November 8, 2007
Avoidance Actions for the Benefit of Whom?
Two recent cases have discussed the concept of "recovery for the benefit of the estate" and have permitted avoidance actions to proceed even though nothing will be paid to unsecured creditors irrespective of the result. Both results are probably right given the specific facts of the case.
In Calpine Corp.v. Rosetta Resources, Inc. (In re Calpine), --- B.R. ---, 2007 WL 3119786 (Bkrtcy.S.D.N.Y. Oct. 27, 2007) Judge Burton Lifland, considering a FRBP 12(b)(6) motion, ruled that the debtor may proceed in its attempt to avoid its own prepetition transfer of assets to certain insiders even though unsecured creditors were going to be paid in full with interest irrespective of the result. He agreed that unsecured creditors must receive some benefit from the recovery but that does not necessarily mean in the form of payment. Here, some creditors were receiving stock under the Plan of Reorganization and therefore to the extent that the recovery benefited the debtor, it benefited the unsecured creditors. In any event, he agreed that the debtor would have to show benefit at trial to prevail.
In Gonzales v. Conagra Grocery Products (In re Furr's Supermarkets, Inc.) 373 B.R. 691 (10th Cir.BAP (N.M.) Aug. 2007) the BAP affirmed a recovery against the recipient of a preference even though the funds would go only to a secured creditor which had a lien on avoidance actions and to administrative expenses. The BAP said that payment of administrative expenses incurred before and after the conversion of the case from chapter 11 to chapter 7 was a "benefit to the estate." The trustee anticipated significant recovery after payment of the secured creditor which funds would then go to administrative expenses and that was sufficient.
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