Fifth Circuit Avoidance Actions

On Monday, January 22, 2024, the United States Court of Appeals for the Fifth Circuit entered a ruling in the South Coast Supply Company case¹ allowing a bankrupt debtor to sell preference claims arising under section 547 of the Bankruptcy Code.² In doing so, the Fifth Circuit overruled the district court, which followed a long body of case law holding that debtors in possession could not sell avoidance actions.³ The Fifth Circuit's ruling in South Coast Supply will have meaningful effects on players in bankruptcy cases. Debtors have an immediately saleable asset that they can use to generate funds. DIP lenders⁴ may subject avoidance actions to liens to secure post-petition loans. Official committees of unsecured creditors may now lack the leverage of judicial ambiguity within the Fifth Circuit once used to preserve avoidance actions for the exclusive (or sometimes shared) benefit of general unsecured creditors.