In creating the Bankruptcy Code, Congress sought to grant certain powers and protections to the debtor-in-possession (DIP). Of particular importance was the power to maintain control over "property of the estate." Property of the estate, therefore, has an expansive definition that allows a DIP to retain an interest even in repossessed property.

Thus, Congress created the automatic stay, avoidance actions and the procedural vehicle for recovery of property known as turnover. Turnover is referred to as a procedural tool because a close examination of its purpose and nature suggests that it is not a separate cause of action or remedy, but a procedure for enforcing a DIP's rights, similar to the automatic stay.

Though a controversial concept, a thorough analysis of §542(a) is relevant due to the trend in creating liquidating trusts. Liquidating trusts commonly bring post-confirmation turnover actions, which could have been brought prior to confirmation. However, as stated below, the language of 11 U.S.C. §542(a) evidences the impropriety of post-confirmation turnover actions.

Section 542 and Turnover as a Procedural Tool

Pursuant to §542(a) of the Code, "an entity, other than a custodian, in possession, custody or control during the case, of property that the trustee may use, sell or lease under §363 of this title...shall deliver to the trustee, and account for, such property or the value of such property..." 11 U.S.C. §542(a) (emphasis added). Though the legislative history of §542(a) is sparse, it is apparent that Congress intended to create a means by which a DIP could recover property in furtherance of an effective reorganization, when such property is due "without dispute" and is "fully matured and payable on demand." See Charter Crude Oil Co. v. Exxon Co. U.S.A. (In re Charter Co.), 913 F.2d 1575, 1579 (11th Cir. 1990).

While Congress intended to create a unique power to further maintain dominance over estate property, §542(a) is not a cause of action such as the avoidance actions found in §§547 and 548. See In re Petro-wax P.A. Inc., 200 B.R. 538, 540 (Bankr. D. Del. 1996). Nor is §542 governed by 11 U.S.C. §546, which addresses the limitations on avoidance powers. Though the exclusion of §542 from §546 might appear to broaden §542(a)'s reach, it actually limits it.

Specifically, §542(a) expressly limits a DIP's turnover power to property of the bankruptcy estate, title to which is not disputed, and temporally to "during the case," and then only to the extent the DIP "may use, sell or lease [the property] under §363." See Charter, 913 F.2d at 1579; 11 U.S.C. §542(a). In addition to the express limitations of §542(a)'s applicability, other limitations exist.

The Applicability of §542(a) to Disputed Debts

As stated above, Congress sought to give DIPs broad powers to maintain domination and control over estate property. However, Congress did not seek to make a DIP omnipotent. Although §542(a) provides a means for turnover of property of the bankruptcy estate where no other cause of action exists, "[t]urnover proceedings are not to be used to liquidate disputed contract claims...Congress intended to ease reorganization by allowing the debtor to obtain funds immediately necessary for survival—not all funds, only those not in dispute." Charter, 913 F2d at 1579. Where a claim is "neither liquidated nor undisputed," a trustee has not asserted a proper turnover claim. Trefny v. Bear Stearns Secs. Corp., 243 B.R. 300, 320 (S.D. Tex. 1999). Thus, no turnover action exists when a bona fide dispute exists as to existence, magnitude or identity of the res to be turned over. Acolyte Elec. Corp. v. New York, 69 B.R. 155, 171 (Bankr. E.D.N.Y. 1986); see, also, In re Ven-Mar Int'l. Inc., 166 B.R. 191, 192-93 (Bankr. S.D. Fla. 1994) (holding that a turnover action was inappropriate when ownership of property to be recovered is disputed); Venn v. Kinjite Motors Inc. (In re WMR Enters. Inc.), 163 B.R. 887, 889 (Bankr. N.D. Fla. 1994) (dismissing a complaint for lack of subject matter jurisdiction because "[w]hat this court actually seeks is the equitable enforcement of rights under the contracts between the former debtor and the defendant"). After all, mere blanket statements as to the ownership of property and/or the existence of liability under a common law cause of action cannot support a turnover claim. See Appel v. Mainstar Oil Co. (In re B & L Oil Co.), 46 B.R. 731, 736 (Bankr. D. Colo. 1985) (holding that mere allegations that a third party should "turnover property does not suffice to convert a common law action into a turnover proceeding").

