Bankruptcy Court Evaluates Trustee's Authority to Sell Avoidance Actions and Right of Target Defendants to Object
Disagreement exists among bankruptcy courts over whether avoidance actions (for example, fraudulent transfer and preference claims) are property of the debtor's bankruptcy estate. While most courts treat them as estate property, others have characterized them as nontransferable avoidance powers of the trustee or chapter 11 debtor-in-possession, sometimes adopting a nuanced approach to categorize the action. The practical stakes are significant. If avoidance actions are estate property, such claims may be monetized through competitive sale processes. If not, only an estate representative may prosecute them, and their value may not be fully realized if the estate lacks resources to fund litigation.
A recent decision by the U.S. Bankruptcy Court for the Western District of Pennsylvania looked at this issue together with questions of bankruptcy standing of parties to object to the proposed transfer. In In re Law Enf't Officers Sec. Union, No. 24-70277-JAD, 2026 WL 560452 (Bankr. W.D. Pa. Feb. 27, 2026) ("LEOSU"), a chapter 7 trustee sought court approval to sell certain avoidance actions to a creditor of the debtor's estate. Potential targets of the subject avoidance actions objected, arguing that such claims were nontransferable powers of the trustee rather than saleable estate property and urging the court to approve their competing settlement with the trustee. The court disagreed with the potential defendants, holding that they lacked standing to object to the proposed sale, that avoidance actions are indeed estate property, and that the sale—rather than the settlement—best served the estate's interests.
Standing
In general terms, "standing" is the legal capacity to commence litigation in a court of law. By statute, standing to raise any issue and appear and be heard on it in bankruptcy proceedings is generally accorded to "parties in interest." Parties in interest are "entities that are potentially concerned with or affected by a proceeding." Truck Ins. Exch. v. Kaiser Gypsum Co., 602 U.S. 268, 278 (2024). Section 1109(b) provides a nonexclusive list of parties in interest, including the debtor, trustee, committees, creditors, equity holders, and indenture trustees. See 11 U.S.C. § 1109(b).
Although section 1109(b) relates to chapter 11 cases, the general bankruptcy standing of parties in interest pervades other chapters of the Bankruptcy Code. See, e.g., 11 U.S.C. § 107(b) (party in interest may request protection for trade secrets, confidential research, development, commercial information, or scandalous or defamatory matter); 11 U.S.C. § 362(d) (party in interest may request relief from the automatic stay); 11 U.S.C. § 502(a) (party in interest may object to a proof of claim); 11 U.S.C. § 706(b) (party in interest may request conversion of a chapter 7 case to chapter 11).
Statutory standing under the Bankruptcy Code is distinct from constitutional standing under Article III of the U.S. Constitution, which is jurisdictional and thus cannot be waived. Although the Third Circuit has held that the standards for both forms of standing are "effectively coextensive," In re Glob. Indus. Techs., Inc., 645 F.3d 201, 211 (3d Cir. 2011), other circuit courts have conducted separate statutory and constitutional inquiries. See, e.g., In re Thorpe Insulation Co., 677 F.3d 869, 887 (9th Cir. 2012); In re Heating Oil Partners, LP, 422 F. App'x 15, 17 (2d Cir. 2011).
Avoidance Actions and Property of the Estate
When a debtor files a bankruptcy petition, the filing creates an estate that consists of, among other things, "all legal or equitable interests of the debtor in property as of the commencement of the case," as well as all property that the estate acquires "after the commencement of the case." 11 U.S.C. § 541(a)(1) and (a)(7). Carefully defining the scope of estate property in a given case may be critical to its outcome. Property of the estate is protected (with certain exceptions) by the automatic stay of section 362; it may generally be sold, used, or leased under section 363, and its proceeds may be available to creditors and equity interest holders for distribution.
Property of the estate generally includes causes of action held by the debtor as of the commencement of the case. See In re Wilton Armetale, Inc., 968 F.3d 273, 280 (3d Cir. 2020) ("A cause of action [becomes] property of the estate if the claim existed at the commencement of the [bankruptcy] filing and the debtor could have asserted the claim on his own behalf under state law.") (quoting Bd. of Trs. of Teamsters Local 863 Pension Fund v. Foodtown, Inc., 296 F.3d 164, 169 n.5 (3d Cir. 2002)). Section 541 "is intended to include in the estate any property made available to the estate by other provisions of the Bankruptcy Code." City of Chicago, Illinois v. Fulton, 141 S. Ct. 585, 589 (2021). As such, it also includes any interest in property that the trustee recovers pursuant to avoidance actions. See 11 U.S.C. § 541(a)(3).
