BANKRUPTCY CORNER
BANKRUPTCY CORNER
Preference Actions are Property of the Estate that May Be Sold
JASON S . RIGOLI
In January , the United States Court of Appeals for the Fifth Circuit ruled that preference actions under 11 U . S . C . § 547 can be sold by a trustee or debtor in possession pursuant to 11 U . S . C .§ 363 . See Briar Cap . Working Fund Cap ., L . L . C . v . Remmert ( In re S . Coast Supply Co .), 2024 U . S . App . LEXIS 1417 , 91 F . 4th 376 ( 5th Cir . Jan . 22 , 2024 ).
Preference Claims
A preference is a claim arising from 11 U . S . C . § 547 and allows a trustee to avoid a transfer of the Debtor ’ s interest in property that occurred within a short period prior to the date of filing of the bankruptcy petition .
See 11 U . S . C . § 547 ( b )( 4 ). The purpose of § 547 is twofold : ( i ) to discourage creditors from racing to the courthouse and ( ii ) equality of distribution among creditors of the estate . See 5 Collier on Bankruptcy P 547.01 ( 16th 2023 ) ( citations omitted ).
Property of the Estate
Property of the bankruptcy estate is governed by 11 U . S . C . § 541 . Section § 541 ( a )( 1 ) includes in property of the estate “ all legal and equitable interests of the debtor in property .” 11 U . S . C . § 541 ( a )( 1 ). As the Fifth Circuit noted “ preference actions are a mechanism in the Bankruptcy Code by which additional property is made available to the estate , fitting squarely within the Whiting Pools definition . A successful preference claim avoids the allegedly preferential transfer and returns that property to the estate . Additionally , claims to avoid allegedly preferential transfers arise with the filing of the bankruptcy petition , making them property that the debtor has an interest in as of the commencement of the case .” Briar Cap ., 2024 U . S . App . LEXIS 1417 at * 11 ( citations omitted ).
Section 541 ( a )( 7 ) of the Bankruptcy Code augments the estate by including “ any interest in property that the estate acquires after the commencement of the estate .” Furthering its argument , the appellant in Briar Cap . contended that “ a right of action that accrues post-petition is estate property if it is created with or by property of the estate or related to or arises out of property that is already part of the estate .” Briar Cap ., 2024 U . S . App . LEXIS 1417 , at * 11-12 ( internal quotation marks omitted ). The Fifth Circuit agreed with the appellant , its prior precedent on whether preference claims constitute property of the estate , and the opinion of the United States Court of Appeals for the Eight Circuit in In re Simply Essentials ,
LLC , 78 F . 4th 1006 , 1006 ( 8th Cir . 2023 ). Briar Cap ., 2024 U . S . App . LEXIS 1417 at * 11- 12 ( citations omitted ).
The Sale of Property of the Estate
“ As a general bankruptcy rule , a debtorin-possession , ‘ after notice and a hearing , may use , sell , or lease . . . property of the estate .’” Briar Cap ., 2024 U . S . App . LEXIS 1417 at * 9 ( quoting 11 U . S . C . § 363 ( b )( 1 ) ( emphasis added in original )).
Having determined preference actions to be property of the estate , the Fifth Circuit then determined that pursuant to 11 U . S . C . § 363 ( b ), the trustee or debtor in possession may sell the preference action , Briar Cap ., 2024 U . S . App . LEXIS 1417 at * 12 , and joined the Eighth and Ninth Circuits which had held the same . Id . at * 12-15 ( collecting cases from the Eighth and Ninth Circuits ). The Fifth Circuit also found that the ability to sell preference claims is consistent with the duties of a trustee , which is to maximize the value of the estate ’ s assets for the benefit of creditors of the estate .
Does Not Need to be A Representative of the Estate
The Fifth Circuit addressed the separate issue with respect to Chapter 11 bankruptcies , and whether 11 U . S . C . § 1123 ( b )( 3 ), which states that a chapter 11 “ plan may provide for the settlement or adjustment of any claim or interest belonging to the debtor or the estate ’ or ‘ the retention or enforcement by the debtor , by the trustee , or by a representative of the estate appointed for such purpose of any such claim .’” Id . at * 18-19 . Finding that the Bankruptcy Code “ provide difference mechanisms by which a debtor-inpossession may liquidate its assets [,]” the Fifth Circuit looked at the language of 11 U . S . C . § 363 and concluded that nothing in that section required the purchaser needed to be a representative of the estate . Id . at * 19-20 .
Conclusion
The Eleventh Circuit has not issued any binding opinions on the bankruptcy estate ’ s ability to sell avoidance actions , including preference actions under § 547 , however , the Fifth Circuit ’ s rationale is persuasive for trustees or debtors in possession who wish to liquidate these claims without engaging in the litigation .
One interesting thought , among others , which comes to mind from this holding is how the rationale jives with the claims process . One of the principles of preference statutes is equality of distribution and a losing preference defendant has a claim against the estate for at least the amount that has been recovered . See 5 Collier on Bankruptcy P 547.01 ( 16th 2023 ), supra . If the preference defendant loses , how does that defendant recoup its pro rata recovery from the estate ? How does such a result ensure “ equality of distribution ”? And , if , as in Briar Cap ., the estate sells the claim as part of a “ credit bid ” could the estate in fact be harmed by the losing defendant still being allowed a claim ?
This article was submitted by Jason S . Rigoli , Esq ., Furr and Cohen , P . A ., 2255 Glades Road , Suite 419A , Boca Raton , FL 33431 , jrigoli @ furrcohen . com
PBCBA BAR BULLETIN 11