8th Circuit: Chapter 5 Avoidance Actions Can Be Sold As Property of the
8th Circuit: Chapter 5 Avoidance Actions Can Be Sold As Property of the
Estate The Bankruptcy Code provides the trustee with powerful tools intended to enhance the value of the bankruptcy estate. Some of these tools seek to recover property that left the estate before or after the petition. Among them are causes of action that could also be available under state law, such as avoidance of “fraudulent” transfers, while others are unique to bankruptcy, such as avoidance of “preferences”.
Some courts have struggled with whether the right to pursue such causes of action are property of the estate that can be sold. To be clear, there is no question that the proceeds of such actions are property of the estate (11 U.S.C. §541(a)(3)); the question is whether the causes of actions themselves are property of the estate and, if so, whether that they can be sold, assigned, or transferred to a third-party.
Some courts have reasoned that the statutory power to avoid fraudulent transfers is exclusively exercised by the the trustee on behalf of creditors and, as such, is never actually an asset of the estate. See In re Cybergenics Corp. v. Chinery, 226 F.3d 237, 245 (3rd Cir. 2000).
Others have recognized that creditors may pursue such claims only when granted derivative standing to sue on behalf of the state. On the other hand, certain courts have focused on the canon of statutory interpretation against surplusage and concluded that avoidance actions themselves (as opposed to a contingent interest in the proceeds) cannot be property of the estate because, otherwise, §541(a)(3) would be redundant or rendered surplusage.
A recent decision out of the U.S. Court of Appeals for the Eighth Circuit made quick work of these concerns. It first noted that the Supreme Court has interpreted the definition of “property of the estate” broadly, and to include (1) property made available to the estate by other provisions of the Bankruptcy Code and (2) inchoate or contingent interests held by the debtor prior to the filing of bankruptcy.
The Eighth Circuit reasoned a debtor has an inchoate interest in the avoidance actions prior to the commencement of the bankruptcy proceedings, which meant that they are property of the estate under § 541(a)(1).
It also noted that the “canon against surplusage is not an absolute rule,” and that “[i]t is not unreasonable that Congress would repeat itself in order to ensure the results it intended were followed.” It also found support for its conclusion in holdings by the First and Fifth Circuits. See In re Moore, 608 F.3d 253, 262 (5th Cir. 2010); In re Ontos, Inc., 478 F.3d 427, 431 (1st Cir. 2007) (“It is well established that a claim for fraudulent conveyance is included within [§ 541(a)(1)] property.”).
It should be noted that the First Circuit has also held that “at least actions under §§ 547 and 548 can constitute property of the estate.” Darr v. Santos, 941 F.3d 576, 587 (1st Cir. 2019).