Supreme Court Rules Creditor’s Retention of Debtor’s Assets Does Not Violate ‘Automatic Stay’ | Harris Beach LLC

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[co-author: William Wolfe]

The United States Supreme Court recently rendered a decision regarding the scope of the “automatic stay” codified in Section 362 of the Bankruptcy Code. As a reminder, the filing of a bankruptcy petition immediately and automatically entails the suspension of all actions and procedures aimed at recovering a claim against the debtor and his property. One of the main purposes of the automatic stay is to maintain the status quo during the debtor’s bankruptcy proceedings. The Automatic Suspension Act is broadly drafted and has been interpreted by the courts as such.

For years, bankruptcy courts were divided on whether a creditor, who had repossessed a debtor’s property before filing for bankruptcy but had not yet sold it, had a positive obligation to return the well once the bankruptcy petition has been filed. A majority of courts, including the Second Circuit (which encompasses New York’s four federal judicial districts), have held that the automatic stay requires the immediate return of the debtor’s assets to the debtor. Other circuits, however, have taken a narrow approach and argued that withholding a debtor’s assets maintains the status quo, is not an affirmative act, and does not violate the automatic stay. In these circuits, debtors seeking restitution of their assets must file a petition for rotation with the court, and creditors can then request that rotation be conditional on the debtor accepting “adequate protection” payments.

On January 14, 2021, at City of Chicago vs. Fulton, No. 19-357, 2021 US LEXIS 496, 2021 WL 125106, the Supreme Court adopted the narrower reading of Section 362 and ruled that the automatic stay provision does not require any affirmative action by creditors to deliver property to the debtor. Creditors are advised that they must always obtain a stay before proceeding with any sale of the debtor’s property. The reprieve may be obtained by petition or by stipulation. Creditors who receive rollover motions should consider seeking legal advice to assess options, including finding adequate protection payments.

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