4.03.2006

Fourth Circuit Notes Circuit Split re Whether Bankruptcy Law “Property of the Estate” Includes Property the Debtor Fraudulently Transferred

Per In re French, 440 F.3d 145 (4th Cir. Feb. 14, 2006) in Note 2:

The circuits are divided as to whether "property of the estate" encompasses property that a debtor has fraudulently transferred. If it does--as the Fifth Circuit has held, see Cullen Ctr. Bank & Trust v. Hensley (In re Criswell), 102 F.3d 1411, 1417 (5th Cir.1997); Am. Nat'l Bank v. MortgageAmerica Corp. (In re MortgageAmera Corp.), 714 F.2d 1266, 1275 (5th Cir.1983)--then the Bahamian property here falls squarely within § 541's definition of "property of the estate," and that provision's clear incorporation of foreign property would obviously rebut the presumption against extraterritoriality. However, not every court has agreed with the Fifth Circuit's conclusion that "property of the estate" includes property that could be, but has not yet been, recovered as the object of a fraudulent transfer. Instead, other courts have concluded that property held by third-party transferees only becomes "property of the estate" after it has been avoided and recovered. See In re Saunders, 101 B.R. 303, 304-05 (Bankr.N.D.Fla.1989); see also FDIC v. Hirsch (In re Colonial Realty Co.), 980 F.2d 125, 131 (2d Cir.1992); Dunes Hotel Assocs. v. Hyatt Corp., 245 B.R. 492, 504-05 (D.S.C.2000). Because we hold that § 548 applies to the transfer in this case even assuming that § 541's definition of "property of the estate" does not by itself extend to the Bahamian property, we need not join this dispute.

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