4.01 PROPERTY OF THE ESTATE

Transcription

1 4 The Estate 4.01 PROPERTY OF THE ESTATE 4.01(a) The Estate In General The concept of the estate defines in some fashion the reach of the bankruptcy law in a bankruptcy case. The filing of a voluntary, involuntary, or joint petition creates an estate, which consists of the various categories of property interests listed in section 541(a). The trustee takes possession of, and must realize value from, the property of the estate. The bankruptcy court has jurisdiction over property of the estate, wherever located. The automatic stay protects property of the estate. Thus, property of the estate is central to the administration of a case. Initially, the estate includes, subject to exclusions mentioned later, all the debtor s legal or equitable interests in property as of the commencement of the case. 541(a)(1). The concept of an interest for the purpose of this section is not limited. It may be title or the fee if in nontechnical terms the debtor owns the property; a limited or life estate; a leasehold interest; a contract right; a lien if the debtor is a secured creditor of someone else; a mere possessory right; or any other kind of interest that derives from the debtor s relationship to property. That is, by operation of law, the estate takes over the debtor s position with respect to all property, both exempt and nonexempt. An individual debtor, however, is entitled later to exempt from the estate certain property. See 522(b); 7.02 infra. Whether the debtor s interest in his books, papers, or other recorded information concerning his financial affairs is an interest in property for the purpose of section 541(a)(1) is of only academic interest, for ordinarily this financial information must be turned over to the trustee under section 542(e). With respect to community property over which the debtor has any legal management power or control or that is subject to claims of the debtor s creditors (or the joint creditors of the husband and wife), the entire interest of both spouses in that property, not merely the debtor s interest, becomes part of the estate of the first spouse to be a debtor under the Code. 541(a)(2). Property recovered or preserved under any of the trustee s avoiding or recovery powers is also part of the estate, 541(a)(3), (4), as are proceeds, rents, profits, and the 11 like of the estate s property and any interests in property the estate itself acquires after the filing of the petition. 541 (a)(6), (7). United States v. Whiting Pools, Inc., 462 U.S. 198 (1983), illustrates how one of the trustee s powers can enhance the property of the estate beyond the interest held by the debtor. The Internal Revenue Service had seized the

2 116 FUNDAMENTALS OF BANKRUPTCY LAW (a) The commencement of a case under section 301, 302, or 303 of this title creates an estate. Such estate is comprised of all the following property, wherever located and by whomever held: (5) Any interest in property that would have been property of the estate if such interest had been an interest of the debtor on the date of the filing of the petition, and that the debtor acquires or becomes entitled to acquire within 180 days after such date (A) by bequest, devise, or inheritance; (B) as a result of a property settlement agreement with the debtor s spouse, or of an interlocutory or final divorce decree; or (C) as a beneficiary of a life insurance policy or of a death benefit plan.

3 THE ESTATE 117 debtor s assets under a tax lien before the filing of the Chapter 11 case. At the time of the petition, therefore, the debtor, under the nonbankruptcy tax law, had no right to possession of the property, at least not without paying the taxes. Nevertheless, the Supreme Court held that by virtue of the turnover provisions of section 542(a), the Chapter 11 estate included the possessory interest, although the Code s requirement for adequate protection of the tax lien had to be met. Insofar as the estate is the statutory successor to the debtor, the petition as a general proposition marks a date of cleavage. What the debtor has as of the petition date belongs to the estate, together with whatever that property subsequently produces. Any property interests of a corporation, limited liability company, or partnership debtor that are generated after bankruptcy typically (although perhaps not invariably) represent a change in the form of estate property or represent proceeds, profits, or the like of the estate s property; thus these interests become part of the estate. When an individual debtor acquires property after the commencement of the case, however, this property, as distinguished from property that the estate produces, belongs to the debtor. With certain exceptions mentioned later, it does not become part of the estate. A specific provision in section 541(a)(6) emphasizes that an individual s postpetition earnings from services are not part of the estate. Sometimes it is difficult to determine what is a prepetition property interest that passes to the estate and what is postpetition property. For example, in Segal v. Rochelle, 382 U.S. 375 (1966), decided under the former Bankruptcy Act, the Court held that a tax refund attributable to a tax loss carryback for the year in which the petition was filed was estate property, even though there was no statutory right to the refund on the date of the petition that is, the refund depended in part on the nonprofitability of the debtor after bankruptcy. The refund right was rooted in the pre-bankruptcy past. Id. at 380. As another example, the future renewal commissions of a debtor insurance broker, which were earned in a sense when the policies were sold before bankruptcy, but which do not accrue to the broker until old policies are renewed by the insureds after the petition, present a problem of allocating on some fair basis the prepetition and postpetition values. Usually the time required to be spent by the debtor after the petition in continuing to service the policies is an important factor in making the allocation. See, e.g., In re Wu, 173 B.R. 411 (9th Cir. BAP 1994). Arguably, the right of a permanently disabled professional athlete to future salary under a contract providing for compensation whether or not the athlete can play presents a similar problem. A similar issue arises where the debtor has a malpractice claim against an attorney. If state law provides that the claim accrues only when the plaintiff suffers loss, then even if the malpractice occurs prepetition, the claim will not be property of the estate if the loss occurs postpetition. See Witko v. Menotte (In re Witko), 374 F.3d 1040 (11th Cir. 2004). The so-called windfall clause, 541(a)(5), is an exception to the rule that the petition date is the date of cleavage. Property that the debtor acquires within 180 days after the petition date by bequest, devise, or inheritance, as a result of a property settlement or divorce decree, or as a beneficiary under a life insurance policy or death benefit plan becomes part of the estate. Prepetition estate planning designed to prevent these interests from vesting in the debtor within the 180-day period ought to be effective to keep the property out of the estate.

