DOES THE CREDITOR'S MERE RETENTION OF A DEBTOR'S ESTATE PROPERTY VIOLATE THE AUTOMATIC STAY?

This is a very important question that many bankruptcy practitioners have grappled with at some point in their career. Essentially, the question is asking whether the automatic stay §362(a)(3) is violated when a creditor merely retains the debtor's estate property after the bankruptcy petition is filed.

First, you need to understand the mechanics behind the creation of a debtor's bankruptcy estate. You look to §541(a) of the bankruptcy code, and it tells us that once the bankruptcy petition is filed with the bankruptcy Court an estate of the Debtor is created. The details behind what comprises an estate property, aside from a few exceptions are listed in that bankruptcy code.

Secondly, you look to §362(a)(3) , which states in relevant part that once a bankruptcy petition is filed it "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 the property of the estate". (Emphasis added)

Finally, §542 of the bankruptcy code provides for the turnover of property to the estate, including stated exceptions to the turnover provision. Which now brings us to the question at hand. Does the mere retention of the debtor's estate property after a bankruptcy petition has been filed violate the automatic stay provision of §362(a)(3)?

The Supreme Court answered that question on January 14, 2021 in a slip; opinion cited as City of Chicago, Illinois v. Fulton Et Al. 592 U.S._____(2021). The Court is essence, in its unanimous opinion, focused on the statutory construction, as well as the interplay between §362(a)(3) and §542(a) to answer the question. However, the Court left unanswered, the question of how to reconcile with how the creditor turnoff obligation of §542 operates. The Court stated that "(t)he better account of the two provisions is that §362(a)(3) prohibits collection efforts outside the bankruptcy proceeding that would change the status quo, while §542(a) works within the bankruptcy process to draw far flung estate back into the hands of the debtor or trustee". See page 5 The status quo that the Court is referring to is for example, continued collection efforts on the debtor after the bankruptcy petition was filed, or an attempt to place a judgment lien on the debtor's estate property after the bankruptcy petition was filed. However, having possession of the debtor's property estate prior to the filing of the bankruptcy petition is the distinction that the Court is drawing.

Thus, the Court held that by a creditor merely retaining the debtor's estate property after the filing of a bankruptcy petition in and of itself, does not violate the automatic stay provision of §362(a)(3) of the bankruptcy code. The Debtor would still have §542 at their disposal to pursue obtaining their estate property back from the creditor.