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 Law

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 fundamentally different kinds 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, the creditor obtains a personal right against the

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

person who incurred the obligation. A proprietary right (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 persons.1 However, the concept of prop-

erty is also sometimes used in a wider, less technical sense to denote

all valuable rights without regard to whether they are personal rights

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.

BANKRUPTCY A ND INSOLVENCY LAW80

Bankruptcy law uses 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 rights and property

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

the bankrupt to recover a debt from another vests in the trustee, who

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

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

tween personal rights and property rights 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 the bankrupt. A right of ac-

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

the trustee. Nevertheless, most economically signif‌icant rights will be

caught by the def‌inition.

The narrower concept of property is used to differentiate between

claims against the bankrupt that are administered within the bank-

ruptcy regime and claims against the bankrupt that remain enforceable

outside it. It is here that the distinction between a personal right and

a property right is of fundamental importance. A person who has a

personal right against the bankrupt loses the right to enforce the claim

upon the occurrence of the bankruptcy.2 In its place, the claimant ob-

tains the right to prove the claim in bankruptcy and obtain a dividend

from the liquidation of the bankrupt’s assets. The matter is entirely

different if the claimant has a property right in the asset. Only those

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

owned by the bankrupt but is the property of the claimant, the claim-

ant will have the right to recover the asset from the trustee.

In many instances, both the bankrupt and the claimant will have

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

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

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

sessory lien, while the customer remains the owner of the watch. The

right to the lien is a property right that vests in the trustee, and it can

be asserted by the trustee against the 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 Bankrupt81

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

of the repairs.

The bankrupt and the claimant may have conf‌licting claims to a

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

the right to both the bankrupt and to another claimant. Property law

provides priority rules for the resolution of conf‌licting claims to the

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

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 legislation.5 If not, priority is given to the

f‌irst person to notify the debtor of the assignment.6

B. the BankruPt’s estate

1) Property Vesting in the Trustee

Upon the occurrence of a bankruptcy, the debtor’s property vests in

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

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

equitable, as well as obligations, easements and every description of

estate, interest and prof‌it, present or future, vested or contingent, in,

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

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

time of the bankruptcy. The vesting of property in the trustee occurs

through operation of law without the need for any document or act of

conveyance to give effect to the transfer.

The assets that vest in the trustee 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.).