August 30, 2016

Ninth Circuit Holds that the One-Year Period in Sec. 727(a)(2) is not Subject to Equitable Tolling

Ronald Neff was a dentist against whom his patient, Douglas DeNoce, obtained a judgment for malpractice. After he filed a chapter 13 petition, Neff recorded a quit-claim deed transferring a condominium from himself to a trust. This first chapter 13 case was dismissed, as was a second chapter 13 case filed by Neff. Neff then filed his third bankruptcy case, a chapter 7 proceeding, more than one year following the recording of the quit-claim deed. DeNoce filed an adversary proceeding, seeking the denial of Neff’s discharge under § 727(a)(2) of the Bankruptcy Code, asserting the transfer of the condominium was made with intent to hinder, delay or defraud creditors. Because § 727(a)(2) requires the transfer be made within one year before the bankruptcy filing, Neff contended the transfer of the condominium, which occurred more than a year before he filed his chapter 7 petition, did not bar his discharge.

The bankruptcy court granted Neff a summary judgment on the complaint, and DeNoce appealed, contending the one-year period in the statute is subject to equitable tolling based on Neff’s first two bankruptcy cases. The Ninth Circuit BAP affirmed, as did the Ninth Circuit. DeNoce v. Neff (In re Neff), 2016 WL 3201236 (9th Cir. 2016).

The sole question before the Ninth Circuit was whether the one-year time period contained in § 727(a)(2) can be subject to equitable tolling. The Ninth Circuit concluded it is not, in an straight-forward analysis. First, the court noted that equitable tolling “is fundamentally a equstion of statutory intent,” and that the Supreme Court presumes that Congress intended equitable tolling would be available “if the period in question is a statute of limitations.” Young v. United States, 535 U.S. 43 (2002). However, this presumption has only been applied to statutes of limitation and has not been applied to other statutes, such as statutes of repose. Lozano v. Montoya Alvarez, 134 S. Ct. 1224 (2014).

Consequently, the court determined the question before it was whether the time period in § 727(a)(2) is a statute of limitations. The court noted that a statute of limitations is generally “[a] law that bars claims after a specified period; specifically, a statute establishing a time limit for suing in a civil case, based on the date when the claim accrued.” CTS Corp. v. Waldburger, 134 S. Ct. 2175 (2014). The purpose of a statute of limitations is to encourage claimants to diligently pursue their claims. The court concluded that § 727(a)(2) was not a statute of limitations. Its purpose was not to encourage claimants to timely pursue claims against a debtor, but rather its purpose is to prevent dishonest debtors from abusing the bankruptcy process by evading the consequences of their misconduct. The court stated: “At the core of the Bankruptcy Code are the twin goals of ensuring an equitable distribution of the debtor’s assets to his creditors and giving the debtor a fresh start.” Sherman v. SEC (In re Sherman), 658 F.3d 1009 (9th Cir. 2011). The one-year is designed to set a date on transfers for which a debtor may be denied a discharge, and is not a statute of limitations by which a creditor must bring an action.