Most creditors realize that when a debtor files a case under the Bankruptcy Code the creditor must cease all collection activity, whether that activity is directed against the debtor or against property of the bankruptcy estate. The bankruptcy estate includes all legal or equitable interests of the debtor in property, wherever located, and by whomever held. In community property states, such as Texas, property of the estate can include the non-filing spouse’s interest in community property of the marriage.
As broad as the estate is, it may surprise you to learn that property of the estate includes property as to which the debtor has an “arguable” claim. The Court of Appeals for the Fifth Circuit has ruled that if a debtor asserts an interest in property, a creditor is obliged to recognize that the automatic stay prohibits the creditor from taking action against such property even though the debtor’s claim to the property is ultimately determined to be without merit. Brown v. Chestnut, 422 F.3d 198 (5th Cir. 2005).
This concept of “arguable property of the estate” allows a debtor to protect a colorable claim in property, and forces the non-debtor claimant to seek relief from the bankruptcy estate to pursue efforts to recover the property. Since the bankruptcy estate constitutes the pool of assets from which all creditor claims are paid, the “arguable property” concept protects creditors. On the other hand, it gives the unscrupulous debtor an opportunity to erect a roadblock merely by asserting an interest in an asset.
If you are a creditor in pursuit of a particular asset, a bankruptcy debtor’s assertion of an interest in the property means that you are likely obliged to seek relief from the Bankruptcy Court before proceeding, even when you are absolutely certain that the debtor has no interest in the property.
For more information on this topic, please email Pat Autry or call him at (210) 598-5400.