Local Governments Win Impounded Car SCOTUS Case

In an 8-0 decision in City of Chicago v. Fulton, the U.S. Supreme Court held that the City of Chicago didn’t violate the Bankruptcy Code’s automatic stay provision by holding onto a vehicle impounded after a bankruptcy petition was filed.  The State and Local Legal Center (SLLC) filed an amicus brief in this case asking the Court to reach this result.

The City of Chicago impounds vehicles where debtors have three or more unpaid fines. Robbin Fulton’s vehicle was impounded for this reason. She filed for bankruptcy and asked the City to return her vehicle; it refused. The Seventh Circuit held the City violated the Bankruptcy Code’s automatic stay provision. The Supreme Court unanimously reversed.

When a bankruptcy petition is filed, an “estate” is created which includes most of the debtor’s property. An automatic consequence of the bankruptcy petition is a “stay” which prevents creditors from trying to collect outside of the bankruptcy forum. The automatic stay prohibits “any act to obtain possession of property of the estate or of property from the estate or to exercise control over property of the estate.”

The Bankruptcy Code also has a “turnover” provision which requires those in possession of property of the bankruptcy estate to “deliver to the trustee, and account for” that property.

The Supreme 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, “[t]aken together, 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.”

However, the Court, conceded it did not “maintain that these terms definitively rule out” an alternative interpretation. According to the Court, “[a]ny ambiguity in the text of [the automatic stay provision] is resolved decidedly in the City’s favor” by the turnover provision. First, reading “any act . . . to exercise control” in the automatic stay provision “to include merely retaining possession of a debtor’s property would make that section a blanket turnover provision,” rendering the turnover provision “largely superfluous.” Second, the turnover provision includes exceptions that the automatic stay provision doesn’t include. “Under respondents’ reading, in cases where those exceptions to turnover . . .  would apply, [the automatic stay provision] would command turnover all the same.”

According to Justice Sotomayor, in a concurring opinion, “the City’s policy of refusing to return impounded vehicles satisfies the letter of the Code, it hardly comports with its spirit.” Justice Sotomayor opined that the City may have violated a number of other provisions of the Bankruptcy Code, including the turnover provision.

The SLLC amicus brief argued for the rule the Supreme Court adopted. According to the brief, “[t]his rule protects the efficacy of traffic and parking regulations, as well as avoiding perverse incentives for owners of impounded vehicles to file bankruptcy petitions.” The SLLC brief also pointed out that “construing the automatic stay as requiring the immediate release of assets would undermine the government’s ability to enforce tax, licensing, and regulatory laws.”

Scott Burnett Smith, Alexandra E. Dugan, and Stephen C. Parsley Bradley of Arant Boult Cummings LLP wrote the SLLC amicus brief which the following organizations joined:  National Association of Counties, National League of Cities, U.S. Conference of Mayors, International City/County Management Association, International Municipal Lawyers Association, and Government Finance Officers Association.