The Supreme Court has ruled that debtors aren’t entitled to have impounded property immediately returned to them as soon as they declare bankruptcy.
When a debtor files a petition for bankruptcy, the U.S. Bankruptcy Code protects the debtor’s interests by imposing an automatic stay “applicable to all entities” on efforts to collect pre-petition debts outside the bankruptcy proceeding. Efforts to exercise control over the property of the bankruptcy estate are forbidden.
“The question in this case is whether an entity violates that prohibition by retaining possession of a debtor’s property after a bankruptcy petition is filed. We hold that mere retention of property does not violate section 362 of the code,” Alito writes.
The case comes out of four bankruptcy proceedings. Robbin Fulton and three other people failed to pay fines levied against them for motor vehicle infractions and Chicago seized their vehicles. They declared bankruptcy, expecting their vehicles would be returned, but Chicago refused to do so.
A bankruptcy court found Chicago’s refusal violated the bankruptcy law, and that ruling was upheld by the U.S. Court of Appeals for the 7th Circuit, which found the city had acted “to exercise control over” respondents’ property in violation of the law.
A spokesperson from the City of Chicago’s Law Department said in a statement the city was “very pleased” with the ruling.
“This decision allows the City to continue to work to reform enforcement and collections procedures, while preventing abuse of the law. The use of bankruptcy to avoid City debt often set off a vicious cycle that left both the City and debtors worse off than before. This ruling ensures that there will be fewer unnecessary Chapter 13 bankruptcies, particularly fraudulent filings, by confirming that all creditors’ interests are protected when a debtor files bankruptcy,” the spokesperson said.
“The City looks forward to continuing to work with those in a difficult financial position, especially with the Fresh Start program and City payment plans. The Fresh Start program is truly that, allowing those who owe debt to the City to work directly with the City to actually get free of that debt.”
Eugene R. Wedoff, counsel of record for Fulton, told The Epoch Times via email that there was a silver lining to the Supreme Court’s ruling.
In one of the bankruptcy cases before the court, that of Timothy Shannon, “the bankruptcy court found that the City’s retention of the debtor’s car also violated two other provisions of the automatic stay,” Wedoff said.
“The City argued against this ruling of the bankruptcy court, but the Seventh Circuit did not decide that aspect of the case, so it is still an open issue,” he said.
The American Civil Liberties Union of Illinois, which filed a friend-of-the-court brief in the case, wasn’t pleased with the ruling.
“The Supreme Court’s decision in the Fulton v. Chicago case is a real disappointment and fails to recognize that states and cities, including Chicago, are crushing residents with exorbitant fines and fees in order to balance the budgets,” Nusrat Choudhury, the group’s legal director, said in a statement.
“Chicago’s reliance on fines and fees buries people under mountains of debt, drives them to bankruptcy, and then keeps people from the vehicles needed to work their way out.”
