In a case with significant implications for the practices of the lending industry, the Supreme Court unanimously ruled in early 2021 that a secured creditor that lawfully repossesses collateral does not have an affirmative obligation under the Bankruptcy Code’s automatic stay provisions of 11 U.S.C. §362(a)(3) to return that property to the debtor or trustee immediately upon the filing of a subsequent bankruptcy petition.¹This ruling appears to relieve creditors of an affirmative obligation to return repossessed property to the estate and shifts the burden to the debtor or trustee to initiate proceedings with the bankruptcy court to compel a turnover of the property.

Circuit SplitSection 362(a)(3) of the Bankruptcy Code provides that a bankruptcy filing “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.” 11U.S.C.§362(a)(3). Because the language of section 362(a)(3) is unclear whether the mere retention of estate property constitutes an “act to . . . exercise control over property of the estate,” a circuit split developed.On the one hand, in several circuits, including the Ninth Circuit prior to Fulton, the “knowing retention” of estate property violates the automatic stay.

The Supreme Court of the United States has resolved a split in the circuits as to whether an entity that is passively retaining possession of property in which a bankruptcy estate has an interest has an affirmative obligation under the Bankruptcy Code’s automatic stay, 11 U.S.C § 362, to return that property to the debtor or trustee immediately upon the filing of the bankruptcy petition. The case, City of Chicago v. Fulton, No. 19-357, resolves this split in favor of the creditor.

In ShortThe Situation: Circuit courts were split on whether mere retention by a creditor of estate property violates the Bankruptcy Code's automatic stay, under 11 U.S.C. § 362(a)(3). The U.S. Supreme Court considered the question in City of Chicago v. Fulton, in which the City of Chicago had refused to return debtors' vehicles after they filed Chapter 13 bankruptcy petitions.

The Third Circuit has recently held in In re Denby-Peterson, 941 F.3d 115 (3rd Cir. 2019) that creditors who refuse to relinquish an item that was seized pre-petition are not subject to sanctions because their refusal does not violate 11 U.S.C. § 362’s automatic stay. The case further deepens a circuit split on the issue.

On July 6, 2022, the Court of Appeals for the Second Circuit (the Circuit Court), in analyzing an issue of first impression, entered a decision clarifying the expansive applicability of the automatic stay provision of the Bankruptcy Code. In Bayview Loan Servicing LLC v. Fogarty (In re Fogarty), No. 20-2187, 2022 U.S. App. LEXIS 18515 (2d Cir. July 6, 2022), the Circuit Court was tasked with determining whether the automatic stay provision of Bankruptcy Code section 362(a) was violated by the foreclosure sale of real property when the debtor was a named defendant in the underlying foreclosure proceedings, even if the debtor’s direct interest in the property was merely possessory. In affirming the decision of the District Court for the Eastern District of New York (the District Court), which reversed an earlier decision of the Bankruptcy Court for the Eastern District of New York (the Bankruptcy Court), the Circuit Court held that the foreclosure sale was a willful violation of the automatic stay.Factual Background and Procedural HistoryEileen Fogarty (the Debtor) held a 99% interest in 72 Grandview LLC (Grandview), which was the sole owner of residential real property located in Shirley, New York (the Property), which was also Debtor’s primary residence.

The court therefore held that the motion was moot.The scenario raises a couple of issues:First, was the Court correct? Specifically, is it accurate that the stay no longer applies to property that has been exempted and as to which the objection period for exemptions has expired?As a broader analysis, what effect, if any, does a conversion of a case from one chapter to another have on this analysis?Applicability of Stay to Exempted PropertyThe Court’s ruling that the automatic stay no longer applies to exempted property is likely grounded in 11 U.S.C. §362(c)(1), which states that:The stay of an act against property of the estate under subsection (a) of this section continues until such property is no longer property of the estate;As we saw above, once exempted, property vests in the debtor and is thereby no longer property of the estate. But is that the end of the story.

One such exemption is a proceeding by a governmental entity to enforce its regulatory or police power. It is widely accepted that such proceedings to benefit the governmental entity may continue, but what if the final benefit rests with a private citizen?The filing of a petition for bankruptcy operates as a stay of most types of collection and legal proceedings. See 11 USC § 362(a). There are multiple exemptions to this automatic stay requirement, especially when it comes to the activities of the government.

You call the police, file a police report and hope the police will recover the equipment so your collateral remains intact. A few weeks later, the chapter 11 debtor files an action against you for willful violation of the automatic stay and requests sanctions again you under 11 U.S.C. 362(k)(1)! Will you have to pay sanctions?

Decided: July 1, 2015The Fourth Circuit vacated the judgment awarded by the district court, reversed its order dismissing the plaintiff’s claims against the Substitute Trustee, and remanded for further proceedings. This appeal stemmed from the district court’s grant of defendant’s motion to dismiss concluding that Houck failed to allege facts that plausibly supported her claim that the violation of the automatic stay was willful, a required element of a 11 U.S.C. § 362(k) claim. Houck was deeded land in North Carolina, and Houck and her fiancé, Ricky Penley placed a mobile home on the property after receiving financing from a predecessor of LifeStore Bank.