One of the primary roles of a Chapter 7 trustee is to ensure that the bankruptcy estate is preserved prior to liquidation. It is no wonder, then, that the Trustee’s avoidance powers are well defined by the Bankruptcy Code. Nevertheless, a string of recent cases out of the Middle District of Florida has illustrated that a trustee is not given carte blanche to avoid all transfers that diminish the estate without first establishing that it has standing to bring the avoidance action.
Under § 549 of the Bankruptcy Code, a trustee may avoid a postpetition transfer that is authorized by the Bankruptcy Code or Court. To do so, the trustee must establish that the transfer actually injured or diminished the bankruptcy estate. Establishing a causal relationship between an unauthorized postpetition transfer and a diminution of the estate does not, at first blush, seem too onerous of a task. However, a string of recent decisions out of the Middle District of Florida in the Wood Treaters case have illustrated that even if the trustee can establish that the transfer was unauthorized, it still bears a significant burden to connect the individual transfer to a direct depletion of the estate.
In Wood Treaters, the debtor filed a Chapter 11 petition and was granted conditional permission to use cash collateral to make postpetition transfers. After the case was converted to Chapter 7, the trustee sought to avoid a number of the debtor’s transfers because they had not been made in strict accordance with the cash collateral order.
Though not condoning the debtor’s unauthorized transfers, Judge Paul M. Glenn found that the trustee had failed to establish that the bankruptcy estate suffered a direct injury as a result of any particular transfer. Specifically, Judge Glenn held that the trustee failed to establish that the goods purchased in any specific transaction (i) were not fair value for the purchase price, or (ii) were re-sold at a loss by the Debtor or the liquidator. This particularity requirement was especially vexing for the trustee, because the trustee did, in fact, introduce evidence that the aggregate effect of the transfers diminished the overall value of the bankruptcy estate.
Judge Glenn’s strict interpretation of § 549 is not universally accepted, although the preliminary holding in Wood Treaters has already been adopted by the Tenth Circuit Bankruptcy Appeals Panel, as well as two lower federal courts. The effect of holding that a showing of aggregate harm will not suffice to carry the jurisdictional burden in a § 549 avoidance action may be chilling to present avoidance actions, but establishing that the estate suffered a loss as a direct result of a particular transfer is certainly not outside the trustees’ collective wheelhouse. Because trustees must now scrutinize each postpetition transfer with greater specificity, Wood Treaters should ultimately prove positive for lenders and other creditors.