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Bankruptcy's Organizing Principle Florida State University Law Review Volume 26 Issue 3 Article 1 1999 Bankruptcy's Organizing Principle David Gray Carlson [email protected] Follow this and additional works at: https://ir.law.fsu.edu/lr Part of the Law Commons Recommended Citation David G. Carlson, Bankruptcy's Organizing Principle, 26 Fla. St. U. L. Rev. 549 (1999) . https://ir.law.fsu.edu/lr/vol26/iss3/1 This Article is brought to you for free and open access by Scholarship Repository. It has been accepted for inclusion in Florida State University Law Review by an authorized editor of Scholarship Repository. For more information, please contact [email protected]. FLORIDA STATE UNIVERSITY LAW REVIEW BANKRUPTCY'S ORGANIZING PRINCIPLE David Gray Carlson VOLUME 26 SPRING 1999 NUMBER 3 Recommended citation: David Gray Carlson, Bankruptcy's Organizing Principle, 26 FLA. ST. U. L. REV. 549 (1999). BANKRUPTCY’S ORGANIZING PRINCIPLE DAVID GRAY CARLSON* I. INTRODUCTION........................................................................................................ 549 II. A SHORT HISTORY OF ESTATE CREATION ............................................................. 553 A. The Nineteenth-Century Theory..................................................................... 555 B. The 1898 Act .................................................................................................... 557 C. The Bankruptcy Code...................................................................................... 558 III. AVOIDANCE IN GENERAL ........................................................................................ 559 A. Fraudulent Conveyances................................................................................. 563 1. Ownership of the Surplus ........................................................................ 563 2. Ownership of the Enforcement Right...................................................... 573 (a) Property Ab Initio............................................................................... 574 (b) Property Only When Recovered......................................................... 576 B. Moore v. Bay .................................................................................................... 579 C. Nonrecourse Security Interests....................................................................... 583 D. Voidable Preferences ....................................................................................... 588 IV. THE CENTRALITY OF SECTION 550(a) TO AVOIDANCE THEORY ........................... 593 A. Deprizio ............................................................................................................ 593 B. Statutory Evidence .......................................................................................... 596 1. Statute of Limitations .............................................................................. 596 2. Dismissals ................................................................................................. 597 3. Lien Preservation...................................................................................... 597 4. Exempt Property ....................................................................................... 598 5. Disallowance ............................................................................................. 598 C. Section 550(a)’s True Function....................................................................... 602 D. Postconfirmation Avoidance........................................................................... 604 E. Transferees of Transferees.............................................................................. 608 V. MISCELLANEOUS MATTERS.................................................................................... 611 A. Postpetition Interest ........................................................................................ 611 B. Abandonment................................................................................................... 613 C. Exempt Property.............................................................................................. 616 VI. AVOIDANCE, NULLIFICATION, AND RECOVERY ..................................................... 620 VII. CONCLUSION ........................................................................................................... 622 I. INTRODUCTION Does bankruptcy law have an organizing principle—a spirit that unifies and animates it? Of course it does. The very invocation of the phrase “bankruptcy” evokes a domain in the mind of every lawyer and judge. Intersubjectively, bankruptcy enjoys a “rule of recogni- tion” that makes it an intelligible concept to an interpretive commu- nity. If this spirit could be identified, our knowledge of bankruptcy law would be enriched. Then hard cases could be solved by reason rather than intuition. Law would become more rational and hence more objective. * Professor of Law, Benjamin N. Cardozo School of Law. I would like to thank Tho- mas E. Plank and Jeanne L. Schroeder for their comments on an early draft of this Article. 550 FLORIDA STATE UNIVERSITY LAW REVIEW [Vol. 26:549 The organizing principle of bankruptcy I wish to identify here has to do with the creation of the bankruptcy estate. In particular, the principle must identify the mode by which property is transferred by the debtor and other entities to the trustee. This organizing principle is a myth of origin: how does bankruptcy commence, and what is the constitution of the estate? The dominant paradigm put forth at present is that the bank- ruptcy estate is created by the fiat of 11 U.S.C. § 541(a). Most rele- vantly, section 541(a) provides: The commencement of a case under section 301, 302, or 303 of this title creates an estate. Such estate is comprised of all the fol- lowing property, wherever located and by whomever held: (1) Except as provided in subsections (b) and (c)(2) of this sec- tion, all legal or equitable interests of the debtor in property as of the commencement of the case. (3) Any interest in property that the trustee recovers under sec- tion 329(b), 363(n), 543, 550, 553, or 723 of this title. (4) Any interest in property preserved for the benefit of or or- dered transferred to the estate under section 510(c) or 551 of this title.1 The orthodox view looks to section 541(a) as bankruptcy’s organizing principle. As such, section 541(a) is an ad hoc compilation of theories that cannot be unified except by the fact that the theories are listed in section 541(a). The above subsections in section 541(a) describe three different, irreconcilable ideas. Subsection 1 describes successorship: the trustee is the sorry heir to the debtor’s property as it existed on the day of the bankruptcy. This is the most important organizing principle in the orthodox view. Section 541(a)(3) is more mysterious because it contains nothing but cross-references to other bankruptcy sections.2 1. 11 U.S.C. § 541(a) (1994). I have left out the other provisions as less important theoretically to the constitution of the bankruptcy estate. Subsection 2 deals with commu- nity property, such as exists in western states. Subsection 5 deals with property inherited within 180 days of a bankruptcy petition. This ad hoc addition to the estate is designed to prevent deathbed bankruptcy petitions attempting to protect an inheritance from the creditors of the impecunious heir. Subsections 6 and 7 include proceeds of estate prop- erty—a principle that might have been deduced from the other sections. Subsection 6 also strives uncertainly to exclude from the estate the post-petition earnings of an individual debtor. 2. The other cross-references in section 541(a)(3) are as follows: Section 329(b) refers to retainer recovered by trustees from lawyers whose fees were unreasonably high. Section 363(n) refers to the trustee’s recovery from a buyer at a bankruptcy sale who colluded to keep bid prices low. Section 543 refers to the recovery of property possessed by “custodi- ans"—creditor representatives under nonbankruptcy law who have taken control of the debtor’s estate. Section 553 refers to setoffs. Specifically, section 553(b) allows the recovery of setoffs actually manifested within 90 days of bankruptcy where the creditor setting off improved its position over the 90-day period. Section 553(a) is not really an avoidance pro- vision so much as it is a defense of setoffs against other avoidance theories. Section 723 1999] BANKRUPTCY’S ORGANIZING PRINCIPLE 551 What unifies these cross-references is that they all refer to property in which the debtor has no interest as of the commencement of the bankruptcy proceeding. Rather, these cross-references encompass property the debtor alienated prior to bankruptcy, but in which the trustee has an avoidance power, or more simply, an in personam cause of action created in the Bankruptcy Code. Of particular con- cern is the cross-reference to section 550, which provides: [T]o the extent that a transfer is avoided under section 544, 545, 547, 548, 549, 553(b), or 724(a) of this title, the trustee may re- cover, for the benefit of the estate, the property transferred, or, if the court so orders, the value of such property, from— (1) the initial transferee of such transfer or the entity for whose benefit such transfer was made; or (2) any immediate or mediate transferee of such initial trans- feree.3 Again, we face a blizzard of cross-references. Most of these cross- references refer to avoidance theories—voidable preferences, fraudulent conveyances,
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