The U.S. Court of Appeals for the Seventh Circuit has held that a debtor who was the sole shareholder in his company could not claim vehicles owned by his company were exempt from his bankruptcy estate.

Because the debtor did not dissolve his company before filing for personal bankruptcy, the shares of his company passed from the debtor to the bankruptcy estate upon filing, the Seventh Circuit noted in Fowler v. Shadel, No. 04-3119 (7th Cir. March 15, 2005). The equitable interest in the vehicles at issue passed with the shares from the debtor to the bankruptcy estate as well, the court concluded.

The debtor in Fowler was the sole stockholder of a trucking company, Fowler Trucking, Inc., who filed for Chapter 7 bankruptcy and elected to pass up the federal bankruptcy exemptions in favor of those permitted under Wisconsin law. While he did not claim his stock in the trucking company was exempt from the bankruptcy estate, he did claim exemptions under Wisconsin law for the Mack truck he drove for a living and a Chevy Impala automobile also owned by the company.

The trustee filed an objection to these exemptions, the bankruptcy court sustained the objection, and the debtor appealed. On appeal, the district court affirmed the bankruptcy court, holding that just like a stockholder in a publicly traded corporation, Fowler could not treat corporate property as his own for exemption purposes.

The district court noted that Fowler had received certain advantages by creating a corporation, such as protecting his personal assets from the satisfaction of corporate debts. By the same token, he surrendered ownership of such corporate assets and had no right to claim them as property exempt from inclusion in his bankruptcy estate, the court concluded.

On appeal to the Seventh Circuit, Fowler claimed he ad an equitable interest in the assets of Fowler Trucking, Inc. because he was the company’s sole shareholder. He claimed this equitable interest entitled him to an exemption from the estate for the vehicles under a Wisconsin statute that exempts from bankruptcy estates various types of property, including business and farm property, consumer goods and motor vehicles.

The court noted that Fowler could have become the legal owner of the vehicles by dissolving the corporation before filing for bankruptcy.

“However, by filing for bankruptcy first, Fowler’s shares of stock passed at the time of filing to the bankruptcy estate and become property of the trustee,” the court stated. “The equitable interest was attached to the shares of stock.”

“The corporate assets of Fowler Trucking, Inc. are not property of the debtor and therefore cannot become property of Fowler’s bankruptcy estate,” the court concluded.

The Seventh Circuit acknowledged the difficult circumstances in which its ruling left the debtor.

“We follow in the footsteps of the bankruptcy court and the district court in expressing our sympathy to Fowler for the consequences of this holding, which will apparently deprive him of the use of the truck by which he generates most of his income,” the court stated.

“As the matter stands now, we cannot breath[e] life into an equitable interest that followed the shares of stock.”

The ruling clarifies that corporate owners cannot have their cake and eat it too: they cannot reap the benefits of corporate ownership, such as personal protection from corporate liability, but then claim exemptions for corporate property in personal bankruptcy.