Property of the Bankrupt

• Author: Roderick J. Wood
• Profession: Faculty of Law University of Alberta
• Pages: 79-117

79

chaPter 4

PROPERTY OF THE

BANKRUPT

a. the cOncePt OF PrOPerty in

BankruPtcy L aw

The concept of property is central to bankruptcy law. In order to under-

stand its use, one must know something about the meaning of this con-

cept in the wider context of the general law. Most often, the concept is

employed to distinguish between two fund amentally different kind s of

rights — personal rights and proprietary tights. A personal right (also

referred to a right in personam) is one that is enforceable against an

identif‌iable person or a def‌inite class of persons. When a creditor lends

money to a debtor, t he creditor obtains a personal right against the

debtor to recover t he debt. The right is enforceable only against the

person who incurred the obligation. A proprietary r ight (also referred

to as a right in rem) is a right in respect of a thing. The right is available

against an indef‌inite class of person s.1 However, the concept of prop-

erty is also sometimes used in a wider, les s technical sen se to denote

all valuable rights without regard to whether they are personal r ights

or proprietary rights.

1 It is sometimes s aid that it is a right enforceable ag ainst the entire world, but

this is not a nece ssary condition for a propert y right. For example, a f‌inder ha s

a property ri ght in the goods that is good aga inst the world except for the true

owner, and a subordin ate secured creditor has a prop erty interest in the coll at-

eral that i s trumped by that of a senior s ecured creditor.

BANKR UPTCY A ND INSOLVENCY LAW80

Bankruptcy law use s the wider meaning of property in one context

and the narrower meaning in another. One must be careful when using

the term in order to understand which sense is intended. The wider

meaning is used in identifying which of the debtor’s assets will be

available to satisfy the claims of the creditors. The Act def‌ines property

in a very broad manner that sweeps both personal r ights and propert y

rights into the bankrupt estate. For example, a personal r ight held by

the bank rupt to recover a debt from another ve sts in the trustee, who

thereby obtains the right to commence an action to recover the debt. In

this respect, the def‌inition of propert y is not drawing a distinction be-

tween personal rights and property right s but rather is using the term

in the broad sense as including all the assets of the bankrupt. This does

not pick up absolutely every right held by t he bankr upt. A right of ac-

tion to recover d amages in tort for pain and suffering does not vest in

the tru stee. Nevertheless, most economically signif‌icant rights w ill be

caught by the def‌inition.

The narrower concept of property is used to differentiate between

claims against the bankrupt that are adm inistered within the bank-

ruptcy regime and claims against the bankrupt that remain enforceable

outside it. It is here that the di stinction bet ween a personal right and

a property right i s of fundamental importance. A person who has a

personal right against the ban krupt loses the right to enforce the claim

upon the occurrence of the bankruptcy.2 In its pl ace, the clai mant ob-

tains the r ight to prove the claim in b ankruptcy and obtain a dividend

from the liquidation of t he bankr upt’s a ssets. The matter is entirely

different i f the claimant has a property r ight in the asset. Only t hose

assets that belong to the bankrupt vest in the trustee.3 If the asset is not

owned by the bankrupt but i s the property of the claimant, the claim-

ant will have the r ight to recover the asset from the trustee.

In many instances, both the ban krupt and the claimant will have

property rights in the same thing. Consider the case of a bankrupt who

operated a jewelry store a nd repaired a watch owned by a customer.

The bankr upt has a property right in the watch in the form of a pos-

sessory lien, while the customer rem ains t he owner of the watch. The

right to the lien is a property right t hat vests i n the tr ustee, and it can

be asserted by the trustee against t he customer. However, the lien se-

cures only the cost of the repairs and does not give the trustee the right

2 The right is not lost but is mer ely suspended in respect of ce rtain kinds of

claims t hat survive the dis charge of an individual ba nkrupt. See Chapter 10,

Section G.

3 Bankruptcy an d Insolvency Act, R.S.C. 1985, c. B-3, s. 71 [BIA].

Property of t he Bankrupt 81

to the full value of the watch unless it happens to b e less than the cost

of the repairs.

The ban krupt and the claimant may h ave conf‌licting claims to a

right. For example, a person to whom a debt is owed may have assigned

the right to both the bankrupt a nd to another clai mant. Proper ty law

provides priority rules for the resolution of conf‌licting claims to the

thing.4 In the example above, priority between the trustee in bank rupt-

cy and the claimant is resolved according to the order of registration in

the personal property registry if the assignments were within the scope

of personal property security legi slation.5 If not, priority is given to the

f‌irst person to notify t he debtor of the assignment.6

B. the Bank ruPt’s estate

1) Property Vesting in the Trustee

Upon t he occurrence of a bankruptcy, the debtor’s property vests in

the trustee i n bankruptcy.7 The def‌inition of property is very wide and

encompasses any t ype of property “whether real or person al, legal or

equitable, as well as obligations, easements and every descr iption of

estate, interest and prof‌it, present or future, vested or contingent, i n,

arising out of or incident to propert y.”8 The def‌inition covers both per-

sonal rights and property rights that are held by the bankrupt at the

time of the bankruptcy. The vest ing of property in the trustee occurs

through operation of law without t he need for any document or act of

conveyance to give effect to the transfer.

The assets t hat vest in the tr ustee are subject to all the limitations

or defences that could be asserted against the bankrupt.9 Thi s is w hat is

4 The subject matter of the prop erty right can be a per sonal right, such as a

debt. Propert y law def‌ines who has the bett er claim to the debt. However, the

subject matter agai nst which the competing cla imants assert t heir proprietary

claims — the debt — remains a person al right. It is enforceable by legal a ction

against the p erson who owes the obligation (the account debtor). If the account

debtor also goes b ankrupt, the part y who has the better claim t o the debt will

nevertheles s lose the right to sue on it and wil l instead obtain only th e right to

prove for a dividend in t he bankruptcy of the account debtor.

5 See R. Cuming, C . Walsh, & R. Wood, Personal Prope rty Security Law (Toront o:

Irwin, 2 005) at 92 and 309–12.

6 Dearle v. Hall (1828), 3 Russ. 1.

7 BIA, above note 3, s. 71.

8 Ibid., s. 2 “property.”

9 Yale v. MacMaster (1974), 18 C.B.R. (N.S.) 225 (Ont. H.C.J.).