Opinion ID: 469162
Heading Depth: 2
Heading Rank: 2

Heading: The Emotional Distress Claim as Property of the Bankruptcy Estate

Text: 20 The district court held that Fehl's emotional distress claim was the property of the bankruptcy estate under 11 U.S.C. Sec. 541(a)(1). Questions of statutory interpretation are reviewed de novo. Powell v. Tucson Air Museum Foundation of Pima County, 771 F.2d 1309, 1311 (9th Cir.1985). 21 11 U.S.C. Sec. 541(a)(1) (1982) defines property of the bankruptcy estate to include all legal or equitable interests of the debtor in property as of the commencement of the case. The scope of section 541 is broad, and includes causes of action. United States v. Whiting Pools, Inc., 462 U.S. 198, 205 & n. 9, 103 S.Ct. 2309, 2313 & n. 9, 76 L.Ed.2d 515 (1983). Section 70a(5) of the Bankruptcy Act, former 11 U.S.C. Sec. 110(a)(5)(1976), the predecessor statute to section 541, defined property to include: 22 [r]ights of action, which prior to the filing of the petition [the bankrupt] could by any means have transferred or which might have been levied upon and sold under judicial process against him, or otherwise seized, impounded, or sequestered: Provided, That rights of action ... for injuries to the person of the bankrupt ... shall not vest in the trustee unless by the law of the State such rights of action are subject to attachment, execution, garnishment, sequestration, or other judicial process.... 23 The issue before us is whether the Bankruptcy Reform Act of 1978 broadened the definition of property to include a cause of action for emotional distress where such a cause of action could not be reached by creditors under state law. 1 See Purdy v. Pacific Automobile Insurance Co., 157 Cal.App.3d 59, 79-80, 203 Cal.Rptr. 524, 536 (1984). This is an issue of first impression in this circuit. The Fourth and Sixth Circuits, having analyzed the scope of section 541, reached conflicting results. 24 In Tignor v. Parkinson, 729 F.2d 977 (4th Cir.1984) the Fourth Circuit broadly construed section 541 and held that an unliquidated personal injury claim was property of the bankruptcy estate. The court, recognizing that such claims would have been excluded under former section 70a as a non-transferable interest, unreachable by creditors, reasoned: 25 The Bankruptcy Reform Act which repealed the old Bankruptcy Act is a significant change in the law applicable to the property of the bankrupt estate. Under the old Act only non-exempt property was included as part of the bankrupt estate.... Under the Reform Act, however, all property of the debtor is included in the bankrupt estate, including exempt property. After the property comes into the estate, then the debtor is permitted to exempt it under proposed 11 U.S.C. Sec. 522, and the court will have jurisdiction to determine what property may be exempted ... Legislative History, 1978 U.S.Code Cong. & Ad.News at 5787, 5868, 6324 ... The legislative history of this statute is explicit ...: The scope of this paragraph is broad. It includes all kinds of property, including tangible or intangible property, causes of action.... 26 The fact that the schedule of exemptions established by Congress in the Reform Act includes an exemption of $7,500 for personal bodily injury claims is another clear indication that 11 U.S.C. Sec. 541(a) brings such claims into the bankrupt estate in the first instance.... 27 The debtor's claims for injuries to the person ... are thus property of the bankrupt estate as of the commencement of the case. (footnotes omitted). 28 Id. at 980-81. 29 The Sixth Circuit reached a different conclusion in In re Baker, 709 F.2d 1063 (6th Cir.1983). That court declined to expand the definition of property under the Bankruptcy Reform Act to include a bankrupt's right to sue his insurance company. The court instead continued to apply the definitional test of Section 70a(5), under which the bankruptcy court first makes a state law inquiry into whether the property could have been transferred by the debtor or whether creditors could have reached it through judicial process. Id. at 1064. 30 Because under Michigan law, a cause of action for bad faith refusal to settle was not assignable, the Sixth Circuit held that the claim did not belong to the bankruptcy estate. 31 We believe the Fourth Circuit's interpretation of Section 541 represents the better view. The Bankruptcy Reform Act eliminated the restrictive language of Section 70a(5) regarding those causes of action to which a bankruptcy trustee could take title. Congress exempted personal injury payments in 11 U.S.C. section 522(d)(11)(D)(1982), and explicitly stated that exempt property is initially included in the bankruptcy estate under Section 541. H.R.Rep. No. 95-595, 95th Cong., 2d Sess. 368 (1977) reprinted in Legislative History, 1978 U.S.Code Cong. & Ad.News 5787, 5963, 6324 [hereinafter Legislative History]. 32 By adopting a comprehensive definition of property, the Bankruptcy Reform Act reduced the bankruptcy court's cumbersome reliance on state law analysis for determining property to be included in the estate. 4 Collier on Bankruptcy, p 541.02 at 541-10 (15th ed. 1985); In re Kwaak, 42 B.R. 599, 601 (Bankr.D.Maine 1984); Legislative History at 6136; 2 Matter of Jones, 43 B.R. 1002, 1005 (N.D.Ind.1984) (The Bankruptcy Code of 1978 broadened 'what is included in the bankruptcy estate by eliminating Act concepts of leviability, transferability, vested title, and fresh start' ). See also In re Mills, 46 B.R. 525, 526 (S.D.Fla.1985) (unliquidated cause of action for personal injuries property of the estate). 33 Thus, regardless of whether a personal injury claim is transferable or assignable under state law, such claims become part of the bankruptcy estate under section 541. 3