When a debtor in bankruptcy seeks to sell assets, the transaction documents often exclude the debtor's avoidance actions from the sale. Those actions might be listed on a schedule to an asset purchase agreement titled "excluded assets." The potential lawsuits will remain with the bankruptcy estate to be pursued by the debtor, a trustee during the case, or a post-confirmation liquidation trustee. The proceeds of such actions will benefit the debtor's creditors, not the buyer of the debtor's assets.

But what if a debtor decides to sell Chapter 5 avoidance actions, those claims that seek to claw back into a bankruptcy estate's alleged preferential transfers and fraudulent transfers? May a debtor sell the actions that arise, for instance, under Sections 544, 547 and 548 of the U.S. Bankruptcy Code, to an acquirer of the debtor's assets? And, if so, what is the legal basis for including these assets in the sale? In other words, are avoidance actions part of a debtor's estate property under Bankruptcy Code, Section 541, that can be bargained away by a debtor-in-possession or a trustee for a price?

To continue reading Daniel Lowenthal's article in Law360, please click here.