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
220.127.116.11. 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.