Although the proceeds of avoidance actions definitively are property of the estate under section 541(a)(3), courts have disagreed as to whether the avoidance actions themselves are estate property that can be sold or assigned to third parties. The majority rule is that avoidance actions are property of the estate. See In re S. Coast Supply Co., 91 F.4th 376, 385 (5th Cir. 2024) ("We hold that preference actions may be sold pursuant to 11 U.S.C. § 363(b)(1) because they are property of the estate under 11 U.S.C. §§ 541(a)(1) and (7)."); In re Simply Essentials, LLC, 78 F.4th 1006, 1009 (8th Cir. 2023) ("[A]voidance actions are property of the estate under § 541(a)(1)."); In re Ontos, Inc., 478 F.3d 427, 431 (1st Cir. 2007) ("It is well established that a claim for fraudulent conveyance is included within [estate] property."); Mellon Bank, N.A. v. Dick Corp., 351 F.3d 290, 291 (7th Cir. 2003) (holding that "the right to recover a preference is an asset of the estate that may be assigned or distributed to a particular class of creditors to satisfy their entitlements"), cert. denied, 541 U.S. 1037 (2004); In re P.R.T.C., Inc., 177 F.3d 774, 780–82 (9th Cir. 1999) (holding that trustees can transfer estate avoidance causes of action); Delgado Oil Co. v. Torres, 785 F.2d 857, 861 (10th Cir. 1986) (preferential transfer avoidance causes of action are property of the estate); see also In re Salas, 160 F.4th 810, 812–13 (6th Cir. 2025) (noting that a chapter 7 trustee sold the estate's interest in avoidance and recovery actions under sections 544 through 553, but not addressing whether such avoidance actions were estate property); Poth v. Russey, 99 F. App'x 446, 457 (4th Cir. 2004) (noting that creditors lack standing to assert "'causes of action [that] are ... similar in object and purpose to claims that the trustee could bring in bankruptcy,' regardless of whether such claims are technically part of the estate of the bankrupt") (cleaned up).
Several courts, however, have reasoned that avoidance actions may not be property of the estate. Some of these decisions are, perhaps incorrectly, grounded in the Second Circuit's decision in In re Colonial Realty Co., 980 F.2d 125 (2d Cir. 1992).
In Colonial Realty, the Second Circuit held that fraudulently transferred property is not property of the estate until it is recovered. Id. at 131. The court did not directly address whether avoidance actions themselves are estate property. And, in a subsequent decision, the court appeared to indicate in dicta that such actions are indeed property of the estate. See United States v. Sabbeth, 262 F.3d 207, 215–16 & n.7 (2d Cir. 2001) (stating that, although a trustee "cannot distribute property that it does not yet possess," the trustee "may be able to assign–or 'distribute'–the right to recover property that it does not yet possess."); see also Knoll, Inc. v. Zelinsky, No. 05-CV-1499 (GLS/DRH), 2008 WL 11504632, at *6 (N.D.N.Y. Apr. 8, 2008) (noting that Sabbeth, "which followed immediately on the heels of a discussion of Colonial Realty, tends to contradict the view that Colonial Realty held that avoidance actions are not property of the estate"); Sec. Inv'r Prot. Corp. v. Bernard L. Madoff Inv. Sec., LLC, 460 B.R. 106, 114 (Bankr. S.D.N.Y. 2011) ("Property of the estate therefore includes any cause of action the debtor had on the petition date … as well as avoidance actions created on the petition date[.]") (citations omitted), aff'd, 474 B.R. 76 (S.D.N.Y. 2012).
Nevertheless, a handful of lower courts within the Second Circuit have construed Colonial Realty to hold that avoidance actions are not property of the estate. See, e.g., United States v. Mazzeo, 306 F. Supp. 2d 294, 326 (E.D.N.Y. 2004) ("[N]either property fraudulently conveyed by the debtor before filing nor a potential fraudulent conveyance action that the Trustee could bring against one of the debtor's transferees is property of the estate."); Rubera v. Rubera (In re Rubera), 289 B.R. 520, 523 (Bankr. D. Conn. 2003) ("Under Second Circuit precedent, an estate's fraudulent conveyance cause of action does not qualify as property of the estate.").
