stuart and 3rd Circuit’s Margavitch by pointing out that in those cases, no funds were obtained postpetition, which the creditor here in Namen did.

Car sold postpetition – “beyond the status quo” – Car seized prepetition but then sold postpetition is a stay violation. In re Rakestraw, Case No. 22-40960-PWB, (Bankr Ct, ND Georgia, 2022). “Although a creditor’s retention of a vehicle repossessed prepetition does not violate the provisions of the automatic stay in 11 U.S.C. § 362(a)(3), the automatic stay in § 362(a)(4) prohibits the enforcement of a lien against property of the estate. Accordingly, the alleged postpetition sale of the Vehicle to enforce the lien violated the automatic stay.”

Retaining prepetition funds. Here, Debtor had paid on a order in state court to Superior Court, then filed bankruptcy.  When Superior Court didn’t execute a postpetition transfer of funds back to Debtor pursuant to a new proposed state court order, Debtor cried foul. The bankruptcy court found no automatic stay violation, ruling, “Assuming without deciding that the funds were property of Debtor’s bankruptcy estate at the time the order was entered, the order serves to maintain the status quo with respect to the funds, which in itself is not a stay violation.” In re Jackson, (Bankr. Ct NDGA 22-58536-BEM, 2023).

Sending statements to codebtor.  Creditor continued to send statements to the Debtor’s non-filing spouse and informing credit reporting agencies that the Debtor’s non-filing spouse made late payments on a debt which the Debtor has no personal liability. “Here, the Bank did not take any affirmative act to gain possession or control of the Home. It did not record a lis pendens or file a foreclosure action as to the Home. The Bank already held the Mortgage which secured all amounts owed under the Note. The amounts owed under the Note simply increased due to the Debtor’s bankruptcy filing.” In re Rose, 645 BR 253, 261 (MDFL 2022)

Summary of turnover cases after Chicago v Fulton

Post-Fulton rulings and jurisprudence are still on the thin side two years later. However, it is clear that the Chicago v Fulton holding applies far beyond motor vehicles. In fact, most rulings citing Fulton had nothing to do with cars and trucks.

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