11 USC 543: Custodian Duties, Turnover, and Excusal

Section 543 of Title 11 of the U.S. Code, often cited as 11 USC 543, tells a person who was already in charge of a debtor’s property before bankruptcy what to do once a bankruptcy case is filed: stop administering the property, deliver it to the bankruptcy trustee, and file an accounting of everything that passed through their hands. The statute also directs the bankruptcy court to compensate the custodian for reasonable services and to protect third parties the custodian dealt with, and it carves out narrow situations in which turnover can be excused.

Who the Statute Calls a Custodian

Section 543 only applies to a “custodian,” a term with a specific meaning under Section 101(11) of the Bankruptcy Code. Three categories qualify:

A receiver or trustee appointed in a non-bankruptcy case or proceeding to take charge of the debtor’s property.
An assignee under a general assignment for the benefit of the debtor’s creditors, a state-law liquidation device.
A trustee, receiver, or agent appointed under applicable law or a contract to take charge of the debtor’s property to enforce a lien or to administer the property for creditors generally.

In practice, most Section 543 disputes involve state court receivers put in place during a foreclosure or collection action, or assignees appointed under a state’s assignment-for-benefit-of-creditors statute. If you were holding the debtor’s property in the ordinary course of business rather than by court appointment or formal assignment, you are not a custodian; you fall under Section 542 instead.

What the Custodian Must Do

Stop Administering the Property

Subsection (a) requires a custodian who knows a bankruptcy case has been filed to stop making disbursements from, or taking any administrative action with respect to, the debtor’s property and any proceeds, rents, or profits it generates. The one exception is action “necessary to preserve such property.”¹ Preservation is read broadly enough that a custodian can protect the property from waste or damage while turnover is arranged.

Deliver the Property and File an Accounting

Subsection (b) imposes two duties. The custodian must deliver to the bankruptcy trustee all of the debtor’s property, along with any proceeds, rents, or profits, that is in their possession, custody, or control when they learn of the bankruptcy case. And the custodian must file an accounting of any property of the debtor that came into their hands at any point during the custodianship.² The statute sets no fixed number of days; the obligations are triggered by the custodian’s knowledge of the case.

Compensation, Surcharge, and Protection of Third Parties

Handing everything over could leave a custodian exposed for costs they have paid, obligations they have taken on, or disbursements they have already made. Subsection (c) addresses that in three ways, after notice and a hearing:

The court must protect entities to which the custodian became obligated during the custodianship, such as contractors and service providers.
The court must provide reasonable compensation for services rendered and for costs and expenses the custodian incurred.
The court may surcharge the custodian for improper or excessive disbursements, unless the disbursement was made in accordance with applicable law or previously approved by a court.

The surcharge power has one carve-out. Under subsection (c)(3), an assignee for the benefit of creditors who was appointed or took possession more than 120 days before the bankruptcy petition cannot be surcharged.¹

What counts as reasonable compensation is left open by the statute. In In re Forde, 507 B.R. 509 (Bankr. S.D.N.Y. 2014), the court identified five factors: time and labor expended, benefit of the services to the debtor and the estate, size or complexity of the estate, what the custodian would have received as a bankruptcy trustee, and the quality of the custodian’s services.³ A separate provision, Section 503(b)(3)(E), speaks in terms of “actual, necessary expenses” for superseded custodians. In In re Montemurro, 581 B.R. 565 (Bankr. N.D. Ill. 2018), the court reconciled the two by looking at the source of payment: the stricter actual-and-necessary standard applies when the custodian is paid from estate property, and the reasonableness standard of Section 543(c)(2) applies when the money comes from a non-estate source.⁴

When Turnover Can Be Excused

Turnover is the default. Subsection (d) creates two ways out — one discretionary, one mandatory.

