The recent decision by the Fifth Circuit Court of Appeals (the “Fifth Circuit” or the “Court”) in Matter of South Coast Supply Company adds to the growing list of circuit courts that have held that preference claims arising under Bankruptcy Code Section 547 can be sold and pursued by non-estate representative third parties. This trend, if it continues, could provide debtors, secured lenders, and creditors’ committees increased flexibility to monetize potentially valuable claims that a bankruptcy estate could not otherwise pursue due to a lack of estate resources in the first instance. Additionally, it could allow them to quickly monetize the last few pending preference actions and be able to close a bankruptcy case and stop incurring ongoing administrative costs that would otherwise accrue if those claims would continue to be pursued. Nonetheless, this decision is a significant development because the Fifth Circuit includes Texas, one of the most popular venues for the filing of large Chapter 11 cases. While the decision could be narrowly construed, as the Fifth Circuit was careful to state that the issue needed to be decided on a case by-case basis, here, in connection with the sale of a single insider preference action, the holding will undoubtedly be relied upon by stakeholders across the country.

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