Assignment of claims in bankruptcy

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One of the main jobs of a trustee in bankruptcy is to sell the property of the bankrupt to create a fund for payment to the bankrupt’s creditors. “Property” includes claims of the bankrupt against third parties. In a recent BC Supreme Court decision, Moffoot (Re), the court interfered with a trustee’s decision to sell the interest of the bankrupt in certain litigation.
The trustee had carried out a silent bidding process after offers had been received to purchase the bankrupt’s interest in the litigation. The bankrupt, now discharged, objected to the sale and applied to court to have the action assigned to her.

The trustee argued that the efficacy and integrity of the sale process would be undermined if the winning bid in such a process was overturned by order of the court. The trustee also argued that allowing the bankrupt to simply take an assignment of the action for free would prejudice the creditors of the bankrupt estate. Although the court found that the trustee had acted appropriately and in the best interests of the creditors in the bidding process, the court nevertheless held that there would be an “unfairness in the working out of the process” if the bankrupt was not afforded the opportunity to match the offer for the purchase of the claim. The court ordered the claim to be sold to the bankrupt provided she paid the amount of the winning bid to the trustee.

The winning bidder under the trustee’s bid process was one of the defendants in the litigation. Although previous cases have made clear that there is nothing improper in a defendant seeking to resolve a dispute in this fashion, the reasons for judgment in Moffoot suggest that the court felt some distaste in allowing a defendant to “buy off” the litigation in the circumstances of this case. 

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