Does A Pre-Petition Lien On “General Intangibles” Attach To Chapter 5 Avoidance Actions In Debtor’s Bankruptcy? (Keystone v. Hanrahan)

By: Donald L Swanson

The opinion is Keystone Savings Bank v. Hanrahan (In re BDC Group, Inc.), Case No. C24-104 in the U.S. District Court for Northern Iowa (decided July 17, 2025).

Facts

Bank’s security agreements and related UCC financing statements identify Debtor’s “general intangibles” as collateral.

Debtor files bankruptcy, and Bank files a proof of secured claim asserting rights in all its collateral, including all “general intangibles.”

Issue and Arguments

The Keystone v. Hanraha issue is whether Bank has a valid and enforceable lien on Chapter 5 avoidance actions in Debtor’s bankruptcy case, based on Bank’s pre-petition lien on Debtor’s “general intangibles.” 

Bank argues that a recent Eighth Circuit Court of Appeals opinion (In re Simply Essentials, LLC, 78 F.4th 1006 (8th Cir. 2023)) supports Bank’s claim to such a lien.

Specifically, Bank:

• points to the Eighth Circuit statement in Simply Essentials that, “the debtor has an inchoate interest in the avoidance actions prior to the commencement of the bankruptcy proceedings”; and
• argues that such statement changes longstanding law and means that a creditor’s pre-petition lien in debtor’s “general intangibles” gives such creditor a lien on avoidance actions in debtor’s bankruptcy.

Debtor’s bankruptcy Trustee argues that Simply Essentials stands for no such thing—it holds only that avoidance actions are part of debtor’s bankruptcy estate and can be sold.

Bankruptcy Court’s Ruling & Analysis

The Bankruptcy Court rejects Bank’s argument that Simply Essentials changes longstanding law.

The Bankruptcy Court begins by summarizing cases holding that pre-petition liens do not attach to avoidance actions.  Then, the Court notes that a creditor may not sue to recover a state law fraudulent transfer once a bankruptcy is filed, because that would take a chose in action away from the bankruptcy estate and violate the automatic stay.

The Bankruptcy Court then discusses the Eighth Circuit’s holding in Simply Essentials, declaring:

• the “debtor in possession or the Trustee” is the party with the rights to avoidance actions—not Debtor;
• avoidance actions are allowed solely for the benefit of the bankruptcy estate and its creditors—not for debtor or for one of its creditors—and “belong to the estate”; and
• Bank’s view “is in direct conflict” with the “fundamental bankruptcy principle” that avoidance actions “arise as a creditor’s right outside bankruptcy, and in bankruptcy are only for the benefit of all creditors.”

The Bankruptcy Court adds:

• Bank is not being deprived of collateral for which it bargained but instead is trying to impermissibly expand its collateral based on an overly broad reading of Simply Essentials;
• extensive case law rejects any notion that avoidance actions are proceeds of prepetition collateral; and
• Simply Essentials emphasizes maximizing the value of the bankruptcy estate for all creditors, while Bank’s argument leads to an opposite result and simply funnels what is available for the estate to a single creditor.

District Court’s Ruling & Analysis

After conducting a thorough, de novo review of the Bankruptcy Court’s opinion and the underlying case law cited in that opinion, the District Judge rules:

• “I find no error”; and
• “I agree with the entirety of the Bankruptcy Court’s opinion.”

Then, the District Judge specifically addresses and rejects two of Bank’s arguments in more detail.

–First Argument

“I disagree” with Bank’s argument that Simply Essentials overturns prior case law.

In Simply Essentials, the Eighth Circuit specifies that “[t]he only issue on appeal is the legal question of whether avoidance actions can be sold as property of the estate.”  And so, the Eighth Circuit’s “debtor has an inchoate interest” statement in that opinion applies only to the sole issue on appeal.

Bank’s argument – that a debtor’s inchoate interest in post-petition avoidance actions can be encumbered pre-petition – would turn the reasoning of Simply Essentials on its head:

• It would allow a creditor to diminish the bankruptcy estate by pre-petition action, rather than using avoidance claims to maximize the value of the estate for the benefit of all creditors; and
• such arguments “have been almost uniformly rejected by case law which [Bank] does not even acknowledge.”

–Second Argument

Bank also argues that “the availability of avoidance actions has to do with the debtor’s pre-bankruptcy past and commencement of the case, and has nothing to do with the amount of investment an estate puts into them.”

“Again, I disagree,” declares the District Judge.

That’s because avoidance actions are the quintessential things that require the addition of estate resources to succeed and produce a recovery:

• Simply Essentials recognized this very point by noting that bankruptcy estates often do not have the resources to pursue those actions—and instead of letting them go with no recovery, Trustees can sell them to get a recovery.

The Bankruptcy Court correctly notes:

• the inchoate right in avoidance actions that a debtor possesses matures into the debtor’s right to file bankruptcy;
• after the bankruptcy filing, avoidance actions arise as a brand-new thing which are created post-petition in the trustee or a DIP, solely for one of them to pursue and solely for the benefit of the estate; and
• as such, avoidance actions require the addition of estate resources to succeed and produce a recovery and thus cannot be proceeds. 

Conclusion

Keystone v. Hanraha is an informative and helpful opinion on a basic bankruptcy issue.

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