On January 15, 2021, the Supreme Court unanimously ruled in City of Chicago v. Fulton that a secured party in possession of a debtor’s collateral does not violate the automatic stay by passively retaining possession after a debtor commences a bankruptcy case. When a debtor files a bankruptcy case, the Bankruptcy Code protects the debtor by imposing an automatic stay on efforts to collect prepetition debts or “any act . . . to exercise control over property” of the bankruptcy estate.

In City of Chicago, the City of Chicago had impounded defendant Fulton’s car based on outstanding motor vehicle fines. When Fulton filed a Chapter 13 bankruptcy petition, Fulton asked the city to return his car.  When the  city refused, the bankruptcy court held that the city’s refusal violated the automatic stay because “by retaining possession of the debtors’ vehicles after they declared bankruptcy,” the city had acted “to exercise control over” Fulton’s property in violation of the automatic stay, and the Seventh Circuit affirmed.

The Supreme Court reversed and held that the City of Chicago did not violate the automatic stay by refusing to return Fulton’s impounded car, holding that the passive post-petition retention of collateral held as a result of a prepetition seizure does not violate the automatic stay. The Supreme Court ruled that the automatic stay only “prohibits affirmative acts that would disturb the status quo of estate property.”

Although City of Chicago is important for secured creditors because it removes the threat of sanctions for violating the automatic stay, it’s not complete immunity. City of Chicago did not address a debtor’s ability to seek a turnover order under section 542 of the Bankruptcy Code. Under that section, a debtor may be able to compel a creditor in possession of collateral to return it to the debtor. But turnover actions are fact-specific and depend on the nature of the claims alleged by the debtor and counterclaims of the creditor. Thus, while it remains to be seen whether debtors will be able to use turnover actions to recover repossessed collateral, it is clear that the debtor’s threat of seeking sanctions for post-petition possession of collateral is gone.

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Stephen Selbst

Stephen Selbst is the co-chair of Herrick’s Restructuring & Finance Litigation Group. He has more than 30 years of experience representing debtors, creditors, official committees, distressed investors and asset purchasers in bankruptcies and out-of-court restructurings. Stephen advises clients from a wide range of…

Stephen Selbst is the co-chair of Herrick’s Restructuring & Finance Litigation Group. He has more than 30 years of experience representing debtors, creditors, official committees, distressed investors and asset purchasers in bankruptcies and out-of-court restructurings. Stephen advises clients from a wide range of industries, including financial services, telecommunications, government agencies and real estate. A skilled commercial litigator, Stephen also has significant experience in district and state courts, where he regularly represents clients in separate litigation arising out of bankruptcy.  He also advises clients on structured finance and derivative transactions.

He is a frequent lecturer on bankruptcy and restructuring topics and has published articles and book chapters on bankruptcy-related topics. He has been frequently quoted in newspaper articles on insolvency related topics and has appeared on CNBC.

Gabrielle Fromer

Gabrielle Fromer is a litigation associate in Herrick’s Restructuring & Finance Litigation Group, where she focuses her practice on bankruptcy and financial restructuring, complex commercial litigation, real estate disputes, and white collar criminal defense and investigations.

Gabrielle has done substantial pro bono work…

Gabrielle Fromer is a litigation associate in Herrick’s Restructuring & Finance Litigation Group, where she focuses her practice on bankruptcy and financial restructuring, complex commercial litigation, real estate disputes, and white collar criminal defense and investigations.

Gabrielle has done substantial pro bono work and helped to bring The Door’s Special Immigrant Juvenile Status Project to Herrick, assisting undocumented youth achieve this status in Family Court and later petition U.S. Customs and Immigration. Additionally, Gabrielle is an active contributor to the City Bar Justice Center’s COVID-19 Small Business Legal Clinic, advising small business owners on real estate and bankruptcy related issues.

Prior to joining Herrick, Gabrielle worked as an Assistant District Attorney in the Trial Division of the Bronx County District Attorney’s Office where she conducted misdemeanor trials and presented felony matters to the grand jury.

While attending law school, Gabrielle served as the Senior Symposium Editor of the Georgetown Journal of Gender and the Law, and worked as a student defense attorney through Georgetown’s Criminal Justice Clinic. As a law student, Gabrielle held internships with the New York County District Attorney’s Office and the Department of Justice. Additionally, Gabrielle summered as a judicial intern for U.S. Magistrate Judge Kevin Nathaniel Fox of the U.S. District Court for the Southern District of New York.