Document Type
Research Memorandum
Publication Date
2024
Abstract
(Excerpt)
Many courts, including the Fifth, Seventh and Ninth Circuits, have found that avoidance actions, under Chapter 5 of the Bankruptcy Code, are property of the estate. Section 541(a)(1) of the Bankruptcy Code defines property of the estate as "all legal or equitable interests of the debtor in property as of the commencement of the case," and section 541(a)(7) states that "[a]ny interest in property that the estate acquires after the commencement of the case" is estate property. The Supreme Court has interpreted the definition of "property of the estate" broadly, finding section 541(a)(1) can be read "to include in the estate any property made available to the estate by other provisions of the Bankruptcy Code." Arguments for and against avoidance actions being sold as property of the estate have been prevalent until recently, when the Eighth Circuit definitively held that avoidance actions are property of the estate and can be sold.
Chapter 5 of the Bankruptcy Code grants bankruptcy trustees the power to set aside certain types of transfers and recapture the value of these avoided transfers for the benefit of the estate. These powers are part of the bankruptcy estate. Once the transfers are avoided and the property is recovered, the property becomes part of the bankruptcy estate and is available for distribution to creditors. Further, "[u]pon the commencement of a case in bankruptcy, all corporate property passes to an estate represented by the trustee." The trustee is then "accountable for all property received," and has the duty to "collect and reduce to money the property of the estate for which such trustee serves, and close such estate as expeditiously as is compatible with the best interests of the parties."
This memorandum will explore the differing arguments for whether chapter 5 avoidance actions may be sold as property of the estate. Part I will discuss what constitutes property of the estate under 11 U.S.C §541(a)(1)-(7) and the analysis of why avoidance actions can be sold as such. Part II analyzes the legal arguments against avoidance actions being property of the estate with analysis from both sides of the issue and how it has been analyzed in previous courts. Part III will conclude with an overall summary of the issue.