Divided Third Circuit Upholds Right of Creditors’ Committees to Bring Avoidance Actions

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To promote equal treatment of creditors, Congress has armed bankruptcy trustees with the power to bring suit to recover a variety of pre-bankruptcy transfers. Prominent among those powers is the right to sue to recover preferences—payments by an insolvent debtor made within 90 days of bankruptcy (one year if to an insider)— which have the effect of favoring some creditors over others. They also encompass the right to recover fraudulent transfers—transfers made without fair consideration— which have the effect of depleting the remaining pool of assets available to pay bona fide claims. In a reorganization under chapter 11, if no trustee has been appointed, the debtor’s management has the right to exercise these avoidance powers as debtor-in-possession.