Ruling on an issue where the Eighth Circuit has not yet taken a position, Chief Bankruptcy Judge Thad T. Collins of Cedar Rapids, Iowa, held that chapter 5 avoidance actions are property of the estate that a trustee can sell.
The Eighth Circuit may soon take a position on the question, because Judge Collins granted a motion for direct appeal to the circuit. The Court of Appeals must accept the case before there can be a direct appeal.
The idea that avoidance actions are not estate property finds support in some of the language of the statute. Basically, the theory against estate property rests on the idea that avoidance actions are not property of the debtor on the filing date.
First, note that the definitions of estate property in Section 541(a) do not contain the expansive word “including.” Rather, the section says that property of the “estate is comprised of all of the following property . . . .”
With exceptions not applicable, Section 541(a)(1) says that “all legal or equitable interests of the debtor in property as of the commencement of the case” are property of the estate. Section 541(a)(7) says, “Any interest in property that the estate acquires after the commencement of the case” is estate property.
The theory that avoidance actions are not estate property goes this way: The estate could not acquire avoidance actions after filing because avoidance actions were not property of the debtor on the filing date. In his April 5 opinion, Judge Collins confronted the argument advocated by a defendant in a contemplated avoidance action.
The chapter 7 trustee of a corporate debtor believed he had meritorious but complex avoidance claims against a creditor. However, the trustee lacked funds to prosecute the claims.
Another creditor offered to buy the avoidance actions and share a portion of the proceeds with the trustee. The target of the avoidance actions made a counteroffer to extinguish the claims by buying them from the trustee.
Deciding to take the offer from the creditor who was offering to share recoveries with the estate, the trustee filed a motion to sell the claims. The target defendant objected on two grounds: The claims were not estate property that the trustee could sell, and even if the claims were estate property, the target defendant contended that its offer was better.
Granting the trustee’s motion to sell, Judge Collins first dealt with property of the estate.
Judge Collins said that the target defendant’s argument was “far from fanciful or frivolous” and that there was “[s]ome . . . caselaw . . . favorable to” the objector.
For starters, Judge Collins rejected the objector’s contention that Section 541(a)(7) applies only to cash the trustee would receive after winning the suit. He said, “There is no such limitation to the language” in Section 541(a)(7).
Next, Judge Collins found guidance from the Eighth Circuit’s holding that the definition of property of the estate is “very broad.” Similarly, he cited the circuit for holding that estate property includes causes of action. However, a debtor’s causes of action on the filing date may be estate property, but avoidance actions that only arise on filing are a different matter that Judge Collins went on to discuss.
Of significance, Judge Collins cited the Eighth Circuit for holding that a creditor may bring an avoidance action on behalf of the estate when the trustee has declined to sue. The appeals court, he said, “reasoned that if the action was for the benefit of the estate, a creditor could obtain derivative standing as long as the creditor showed that the action was both necessary and beneficial to the fair and efficient resolution of the bankruptcy proceeding.”
In the case before him, Judge Collins said, “There is no question that pursuit of these causes of action is both necessary and beneficial to the proper administration of the estate.”
Holding that avoidance actions are estate property “makes sense for practical reasons,” Judge Collins said. “To allow parties otherwise facing meritorious Chapter 5 avoidance claims to escape those claims because the Trustee cannot afford to pursue them and they cannot be sold or transferred would be an absurd result,” he said.
Judge Collins held that the avoidance actions were estate property, based on the “Code, case law, and common sense.”
Having found the power to sell, Judge Collins turned to the question of whether the trustee should have accepted the offer to share recoveries or the all-cash offer from the target.
Judge Collins found that the trustee’s testimony was “credible and very persuasive” and cited the trustee’s “vast experience” along with his “reasonable and thoughtful” reasons for selecting the winning offer.
Giving the trustee the required “substantial deference” and finding that the offer was above the lowest point in the range of reasonableness, Judge Collins approved the sale.
Ruling on an issue where the Eighth Circuit has not yet taken a position, Chief Bankruptcy Judge Thad T. Collins of Cedar Rapids, Iowa, held that chapter 5 avoidance actions are property of the estate that a trustee can sell.
The Eighth Circuit may soon take a position on the question, because Judge Collins granted a motion for direct appeal to the circuit. The Court of Appeals must accept the case before there can be a direct appeal.
The idea that avoidance actions are not estate property finds support in some of the language of the statute. Basically, the theory against estate property rests on the idea that avoidance actions are not property of the debtor on the filing date.
First, note that the definitions of estate property in Section 541(a) do not contain the expansive word “including.” Rather, the section says that property of the “estate is comprised of all of the following property . . . .”