Person or Property? On the Legal Nature of the Bankruptcy Estate
54 Pages Posted: 28 Jun 2007
This article addresses the legal nature of the bankruptcy estate: whether the bankruptcy estate is a collection of property interests, like the traditional conception of a decedent's estate, or whether the estate is the legal person in which such property interests vest, analogous to a corporation, a partnership, or an individual. The legal nature of the bankruptcy estate becomes most important when a corporation which files a chapter 11 petition becomes a debtor in possession. Suppose Acme Corporation files a chapter 11 bankruptcy petition and becomes a debtor in possession; Acme's property becomes the bankruptcy estate. What is Acme Corporation's current relationship to its property? Under what I will call the "property view," that property remains vested in Acme Corporation, a corporation in bankruptcy, with Acme subject to new rights and obligations as a debtor in possession. Under what I will call the "new person view," the commencement of the bankruptcy case (1) creates a new legal person, the Acme Estate, (2) causes Acme Corporation's property to be transferred from Acme Corporation to the Acme Estate, and (3) places Acme Corporation, the debtor in possession, as representative of the Acme Estate. The new person view is actually a new variant of a rather metaphysical legal doctrine, the "new entity" view. Part I examines relevant provisions of the Code and the tax laws, and concludes that the statutory support for the new person view is, at best, ambiguous. Part II discusses executory contracts, the area of bankruptcy law in which the new person view, and its predecessor, the new entity view, developed. Part III examines the effects of the new person view on analysis of corporate governance issues and the appropriate use of the corporate powers of the debtor during bankruptcy. Part IV turns from doctrinal analysis to legal theory and discusses whether the new person view is necessary for a noneconomic theory of bankruptcy.
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