The Third Circuit has distinguished between avoidance actions that are "general" and those that are "personal" to creditors because they can assert them under non-bankruptcy law to redress injury suffered by them individually. See Wilton Armetale, 968 F.3d at 283 ("Only when a particular creditor suffers a direct, particularized injury that can be 'directly traced' to the defendant's conduct is the claim personal to that creditor and not property of the estate."); In re Cybergenics Corp., 226 F.3d 237, 241–45 (3d Cir. 2000) (reasoning that fraudulent transfer claims under state law that may be asserted by a trustee or DIP under section 544 belong to creditors, not the transferor, and are therefore not estate property).
LEOSU
The decision of the bankruptcy court in LEOSU involved inter-syndical disputes among the debtor, the avoidance action targets, and the debtor's litigation creditor. The debtor—a labor union—filed a chapter 7 bankruptcy petition on July 8, 2024, in the Western District of Pennsylvania. LEOSU, 2026 WL 560452, at *2. In administering the debtor's estate, the chapter 7 trustee identified certain avoidance claims and, in an effort to monetize the claims, participated in mediation with the potential defendants, which included certain other labor unions. See id. That effort resulted in a settlement between the trustee and the defendants in the amount of $140,000. See id. at *8.
When the trustee sought bankruptcy court approval of the settlement, a litigation creditor—yet another labor union—objected on the basis that the settlement was insufficient. See The SPFPA's Obj. to the Mot. to Approve Settlement, In re Law Enf't Officers Sec. Union, No. 24-70277-JAD (Bankr. W.D. Pa. Oct. 28, 2025), ECF No. 99. The creditor, which held contingent, unliquidated claims against the debtor in the alleged amount of at least $2.4 million, argued that the avoidance actions were worth $1.8 million to the debtor's estate. See id. at 2–4. Based on this assessment, the creditor offered to purchase the avoidance actions from the estate for $145,000, subject to higher or better bids and court approval, agreeing further to return all net proceeds of the actions over and above that amount to the debtor's estate. LEOSU, 2026 WL 560452, at *1.
With respect to litigation costs, the creditor reserved for itself only the right to seek reimbursement of such costs under section 503(b) of the Bankruptcy Code. See id. at *2.
The defendants objected to the proposed sale, arguing that the trustee should instead have entered into their proposed settlement in exchange for a release of all of the claims. See id. According to the defendants' arguments, the avoidance actions were nontransferable "powers" rather than property of the estate that could be assigned. Id. As such, the trustee could not "auction off his statutory role." Id.
The Bankruptcy Court's Ruling
The bankruptcy court held that a chapter 7 trustee has the power to "monetize litigation claims" by selling them under section 363(b) of the Bankruptcy Code, and that the proposed sale to the buyer should be approved as a sound exercise of the trustee's business judgment. See id. at *1.
As an initial matter, the bankruptcy court examined whether the targets had standing to object to the proposed sale, concluding that they did not. Citing Third Circuit authority regarding appellate standing, the court stated that bankruptcy standing "is limited to aggrieved persons whose pecuniary interests are directly and adversely affected by the order at issue." Id. at *3 (citing In re Combustion Eng'g, Inc., 391 F.3d 190, 214 (3d Cir. 2004)). According to the court, "[t]his doctrine narrows participation in bankruptcy proceedings to those with a direct financial stake in the outcome and promotes the efficient administration of the estate." Id.
The court equated the potential defendants to prospective purchasers and unsuccessful bidders that courts consistently hold lack standing to challenge bankruptcy sales. See id. Because the potential defendants had no ownership interest in the avoidance claims and were not creditors of the bankruptcy estate, the court noted, the proposed sale did not alter their legal rights at all—it merely permitted an assignee to pursue the claims against them. See id. To the contrary, as the court emphasized, the defendants' interest with respect to the matter was to extinguish the avoidance claims as cheaply as possible for their own benefit. See id.
The bankruptcy court rejected the target defendants' argument that the avoidance claims were not property of the debtor's bankruptcy estate. It grounded its ruling initially in section 541(a)(1), which, as discussed above, generally includes causes of action as property of the estate. See id. at *7. Because avoidance actions typically are considered to be causes of action, the court reasoned, and they exist as of the commencement of the case (at least with respect to prepetition transfers), they must be property of the estate. See id.
