14: Property of the estate
© Charles Tabb 2010
Timing: as of commencement
• GENERAL RULE: date of filing of petition
establishes property of estate
• Same rule applies for “claims” against DR
• Take all property, and all claims, as of instant
of bk filing, and settle Dr’s financial affairs
Point of demarcation
Property at instant file
Post-Bk
ESTATE
NOT estate
Timing problems
• In some cases is hard to fix the timing “as of
commencement” because the property has roots
in BOTH the pre-bk AND post-bk periods
pre- bankruptcy
• Taxes paid prior years
• DR suffers NOL
Segal v Rochelle
post-bankruptcy
* Tax year ends
* Tax carryback
refund vests
What did DR have at instant of BK?
• In Segal, ask – what, exactly, did DR have at
the instant the bankruptcy petition was filed?
• Had a potential tax refund – had paid taxes in
prior years, had suffered net operating losses
in this year
– Taxes paid
– NOL
POTENTIAL REFUND
Was this interest guaranteed?
• NO – Dr could have generated net income
POST-filing, before the taxable year closed,
that would have wiped out the NOL
• POSSIBLE income
• Would wipe out pending NOL &
eliminate carryback loss refund
POTENTIAL REFUND
Does contingency matter?
• Supreme Court held NO – fact that the tax
refund was contingent at the time of
bankruptcy (on DR NOT earning income to
offset pre-bk losses), does NOT mean that it
was not “property” at time of bankruptcy
• Estate got exactly what Dr had  a potential
tax refund
Estate gets “property” when
contingency works out
• So, when DR’s potential tax refund (as of time
of filing) DID come to fruition post-bk, estate
got to claim it as “property” of bk estate
“everything of value”
• Supreme Court in Segal – bankruptcy estate
consists of “everything of value” the bankrupt
had on the date of bankruptcy
“roots”
• Supreme Court made key point that the tax
refund had roots in pre-bk period
• When those roots matured and bore fruit
post-bk, belonged to estate
pre- bankruptcy
post-bankruptcy
roots of tax refund
refund realized
Exception for “fresh start”
• Segal Court emphasized one important
exception  where the post-petition
flowering of the “property” is attributable to
the post-petition labor of an individual DR
• i.e, the “fresh start”
• “leave the bankrupt free after the date of his
petition to accumulate new wealth in the
future”
Fresh start exception
• Code: exception clause in § 541(a)(6)
pre- bankruptcy
post-bankruptcy
Schmitz
pre- bankruptcy
• DR fished
• Regs considered
post-bankruptcy
* Fed regs enacted
* QS issued to DR
* DR sold QS for > $46K
Nature of QS
• How were QS calculated?
– Based entirely on DR’s pre-bk fishing history
• Applied to future fishing rights
– Is how 9th Cir. distinguishes contingency cases in
part IV.B.
Court held?
• NOT property
• DR had nothing when filed Bk
 Fed regs creating QS had NOT been
promulgated at date of petition
Court: “as of the date of the petition, Schmitz’s
1988-1990 catch history had no value.”
Valuation fallacy
• Shell game
• What is value of chance?
• In Schmitz, what was value as of petition date of
“chance” fed govt would enact quota program?
Might be nothing?
• If pick wrong shell, get nothing
• Court in Schmitz took view that fed govt might
NOT enact quota program
But might pay off!
• But there is a contingency, as of petition date,
that WILL pay off
• In Schmitz, it DID pay off – Dr got $46 grand!
Would someone have paid $?
pre- bankruptcy
• DR fished
• Regs considered
Pay $?
What would buyer get?
• If Dr (or Trustee?) sold Dr’s “hope” of getting QS
to a buyer at the date the bk petition was filed,
what would the buyer get?
Whatever the DR had!
- Chance of winning the fed “shell game”, being issued
valuable QS based on DR’s pre-bk fishing history
- Which QS could then be applied to future fishing
- Or, if no regs enacted, ultimate value = $0
Payoff, or not
• So, buyer might get nothing
• But also might get something, if “hope” is
realized
Everything of value?
