The Automatic Stay: Supreme Court Finds that Retaining Debtors’ Property, Despite Turnover Demands, is Not a Stay Violation

Mintz - Bankruptcy & Restructuring Viewpoints
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Mintz - Bankruptcy & Restructuring Viewpoints

If a creditor is holding property of a party that files bankruptcy, is it “exercising control over” such property (and violating the automatic stay) by refusing the debtor’s turnover demands? According to the Supreme Court, the answer is no – instead, the stay under Section 362(a)(3) of the Bankruptcy Code only applies to affirmative acts that disturb the status quo as of the filing date. In other words, the mere retention of property of a debtor after the filing of a bankruptcy case does not violate the automatic stay.

In Chicago v. Fulton, the Supreme Court considered whether the City of Chicago had violated the automatic stay by refusing to return impounded cars to Chapter 13 debtors. The debtors asserted, and all lower courts agreed, that the City’s refusals violated Section 362(a)(2)’s prohibition 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.” (emphasis added). The Supreme Court disagreed in a decision issued on January 14, 2021.

The Court, examining the plain language of Section 362(a)(2), noted that the most natural reading of the terms “stay,” “act,” and “exercise control” indicated that only affirmative acts that disturb the status quo were prohibited. The coup de grâce for the debtors’ argument, however, was that a separate section, Section 542, governs turnover of estate property. Adopting the debtors’ reading of Section 362(a)(2) would render Section 542 largely superfluous – an outcome courts should always avoid when interpreting statutory text. Moreover, the debtors’ interpretation of Section 362(a)(2) contradicted Section 542, which includes exceptions to turnover that Section 362(a)(2) does not recognize. As a result, the Court ruled that Section 362(a)(2) was inapplicable, and no stay violation occurred, when a creditor merely retained estate property after the filing of a bankruptcy case. It’s worth noting, though, that this decision does not mean a creditor can retain estate property indefinitely; a debtor may pursue recovery under Section 542.

[View source.]

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