Quoting U.S. Supreme Court authority, the court also reasoned that the right to recover a transfer under section 550 is property of the estate, not merely the property recovered or preserved as set forth in sections 541(a)(3) and (a)(4). Id. at *7 (citing United States v. Nordic Vill., Inc., 503 U.S. 30, 37 (1992)).
The court found its conclusion further bolstered by section 541(a)(7), which includes in property of the estate interests in property that the estate acquires after commencement of the case. See id. Because avoidance actions under sections 547 and 548 of the Bankruptcy Code are "creatures of federal bankruptcy law [that] come into existence only upon commencement of a case … it is both logical and textually consistent to regard these avoidance rights as interests acquired by the estate postpetition." Id.
The avoidance actions proposed to be transferred to the purchaser were not restricted to rights that "[o]utside of bankruptcy, no creditor or debtor possesses," however. Id. Creditors' rights to pursue avoidance of prepetition transfers arising under state law and granted to the trustee pursuant to section 544 were also proposed to be sold. See Mot. to Sell Property Free and Divested of Liens and Encumbrances, at 1, In re Law Enf't Officers Sec. Union, No. 24-70277-JAD (Bankr. W.D. Pa. Oct. 28, 2025), ECF No. 127 ("Causes of Action" to be transferred include "[a]ny and all bankruptcy estate claims, rights of action, suits, and proceedings including those arising under 11 U.S.C. §§ 544-551 … .") (emphasis added).
In Cybergenics, the Third Circuit rejected the argument that such state law rights were property of the estate. See Cybergenics, 226 F.3d at 244 ("The fact that section 544(b) authorizes a debtor in possession, such as Cybergenics, to avoid a transfer using a creditor's fraudulent transfer action does not mean that the fraudulent transfer action is actually an asset of the debtor in possession … ."). The bankruptcy court generally distinguished Cybergenics, however, on the basis that the Third Circuit's statements were dicta, arising in the context of determining whether certain claims had been transferred in an asset sale.
The court's additional justifications for concluding that the avoidance actions were property of the estate arose from the administrative expense provisions of section 503 of the Bankruptcy Code and the abandonment power of section 554. Section 503(b)(3)(B) allows creditors to recover certain expenses incurred—with court approval and for the benefit of the estate—in recovering property transferred by the debtor. See 11 U.S.C. § 503(b)(3)(B). According to the court, that provision "presupposes the existence of an estate-owned avoidance right capable of being prosecuted by a party other than the trustee in appropriate circumstances." LEOSU, 2026 WL 560452, at *7.
Finally, since only property of the estate can be abandoned pursuant to the plain language of section 554, and courts agree that avoidance action rights can be abandoned (in which case they may revert to creditors that possessed them prepetition), the court reasoned that such rights must be property of the estate. See id. at *8.
In approving the sale, the court summarized its conclusions as follows:
Taken together, the statutory text, Supreme Court guidance, and modern appellate authority demonstrate that avoidance actions are not mere statutory powers divorced from property concepts. Rather, they are claims or interests that become part of the bankruptcy estate through the operation of section 541(a). To the extent earlier decisions suggested otherwise, those statements either arose in different contexts or have been clarified as non-binding dicta.
Id.
Practical Implications
The bankruptcy court's decision in LEOSU is consistent with the majority view regarding the ability of a bankruptcy trustee or DIP to sell avoidance causes of action that are property of the bankruptcy estate. The court avoids the arguable conflict posed by the Third Circuit's ruling in Cybergenics by limiting that decision to its facts, although it declined to address whether any distinction should be drawn between avoidance action rights that arise directly under the Bankruptcy Code and creditors' state law avoidance action rights that are made available to bankruptcy trustees pursuant to section 544(b).
The potential defendants have appealed the bankruptcy court's decision in LEOSU. However, they apparently have not challenged the bankruptcy court's application of the appellate "person aggrieved" standard to the issue presented. See Br. of Appellants, at 22, In re Law Enf't Officers Sec. Union, No. 26-cv-00467-SLH (W.D. Pa. June 15, 2026), ECF No. 21 ("The Bankruptcy Court correctly observed that standing in bankruptcy is 'limited to aggrieved persons whose pecuniary interests are directly and adversely affected by the order at issue.'").
