By: J. Ellsworth Summers, Jr. & Scott St. Amand
One of the primary roles of a Chapter 7 trustee is to ensure that the bankruptcy estate is preserved prior to liquidation. It is no wonder, then, that the Trustee’s avoidance powers are well defined by the Bankruptcy Code. Nevertheless, a string of recent cases out of the Middle District of Florida has illustrated that a trustee is not given carte blanche to avoid all transfers that diminish the estate without first establishing that it has standing to bring the avoidance action.
Under § 549 of the Bankruptcy Code, a trustee may avoid a postpetition transfer that is authorized by the Bankruptcy Code or Court. To do so, the trustee must establish that the transfer actually injured or diminished the bankruptcy estate. Establishing a causal relationship between an unauthorized postpetition transfer and a diminution of the estate does not, at first blush, seem too onerous of a task. However, a string of recent decisions out of the Middle District of Florida in the Wood Treaters case have illustrated that even if the trustee can establish that the transfer was unauthorized, it still bears a significant burden to connect the individual transfer to a direct depletion of the estate.
In Wood Treaters , the debtor filed a Chapter 11 petition and was granted conditional permission to use cash collateral to make postpetition transfers. After the case was converted to Chapter 7, the trustee sought to avoid a number of the debtor’s transfers because they had not been made in strict accordance with the cash collateral order.