Guide-for-Nonprofit-Organizations-Bankruptcy-Issues-FINAL-with-ads

Property of the EstateOnce a debtor commences a bankruptcy case several important events occur, including thecreation of an ―estate.‖ This bankruptcy estate contains all of the ―legal and equitable interestsof the debtor in property as of the commencement of the case.‖ To understand this concept, itmight be helpful to think of a fenced off open field into which all of a debtor’s property isdumped. For example, immediately after filing a bankruptcy petition, all of the debtor’s cash istransferred to our hypothetical open field. The same is true regarding any tangible personal orreal property. At some point, the open field analogy breaks down because, as noted above, theBankruptcy Code’s concept of the bankruptcy estate also includes intangible property andproperty in which the debtor only has an ―interest.‖For some debtors, their intangible assets may be more valuable than their tangible ones. Forexample, a debtor may have a significant amount of accounts receivable outstanding as of thepetition date. Although the debtor may not have collected on these accounts, they will bebrought within the estate because the debtor has a contractual right to receive amounts that areor will become due and owing under the debtor’s contracts. Similarly, a debtor may havecommenced a lawsuit to recover damages, say for breach of contract, prior to filing bankruptcy.The debtor’s right to collect those damages, if successful in the lawsuit, will also inure to thebenefit of the estate.Indeed, the Bankruptcy Code’s definition of the estate is meant to be—and courts interpret it tobe—as broad as possible. The rationale is simple: in order to effectively deal with the debtor’spre-petition financial affairs, the bankruptcy court must take constructive control of all of thedebtor’s assets that can be used to generate value for payment to creditors. Thus, when facedwith questions regarding the corpus of the bankruptcy estate, the best rule of thumb is toconsider whether: (a) the debtor has any legal or equitable interest in the subject property; and(b) whether the subject property can be used to satisfy payments to creditors. Of course, issuesrelated to property of a bankruptcy estate can be hotly contested and there is a vast amount ofcase law interpreting Section 541 of the Bankruptcy Code. Accordingly, it is wise to seekassistance from a bankruptcy lawyer if thorny issues related to the bankruptcy estate arise.All that said, a nonprofit organization generally would have a limited universe of property.Most commonly, a nonprofit debtor’s estate will likely be made up of cash, real property, andpersonal property.“Claims” Under the Bankruptcy CodeNow that you have a basic understanding of what makes up the property of a debtor’s estate, itis important to understand the corollary to the estate: the pool of creditors’ demands on estateproperty. Just like it defines estate property as broadly as possible, the Bankruptcy Codedefines the term ―claim‖ broadly, including any ―right to payment, whether or not such right isreduced to judgment, liquidated, unliquidated, fixed, contingent, mature, unmatured, disputed,undisputed, legal, equitable, secured, or unsecured.‖The purpose behind this broad definition is the fundamental goal of bankruptcy law to, onceand for all, resolve a debtor’s pre-bankruptcy financial affairs.19