The Restructuring Report

If you are a frequent reader of The Restructuring Report (thank you for your readership!), you may recall an article from nearly two years ago written by my colleague, Clinton E. Cutler (better known as Clint), titled “Eighth Circuit Holds Avoidance Actions May Be Sold Under § 363.” In the article, Clint discussed Pitman Farms v. ARKK Food Co. LLC (In re Simply Essentials LLC), 78 F.4th 1006 (8th Cir. 2023), where the Eighth Circuit held that Chapter 5 avoidance actions are property of the estate under 11 U.S.C. § 541 and, therefore, may be sold by the trustee or debtor in possession. In addition to 11 U.S.C. § 541(a)(7), the court relied on 11 U.S.C. § 541(a)(1) and held that the Chapter 5 avoidance actions are property of the estate because the debtor had a prepetition inchoate interest in such actions. Given the court’s reasoning, Clint raised the question of “whether this interest is sufficient for the debtor to be able to grant a pre-petition security interest in those causes of action to its lender.”

Well, we now have an answer — and it comes from within the Eighth Circuit. Earlier this summer, in Keystone Savings Bank v. Hanrahan (In re BDC Group, Inc.), No. 1:24-cv-00104-LTS-MAR (Bankr. N.D. Iowa July 17, 2025), ECF No. 9, the Honorable Leonard T. Strand, United States District Judge for the Northern District of Iowa, affirmed the bankruptcy court’s decision (account required) to deny a lender’s motion to recognize a lien. The facts are very straightforward, such that they are summarized by both the bankruptcy court and the district court in just two sentences. In short, the secured lender had a prepetition security interest in “general intangibles.” The question before the court was whether the secured lender has a lien on Chapter 5 avoidance actions held by the debtor, BDC. The secured lender relied on Simply Essentials in asserting it has a lien on such actions. The Chapter 7 trustee argued that Simply Essentials does not stand for the proposition that a debtor’s pre-petition grant of a security interest in “general intangibles” includes Chapter 5 avoidance actions.

The bankruptcy court (the Honorable Thad J. Collins, United States Bankruptcy Court for the Northern District of Iowa and the same judge that had originally decided Simply Essentials), rejected the secured lender’s argument by citing to several cases from all over the country that have held that a pre-petition lien does not include causes of action that belong to the trustee of a bankruptcy estate and only arise post-petition. The bankruptcy court then provided a myriad of reasons why Simply Essentials did not change that well-established law, including because Simply Essentials did not address the issue at all and narrowly defined a debtor’s inchoate interest. Finally, the bankruptcy court found that the secured lender’s position is contrary to the emphasis in Simply Essentials on maximizing value for the bankruptcy estate — any recovery on Chapter 5 avoidance actions would instead be funneled to a single creditor.

The district court affirmed the bankruptcy court’s decision and adopted the same reasoning. However, the district court chose to further emphasize three points: (1) Simply Essentials did not overturn prior case law; (2) Chapter 5 avoidance actions are not proceeds of collateral; and (3) the bankruptcy court did not error in analogizing a debtor’s inchoate interest in Chapter 5 avoidance actions to a spouse’s inchoate dower interest.

It remains to be seen whether the bankruptcy court and the district court got it right. On August 15, 2025, the secured lender filed a notice of appeal of the district court’s decision. The appeal is pending before the Eighth Circuit as Case No. 25-2635 (account required). The secured lender’s principal brief is due on September 29, 2025. At least one commentator, the famous Bill Rochelle, hopes that the Eight Circuit affirms. He cautions that if the Eighth Circuit does not affirm, “every security agreement will be written to give liens to lenders on bankruptcy avoidance actions” and “[p]rimary assets will disappear, and lenders could extinguish claims against themselves by snatching ownership away from trustees, debtors in possession, creditors’ committees and liquidating trustees.” Stay tuned for more.