Selling the Trustees Powers
The overall judicial response to Hen House has been mixed. In a fraudulent conveyance action brought by a creditor, the Tenth Circuit BAP held that Hen House bars such an action by anyone other than the trustee, period. In re Fox, 305 B.R. 912 (2004). By contrast, the Third Circuit en banc reversed the decision of its panel and found that Hen House did not foreclose creditors' committees from bringing avoidance actions if the trustee/debtor-in-possession (DIP) unreasonably refused to do so. Cybergenics Corp. v. Chinery, 330 F.3d 548 (3d Cir. 2003). Obviously, the Fox reading would foreclose sale of the trustee's powers. Even the Cybergenics reading may prevent such sales because its exception is based on an unreasonable refusal by the trustee/DIP to bring the action. Does that mean the estate can never sell the powers, because such a sale would not fit within the "unreasonable refusal" idea? Or should Cybergenics be understood to state just one policy ground for a Hen House exception, leaving open the possibility that a really good result for the estate from a sale would be a second one?2
Hen House was dispositive in a Judge Paskay opinion about a sale of special powers, In re Pro Greens Inc., 297 B.R. 850 (Bankr. M.D. Fla. 2003). In this case, the TIB had sold to a buyer the estate's claims against a transferee of equipment. The claims included turnover, wrongful detainer and fraudulent conveyance. The court followed a direct path of reasoning, reminiscent of the original three-judge panel in Cybergenics. The court said that Hen House had clarified that when the statute gives a power to the trustee, only the trustee can exercise it. These powers are given to the trustee. Therefore, the buyer cannot exercise them.3
Other recent cases have continued to approve sales of TIB powers. In re Ames Dept. Stores Inc., 287 B.R. 112 (Bankr. S.D.N.Y. 2002). The debtors sold to Stop and Shop their right to assume or reject 18 leases.4 Against a major attack by the landlords, the court held that these rights are estate property, consisting of the "bonus value" of the leases. The court explained that the debtors are not selling a federal power; they retain the sole right to assume or reject. Candidly, we are not sure what that means, when the debtors apparently have agreed to assume or reject at the buyer's direction, but that point is not the one that counts.
More persuasive is the court's view that this process is really just a way of maximizing the inherent economic value of the leases. This means that a sale is merely an acceleration of a process that is clearly built into the Code, maximizing an asset held by the debtor. The Ames sale of 18 leases may be nothing more than a wholesale rather than a retail disposition. The landlord is arguably no worse off than in the traditional case where the debtor sells one lease at a time, assuming and assigning whenever it found a buyer, while the estate's marketing costs will be greatly reduced and the value of the leases will be realized and distributed to creditors much sooner.
As with so many decisions, the estate-maximization approach may have unexpected practical consequences that create competing policy concerns. The bulk sale of leases might tend to reduce incentives for prompt action, leaving the landlord in limbo longer, because the debtor and the bulk buyer may feel less pressure to resolve a given lease quickly. Bulk sales may also generate more litigation about whether a lease assignee will be engaged in non-conforming uses or other §365 issues. There is also a problem of perception. The pro-estate, dividend-maximization focus of §365 often means the TIB or DIP can speculate in a doubtful market over a fairly substantial period of time, a painful situation for landlords and adjacent tenants. If this "power" is sold to a third party, is there a point where the relationship between this process and recoveries by creditors becomes so attenuated and obscure that the public will see its exercise as an injustice?
That brings us to the broader question. Bankruptcy law gives the TIB extraordinary powers, but when the TIB passes them along to someone else, have the policies that support those powers been substantively changed? The TIB is visibly the court-appointed representative of creditors, but a buyer is just another self-interested party.5 Consistent with that concern, the Delaware bankruptcy court held that a sale of avoiding powers cannot be sustained if the recoveries would not flow through to the creditors.6 But the obvious response is that a lump-sum payment up front may be better for the creditors, so why draw this distinction? That point may suggest that the underlying problem is not so much "who benefits" as "who controls."
Some reaction to these concerns is beginning to echo through the courts. One recent decision refused approval of sale of an avoiding power claim. In re Metropolitan Electric Manu. Co., 295 B.R. 7 (Bankr. E.D.N.Y. 2003). The court found that the claims being sold were likely worthless, good only as devices to harass the defendants. The TIB in that case was reluctant to certify the merits of these claims. The court held that unless a TIB agrees to "bless" the merits of the claims to be sold and to be involved in deciding whether they should be brought, the sale will not be approved, even if some cash would thereby become available to creditors. The obvious premise is that TIBs will not bring unjustified suits and will be accountable if they do.7 An estate should not profit by encouraging others to engage in such shenanigans.
The court in Metropolitan emphasized that the TIB is a fiduciary to every creditor, even one that might be sued. As a court-appointed and supervised officer, the TIB is likely to be responsible and balanced in taking legal action and can be held responsible as well. The logic of Hen House may ultimately bar all these sorts of sales. If not, it is probably a good thing that the courts are starting to insist that the trustee remain a central figure in the assertion of any of the estate's unique powers, although perhaps allowed to partner with others who might provide funding and other assistance.
On the other hand, if the sale of the special powers is widely condoned, perhaps we'll see a sale of a contempt action under §362. Or maybe an auction of a chance to take a 2004 deposition. Or, let's see now....
2 In the Second Circuit, Hen House has apparently no relevance to these issues, a situation that leaves us more confused than usual. See, e.g., In re Housecraft Indus. USA Inc., 310 F.3d 64 (2d Cir. 2002). Return to article
3 The case had a stunning twist: Judge Paskay himself had approved the sale just a short time before. "A-ha," says the judge, "I made very sure that the sale was 'AS IS' and with no reps or warranties!" Yes, judge, but.... Return to article
4 The interests transferred are called "designation rights." The court says they have been described as "the right to direct the debtors to assume and assign...unexpired leases...to third parties qualifying under the Bankruptcy Code, after such non-end users locate ultimate purchasers of the unexpired leases...." Ultimately, it appears, the debtors hope to sell hundreds of leases. See, also, In re Ernst Home Center Inc., 221 B.R. 243 (BAP 9th Cir. 1998) (appeal of bankruptcy court approval of a similar scheme dismissed as moot). Return to article
7 The Second Circuit has permitted sale of a fraudulent conveyance action to a secured creditor, but explicitly rested its approval on the fact that the TIB would remain as a plaintiff and would exercise some control in the case. In re Housecraft Indus. USA Inc., 310 F.3d 64 (2d Cir. 2002). Return to article