• Segal tells us that Dr’s Creditors should get
“everything of value” Dr had
• Result in Schmitz is otherwise
– Under court’s approach, creditors are guaranteed
ZERO
– And any potential value goes to DR!
Segal “roots”?
• Supreme Court:
= “property” if has roots in pre-bk period
pre- bankruptcy
post-bankruptcy
Dr fished
QS issued
Proceeds?
• Could argue that the Dr’s “fishing history”
became property of the estate under §
541(a)(1)
• And that QS issued post-petition were
“proceeds” of that pre-bk history, and thus
included in estate under 541(a)(6)
“fresh start” exception?
• Remember that Segal noted one important
exception – the fresh start for an individual DR
• exclude from estate, even if pre-petition roots, IF the
flowering of the contingency is dependent on
individual DR’s post-petition labor
9th circuit said yes fresh start
• Said the QS “governed what Schmitz would be
allowed to catch in the post-filing future.”
• “If we were to hold that Schmitz’s right to fish
in the post-filing future is property of the
bankruptcy estate simply because it is affected
by his pre-filing past, we would defeat the
salutary purpose of bankruptcy, which is to
provide a fresh start from the date of filing.”
Sounds great!
• This rhetoric of 9th circuit sounds great
• If denying Schmitz the QS would harm his
post-bankruptcy pursuit of his fishing
livelihood, should not come into estate
Post-petition earnings exclusion
• And under 2nd clause of 541(a)(6), if the value
of QS were dependent on Schmitz himself
fishing post-bk, then ≠ “property of estate”
pre- bankruptcy
Dr fished
post-bankruptcy
QS issued
Dr fishes
NOT
• Only problem is that the value of QS is NOT
dependent on Schmitz himself fishing post-bk
• Has $46K value to ANY qualifying fisherman
pre- bankruptcy
Dr fished
post-bankruptcy
QS issued
Dr fishes
ANYONE
Exclusions from estate: exemptions
• Exempt property is removed from estate
• Facilitates fresh start of an individual DR
Exempt
Debtor
Estate
Creditors
Retirement assets?
• One of the biggest issues has been whether
the pension plan assets an individual Dr had at
time of Bk come
• Competing policies
– Give Crs “everything of value”
– Provide for DR’s future financial security
• Also ~ deferred future wages
Patterson v Shumate
• DR (Joseph Shumate) Pres. & CEO of company
• $ ¼ million in pension plan when filed bk
• Pension plan “ERISA-qualified”
 issue: is the $250K in ERISA plan property of
the bk estate?
No timing problem
• Patterson does not involve a timing problem –
no doubt that DR (Shumate) was the
beneficial owner of the quarter-million $
interest at the date of bankruptcy
Transfer restriction
• Problem is the transfer restriction on the
alienability of a DR’s pension plan interest
• Under ERISA, a beneficiary’s interest “may not
be assigned or alienated”
• Issue is whether that ERISA transfer restriction
is enforceable in bankruptcy
General rule nixes transfer restrictions
• General rule in bankruptcy is that nonbankruptcy transfer restrictions (whether in
an agreement or in applicable law) are
invalidated in bankruptcy, § 541(c)(1)
– In sum, whatever DR has comes into the estate
• the “transfer” from the Dr to the estate is permitted
• But then restriction might keep estate itself from
transferring
Example – tort claim
• In many states a tort victim cannot transfer a
tort claim
• What happens if such a tort victim files bk?
