Opinion ID: 147670
Heading Depth: 2
Heading Rank: 2

Heading: The Fraudulent-Transfer Claims

Text: Whether an action brought under state law belongs to the estate under § 541(a)(1) depends on whether the debtor could have brought that action at the commencement of the case. [6] At least one of our decisions reads MortgageAmerica broadly to hold that fraudulent-transfer claims brought under Texas law are property of the estate under § 541(a)(1). [7] That reading of MortgageAmerica conflicts with S.I. Acquisition: In addressing the Fraudulent Transfer action, we held that under Texas law this cause of action was assertable only by a creditor and did not belong to the debtor corporation [citing MortgageAmerica, 714 F.2d at 1272-73]. Even though this claim therefore could not be treated like the other two actions, [which we held to be property of the estate,] we nevertheless held that it also was stayed pursuant to section 362(a)(3). Our reasoning was that while the defendant in the state court action was not the debtor, but a control person of the debtor, the creditor's suit sought to recover property of the debtor's estate. S.I. Acquisition, 817 F.2d at 1150. [8] Our decision in Educators nevertheless controls, because the above discussion in S.I. Acquisition is dictum. [9] Thus, under our precedent, the Texas fraudulent-conveyance actions are property of the estate under § 541(a)(1) that the trustee may sell to Cadle. [10] Yet we hesitate to rest our decision entirely on that basis, because of the conflict between Educators and S.I. Acquisition and because of the tension between that result and the general rule that an action belongs to the estate under § 541(a)(1) only if the debtor could have brought that action at the commencement of the case. [11] But § 541(a)(1) is not the only provision under which property may become property of the estate. Although that section often provides the bulk of estate assets and thus is the focus of property of the estate analysis, the trustee's avoidance powers, allow the trustee to enlarge the property of the estate after commencement of the case. See Gaudet v. Babin (In re Zedda), 103 F.3d 1195, 1201 (5th Cir. 1997). The relationship between property of the estate under § 541 and the strong-arm powers of [§ 544] is one of the most important and least appreciated in all of bankruptcy law . . . . Too often lawyers focus exclusively on § 541 and forget that § 544 does much of the work. DOUGLAS G. BAIRD, ELEMENTS OF BANKRUPTCY 125 (4th ed.2006). Central to this bankruptcy is the trustee's power under § 544(b), which allows him to succeed to the actual, allowable and unsecured claims of the estate's creditors. See 11 U.S.C. § 544(b). If an actual, unsecured creditor can, on the date of the bankruptcy, reach property that the debtor has transferred to a third party, the trustee may use § 544(b) to step into the shoes of that creditor and avoid the debtor's transfer. Although the cause of action belonged to one creditor, any property the trustee recovers becomes estate property and is divided pro rata among all general creditors. [12] The trustee may recover the full extent of the fraudulently transferred property on the basis of one creditor's claim. Moore v. Bay, 284 U.S. 4, 52 S.Ct. 3, 76 L.Ed. 133 (1931). In other words, an entire transfer may be set aside even though the creditor's claim is nominal. 5 COLLIER ON BANKRUPTCY ¶ 544.09[5] (15th ed. rev.2009). The trustee's successor rights arise under federal law, but the extent of those rights depends entirely on applicable state law. That distinction creates important differences between fraudulent transfer actions brought under § 544(b) and those pursued under § 548. For example, a four-year limitations period applies to fraudulent transfer actions brought under Texas law, whereas the § 548 reachback period is limited to two years. Compare TEX. BUS. & COMM.CODE ANN. § 24.010(a)(1) with 11 U.S.C. § 548(a)(1). Cadle is an actual unsecured creditor that brought fraudulent-conveyance claims against defendants under Texas law before commencement of the bankruptcy. Because those claims sought to recover estate property, the automatic-stay provisions of § 362(a)(3) barred Cadle from pursuing the fraudulent-transfer claims individually once the petition was filed. See MortgageAmerica, 714 F.2d at 1275. At the same time, the trustee stepped into Cadle's shoes under § 544(b) and assumed control of the claims for the benefit of all general creditors. The question we must next address is whether, by operation of § 544(b), those fraudulent-transfer claims became property of the estate that may be sold. A split of authority exists as to whether the trustee may sell causes of action that arise from his avoidance powers. [13] We focus narrowly on the trustee's ability to sell causes of action that he has inherited from creditors under § 544(b)causes of action that exist independent of the bankruptcy proceeding. It is well established that a claim for fraudulent conveyance is included within . . . [estate] property. [14] [T]he right to recoup a fraudulent conveyance, which outside of bankruptcy may be invoked by a creditor, is property of the estate that only a trustee or debtor in possession may pursue once a bankruptcy is under way. Nat'l Tax Credit Partners, L.P. v. Havlik, 20 F.3d 705, 708-09 (7th Cir.1994). Although fraudulent-transfer claims under Texas state law could not be brought by the debtor, MortgageAmerica, 714 F.2d at 1272, such claims become estate property once bankruptcy is under way by virtue of the trustee's successor rights under § 544(b), Havlik, 20 F.3d at 708-09. The trustee may therefore sell these state law fraudulent-conveyance actions back to Cadle. [15] Allowing a trustee to sell § 544(b) rights of action is in accord with the trustee's existing powers. In chapter 11 cases, for instance, a party other than the debtor or the trustee may be authorized by a plan of reorganization to exercise avoidance powers. McFarland v. Leyh (In re Tex. Gen. Petroleum Corp.), 52 F.3d 1330, 1335 (5th Cir.1995). Outside the context of a reorganization plan, we have consistently recognized that a single creditor may bring a chapter 5 avoidance action on behalf of the trustee after court approval. [16] The Bankruptcy Code permits an individual creditor to pursue a fraudulent-conveyance action, for the benefit of the estate, in the name of the trustee but at the creditor's own risk and expense. [17] Moreover, a sale of assets under § 363 requires notice and a hearing and is subject to court approval. See Cont'l, 780 F.2d at 1226. Courts will look to the trustee's articulated business justification or sound business reasons for the proposed sale. Id. Any sale of § 544(b) actions would therefore undergo careful judicial scrutiny pursuant to existing § 363(b) requirements. [18] We conclude, therefore, that the fraudulent-transfer claims are property of the estate under § 541(a)(1) per Educators, 25 F.3d at 1285-86. In the alternative, the fraudulent-transfer claims became estate property under § 544(b) andlike other estate propertymay be sold pursuant to § 363(b). [19] The bankruptcy court's ruling that the claims could not be sold was legal error, and its approval of the proposed settlement was an abuse of discretion. The court's failure to consider the consequences to the estate of a sale was also an abuse of discretion. [20]