The NCSL Blog

13

By Lisa Soronen 

The U.S. Supreme Court will decide in City of Chicago, Illinois v. Fulton whether a local government must return a vehicle impounded because of code violations immediately upon a debtor filing for bankruptcy. 

booted cars; credit: Wikimedia CommonsChicago impounds vehicles whose owners have three or more unpaid fines. Robbin Fulton’s vehicle was impounded for this reason. She filed for bankruptcy and asked the city to turn over her vehicle; it refused. 

Fulton claims the bankruptcy code’s “automatic stay” provision requires the city to immediately return her vehicle even though she didn’t pay her outstanding tickets. The 7th Circuit agreed. 

The “automatic stay” provision of the bankruptcy code provides that a bankruptcy petition “operates as a stay, applicable to all entities, of … any act to obtain possession of property of the estate or of property from the estate or to exercise control over property of the estate.”  

In a previous case decided in 2009, Thompson v. General Motors Acceptance Corp., the 7th Circuit concluded that “exercise control” includes holding onto an asset and that “exercise control” isn’t limited to “selling or otherwise destroying the asset.” So, the court reasoned in this case, Chicago “exercised control” over Fulton’s car in violation of the automatic stay by not returning it after she filed the bankruptcy petition. 

The 7th Circuit next concluded that the bankruptcy stay becomes effective immediately upon filing the petition, without the debtor bringing a “turnover action.” Another section of the bankruptcy code requires the creditor to request “adequate protection” of its interest in property subject to a bankruptcy petition.

According to the 7th Circuit in Thompson: “[I]f a creditor is allowed to retain possession, then this burden is rendered meaningless—a creditor has no incentive to seek protection of an asset of which it already has possession.” 

Chicago asked the 7th Circuit to overturn Thompson but the court refused. The lower court also rejected Chicago’s argument that two exceptions to the automatic stay provision apply in this case. 

The International Municipal Lawyers Association submitted a certiorari stage amicus brief pointing out that municipalities impound thousands of vehicles a year for code violations. The brief also notes that at least two states, Texas and Pennsylvania, have adopted statewide regulatory schemes allowing this practice.

According to the brief, remarkably, “a 2013 investigation by the Chicago Tribune found that hundreds of owners of impounded vehicles had turned to a single scam artist to file fraudulent bankruptcy petitions in order to receive their vehicles without paying an impoundment fee.”

Lisa Soronen is executive director of the State and Local Legal Center and a regular contributor to the NCSL Blog on judicial issues.

Actions: E-mail | Permalink |

Subscribe to the NCSL Blog

Click on the RSS feed at left to add the NCSL Blog to your favorite RSS reader. 

About the NCSL Blog

This blog offers updates on the National Conference of State Legislatures' research and training, the latest on federalism and the state legislative institution, and posts about state legislators and legislative staff. The blog is edited by NCSL staff and written primarily by NCSL's experts on public policy and the state legislative institution.