DR cause of action Estate
Purchaser
Sue tortfeasor
exception
• One exception to the general rule that nixes
non-bk transfer restrictions
• § 541(c)(2): “a restriction on the transfer of a
beneficial interest of the DR in a trust that is
enforceable under applicable nonbankruptcy
law is enforceable in a [bankruptcy] case”
Classic case: spendthrift trust
• The paradigmatic case Congress had in mind is
a spendtrhift trust where DR is the beneficiary
of the trust
• Under state law, the beneficiary’s Crs can’t
reach beneficiary’s interest in spendthrift trust
Creditor
TRUST
Beneficiary’s
interest
Creditor
Creditor
Creditor
State law upholds spendthrift trust
• State trust law upholds the settlor’s antialienation provision
• Crs can’t reach by process, nor can beneficiary
assign
• A limit on the property interest held by the
beneficiary
– Doesn’t have the “stick” of prospective alienation
Same result in bankruptcy
• In bankruptcy, the DR-beneficiary’s interest in
spendthrift trust does not become property of
the estate, § 541(c)(2)
Estate
TRUST
Beneficiary’s
interest
Butner?
• Exclusion of spendthrift trust interest is
consistent with basic principles of Butner:
 Property interest defined by state law
• Not a transferable interest
Avoid bankruptcy “windfall” and avoid forum
shopping
● no reason why DR’s Crs should do better IN
bankruptcy than OUT
-> and out of bankruptcy can’t reach trust interest
Self-settled?
• Under state law, general rule is that while
spendthrift trusts are immune from Crs, a Dr
can’t put his OWN assets into an immune
spendtrhift trust (called “self-settled”)
ME
Trust for me
My assets
--available
to Crs
TRUST
-- NOT
available to
Crs?
Pension plan ~ self-settled trust
• In substance, a pension plan (to extent of
beneficiary’s contributions) is ≈ self-settled
trust
• Dr/beneficiary (Joseph Shumate) puts in
money – which otherwise Crs COULD have
reached -- and now CRs can NOT reach it
Dueling policies -- which controls?
• In a sense, as a matter of policy, have Butner
principle at war with itself:
– Not include in estate:
• Follow non-bk law (pension plan not alienable)
• anti-forum shopping/windfall (Crs not do better in bk)
– Include in estate:
• Non-bk policy –DR can’t immunize his own assets
Resolution
• Supreme Court held for Dr – NOT in estate
• Relied on “plain language” of § 541(c)(2)
1. “restriction on transfer of beneficial interest of
Dr in a trust”
-> ERISA requires anti-alienation provisions
2. “enforceable under applicable non-bankruptcy
law”
-> yes under federal ERISA law
No conflict after all
• No policy conflict after all
• 1st, Butner’s “no windfall” principle applies
– Crs can’t reach ERISA assets outside of bankruptcy
– EVEN IF “self-settled” (i.e. Dr contributions)
• 2nd, creating law (federal ERISA law) favors
protection of pension benefits
Current statute (2005)
• § 541(b)(7): exclude from estate amounts in
Dr’s ERISA plan to extent is withheld from DR’s
wages or DR directly pays in
– Thus partially moots Shumate decision
• Does NOT apply to employer contributions to
pension plan
– So Shumate remains relevant there
IRA?
• What about an IRA? (Individual Retirement
Account)
• Shumate reasoning and § 541(c)(2) not apply
– Because IRA need not have anti-alienation transfer
restriction, like an ERISA plan
Rousey
• Supreme Court held in Rousey v. Jacoway that
IRA could be exempted under § 522(d)(10)(E)
• Dr’s right to receive payment under pension
plan
• Limited to extent reasonably necessary for
support
IRA – 2005
• In 2005, Congress added express exemptions
for IRA
• Whether elect federal exemptions
(522(d)(12)) or state (522(b)(3)(c))
• Overall cap of just over $1 million (or in joint
case, $2 million), 522(n)
Fresh start exclusion
• Recall in Segal, the Supreme Court announced
an important exclusion from property of the
estate  property to the extent attributable
to the post-bk labor of an individual Dr
Only for INDIVIDUAL Dr
• Fresh start only applies to an individual dr
• Problem 3.1(a) – post-petition earnings of a
corporate DR?
