Are Chapter 5 Claims Assets Of The Estate That A Trustee Can Sell?

• Published date: 11 January 2024
• Subject Matter: Criminal Law, Insolvency/Bankruptcy/Re-structuring, Insolvency/Bankruptcy, White Collar Crime, Anti-Corruption & Fraud
• Law Firm: Phelps Dunbar
• Author: Garrett A. Anderson and Danielle Mashburn-Myrick

This article was originally published in Volume XLIII, Issue 1 of the American Bankruptcy Institute Journal.

Introduction

Trustees owe fiduciary duties to the estate, its creditors and other parties-in-interest.¹Among other things, they have a duty to "collect and reduce to money the property of the estate for which such trustee serves, and close the estate as expeditiously as is compatible with the best interests of parties in interest."² Liquidation of real property and tangible personal property is generally compatible with an expeditious closing of the estate. Resolving estate claims and causes of action, however, can take years and often delays distributions to creditors. Yet, in determining how to most expeditiously close the estate in keeping with the best interests of parties in interest, trustees are not stuck with either litigating or abandoning causes of action. Under the right circumstances, selling causes of action, including chapter 5 causes of action, allows for the speediest and most beneficial return to creditors.

While the ' 363 sale process is fairly straightforward when dealing with real property, tangible personal property and even certain intangible property, the legal landscape is decidedly thornier when the assets to be sold are causes of action. Though it is clear that trustees are empowered to sell claims the debtor could have brought prepetition, courts are deeply divided on the trustee's power to sell claims arising under chapter 5 of the Bankruptcy Code. This article examines that division, suggests that the Bankruptcy Code, case law, policy and practicality weigh in favor of the salability of estate claims, including chapter 5 causes of action, and argues that to fulfil their fiduciary duties to the estate, trustees must consider selling claims in determining how to most expeditiously close cases in the best interests of all parties in interest.

Trustees' Authority to Sell Property of the Estate

Section 363 authorizes the trustee, after notice and a hearing, to sell "property of the estate," other than in the ordinary course of business.³ Because the trustee can only sell "property of the estate," a threshold question in any ' 363 sale is whether the asset to be sold is, in fact, property of the estate. Courts permitting the sale of avoidance powers find that such powers are transferrable property of the estate and locate support for this position in various statutory provisions. Conversely, courts rejecting a trustee's power to sell avoidance actions find that those actions are "non-transferrable statutory powers," that cannot be sold.⁴ In short, the split of authority over a trustee's power to sell chapter 5 causes of action boils down to a split over whether chapter 5 causes of action are property of the estate.⁵

Avoidance Powers are Property of the Estate That Can Be Sold

Many courts, including the Fifth, Seventh and Ninth Circuits, have either implicitly or explicitly found that avoidance actions constitute property of the estate.⁶

Section 541(a)(1)

"Property of the estate," is defined in ' 541 and includes "all legal or equitable interests of the debtor in property as of the commencement of the case."⁷ "The House and Senate Reports on the Bankruptcy Code indicate that ' 541(a)(1)'s scope is broad," including "tangible or intangible property, causes of action, and all other forms of property currently specified in section 70a of the Bankruptcy Act."⁸ Both courts and the Bankruptcy Code itself describe avoidance actions as "causes of action."⁹ Following this logic, courts have held that ' 541(a) brings into the estate avoidance actions, specifically fraudulent transfer causes of action.

In In re Moore, the Trustee sought approval of a settlement of claims against the Debtor's wife, JHM Properties, and Brunswick Homes for $37,500.¹⁰ The Debtor's largest creditor, Cadle Co., immediately offered to pay the Estate $50,000 for the claims and objected to the Trustee's proposed settlement, arguing that the Trustee's proposal was effectively a sale of estate assets, which triggered the Trustee's duty to maximize the value of claims.¹¹

On appeal, the Fifth Circuit considered the propriety of the Trustee selling the claims.¹²First recognizing that pursuant to ' 363(b)(1), 541(a)(1), and 363(b), "[a] Trustee may sell litigation claims that...