The Bankruptcy Estate

• Author: Gregory Germain
• Pages: 84-94

84

Chapter 4: The Bankruptcy Estate

There are two fundamental purposes of Chapter 7 of the Bankruptcy Code: (1) to establish

an orderly system for liquidating (selling) the debtor’s assets to pay creditors’ claims, and (2) to

provide the debtor with a fresh start b y discharging the debtor’s pre-bankruptcy debts. In this

chapter we begin the study of the process of liquidation and distribution to creditors.

4.1. The Estate

Section 541 of the Bankruptcy Code provides that the filing of bankruptcy automatically

creates a new legal entity called the bankruptcy “estate.” The estate separates what property is

owned by the debtor after bankruptcy from what property is to be sold to pay creditors. Section

541 starts with a broad rule that everything owned by the debtor – all legal or equitable interest

of the debtor in property – wherever located and by whomever held, as of the date that the

bankruptcy case is filed – belongs to the bankruptcy estate. 11 U.S.C. § 541(a). This creates a clear

line dividing the property acquired by the debtor after bankruptcy from post-bankruptcy earnings

(which belongs to the debtor free of the claims of pre-bankruptcy creditors), and property owned

by the debtor on the petition date (which will be used to pay creditors).

However, this broad language disguises many subtleties. To start with, what is “property”?

Did the debtor have an “interest” in the “property” on the petition date? If not, the non-property

rights belong to the debtor not the bankruptcy estate.

4.2. Cases on Property of the Estate

4.2.1.1. BOARD OF TRADE OF CHICAGO v. JOHNSON,

264 U.S. 1 (1924)

CHIEF JUSTICE TAFT

Wilson F. Henderson, the bankrupt, a citizen of Chicago, was admitted to membership in

the Board of Trade in 1899, and for many months prior to March 1, 1919, was president and one

of the principal stockholders in a corporation known as Lipsey and Company, and actively engaged

in making contracts on its behalf for present and future delivery of grain on the Board of Trade. In

March, 1919, Lipsey and Company became insolvent and ceased to transact business, being then

indebted to thirty or more members of the Exchange on its contracts in an aggregate amount of

more than $60,000.

The District Court, finding that the [bankrupt’s] membership [in the Chicago Board of

Trade] was property and under the rules of the Board passed to the trustee in bankruptcy free of

all claims of the members, ordered that it be held for transfer and sale for the benefit of the general

creditors. [W]as its decree right upon the merits?

[The Board of Trade alleged] that the membership was not property, or capable of being

treated as an asset of the bankrupt, that transfer of it had been duly objected to by respondents as

members, and that they had adverse claims.