Michigan Bankruptcy Blog

Avoidance Actions Are Not Property of Estate That the Trustee Can Sell Pursuant to § 363(b)

The Bankruptcy Court of the Western District of Michigan recently denied a Trustee’s Motion to Sell Avoidance Actions pursuant to 11 U.S.C. 363(b).¹ The Trustee’s Motion sought authority to sell potential causes of actions under Chapter 5 of the Bankruptcy Code, as the estate had limited resources to pursue the actions. The Court noted that the Sixth Circuit has not decided the issue of whether a Bankruptcy Trustee has authority to sell avoidance actions.

The real issue before the Court was whether an avoidance action is “property of the estate” given a Trustee has authority to sell property of the estate pursuant to § 363(b). The Court rejected the Trustee’s argument that avoidance actions are included within property of the estate.

The Western District of Michigan Bankruptcy Court adopted the Third Circuit Court’s reasoning from Cybergenics² characterizing Chapter 5 rights as “powers.” The Court went on to recognize that public officials are not permitted to sell their official powers or delegate authority to private persons, and similarly Bankruptcy Trustees should not be permitted to do so either. The Court further reasoned that the rights to fraudulent conveyance claims belong to creditors, not debtors. As previously decided by Congress, property fraudulently conveyed does not become property of the estate until an avoidance action is complete and recovery occurs – then the property that was fraudulently conveyed becomes property of the estate.

Accordingly, for the above reasons and in the absence of controlling authority from the Sixth Circuit, the Court held that avoidance actions are not property of the estate that the Trustee can sell under § 363(b).

---

Categories: Western District of Michigan