If the White Sox Can Win the World Series, the Supreme Court Can Overturn Moore v. Bay

Last night, the Chicago White Sox swept the World Series, bringing great joy to much of Chicago (except for Cub fans, whose Cubbie blue is turning a shade of pale-green from all the jealousy). Even the most dogged Cub fan has to admit that the White Sox played incredible baseball. Congratulations to the entire organization and to all the long-suffering White Sox fans!

Speaking of long-suffering... In a recent post, I noted the inequity of the "all or nothing" rule of Moore v. Bay, 284 U.S. 4 (1931), which provides that a transfer avoidable by a bankruptcy trustee as to a single creditor (even as to just a nickel), is avoidable to the entire extent of the transaction (even if the transaction is worth millions). Unlike today's weighty US Supreme Court opinions, Moore v. Bay is only one page. It's author was none other than Justice Oliver Wendell Holmes, Jr., who wrote the opinion at the end of his rich life, while in his last term on the bench. You can't say much in one page; and Justice Holmes didn't, to be sure. Still, the rule of Moore v. Bay staunchly remains the law of the land.

Having brought up the case only in passing in my previous post, I said that my discussion of Moore v. Bay will have to await another day. With the Bankruptcy Court from the Northern District of Illinois in In re Unglaub, (2005 WL 2740595) (Bankr. N.D. Ill., 10/24/05), reminding us recently that the rule of Moore v. Bay remains the law of the land, it looks like today is that day. In Unglaub, the Bankruptcy Court stated matter of factly:

In a case under § 544(b)(1), the trustee has the rights of an unsecured creditor to avoid transactions that can be avoided by such creditor under state law. In re Image Worldwide, Ltd., 139 F.3d 574, 576-77 (7th Cir. 1998). The trustee need not identify the creditor, so long as an unsecured creditor exists. Id. at 577; In re Leonard, 125 F.3d 543, 544 (7th Cir. 1997). The transaction can be avoided completely even if the trustee cannot produce creditors whose liens total more than the value of the property. Leonard, 125 F.3d at 544-45.

Though the Bankruptcy Court did not expressly cite Moore v. Bay, it effectively did so by citing to Leonard, where the Seventh Circuit said this about Moore v. Bay:

Section 544(b) of the Bankruptcy Code of 1978 gives the Trustee the power to "avoid any transfer of an interest of the debtor in property ... that is voidable under applicable law by [an unsecured creditor]". 11 U.S.C. § 544(b). In other words, if any unsecured creditor could reach an asset of the debtor outside bankruptcy, the Trustee can use § 544(b) to obtain that asset for the estate. As part of the estate, that asset is then divided among all the unsecured creditors, not just the creditor who could have reached the asset outside bankruptcy. Barker and Lieblich complain that the Trustee has not articulated the specific creditor who could set aside Zach's gift, but a trustee need not do so. Thirteen unsecured claims have been filed; the Trustee can assume the position of any one of them. Unless the claims of Barker and Lieblich are secured, any unsecured creditor may pursue a fraudulent-conveyance action under Illinois law. Even if he cannot point to creditors whose claims total more than the value of the land, the Trustee can avoid the transaction entirely. Moore v. Bay, 284 U.S. 4, 52 S.Ct. 3, 76 L.Ed. 133 (1931). The whole value of the asset then is distributed among creditors of the estate. 11 U.S.C. § 551. The wisdom of this approach has been questioned, see Douglas G. Baird, The Elements of Bankruptcy 104 (2d ed. 1993); Thomas H. Jackson, The Logic and Limits of Bankruptcy Law 79-83 (1986), but this entrenched rule is the source of the dilution that Barker and Lieblich want to escape.

While the application of Moore v. Bay didn't appear to affect the outcome of the case before the Bankruptcy Court in Unglaub, it surely could have. Which leads to a simple question, why should a transaction that is not voidable as to certain creditors become avoidable in its entirety merely because the debtor happens to be in bankruptcy?

It's always easier to follow a rule then to work to change it, but this law needs to be changed. Perhaps someday the rule of Moore v. Bay will become a relic of the past, just as the "no-World-Series-win-in-my-lifetime" is now, happily, a thing of the past on Chicago's south side. Go Sox!


Steve Jakubowski

Written By:Mark T On October 31, 2005 01:38 PM

This is an excellent idea. Moore v Bay is an unconstitutional taking of property from the transferee without just compensation and is economically equivalent to punitive damages without meeting the heightened burden of proof as to the transferee. It only exists to shakedown defendants and ensure that the trustee's counsel gets fees paid.

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