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A secured lender’s “mere retention of property [after a pre-bankruptcy–repossession] does not violate” the automatic stay provision [§362(a)(3)] of the Bankruptcy Code (Code), held a unanimous U.S. Supreme Court on Jan. 14, 2021. City of Chicago v. Fulton, 141 S. Ct. 585, 589 (Jan. 14, 2021). Reversing the Seventh Circuit’s affirmance of a bankruptcy court judgment holding a secured lender in contempt for violating the automatic stay, the Court resolved “a split” in the Circuits. Id. The Second, Eighth and Ninth Circuits had agreed with the Seventh Circuit. See, e.g., In re Weber, 719 F.3d 72, 79 (2d Cir. 2013) (by retaining possession of collateral, lender “was ‘exercising control’ over” debtor’s property). But the Third, D.C., and Tenth Circuits, had reached the right result in other cases. In re Denby-Peterson, 941 F.3d 115 (3d Cir. 2019) (secured creditor has no “affirmative obligation under the automatic stay to return a debtor’s [repossessed] collateral” to estate “immediately upon notice” of debtor’s bankruptcy filing); In re Cowen, 849 F.3d 943, 950 (10th Cir. 2017) (only “affirmative acts” to take “possession of, or to exercise control over” debtor’s property “violate” automatic stay); United States v. Inslaw, Inc., 932 F.2d 1467, 1474 C.D.C. Cir. 1991) (“Nowhere in [Code §362(a)] is there a hint that it creates an affirmative duty ….”). As shown below, the Supreme Court effectively held that the Code’s automatic stay provides no automatic turnover of a lender’s collateral. The Code’s turnover provision (§542) is also not automatic.
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By Steven B. Smith and Silvia Stockman
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Obtaining Administrative Claim Status When Doing Business With a Debtor
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By Rudolph J. Di Massa Jr. and Drew S. McGehrin
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Appellate Court Finds Plaintiffs’ Claims Under Section 362 Not Automatically Stayed
By Rudolph J. Di Massa Jr. and Malcolm Bates
Parties holding potential claims against non-debtor third parties that are arguably “related to” the bankruptcy estate must weigh the risks and benefits of actively prosecuting such claims. The mere fact that a bankruptcy trustee could pursue such claims as property of the bankruptcy estate under Section 541 of the Bankruptcy Code will not be enough to argue that such claims are conclusively barred by the automatic stay.
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