Imagine your Albuquerque company gets a demand letter from a chapter 7 trustee: payments a customer made before its bankruptcy are allegedly recoverable as preferences. You open settlement talks, and a deal seems close. Then the trustee moves to sell the claims against you — not settle them — to another creditor: perhaps a rival with its own litigation budget, a grudge, and no interest in a cheap resolution.
That is what happened in In re Law Enforcement Officers Security Union (“LEOSU“), No. 24-70277-JAD, 2026 WL 560452 (Bankr. W.D. Pa. Feb. 27, 2026), where the court approved a trustee’s sale of avoidance actions to a creditor — and held the targets had no standing to object. For New Mexico businesses and insiders facing clawback claims, the decision is both warning and roadmap.
What Did the Bankruptcy Court Decide in In re LEOSU?
The debtor, a labor union, filed a chapter 7 petition in July 2024. The trustee identified preference and fraudulent transfer claims against several related unions, mediated with those targets, and reached a proposed $140,000 settlement. Before approval, a litigation creditor asserting claims of at least $2.4 million objected, valued the avoidance claims at roughly $1.8 million, and offered to buy them for $145,000, subject to higher bids.
The targets objected that avoidance claims are nontransferable statutory “powers” of the trustee, not saleable property, and urged approval of their settlement. The court rejected every piece of that argument: the targets lacked standing, avoidance actions are estate property saleable under 11 U.S.C. § 363(b), and the sale — not the settlement — best served the estate. The claims now belong to the targets’ adversary.
Are Preference and Fraudulent Transfer Claims Really Property of the Estate?
A bankruptcy filing creates an estate that includes “all legal or equitable interests of the debtor in property as of the commencement of the case” and any interest the estate acquires afterward. 11 U.S.C. § 541(a)(1), (a)(7). The LEOSU court reasoned that avoidance claims — preference claims under 11 U.S.C. § 547, fraudulent transfer claims under § 548, and state-law claims imported through § 544 — either exist at filing or spring into existence upon it, landing in the estate under one prong of § 541(a) or the other.
That tracks the majority appellate rule. The Fifth Circuit held in In re South Coast Supply Co., 91 F.4th 376, 385 (5th Cir. 2024), that preference actions may be sold under § 363(b) precisely because they are estate property; the Eighth Circuit agreed in In re Simply Essentials, LLC, 78 F.4th 1006 (8th Cir. 2023). Once a claim is estate property, the trustee can auction it, and the court reviews the sale only for benefit to the estate — not fairness to the people being sued.
Why Don’t Clawback Targets Get to Object to the Sale?
Bankruptcy standing generally belongs to “parties in interest” — entities “potentially concerned with or affected by a proceeding,” as the Supreme Court put it in Truck Insurance Exchange v. Kaiser Gypsum Co., 602 U.S. 268, 278 (2024), construing 11 U.S.C. § 1109(b). LEOSU shows the doctrine’s other edge: objections were limited to parties “whose pecuniary interests are directly and adversely affected by the order at issue,” and the targets flunked that test.
The targets owned no interest in the claims and were not creditors of the estate; the sale changed none of their legal rights — before it a trustee could sue them, after it an assignee can. Their real interest, the court said, was extinguishing the claims as cheaply as possible, which the sale-approval process does not protect. In short, you may have no formal voice in who ends up holding the lawsuit against you.
What Does a Sold Claim Mean for the New Mexico Business Defending It?
A trustee is an economically rational plaintiff: a certain $140,000 today often beats a speculative $1.8 million after years of litigation. A creditor-assignee can be a very different animal. If the buyer is a competitor or a creditor that believes you caused its losses, the claim stops being a mere asset and becomes an instrument. The assignee may value the litigation itself — discovery into your finances, leverage in related disputes, the satisfaction of a grudge — funded by its own budget.
The LEOSU targets learned a second lesson: settlement talks with a trustee protect nothing until court approval. Their mediated $140,000 settlement was undercut by a $145,000 sale offer, and the court chose the sale. A trustee owes fiduciary duties to the estate, not to you, and may take a better offer mid-negotiation. Assume the claims are on the market until an approval order is entered.
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Can You Buy the Claims Against Your Own Business?
Here is the strategic flip side LEOSU itself validates: if avoidance claims are estate property anyone can buy, the target can bid too. Section 363 sales are generally subject to higher or better offers. A target that outbids the hostile creditor — structured as a purchase-and-release, or a settlement priced above the competing bid — gives the trustee an offer hard to refuse under the same best-interests review that doomed the targets’ cheaper deal.
Buying the claim against yourself can be dramatically cheaper than defending it: a purchase price is a known number paid once, while a defense means years of fees, discovery into your banking records, depositions of your principals, and judgment risk. The catch: the court will scrutinize whether your offer truly beats the alternative — insiders should expect heightened attention — and the move requires speed. Once a sale order is entered, your leverage with the estate is gone.
