Impound Isn’t in the Wrong, High Court Says, When Debtors Go Bankrupt

The U.S. Supreme Court. (Courthouse News photo/Jack Rodgers)

WASHINGTON (CN) — Debtors are not entitled to immediately reunite with their impounded property once they declare bankruptcy, the U.S. Supreme Court ruled Thursday. 

The 8-0 decision settles four separate bankruptcy cases where Robbin Fulton and others saw their vehicles were impounded by the city of Chicago, refused to pay the fines and then declared bankruptcy.

Section 362 of the U.S. Bankruptcy Code prohibits collection activity against those who claim to be indigent, but the Supreme Court ruled Thursday that the mere retention of a debtor’s property once bankruptcy proceedings are underway does not violate the law.

Justice Samuel Alito wrote the lead opinion Thursday, saying how “any ambiguity in the text of §362(a)(3) is resolved decidedly in the city’s favor by the existence of a separate provision, §542, that expressly governs the turnover of estate property.”

“Titled ‘Turnover of property to the estate,’ §542 provides, with just a few exceptions, that an entity (other than a custodian) in possession of property of the bankruptcy estate ‘shall deliver to the trustee, and account for’ that property,” according to the ruling.

Alito also wrote that lawmakers could have included a turnover obligation specifically into the code if that is what they had intended. 

“Had Congress wanted to make Section 362(a)(3) an enforcement arm of sorts for Section 542(a), the least one would expect would be a cross-reference to the latter provision, but Congress did not include such a cross-reference or provide any other indication that it was transforming Section 362(a)(3),” Alito wrote. 

Justice Sonia Sotomayor wrote a concurring opinion to emphasize that the court is yet to address how the bankruptcy judges should go about sticking to a creditor’s other obligations to deliver estate property.

“Regardless of whether the city’s policy of refusing to return impounded vehicles satisfies the letter of the code, it hardly comports with its spirit,” she wrote, adding that, “for a Chapter 13 bankruptcy to succeed … the debtor must continue earning an income so he can pay his creditors.”

Sotomayor wrote that car ownership is usually essential in maintaining employment. Such was the case for George Peake, one of the debtors behind the case in Chicago.

Before the city seized it, Peake’s 2007 Lincoln MKZ took him 45 miles each day to and from his employment. He filed for bankruptcy when that car was impounded with $4,300 in red-light tickets and other fees, but the court wouldn’t return his property unless he paid $1,250 upfront. 

“By denying Peake access to the vehicle he needed to commute to work, the City jeopardized Peake’s ability to make payments to all his creditors, the City included,” Sotomayor wrote. “Surely, Peake’s vehicle would have been more valuable in the hands of its owner than parked in the City’s impound lot.” 

Justice Amy Coney Barrett did not take part in the court’s consideration or decision of the case, which was argued on Oct. 13.

Eugene Wedoff, an attorney who represents Peake and other individuals with impounded vehicles, declined to comment Thursday on the court’s decision.

Chicago’s Law Department released a statement meanwhile that cheers Thursday’s decision as one that that will help prevent fraudulent filings while also protecting creditors’ interests. It notes that the use of bankruptcy to prevent collections is “a vicious cycle,” harming both parties.

“The city looks forward to continuing to work with those in a difficult financial position, especially with the Fresh Start program and city payment plans,” Chicago’s statement continues. “The Fresh Start program is truly that, allowing those who owe debt to the city to work directly with the city to actually get free of that debt. We are also pleased to recognize the contribution of Craig Goldblatt and other attorneys at WilmerHale, who represented the city pro bono.”

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