The Fifth Circuit recently ruled that a debtor can sell a preferential transfer action under Bankruptcy Code section 363 to a purchaser that is not a representative of the bankruptcy estate. Briar Cap. Working Fund Cap., L.L.C. v. Remmert (In re S. Coast Supply Co.), No. 22-20536, 2024 U.S. App. LEXIS 1417 (5th Cir. Jan. 22, 2024). The decision follows a similar ruling last year by the Eighth Circuit. In re Simply Essentials, LLC, 78 F.4th 1006 (8th Cir. 2023).

The debtor in Briar Cap. was a distributor of industrial products. Pre-bankruptcy, the debtor had borrowed $800,000 from its former CFO. The debtor paid back part of the loan before the bankruptcy filing.

Financial problems and mismanagement of the business led to a chapter 11 filing in 2017. During the case, the debtor sued the former CFO, seeking to avoid and recover $300,000 paid on the loan.

The debtor’s chapter 11 plan included a sale of the preference action to its secured lender. The deal required the lender to abandon its security interest in $700,000 of certain sale proceeds and to waive an administrative expense claim.

The plan allowed the secured lender to keep all proceeds of the preference action, even if the proceeds exceeded the amount owed to the lender on its claim.

After the plan was confirmed, the secured lender replaced the debtor as the plaintiff in the preference action. Three and a half years into the litigation and just before trial, the former CFO asserted that the secured lender lacked standing to pursue the preference action.

The CFO argued that recovery by the secured lender would not benefit the bankruptcy estate’s creditors. The court below agreed with the former CFO and dismissed the case. The debtor appealed.

Bankruptcy Code section 363 enables debtors to “use, sell, or lease . . . property of the estate.” Consistent with rulings of other courts, the Fifth Circuit concluded that preference claims come within the broad definition of “property of the estate” under 11 U.S.C. § 541. Briar Cap. Working Fund Cap., 2024 U.S. App. LEXIS 1417, *10 (“The scope for property rights and interests included in a bankruptcy estate is very broad: The conditional, future, speculative, or equitable nature of an interest does not prevent it from being property of the estate.” (quoting In re Kemp, 52 F.3d 546, 550 (5th Cir. 1995)).

In addition, the Fifth Circuit concluded that a preference action is within the category of property set forth in Bankruptcy Code section 541(a)(7): “any interest in property that the estate acquires after the commencement of the estate.” Id. at *11-12.

The Fifth Circuit’s analysis is consistent with the Eighth Circuit’s decision in In re Simply Essentials and with other courts’ decisions as well.

Those courts, the Fifth Circuit observed, “took a broad view of what benefits the estate, which we adopt here. This logic of maximization of the estate applies even under circumstances like these, where a creditor is not pursuing the claim for the benefit of all creditors.” Id. at *14.

The former CFO also argued that the secured lender shouldn’t be allowed to pursue the preference claim because it was not a “representative of the estate.”

The Fifth Circuit disagreed, holding that, “[b]ecause we find that preference claims can be sold, we hold that [the secured lender] has standing to pursue this claim as a purchaser of the claim regardless of whether it was a ‘representative of the estate.’” Id. at *18. Thus, the court concluded, whether the assignee of a preference claim is a “representative of the estate” is “irrelevant to this appeal.” Id.