Gibson, Bankruptcy, Spring 2012
CHAPTER SEVEN
1/10 The bankruptcy estate [§541]
Sec. 541 Property of the Estate
(a) (what is included)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: (estate is created by commencement of bankruptcy case. The estate is a new legal entity, separate from debtor. At same time as bankruptcy estate is created, the individual Ch. 7 debtor begins to accumulate a new estate consisting of earnings and property acquired post filing as well as property that is released to debtor from estate as exempt or abandoned by trustee as having no economic value. Ch. 11 & 13 enable debtor to reacquire prepetition property from estate by committing postpetition earnings or other value to the payment of claims that would otherwise have been settled by liquidation of the property. Only in ch. 12 & 13 does property acquired by debtor after petition continue to enter the estate until the case is closed. Whether debtor has an interest in property must be resolved under nonbankruptcy law. The estate generally can acquire no greater right to property than the debtor had.)
541(a) tells us what becomes property of the estate, and asks us when the estate is created. It is the commencement of the cases under 301, 302, or 303 (these are three ways in which bankruptcy case can be started). Once petition is filed under whichever provision, you go into ct or file it electronically, then that creates bankruptcy estate.
Benefit from creditor’s pt of view: if try to collect under state law, would have to go state by state and really country by county within a state. Debtor w/ property in lots of diff states could be difficult. In bankruptcy, wherever property located comes into control of bankruptcy estate.
What becomes property of estate? Almost everything and then some, almost all property debtor has at commencement of case, and then some that debtor or trustee acquires after commencement of case.
(1) Except as provided in subsections (b) and (c)(2) of this section, all legal or equitable interests of the debtor in property as of the commencement of the case.
We want to look at the point of commencement of bankruptcy. Look at commencement and it is all legal and equitable interests. State law may be looked to to decide what rights debtor has as a matter of state law. Then look to federal law to see whether has legal interest in property and that becomes property of estate.
(2) All interests of the debtor and the debtor’s spouse in community property as of the commencement of the case that is—
(A) under the sole, equal, or joint management and control of the debtor; or
(B) liable for an allowable claim against the debtor, or for both an allowable claim against the debtor and an allowable claim against the debtor’s spouse, to the extent that such interest is so liable.
(3) Any interest in property that the trustee recovers under section 329 (b), 363 (n), 543, 550, 553, or 723 of this title.
(a(3)-(7) is the and then some: some property that the debtor or estate acquires after the petition is filed. (3) and (4) are property trustee recovers after the case.)
(4) Any interest in property preserved for the benefit of or ordered transferred to the estate under section 510 (c) or 551 of this title.
(This obliges the debtor to surrender all property to the trustee when the petition is filed. Under 542, any property of the debtor in the possession of other persons must be delivered to the trustee or its value accounted for. A debt due to debtor must be paid to the trustee. Applies to all property that may be used, sold, or leased by the trustee, or that may be exempted by the debtor. Even creditor w/ interest in property is obliged to relinquish possession to trustee. If creditor whishes to recover the property so that the interest can be enforced, application must be made for relief from stay. 542(a) makes exception to duty of delivery to the trustee for property that is of inconsequential value or benefit of the estate.)
(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—
Not just property in debtor’s possession, could be what someone else is holding. Property debtor didn’t own at date of petition, but acquires it 180 days after filing for bankruptcy by–
(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.
(6) Proceeds, product, offspring, rents, or profits of or from property of the estate, except such as are earnings from services performed by an individual debtor after the commencement of the case.
(7) Any interest in property that the estate acquires after the commencement of the case.
Any interest in property that estate acquires while case is pending that becomes property of estate
(b) (excluded)Property of the estate does not include—
(In Ch. 7 and Ch. 11, the general rule is that all earnings and property acquired postpetition from sources not related to prepetition property remain property of the debtor and do not become property of estate. However, 6 & 7 of this subsection include in the estate proceeds and profits of estate property and property acquired postpetition by the estate itself. In ch. 12 and 13, 1207 and 1306 provide for property of debtor to continue entering estate until case comes to an end. Postpetition property and earnings are included in the ch 12 or 13 estate so that the trustee has supervisory power over them while the debtor is performing under the plan. Postpetition property under 13 vests in the debtor and debtor retains possession of it while trustee’s control of the property is legal rather than physical.)
Notwithstanding (a), here are things that don’t become property of the estate. Even though may have legal or equitable interest in it at commencement of case, these don’t become property of estate.
(1) any power that the debtor may exercise solely for the benefit of an entity other than the debtor;
(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 therminated at the expiration of the stated term of such lease during the case;
If lease has expired, doesn’t become property of estate. Important to lessor who wants to get property back, and makes it easy for lessor to repossess property.
