BANKRUPTCY BULLETIN
Contributing Author:
Hong (Sophia) Yao
University of Minnesota Law School
J.D. Candidate, 2024
Judicial Extern to U.S. Bankruptcy Judge Kesha Tanabe
In In re Simply Essentials, LLC, 78 F.4th 1006 (8th Cir. 2023), the United States Court of Appeals for the Eighth Circuit (“Eighth Circuit”) held that Chapter 5 avoidance actions can be sold as property of the bankruptcy estate.
In the Chapter 7 case, the trustee determined the bankruptcy estate did not have sufficient funds to pursue avoidance actions it held against a creditor (“Creditor 1”). As a result, the trustee sought bids to compromise and sell the actions. Creditor 1 argued that the Chapter 5 avoidance actions were not part of the bankruptcy estate under 11 U.S.C. § 541(a) and offered to pay $1 million for the avoidance actions. Another offer was received from a different creditor (“Creditor 2”). Creditor 2’s offer included to assume the litigation costs for the avoidance actions, share recovery in the litigation, and reduce its bankruptcy claim from $23.4 million to $2.5 million. The trustee determined Creditor 2’s offer was superior, and filed a motion to approve a compromise and sale. The bankruptcy court approved the motion to sell to Creditor 2.
On appeal, Creditor 1 argued that avoidance actions are not property of the bankruptcy estate. In rejecting the argument, the Eighth Circuit looked to case precedents, the broad scope of property of the estate under § 541(a), the policy to encourage reorganization/rehabilitation of the debtor, the debtor’s inchoate interest in avoidance actions prior to bankruptcy, and canons of statutory construction. Further, the Eighth Circuit rejected the argument that the trustee’s sale of the avoidance actions would violate the trustee’s fiduciary duties because those duties are to maximize the value of the estate, including through the sale of avoidance actions.
Accordingly, the Eighth Circuit affirmed that Chapter 5 avoidance actions were property of the estate and affirmed the bankruptcy court’s order approving the sale.
To read the Eighth Circuit’s decision, click here.
Editors-in-Chief:
C.J. Harayda, Stinson LLP
David M. Tanabe, Winthrop & Weinstine, P.A.