Chicago v. Fulton

The City of Chicago impounded vehicles belonging to debtors who subsequently filed for Chapter 13 bankruptcy. The debtors argued the city violated the automatic stay under 11 U.S.C. § 362(a)(3) by refusing to return the vehicles after the petitions were filed. The U.S. Court of Appeals for the Seventh Circuit ruled that the city's retention of the vehicles constituted an exercise of control over estate property, thus violating the automatic stay. The Supreme Court granted certiorari to resolve a circuit split on whether passive retention of property post-petition violates the stay. The Court ultimately held that merely retaining a debtor's property after the bankruptcy filing does not constitute an "act to exercise control" under Section 362(a)(3), reversing the Seventh Circuit and remanding the case.

The U.S. Supreme Court unanimously (8-0) reversed the Seventh Circuit, holding that mere retention of property does not violate the automatic stay; the creditor's passive possession is not an "act to exercise control" under § 362(a)(3). The case was remanded.

Whether a creditor violates the automatic stay under 11 U.S.C. § 362(a)(3) by passively retaining possession of a debtor's property after the filing of a bankruptcy petition, without taking any affirmative action to exercise control over the property.

The decision clarified the boundaries of the automatic stay, alleviating concerns among creditors about immediate turnover obligations upon a bankruptcy filing. It confirmed that debtors must use the turnover action under Section 542 to recover property, promoting certainty in bankruptcy practice and reducing the burden on secured creditors and municipal entities.