Enrica Brook
St. John’s University School of Law
American Bankruptcy Institute Law Review Staff
In Pitman Farms v. ARKK Food Co., LLC, the United States Court of Appeals for the Eighth Circuit held that avoidance actions, under chapter 5 of title 11 of the United States Code (the “Bankruptcy Code”), are property of the estate under Section 541(a) that a trustee may sell “free and clear.”[1]
Simply Essentials, LLC (“Simply Essentials”) operated a chicken production and processing facility in Iowa and had run into financial issues.[2] Certain “disgruntled farmers brought an involuntary petition under Chapter 7 of the Bankruptcy Code” against Simply Essentials.[3] On April 5, 2022, an order for relief was entered and a chapter 7 trustee (the “Trustee”) was appointed. Two creditors - Pitman Farms and ARKK Food Company (“ARKK”) - filed claims against Simply Essentials’ estate.[4] The Trustee “determined the estate did not have sufficient funds to pursue certain avoidance actions it held against Pitman Farms and received bids to compromise and sell the actions.”[5] Both creditors entered bids for the avoidance actions and the Trustee deemed ARKK’s offer to be “superior,” and “filed a motion to approve a compromise and sale.”[6] “The bankruptcy court approved the motion to sell to ARKK, and Pitman Farms appealed.”[7]
According to Pitman Farms, avoidance actions are not property of the estate but rather belong to the Trustee or to the other creditors.[8] However, the Eighth Circuit relied on the Supreme Court’s broad interpretation of “property of the estate,” holding that avoidance actions are property of the estate under section 541(a)(1), regardless of the avoidance action being brought by the trustee or the creditor.[9] The action is “brought for the benefit of the estate” and thus the action belongs to the estate.[10]
Further, Pitman Farms argued that to read subsection (1) or (7) of section 541(a) to include avoidance actions would cause surplusage in section 541(a).[11] “Subsection (1) states that property of the estate includes: ‘all legal or equitable interests of the debtor in property as of the commencement of the case’” and “subsection (7) states property of the estate includes “[a]ny interest in property that the estate acquires after the commencement of the case.”[12] As the statue has been edited over time to add specificity, redundancies across statues occur.[13] The Eighth Circuit rejected this argument by pointing to the “complex nature” and “drafting history” of the Bankruptcy Code, stating that under the plain language of section 541(a), avoidance actions are part of the estate, regardless of a surplusage.[14]
It is not unusual for Congress to repeat itself across statues, especially when doing so does not create inconsistency between the laws.[15] Thus, the plain language of section 541(a), regardless of the “possibility of creating surplusage” did not alter the court’s opinion that avoidance actions were property of the estate.[16] Additionally, the court explained that its interpretation of the Bankruptcy Code follows congressional intent. “[T]he trustee’s fiduciary duty is to ‘maximize the value of the estate.’”[17] Here, as Simply Essentials was not financially able to pursue avoidance actions, according to the Trustee, there best alternative to maximizing the value of estate was to sell the actions.
Pitman Farms argued that “allowing the sale of avoidance actions would violate the trustee’s fiduciary duty or undermine the purpose of avoidance actions.”[18] The Eighth Circuit rejected this argument by stating that the Bankruptcy Code is “consistent with the congressional intent behind including fiduciary duty to maximize the value of the estate.”[19]
Avoidance actions are aimed at preventing a debtor from transferring property that the Bankruptcy Code has deemed voidable because it places assets beyond the reach of creditors.[20] The court in In re Racing Services, Inc., held that “while trustees have the first opportunity to bring avoidance actions, other creditors may seek permission to obtain derivative standing to bring the avoidance actions on behalf of the estate when a trustee is “unable or unwilling” to do so.”[21] Here, because Simply Essentials, had an “inchoate interest in the avoidance actions prior to the commencement of the bankruptcy proceeding,” the avoidance action qualifies as property of the estate under section 541(a)(1).[22]
Additionally, Pitman Farms asserted that the property was created “in a third period of time,” a time equivalent to the moment the bankruptcy proceeding begins, however, the court disagreed. The Bankruptcy Code does not have a temporal requirement. Section 541(a)(1) of the Bankruptcy Code does not require that the debtor have a “possessory interest in the property at the commencement of the reorganization proceeding.”[23] To avoid frustrating the broad inclusion of property of the estate, the court disagrees with Pitman Farms argument.[24]
Pitman Farms had not pointed to any cases that provided a strong conclusion in support of their reasoning for avoidance actions under section 541(a) not belonging to the property of the estate. Hence, the Eighth Circuit affirmed the bankruptcy court’s conclusion that chapter 5 avoidances are property of the estate and approved the Trustee’s motion to sell the property of the estate.[25]
[1] Id. at *9.
[2] Id. at *3.
[3] Id.
[4] Id.
[5] Id.
[6] Id.
[7] Id.
[8] Id. at *4.
[9] Id. at *5.
[10] Id.
[11] Id. at *7.
[12] Id. at *4.
[13] Id, at *5.
[14] Id. at *8.
[15] Id. at *8 (citing Conn. Nat’l Bank v. Germain, 503 U.S. 249, 253 (1992).
[16] Id. at *8.
[17] Id. at *9. (citing Commodity Futures Trading Comm’n v. Weintraub, 471 U.S. 343, 352 (1985)).
[18] Id. at *9.
[19] Id.
[20] Id. at *4.
[21] Id. at *5. (citing In re Racing Services, Inc., 540 F.3d 892, 898 (8th Cir. 2008)).
[22] Id. at *7.
[23] Id. at *6. (citing United States v. Whiting Pools Inc., 462 U.S. 198, 205 (1983)).
[24] Id.
[25] Id. at *10.