Winter 2003-10 Attached goods must be returned to debtor in bankruptcy

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Number 50
Winter 2003

Attached goods must be returned to debtor in bankruptcy

An attaching creditor must return attached goods in the event of bankruptcy. Otherwise the creditor would be in breach of the automatic stay of actions against property of the estate, that comes into play upon the filing of the bankruptcy petition. Reliable Equipment Corp. v. Turabo Motors Co. (In re: Turabo Motors Co.), 2002 Bankr. LEXIS 1278 (Bkrcy. App. 1st Cir).

Bad check

Turabo Motors Co. had purchased some electric cars from Reliable Equipment Corp., with the intention of distributing them in Puerto Rico. The check delivered as payment was returned unpaid for lack of sufficient funds, which prompted Reliable to commence collection proceedings in local court. Judgment was entered for Reliable, who seized the vehicles in question. Turabo filed for protection of Chapter 11 of the Bankruptcy Code.

Annulment

Upon motion by Turabo, the local court annulled the attachment due to the fact that the cars were under the possession of Reliable, instead of that of the custodian appointed for such purpose. The judge then reversed himself at the request of Turabo, and reinstated the attachment order.

Automatic stay

Turabo then asked the Bankruptcy Court to order the return of the cars and to find that Reliable had breached the automatic stay. The Bankruptcy Code requires that custodians of property return it to the debtor.

The Code also forbids that creditors take (or continue taking) any action with respect to the same. On the other hand, the creditor may request from the Bankruptcy Court that it be adequately protected for the loss of the attachment. Such adequate protection may take many forms (like a substitute lien, for example). Reliable did so the day after the court found it to be in violation of the automatic stay. Reliable conditioned the surrender of the vehicles to the granting of such protection.

Bankruptcy Appellate Panel

The Bankruptcy Appellate Panel for the First Circuit described the automatic stay as giving debtors "breathing room" from the pressures of their creditors-"one of the fundamental protections under federal bankruptcy law." "Section 362(a)(3) expressly prohibits any post-petition actions by creditors 'to obtain possession of property of the estate or of property from the estate or to exercise control over property of the estate.'"

While acknowledging that courts are divided on whether a creditor's post-petition retention of estate property that was lawfully seized pre-petition constitutes a violation of the automatic stay provision, the panel said that it had before sided with those who maintained that it does, and saw no reason to change said posture at this time. "By withholding possession of the assets until Turabo agreed to tender adequate protection, Reliable exercised control over Turabo's assets and over Turabo's right to possess those assets. This exercise of control violated § 362(a)(3). Therefore, the Bankruptcy Court acted well within its discretion in finding that Reliable had violated the automatic stay."


© 2003 Goldman Antonetti