Do Your Section 547(c) Defenses Survive the Sale?
Yes — the most important point of comfort. An assignee buys the claim as it exists, subject to every statutory defense the target could raise against the trustee. Section 547(c) gives preference defendants three workhorses: the § 547(c)(1) defense for transfers that were “in fact a substantially contemporaneous exchange” for new value; the § 547(c)(2) defense for payments made in the ordinary course or “according to ordinary business terms”; and the § 547(c)(4) subsequent-new-value defense for creditors who kept extending credit after being paid.
A worked example shows the stakes. Suppose a Farmington oilfield vendor received $85,000 from a Permian Basin operator in the 90 days before its chapter 7 filing. After the first payment, the vendor delivered $22,000 in downhole tools on unpaid invoices; after the second, another $18,000 in services, also never paid. Under § 547(c)(4), that $40,000 of subsequent new value offsets exposure dollar for dollar, cutting the claim to $45,000 before the ordinary-course analysis begins; if the remaining payments matched pre-crisis invoice terms, § 547(c)(2) may shrink it toward zero. The math is identical whether the plaintiff is the trustee or a purchaser — and it frames a rational purchase price, which is why building the § 547(c) analysis early serves both defense and buyout strategies.
Where Do the Tenth Circuit and the District of New Mexico Stand?
New Mexico cases sit in the Tenth Circuit, which planted its flag early: Delgado Oil Co. v. Torres, 785 F.2d 857, 861 (10th Cir. 1986), held that a preferential transfer avoidance cause of action is property of the estate — the foundational premise for saleability. What the circuit and its Bankruptcy Appellate Panel have not squarely resolved is the second step: the mechanics and limits of selling avoidance actions under § 363(b), including whether state-law claims channeled through § 544(b) travel with the package. A District of New Mexico judge facing a LEOSU-style motion would find Delgado Oil pointing toward approval, reinforced by the Fifth and Eighth Circuits — so New Mexico targets should plan as though such sales are available here.
| Option for the clawback target | How it works | Key risk |
|---|---|---|
| Settle with the trustee | Negotiate a release before any sale motion | Trustee can take a better offer any time before approval, as in LEOSU |
| Outbid the hostile creditor | Higher or better offer in the § 363 process, as purchase-and-release | Bidding war raises the price; scrutiny of insider offers |
| Buy the claims outright | Acquire and extinguish the claims at a fixed cost | Must move before the sale order; must beat alternatives under best-interests review |
| Defend against the assignee | Litigate § 547(c) and other defenses, which survive the sale | Years of fees and discovery against an adversary who may never settle cheaply |
Frequently Asked Questions
Can a bankruptcy trustee really sell a preference claim against my business to another creditor?
Under the majority rule, yes. The Fifth and Eighth Circuits treat avoidance actions as estate property saleable under 11 U.S.C. § 363(b), and In re LEOSU approved such a sale over the targets’ objection.
Do I get to object if the trustee sells the claims against me?
Probably not. LEOSU held that targets’ pecuniary interests are not directly affected by the sale order — it merely changes who sues them — so they lacked standing. Your leverage lies in bidding or settling, not objecting.
Do my preference defenses change when a creditor buys the claim?
No. The buyer takes the claim subject to every defense you had against the trustee, including the § 547(c) defenses. What changes is the adversary’s motivation and budget, not the law.
Can I buy the avoidance claims against my own business?
Often, yes. Section 363 sales are typically subject to higher and better offers, so a target can outbid a hostile creditor or price a settlement above the competing bid. A purchase caps your cost and ends the litigation — but act before the sale is approved.
Does LEOSU apply in New Mexico bankruptcy cases?
It is persuasive, not binding — a Pennsylvania bankruptcy decision now on appeal. But the Tenth Circuit held in Delgado Oil Co. v. Torres that preference avoidance actions are estate property, so the foundation for LEOSU-style sales already exists in the circuit governing New Mexico.
How North Star Law Firm Can Help
North Star Law Firm defends businesses and individuals across New Mexico — Albuquerque, Santa Fe, Las Cruces, and beyond — against preference and clawback claims, whether the plaintiff is a trustee or a creditor that bought the claim. Phillip Zagotti, JD/CPA, is admitted to practice before the federal courts in the District of New Mexico and handles bankruptcy matters across the state; his accounting background drives the transaction-level § 547(c) analyses behind both defense value and buyout pricing. If exposure threatens your own company’s footing, see the firm’s guide to choosing the right bankruptcy chapter for a New Mexico business. Timing determines leverage — contact the firm for a free consultation before the claims change hands.