In a recent court decision that may impact the way corporations manage insolvency procedures, an appeals court has declared that chapter 5 avoidance actions are considered part of a debtor’s bankruptcy estate. These actions can be sold in section 363 sales according to the case of In re Simply Essentials, LLC, No. 22-2011, 2023 U.S. App. LEXIS 21814 (8th Cir. Aug. 21, 2023). This ruling follows a trend set by other court decisions within the appeals court system. Here is the court ruling.
Understanding Chapter 5 avoidance actions is critical for professionals in corporate legal departments and law firms dealing with bankruptcy cases. These avoidance actions allow debtors in bankruptcy to recover certain transfers of property that are deemed unfair or in violation of the bankruptcy code. They serve as an important tool to maximize the value of the bankruptcy estate for the benefit of creditors.
The decision to allow the sale of these avoidance actions in section 363 sales means they are treated as assets of the debtor’s bankruptcy estate. Section 363 of the Bankruptcy Code permits the sale of assets in a bankruptcy case, offering potential benefits to debtor companies, such as providing the ability to quickly liquidate assets to generate cash to repay creditors. It also presents opportunities for purchasers to acquire assets free and clear of any liens, claims, and other interests.
The case of In re Simply Essentials represents another step towards solidifying avoidance actions as a salable component of the debtor’s assets, a trend that we’ve seen across other appeals courts. It is not mere speculation to suggest that this decision and others like it could progressively shape how bankruptcy proceedings are managed and how corporate legal teams advise their clients about the value of avoidance actions in their bankruptcy estates.
Law firms and corporate legal departments should be aware of the implications of this ruling. Being able to sell avoidance actions could potentially maximize the value of a bankruptcy estate for the benefit of its creditors. Thus, we see the potential for a comprehensive re-evaluation of how bankruptcy law professionals approach their strategies in advising clients facing insolvency scenarios.