Eighth Circuit: Avoidance Causes Of Action Are Property Of The Bankruptcy Estate That Can Be Sold

Published date12 December 2023
Subject MatterCriminal Law, Insolvency/Bankruptcy/Re-structuring, Insolvency/Bankruptcy, White Collar Crime, Anti-Corruption & Fraud
Law FirmJones Day
AuthorJulian E.L. Gale

A debtor's non-exempt assets (and even the debtor's entire business) are commonly sold during the course of a bankruptcy case by the trustee or a chapter 11 debtor-in-possession ("DIP") as a means of augmenting the bankruptcy estate for the benefit of stakeholders or to fund distributions under, or implement, a chapter 9, 11, 12, or 13 plan. However, it is less well understood that causes of action that become part of the bankruptcy estate in connection with a bankruptcy case (e.g., fraudulent transfer, preference, or other litigation claims) may also be sold or assigned by a trustee or DIP during bankruptcy to generate value.

The U.S. Court of Appeals for the Eighth Circuit examined the circumstances under which estate avoidance claims can be sold in Pitman Farms v. ARKK Food Co. LLC (In re Simply Essentials LLC), 78 F.4th 1006 (8th Cir. 2023). In affirming an Iowa bankruptcy court's ruling that avoidance causes of action can be sold as property of the estate, the Eighth Circuit rejected the argument that such causes of action cannot constitute estate property because avoidance claims "belong" only to the trustee or the DIP. In so ruling, the Eighth Circuit adopted the broad majority view that estate property includes a debtor's "inchoate or contingent" interests.

Broad Scope of Property of the Estate

When a debtor files a bankruptcy petition, the filing creates an "estate" that consists of, among other things, "all legal or equitable interests of the debtor in property as of the commencement of the case" (with certain exceptions) as well as all property that the estate acquires "after the commencement of the case." 11 U.S.C. ' 541(a)(1) and (a)(7). Also included in "property of the estate" is "[a]ny interest in property that the trustee [or DIP] recovers" under various provisions of the Bankruptcy Code (see 11 U.S.C. ' 541(a)(3)), including section 550, which authorizes the trustee or DIP to recover any property (or its value) that has been fraudulently or preferentially transferred by the debtor during a specified period prior to its bankruptcy filing. The estate also includes any property interest that a bankruptcy court orders to be transferred to the estate or preserved for the estate's benefit because it is either a lien securing an equitably subordinated claim (see 11 U.S.C. ' 510(c)) or an avoided transfer (see 11 U.S.C. ' 551). In addition, under section 541(a)(6) of the Bankruptcy Code, estate property includes any "[p]roceeds, product, offspring, rents, or profits of or from property of the estate," with certain exceptions.

Section 541 "is intended to include in the estate any property made available to the estate by other provisions of the Bankruptcy Code." City of Chicago, Illinois v. Fulton, 141 S. Ct. 585, 589 (2021). Carefully defining the scope of estate property in a given case may be critical to the outcome of the bankruptcy. Property of the estate is protected (with certain exceptions) by the automatic stay under section 362; it may generally be sold, used, or leased under section 363; and, if unencumbered or non-exempt, it is available to stakeholders for distribution under a chapter 9, 11, 12, or 13 plan. Given the importance of estate property, courts have found that a wide variety of interests of the debtor qualify as property of the...

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