Categorizing Categories: Property of the Estate and Fraudulent Transfers in Bankruptcy
11 U.S.C. § 541 defines “property of the estate” in bankruptcy, but courts have not interpreted that section uniformly. The Fifth Circuit has read the term broadly to include both interests in property that the trustee recovers under § 541(a)(3) and legal or equitable interests under § 541(a)(1) that have purportedly been fraudulently transferred but which the trustee has not yet recovered. The Second Circuit, however, has taken a more restrained approach, holding that fraudulently transferred property that the trustee has not yet recovered does not constitute property of the estate. This Note argues that courts should adopt the Second Circuit’s restrained approach to “property of the estate.” Canons of construction indicate that fraudulently transferred property is “property of the estate” only once the trustee has recovered it. Moreover, although the Fifth Circuit’s expansive approach to § 541 attempts to equitably protect creditors, including fraudulently transferred property as “property of the estate” prior to its recovery is problematic for the administration of bankruptcy proceedings, potentially clouding title to property of the estate and thereby contravening bankruptcy’s twin goals of giving the debtor afresh start and efficiently and equitably distributing the debtor’s property to its creditors.