In February 2020, the Delaware bankruptcy court in In re DSL Renal Holdings, LLC concluded that, under 11 U.S.C § 550(a), a trustee cannot seek recovery from avoidance actions that exceed the total amount of unsecured creditor’s claims in the case.[1] The court relied on Third Circuit interpretations of the Code’s limiting phrase “for the benefit of the estate” as equating to “for the benefit of the creditors.” From this narrow statutory interpretation, the court concluded that debtors are prohibited from benefitting from bankruptcy courts’ avoidance powers, as they are not creditors. In such a situation where a trustee seeks recovery that exceeds the amount of the claims, the court reasoned that receiving such excess funds would not benefit creditors as their claims would already be satisfied; rather, the surplus would give debtors unentitled value. Ultimately, in Delaware, a trustee is able to recover only the amount of the creditor’s claims in an avoidance action, not more.
The DSL Renal Holdings ruling reflects one side of the ongoing debate among and, in certain districts, within the bankruptcy courts. Although avoidance actions are typical claims brought in bankruptcy proceedings, the scope and application of § 550(a) is debated among the bankruptcy courts across the circuits. Section 550(a) limits a trustee’s recovery in avoidance actions to an amount that is “for the benefit of the estate.” This ambiguous language is the at the center of the differing interpretations among the bankruptcy courts and the varying extent to which recovery can be pursued in avoidance actions. Specially, the debate centers on whether the avoidance recovery sought by the trustee should be capped at the exact amount creditors had outstanding or can exceed that amount, bringing in more money for the estate.
On the other side of the debate, bankruptcy courts look to the Supreme Court case Moore v. Bay, which provides for unlimited avoidance recovery.[2] These courts have held that Moore’s reasoning allows a trustee to recover an entire transfer, even in excess of all creditors’ claims.[3] This reasoning is rooted in the interpretation of “benefit of the estate” broadly, to mean that, as long as the recovery provides some benefit to the estate, then the trustee may recover the transfer or value thereof, even if it exceeds the claims.[4] In these jurisdictions, once the trustee has established that a transfer is avoidable, the Trustee may recover the entire fraudulent transfer under § 550(a).
Both the Tenth and Eleventh Circuit bankruptcy courts agree with this latter interpretation of § 550(a) and of the phrase “for the benefit of the estate.” These courts have specifically rejected the interpretation of “benefit of the estate” to mean “payment to general unsecured creditors.”[5] Rather, the plain language of § 550(a) applies, mandating that recovery of an avoidable transfer must only result in some benefit to the bankruptcy estate.[6] “Benefit of the estate” should be construed broadly, rather than narrowly, to include indirect benefits.[7] Once the trustee has established that a transfer is avoidable and identifies a benefit, the Trustee may recover the entire fraudulent transfer under § 550(a).[8] A ‘trustee may avoid a fraudulent transfer even if the unsecured creditors have been satisfied in full.’”[9] Whether the recovery of an avoidance will benefit the estate is determined on a case by case basis.[10]
Thomas H. Curran Associates, LLP has years of experience representing Chapter 7 trustees and creditors in bankruptcy avoidance and recovery actions throughout the country, and has had success in maximizing the assets awarded for both estates and creditors. Thomas H. Curran Associates, LLP can provide both trustees and creditors innovative and strategic advice and litigation tactics to ensure the highest recovery for the bankruptcy estate.
[1] No. 11-11722 (KBO), 2020 WL 550987, at *6 (Bankr. D. Del. Feb. 4, 2020).
[2] Moore v. Bay, 284 U.S. 4, 5 (1931).
[3] See, e.g., In re DLC Ltd., 295 B.R. 593, 606-07 (B.A.P. 8th Cir. 2003), aff’d, 376 F.3d 819 (8th Cir. 2004); In re Acequia, Inc., 34 F.3d 800 (9th Cir. 1994); MC Asset Recovery, LLC v. S. Co., No. CIV.A. 1:06-CV-0417B, 2006 WL 5112612, at *4 (N.D. Ga. Dec. 11, 2006).
[4] In re Acequia, Inc., 34 F.3d at 811 (citing Trans World Airlines, Inc. v. Travelers Int’l AG (In re Trans World Airlines, Inc.), 163 B.R. 964, 967 (Bankr. D. Del. 1994)).
[5] In re C.W. Min. Co., 447 B.R. at 189; MC Asset Recovery, LLC v. S. Co., No. CIV.A. 1:06-CV-0417B, 2006 WL 5112612, at *4 (N.D. Ga. Dec. 11, 2006).
[6] In re C.W. Min. Co., 447 B.R. at 188-89 (emphasis added); see also MC Asset Recovery, LLC, 2006 WL 5112612, at *4.
[7] In re Furrs, 294 B.R. 763, 772 (Bankr. D.N.M. 2003); In re Skyway Comm. Holding Corp., 389 B.R. 801, 808 (Bankr. M.D. Fla. 2008).
[8] In re Trafford Distributing Center, Inc., 431 B.R. 263, 289 (Bankr. S.D. Fla. 2010).
[9] In re Skyway Comm. Holding Corp., 389 B.R. 801, 808 (quoting MC Asset Recovery, LLC, 2006 WL 5112612, at *6.).
[10] Id.; In re C.W. Min. Co., 447 B.R. at 189.