The United States Supreme Court has granted the city of Chicago’s writ of certiorari and will hear the city’s appeal of In re Fulton, 926 F.3d 916 (3rd Cir. 2019). In Fulton, the Seventh Circuit Court of Appeals, siding with a majority of circuits and affirming its own precedent, ruled that the city of Chicago exercised control over the debtor’s car, impounded pre-bankruptcy for non‑payment of parking fines, when it refused to release the vehicle after the debtor filed Chapter 13 bankruptcy unless the debtor first paid pre‑petition parking fines. Fulton held that this was an “act to obtain possession of property of the estate or of property from the estate, or to exercise control over the estate” under 11 U.S.C. §362(a)(3). Chicago was held in contempt when it failed to turn over the car to the debtor under 11 U.S.C. § 542(a) once it had notice of the bankruptcy filing, and its duty to turn over the vehicle was not dependent on the debtor first bringing a turnover action.
Chicago argued that leaving a car in an impound lot is not an “act” to exercise control under 11 U.S.C. § 362(a)(3), but the court disagreed, citing Thompson v. General Motors Acceptance Corp., 566 F.3d 699 (7th Cir. 2009):
In refusing to return the vehicles to their respective estates, the City was not passively abiding by the bankruptcy rules but actively resisting § 542(a) to exercise control over debtors' vehicles.
Fulton, at 925. 11 U.S.C. § 542(a) provides that a custodian must in certain circumstance deliver property to the trustee or, in this case, the Chapter 13 debtor.
Chicago had not sought adequate protection under 11 U.S.C. § 363(e), and it could not simply keep the vehicle. “A creditor with a secured interest in property included in the estate must look to [§ 363(e)] for protection, rather than to the nonbankruptcy remedy of possession.” Fulton, at 924, citing United States v. Whiting Pools, Inc., 462 U.S. 198, 204. And Fulton pointed out that Chicago would not lose its possessory lien by involuntarily turning over the vehicle.
With the In re Fulton opinion, the Seventh Circuit remains in the majority of circuits with the Second, Eighth, and Ninth Circuits. The Tenth Circuit is in the minority. The Supreme Court may or may not resolve the circuit split regarding “inaction” and the automatic stay when it decides Fulton.