Whoomp! (Where'd It Go?): Disappearing Assets In Bankruptcy

• Published date: 10 August 2021
• Subject Matter: Insolvency/Bankruptcy/Re-structuring, Insolvency/Bankruptcy
• Law Firm: Bryan Cave Leighton Paisner LLP
• Author: Mr Brian Walsh

In a recent post, I discussed three situations in which a debtor in bankruptcy might find itself dispossessed of assets that appeared to be property of the bankruptcy estate. This article expands on that general idea and presents a compendium of situations in which creditors or circumstances may deprive a debtor of assets or their value.

• Adverse possession. Adverse possession is technically an application of the statute of limitations, discussed more generally below. In re Colarusso, 295 B.R. 166, 173 (B.A.P. 1st Cir. 2003). The expiration of the statutory period to recover possession, as extended by 11 U.S.C. ' 108(a), may shift ownership and control of real property from the bankruptcy estate to others. Reported decisions often arise in the context of a debtor's efforts to sell property free and clear of the interest of the adverse possessor. See, e.g., In re Catholic Bishop of Northern Alaska, 509 B.R. 229 (Bankr. D Alaska 2014) (involving caretaker's claim to 320-acre property and hot springs).
• Bankruptcy of another. A debtor's account receivable may be subject to discharge in the account debtor's bankruptcy case. Or a debtor's contractual counterparty may reject the contract in its own case. See In re Noranda Aluminum, Inc., 549 B.R. 725, 729 (Bankr. E.D. Mo. 2016) (authorizing debtor to reject contract even though counterparty pursued assumption in its bankruptcy case).
• Casualty. Debtors are not immune from fires floods, storms, and other destructive forces. In ordinary circumstances, insurance proceeds should replace the value of the damaged or destroyed asset. See In re Scholl, 605 B.R 163, 178-79 (Bankr. S.D. Ohio 2019) (rejecting Chapter 13 debtors' attempt to retain $194,000 in insurance proceeds while paying 3% dividend to unsecured creditors).
• Condemnation. A debtor that owns or controls unsafe premises can't count on the automatic stay to stall regulatory proceedings or demolition of the property. See In re Javens, 107 F.3d 359, 370 (6th Cir. 1997) (upholding bankruptcy court's determination that city could demolish apartment building and houses owned by debtor).
• Conditional gift. In Kansas, if the debtor has an engagement ring on the petition date but the wedding is called off post-petition, the ring is no longer property of the estate In re Heck, 355 B.R. 813, 823 (Bankr. D. Kan. 2006) Results may vary in other states or with other types of conditional gifts.

• Constructive trust. See my prior post on issues relating to constructive...