Discretionary Excusal Under (d)(1)

The bankruptcy court may excuse a custodian from the freeze, delivery, and accounting requirements if the interests of creditors, and equity security holders if the debtor is solvent, would be better served by letting the custodian continue.² The party asking to keep the custodian in place bears the burden of proof, by a preponderance of the evidence.⁵

Courts frequently work through the seven factors from In re Falconridge, LLC, No. 07-bk-19200 (Bankr. N.D. Ill. 2007):

The likelihood of a successful reorganization.
The probability that funds for reorganization will be available.
Whether there is evidence of debtor mismanagement.
Whether turnover would be injurious to creditors.
Whether the debtor will use the property for the benefit of creditors.
Whether there are avoidance issues with property retained by a receiver, given that receivers lack the avoiding powers of a bankruptcy trustee.
The effect of the automatic stay on the state court receivership.

Courts treat these factors as a checklist rather than a rigid formula, and other considerations can enter the analysis.⁶

Mandatory Excusal Under (d)(2)

Subsection (d)(2) requires the court to excuse compliance if the custodian is an assignee for the benefit of creditors who was appointed or took possession more than 120 days before the petition, unless compliance is necessary to prevent fraud or injustice.¹ This favorable treatment reflects that the debtor voluntarily transferred its assets to the assignee, a position of trust a court-appointed receiver does not share.

How Courts Have Applied Section 543

The practical effect of Section 543 is often to end a receivership. In In re Novus Structures, Inc., No. 23 B 06723 (Bankr. N.D. Ill. Sept. 11, 2023), a lender asked the bankruptcy court to keep a state court receiver in control of a Chicago apartment building after the debtor filed Chapter 11. Judge David Cleary denied the motion and ordered turnover. The court concluded that the debtor’s plan to lease vacant units, make repairs, and market the property would be undermined by leaving the receiver in place, and it warned that using subsection (d)(1) to preserve a receivership could function as an end run around the more demanding standards for appointing a Chapter 11 trustee under Section 1104 or lifting the automatic stay under Section 362(d).⁵

Falconridge came out the other way. Evidence of serious debtor mismanagement, including failure to account for income and expenses, failure to turn over tenant security deposits, and a potential fraudulent transfer, led the court to excuse the receiver and let it continue managing the property. The debtor was insolvent, and returning the property was found not to serve the creditors.⁶

Section 543 applies in Subchapter V small business cases the same way it does in standard Chapter 11 cases. In In re U.S.A. Parts Supply, 619 B.R. 619 (Bankr. N.D. W. Va. 2020), the court denied a creditor motion to excuse a state court receiver from turnover, pointing to the debtor’s plan to pay creditors in full and the oversight provided by the Subchapter V trustee. The court also confirmed that a state court receiver is not an assignee for the benefit of creditors and cannot claim the mandatory 120-day exception in subsection (d)(2).⁷

How Section 543 Differs From Section 542

Section 543 works alongside Section 542, and it helps to know which one applies. Section 542 governs turnover by any entity “other than a custodian,” meaning ordinary third parties such as banks, business partners, or vendors holding the debtor’s property. Section 543 governs the narrower situation where someone was formally put in charge of the property before bankruptcy began. The legislative history makes the split explicit: custodians are excluded from Section 542 because Section 543 imposes its own, more detailed regime, including the freeze on administration, the accounting requirement, and the compensation and surcharge provisions.⁸

1
Office of the Law Revision Counsel. 11 USC 543: Turnover of Property by a Custodian
2
Cornell Law Institute. 11 U.S. Code § 543 – Turnover of Property by a Custodian
3
Howard & Howard Attorneys. ABI Article on Custodian Compensation
4
U.S. Bankruptcy Court, Northern District of Illinois. In re Montemurro, Case No. 17bk10230
5
U.S. Bankruptcy Court, Northern District of Illinois. In re Novus Structures, Inc., Case No. 23 B 06723
6
U.S. Bankruptcy Court, Northern District of Illinois. In re Falconridge, LLC, Case No. 07-bk-19200
7
American Bankruptcy Institute. Subchapter V and § 543 Custodian Rules: In re USA Parts Supply
8
Cornell Law Institute. 11 U.S. Code § 542 – Turnover of Property to the Estate