City of Chicago, Illinois v. Fulton,  926 F.3d 916  (7th Cir 2019)

Issue:   Does the City of Chicago violate the automatic stay when it continues to “hold” a debtor’s vehicle after the filing of a chapter 13 petition?

Holding:   Yes.

According to the 7th Circuit, “In this consolidated appeal of four Chapter 13 bankruptcies, we consider whether the City of Chicago may ignore the Bankruptcy Code’s automatic stay and continue to hold a debtor’s vehicle until the debtor pays her outstanding parking tickets.”  A previous 7th Circuit case called Thompson required turnover on these same basic facts and the 7th Circuit refused to overturn it.  The Thompson case ruled that holding onto an asset is exercising control which is an “act” which violates the stay.  It held that turnover is compulsory “under a plain reading of §§ 363(e) and 542(a) and the Supreme Court’s decision in Whiting Pools.”  363(e) requires the court to “prohibit or condition such use . . . [of property of the estate] as is necessary to provide adequate protection of such interest” (meaning turnover is required?).    542(a) says “a creditor in possession of property of the estate ‘shall deliver [it] to the trustee.'”

The City argued that it needed to retain possession “to prevent the loss or destruction of the vehicles” but it apparently offered no evidence that giving the vehicle back would result in loss or destruction.  Further it could and should “seek protection on an expedited basis” under 363(e).  The City argued that it had a lien perfected by possession and that § 362(b)(3) excepted it from compliance, i.e., the stay does not apply to acts “to continue the perfection of” its lien.  The court responded that there are other ways to perfect liens and in any event, “the City’s possessory lien is not destroyed by its involuntary loss of possession due to forced compliance with the Bankruptcy Code’s automatic stay.”  The City also argued that this is an act to enforce its “police or regulatory power.”  The court chided the City saying this is “an exercise of “revenue collection” rather than police power.

The court concluded, “the City needs to satisfy the debts owed to it through the bankruptcy process, as do all other creditors.”

Note:  The court says that this ruling is in line with the 9th Circuit in California Employment Development Department v. Taxel 98 F.3d 1147 (9th Cir. 1996).

The City argued to the Supreme Court that this ruling ignores its ruling in Citizens Bank of Maryland v. Strumpf, 516 U.S. 16 (1995)(bank may put a “temporary” administrative freeze on the debtor’s bank account upon learning of the bankruptcy filing without violating the automatic stay under Section 362(a)).  But this case is not discussed anywhere in the 7th Circuit opinion.