Page 56 - Bankruptcy Volume 1

Chapter 8

Avoidance Powers fn 1

The Bankruptcy Code grants the trustee the right to avoid or set aside certain prepetition and postpetition
transactions taken with respect to a debtor’s property. These avoidance powers are used in practice to in-
itiate proceedings or avoidance actions for the benefit of creditors to recover transferred property, to set
aside certain liens and unperfected security interests, and to disallow claims against the debtor. The au-
thority to pursue avoidance actions is provided to the trustee to ensure that similarly situated, nonpriority
creditors receive equitable, pro rata distributions of the debtor’s property postpetition without being det-
rimentally affected by the actions of the debtor or its creditors immediately preceding or following a
bankruptcy filing.

A trustee’s avoidance powers are codified by Chapter 5, Creditors, the Debtor, and the Estate, of USC
Title 11, which establishes the trustee’s powers to avoid the following:

 Unperfected security interests in personal and real property as of the time of the filing (11 USC
544(a))

 Transfers and liens on the debtor’s property that could be avoided by a creditor under the appli-
cable local law (11 USC 544(b))

 Statutory liens (11 USC 545)

 Certain preferential transfers not subject to safe harbor rules within a specified prepetition period
of time (11 USC 547)

 Certain fraudulent transfers made within a specified prepetition period of time (11 USC 548);

 Certain postpetition transactions (11 USC 549)

 Certain setoffs (11 USC 553)

11 USC 546 establishes numerous limitations on these avoidance powers. fn 2 Among such limitations is
a statute of limitations, codified by 11 USC 546(a), which requires that avoidance actions brought under
sections 544, 545, 547, 548, and 553 fn 3 must be commenced by the trustee before the earlier of

fn 1 This chapter of the practice aid was prepared in consultation with chapters 5 and 11 of Bankruptcy and Insolvency Accounting,
vol. 1, Practice and Procedure, 7th ed., by Grant W. Newton (New York: John Wiley & Sons, Inc., 2009). Further detailed discussion
of avoidance actions may be found there.
fn 2 This practice aid does not contain an exhaustive list of such limitations, which include, among others, limitations on reclamation
rights and limitations on avoidance powers regarding transactions involving securities contracts, repos, swaps, and master netting
agreements. Practitioners are encouraged to familiarize themselves with the general limitations outlined by 11 USC 546 and to consult
with legal counsel, as appropriate.

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