4 118 FUNDAMENTALS OF BANKRUPTCY LAW (c)(1) Except as provided in paragraph (2) of this subsection, an interest of the debtor in property becomes property of the estate under subsection (a)(1), (a)(2), or (a)(5) of this section notwithstanding any provision in an agreement, transfer instrument, or applicable nonbankruptcy law (A) that restricts or conditions transfer of such interest by the debtor; or (B) that is conditioned on the insolvency or financial condition of the debtor, on the commencement of a case under this title, or on the appointment of or taking possession by a trustee in a case under this title or a custodian before such commencement, and that effects or gives an option to effect a forfeiture, modification, or termination of the debtor s interest in property. (d) Property in which the debtor holds, as of the commencement of the case, only legal title and not an equitable interest, such as a mortgage secured by real property, or an interest in such a mortgage, sold by the debtor but as to which the debtor retains legal title to service or supervise the servicing of such mortgage or interest, becomes property of the estate under subsection (a)(1) or (2) of this section only to the extent of the debtor s legal title to such property, but not to the extent of any equitable interest in such property that the debtor does not hold. (b) Property of the estate does not include (2) any interest of the debtor as a lessee under a lease of nonresidential real property that has terminated at the expiration of the stated term of such lease before the commencement of the case under this title, and ceases to include any interest of the debtor as a lessee under a lease of nonresidential real property that has terminated at the expiration of the stated term of such lease during the case; (b) Property of the estate does not include (1) any power that the debtor may exercise solely for the benefit of an entity other than the debtor; (c)(2) A restriction on the transfer of a beneficial interest of the debtor in a trust that is enforceable under applicable nonbankruptcy law is enforceable in a case under this title.

5 THE ESTATE 119 Subject to a single exception discussed later, no provision in a contract, in a deed, or in applicable law making the debtor s interest in property nontransferable or conditioning its transferability is effective to prevent that interest from passing into the estate. 541(c)(1)(A). (Whether a given restriction is enforceable as against the estate when the trustee or debtor in possession subsequently attempts to transfer property out of the estate is a different question; the answer depends in part on the nature of the property and the restriction, as well as on the provisions of sections 363(f)-(h), (l) and 365(f). See discussion at 5.02(c), 5.04(b), infra.) Similarly, insolvency, bankruptcy, or financial condition clauses the so-called ipso facto or forfeiture provisions are ineffective to keep property out of the estate or to enable another party to modify the nature of the debtor s property interest upon the filing of the petition. 541(c)(1)(B); see also 363(l). The estate as statutory successor to the debtor under section 541(a)(1) takes no greater interest than the debtor had immediately before bankruptcy. Thus if property is encumbered or subject to liens, the estate s interest under section 541(a)(1) is similarly encumbered. True, the avoiding powers, discussed in 4.03, infra, or some other Code provision may enhance the estate s interest beyond the debtor s, but section 541(a)(1) does not. If the debtor was the trustee of a trust, the estate s interest under section 541(a)(1) is the mere legal title (and perhaps the debtor s right to accrued compensation for services rendered as trustee); but no interest in the corpus passes to the estate. See also 541(d). If the debtor has a cause of action that, as of the time of the petition, is barred by the applicable statute of limitations, only an unenforceable claim becomes part of the estate. (If the statute of limitations has not expired before the petition, however, section 108(a) might extend the period during which the trustee may sue.) If a lease under which the debtor is lessee terminates because of the expiration of its term, either before or after bankruptcy, it follows that the estate s interest in the lease under section 541(a)(1) likewise expires (subject to resuscitation under any applicable nonbankruptcy antiforfeiture law). An unnecessary 1984 amendment adding section 541(b)(2) repeated this principle as it applies to leases of nonresidential real estate. 4.01(b) Exclusions From Property Of The Estate There are two main exceptions and several other exceptions to the rule that all property interests of the debtor at bankruptcy pass to the estate. First, any power that the debtor can exercise only for someone else s benefit for example, a power of appointment under a will or other instrument that prohibits appointment to the debtor himself or to the debtor s estate is excluded from the estate. 541(b)(1). The effect is to preclude the trustee from exercising this kind of power. Second, under section 541(c)(2), a restriction on the transfer of the debtor s beneficial interest in a trust is effective to keep the trust interest out of the section 541 estate if the restriction is enforceable under applicable nonbankruptcy law. The language of section 541(c)(2) is broad enough to cover not only a traditional spendthrift trust interest but also an interest of the debtor in an ERISA pension plan, which typically contains nontransferability and nonleviability provisions. Patterson v. Shumate, 504 U.S. 753 (1992). Three of the minor exceptions of including property in the estate apply only in certain very limited kinds of cases: of an educational institution, a debtor with oil or gas interests, or a debtor that issues money orders. See 541(b)(3), (4), (9).