Last week, the United States Supreme Court held that the City of Chicago did not violate the automatic stay provision of the Bankruptcy Code when the City refused to return impounded vehicles to debtors. City of Chicago v. Fulton

Under the Bankruptcy Code, when a debtor files a bankruptcy petition, that action creates an automatic stay that prohibits “any act to obtain possession of property of the [debtor’s] estate or to exercise control over” the debtor’s property. This provision is intended to protect the debtor’s assets and halts all collection activity while the bankruptcy proceeding moves forward.

Like many other municipalities, the City of Chicago impounds vehicles for failure to pay fines for motor vehicle infractions. After a number of individuals’ cars were impounded and they filed for bankruptcy, they filed suit against the City, arguing that the automatic stay provision required the City to return their cars. In each case, the bankruptcy court held that the City’s refusal violated the automatic stay provision. The Court of Appeals affirmed all of the judgments in a consolidated opinion. The City then appealed to the U.S. Supreme Court.

The U.S. Supreme Court held that the City did not violate the automatic stay provision by retaining possession of the debtor’s vehicles. The Court reasoned that “to exercise” under the Code means to “bring into play” or take an affirmative action. Because the City merely retained possession of the vehicles and did not change the status quo of possession of the property, the Court found that the City’s actions did not amount to an “exercise of power” over the vehicles within the meaning of the automatic stay provision of the Bankruptcy Code. As a result, the Court held that the City of Chicago’s mere retention of debtors’ impounded vehicles did not violate the automatic stay provision of the Bankruptcy Code.

Post authored by Rain Montero & Julie Tappendorf, Ancel Glink