(3) any eligibility of the debtor to participate in programs authorized under the Higher Education Act of 1965 (20 U.S.C. 1001 et seq.; 42 U.S.C. 2751 et seq.), or any accreditation status or State licensure of the debtor as an educational institution;
(4) any interest of the debtor in liquid or gaseous hydrocarbons to the extent that—
(A)
(i) the debtor has transferred or has agreed to transfer such interest pursuant to a farmout agreement or any written agreement directly related to a farmout agreement; and
(ii) but for the operation of this paragraph, the estate could include the interest referred to in clause (i) only by virtue of section 365 or 544 (a)(3) of this title; or
(B)
(i) the debtor has transferred such interest pursuant to a written conveyance of a production payment to an entity that does not participate in the operation of the property from which such production payment is transferred; and
(ii) but for the operation of this paragraph, the estate could include the interest referred to in clause (i) only by virtue of section 365 or 542 of this title;
(5) funds placed in an education individual retirement account (as defined in section 530(b)(1) of the Internal Revenue Code of 1986) not later than 365 days before the date of the filing of the petition in a case under this title, but—
(A) only if the designated beneficiary of such account was a child, stepchild, grandchild, or stepgrandchild of the debtor for the taxable year for which funds were placed in such account;
(B) only to the extent that such funds—
(i) are not pledged or promised to any entity in connection with any extension of credit; and
(ii) are not excess contributions (as described in section 4973(e) of the Internal Revenue Code of 1986); and
(C) in the case of funds placed in all such accounts having the same designated beneficiary not earlier than 720 days nor later than 365 days before such date, only so much of such funds as does not exceed $5,000;
(6) funds used to purchase a tuition credit or certificate or contributed to an account in accordance with section 529(b)(1)(A) of the Internal Revenue Code of 1986 under a qualified State tuition program (as defined in section 529(b)(1) of such Code) not later than 365 days before the date of the filing of the pet
o preclude assignment of benefits. If it is a trust subject to restrictions on transfer under state or federal law, it may not be property of the estate.)
(d) (excluded) 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.
(e) In determining whether any of the relationships specified in paragraph (5)(A) or (6)(A) of subsection (b) exists, a legally adopted child of an individual (and a child who is a member of an individual’s household, if placed with such individual by an authorized placement agency for legal adoption by such individual), or a foster child of an individual (if such child has as the child’s principal place of abode the home of the debtor and is a member of the debtor’s household) shall be treated as a child of such individual by blood.
(f) Notwithstanding any other provision of this title, property that is held by a debtor that is a corporation described in section 501(c)(3) of the Internal Revenue Code of 1986 and exempt from tax under section 501(a) of such Code may be transferred to an entity that is not such a corporation, but only under the same conditions as would apply if the debtor had not filed a case under this title.
E&E problems:
1.
Tort Claim: As a general rule of state law, tort liability is created as soon as the tort is committed, thus debtor has a property right in his claim for damages. The inclusive language of 541 is broad enough to include unliquidated claims for damages.
Refrigerator: Foreclosure sale has not yet taken place, and it is stayed upon the advent of B. Even though debtor defaults on loan and foreclosure proceedings have begun prior to petition, the debtor still owns fridge under majority state law, and this ownership interest passed to the estate under 541(a)(1). Of course, the debtor’s ownership interest may not be very valuable if the secured debt is close to or equal to the value of the collateral. Nevertheless, it exists, and had the sale occurred prior to bankruptcy the debtor would have been entitled to any surplus sale proceeds or to a redemption right under state law. Creditor may apply for relief from stay so that foreclosure can proceed. Until then, estate is entitled to fridge, and trustee can demand turnover under 542.
Furniture: Sold furniture at garage sale 2 weeks before petition (buyer paid cash then). Buyer has not picked up furniture yet. Nonbankruptcy law—in this case UCC Article 2—determines the nature and extent of the debtor’s rights in property. Article 2 provides for the passage of title when the goods were identified to the contract, so the sale passed title and the furniture does not become property of the estate.
Retirement plan: 541(c)(1) generally overrides restrictions on transfer of property under contract or nonbankruptcy law, so that such property goes to the estate in spite of the restriction. However, 541(c)(2) provides an exception to 541(c)(1) where the restriction on transfer relates to the debtor’s beneficial interest in a trust and the restriction is enforceable under nonbankruptcy law. A retirement plan with valid restrictions on transfer under nonbankruptcy law, such as those imposed by ERISA, is covered by 541(c)(2) and does not enter the estate.