Indeed, only property of the bankruptcy estate is subject to turnover and, until such time as such a dispute is liquidated and resolved, §542(a) is inapplicable. Venn, 163 B.R. at 889; Trefny, 243 B.R. at 320. Stated otherwise, where a DIP cannot demonstrate that funds are property of the bankruptcy estate, it cannot use turnover as a alternate remedy when applicable state law otherwise controls. See Venn, 163 B.R. at 889; see, also, Appel v. Mainstar, 46 B.R. at 736. Instead, turnover is a remedy to obtain what is "acknowledged to be property of the estate." See Helm v. Roti (In re Roti), 271 B.R. 281, 291 (Bankr. N.D. Ill. 2002).

The inapplicability of §542(a) is further evidenced by §542(b)'s "matured, payable on demand or payable on order" requirement as well as the express right of setoff provided therein. See 11 U.S.C. §542(b). Since §542(b) provides the procedural vehicle for "recovering" debts that are matured, payable on demand or payable on order, it only follows that §542(a) does not apply under such circumstances. Based again on §542(a)'s express language, §542(a) is also temporally limited.

Timing Is Everything

Section 542(a) expressly limits a DIP's turnover power to "during the case." 11 U.S.C. §542(a). The "case," however, ends upon confirmation and consummation of a plan because confirmation and consummation (i.e., going effective) causes the bankruptcy court's jurisdiction to contract and revests property of the estate in the reorganized debtor or other successor. See In re Lacy, 183 B.R. 890, 894 (Bankr. D. Colo. 1995). "At that point, the property's relationship to the estate, and therefore the bankruptcy court's jurisdiction over the property, normally ends." Id.

Stated otherwise, "[a] complaint for turnover cannot exist once the bankruptcy court confirms the debtor's plan because the estate ceases to exist upon plan confirmation. All estate property not otherwise transferred under the plan reverts back to the debtor. The claim for turnover expressly states that it applies 'during the case'—the bankruptcy case—and requires return of the property to the trustee." See In re Diagnostic Int'l. Inc., 257 B.R. 511, 515 (Bankr. D. Ariz. 2000); see, also, Rickel & Assocs. Inc. v. Smith (In re Rickel & Assocs. Inc.), 272 B.R. 74, 97-8 (S.D.N.Y. 2002); Polar Run Five Ltd. Partnership v. Virginia Elec. & Power Co. (In re Polar Run Five Ltd. Partnership), 192 B.R. 848, 856 (Bankr. E.D. Va. 1995); Venn, 163 B.R. at 889.

Further, the plain language of §542(a) expressly limits a DIP's ability to seek turnover to the extent that the DIP could use such property under 11 U.S.C. §363. See 11 U.S.C. §542(a); see, also, e.g., U.S. v. Whiting Pools Inc., 462 U.S. 198, 211-12, 103 S.Ct. 2309, 2317, 76 L.Ed.2d 515, 526 (1983). Since the bankruptcy estate does not exist post-confirmation, §363 does not apply. See In re Roy Gooden Plumbing & Sewer Co. Inc., 156 B.R. 635, 637-38 (Bankr. E.D. Mo. 1993); see, also, United States v. Redmond, 36 B.R. 932, 934 (D. Kan. 1984), aff'g. In re Westholt Mfg. Inc., 20 B.R. 368 (Bankr. D. Kan. 1982).

Section 363 does not apply post-confirmation because it authorizes the use, sale or lease of property of the bankruptcy estate. See 11 U.S.C. §363. Thus, if the bankruptcy estate does not exist, there can be no property of the bankruptcy estate. Otherwise, bankruptcy cases could linger on indefinitely with reorganized debtors moving for the use of cash collateral after defaulting on exit financing. The use of such administrative tools post-confirmation offends the notion of the bankruptcy estate and the effect of confirming and consummating a chapter 11 plan. Congress did not intend for all of the Code's provisions to continue indefinitely.

Conclusion

A DIP should seek turnover during the administration of its bankruptcy case because, upon entry of a confirmation order, the subsequent consummation of the confirmed plan and the occurrence of the effective date, the bankruptcy estate ceases to exist. Many would argue that the provision of the transfer of claims and/or retention of jurisdiction set forth in a reorganization plan makes the cessation of the bankruptcy estate irrelevant. However, such retention of jurisdiction and transfer of putative claims cannot create substantive rights and/or jurisdiction, or otherwise extend procedural mechanisms that exist only prior to confirmation. See Diagnostic International, 257 B.R. at 515-16. As stated above, §542(a) has its limitations, which a plan proponent cannot unilaterally extend.

While many would argue that §542(a) has no such limitations, the simple fact is that there is limited case law on the matter. Few courts have addressed such assertions, and apparently, few have raised such arguments. Nonetheless, based on the express language of §542(a), there are arguments to be made. However, whether they are accepted and adopted remains to be seen.