 EVERYTHING comes into estate
* already had it (541(a)(1)), or
* proceeds of what had (541(a)(6)), or
* acquired by estate (541(a)(7))
Earnings exclusion
• 2nd clause of § 541(a)(6): exclude “earnings from
services performed by an individual DR after the
commencement of the case”
Problem 3.1(b) – individual employee,
postpetition wages, chapter 7 case
employed
worker keeps working
paid wages
Post-bankruptcy wages excluded
• 3.1(b) is classic illustration of post-petition
earnings exclusion
 Rationale?
Incentive to keep working
• What if rule were otherwise, and an individual
DR’s post-bk wages were taken away from Dr
and paid to Crs
– What incentive for Dr to keep working?
– Could lose Dr as productive member of society
Individual DR can defer fresh start
• An individual DR has the option of proceeding
under a repayment plan instead of getting an
immediate discharge under chapter 7
• Problem 3.1(c) – individual worker, chapter 13,
post-petition wages during chapter 13
Chapter 13 inclusive rule
• In chapter 13, the DR’s earnings during the
plan payment period = “property of estate,”
see § 1306(a)
• Rationale?
13’s inclusive rule
• The rule including in the estate the DR’s postpetition earnings in a chapter 13 case makes
sense
• The whole point is that Dr will pay Crs during
the plan period out of those post-petition
earnings
• By including in “estate,” those earnings enjoy
benefit of automatic stay
– Dr’s payment plan can’t be disrupted
Individual chapter 11?
• What about if the individual Dr proceeds
under chapter 11, rather than chapter 13?
• This is Problem 3.1(d)
• As amended in 2005, the Chapter 11 rule for
individual Drs is identical to the chapter 13
rule
– i.e., post-petition earnings brought into estate
– See § 1115
Attribution issues
• If sort of case where DO apply the postpetition individual earnings exclusion (i.e, ch.
7, some post-pet. services), what do you do if
DR does some of work that leads to property
interest both before AND after petition?
Straddle work?
“it was the best of times,
“It is a far, far better thing
it was the worst of times.”
that I do, than I have ever
done; it is a far, far better
rest that I go to, than I
have ever known.”
Allocate: to estate (pre) -- to Dr (post)
• Where Dr does some, but not all, of necessary
work before bankruptcy, but completes work
after, have no choice but to try to allocate
value to the services performed before
(belongs to estate) and after (belongs to DR)
What is work?
• Andrews case raises question of what we
mean by “earnings from services performed”
postpetition by individual DR
* Dr sold company
* non-compete ($1M)
* $250K still due
-- if DR not compete
issue
• Issue in Andrews – is the remaining $250K
payment under the non-compete property of
the estate, or is it excluded under the earnings
exception of 541(a)(6)?
Held: include in estate
• Holding: part of estate, not excluded as postpetition earnings
“Roots”
->non-compete
$250K final payment
Services?
• What are post-petition “services performed”?
Do NOTHING
≠
“services performed”
How will Dr make a living?
• If Dr’s best way of making a living is in readymix concrete business, where does Ct decision
leave him?
Can he compete in concrete?
• Ct says that Dr’s estate – not DR – gets the
final $250K under the non-compete.
so can DR compete?
 NO – under state law, if non-compete is
reasonable, can usually enforce by injunction
* so Tarmac likely could get order enjoining
Andrews from competing in concrete
Wage substitute
• Since Dr can’t actually compete and earn
money in concrete business, the substance
and effect of the non-compete payment of
$250K is to serve as a substitute for his salary
• Note that the $250K/year figure was arrived at
to ~ that salary!
If did compete, then what?
• What would happen if Dr did compete?
• Tarmac would NOT have to pay the final $250K
payment to estate
– Material breach analysis
Some “services”?
• Could DR have kept his right to $ if he did have
to do something affirmative?
– E.g., meet annually with Tarmac,
and consult
– talk some ready-mix talk
Now at least SOME of $250K would have to be
excluded
* May have attribution issue – how much for services vs
how much for doing nothing
Compare Schmitz and Andrews
Fish? No – any fisherman
would do – need not be DR
not do concrete? YES – DR
alone must not compete