Tag Archives: limitations

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.

February 18, 2014

Sixth Circuit Answers Two Questions of First Impression in Connection with Motions for Relief—(1) A Creditor Bears the Burden to Prove Validity of its Lien and (2) A Trustee May Allege an Expired Preferential Transfer Defensively to Defeat Relief from S

The Sixth Circuit in its recent opinion in Grant, Konvalinka & Harrison, P.C. v. Still (In re McKenzie), 737 F.3d 1034 (6th Cir. 2013) recently addressed two questions of first impression in the circuit:  (1) as between the creditor and the bankruptcy trustee, who bears the burden under § 362(g) to prove the validity (or non-validity) of the creditor’s lien and (2) if the trustee’s action to avoid the lien as a preference is barred by limitations under § 546, may the trustee nevertheless use the preference to defeat the secured creditor’s motion for relief?  The Sixth Circuit held the secured creditor bears the burden to prove the validity of its lien under § 362(g) and the trustee may use a preference claim defensively to defeat a motion for relief.

In connection with the burden of proof issue, the creditor contended that the burden is on the trustee to establish the invalidity of the secured creditor’s lien or security interest.  The creditor argued that § 362(g) itself mandated this conclusion.  Section 362(g) provides that, in a hearing on a motion for relief, the party seeking relief from stay has the burden of proof on the issue of the debtor’s equity in the property, and the party opposing relief has the burden on all other issues.  The creditor contended that the plain language of the statute required the burden to be placed on the trustee to prove the lien to be invalid.  The court disagreed, stating that “while this plain-language argument by [the creditor] has some surface appeal,” the argument ignored the fact that whether the debtor has equity in the property in question will be determined in large part by whether the secured creditor’s lien is valid and enforceable against the property.  In short, determining the validity of the asserted lien was part and parcel of determining whether the debtor has an equity in the property.  The court noted the lack of any case authority at the circuit or district level on the issue, but did cite to a number of bankruptcy court decisions throughout the country which were in accord.  Further, the court stated that placing the burden of proof on the creditor made sense as a matter of sound judicial policy because the creditor would likely be in the best position to establish whether its lien is valid. 

The issue whether the trustee could assert his preference claim defensively against the motion for relief presented another interesting matter of first impression for the court.  The preference arose from the debtor’s pre-petition conduct in executing a promissory note and granting a security interest in various assets in payment of an antecedent debt.  The trustee did not seek to avoid the grant of the security interest within the time required by § 546(a)(1).  However, the trustee asserted that the bankruptcy court properly denied the motion because the assets which were the subject of the motion had been preferentially transferred to the secured creditor.  Thus, the trustee argued that, even though he was precluded from avoiding the lien as a preference, the secured creditor should not be allowed to foreclose its security interest in the assets.  The trustee’s argument was grounded in § 502(d), which requires a bankruptcy court to disallow a claim of any creditor who received a preference, unless the creditor has turned over the property for which the creditor is liable under § 550.  The Sixth Circuit concluded that the trustee could use the preference as a defense to the motion for relief, and based its decision on the language of § 502(d).  However, the cases cited by the court for support of its conclusion were in the context of objections to claims.  In re Meredosia Harbor & Fleeting Serv., Inc., 545 F.2d 583, (7th Cir. 1976), a bankruptcy referee under the Act sold assets which were subject to preferential liens.  The secured creditors did not object to the sale, but did assert claims to the proceeds, and the trustee countered that the liens were preferential and the claims to the funds should be treated a general unsecured claim.  The Seventh Circuit held that the trustee’s preference claim was in the nature of “recoupment” and therefore could be asserted defensively even though limitations to avoid the liens had run.  In re Cushman Bakery, 526 F.2d 23 (1st Cir. 1975), under the Bankruptcy Act, the First Circuit held that a trustee properly asserted a barred preference action to defeat the creditor’s asserted unsecured claim.  The Sixth Circuit also relied on the 9th Cir. BAP’s decision in In re KF Dairies, Inc., 143 B.R. 734, where the BAP stated that “statutory time-bars are inapplicable to matters of defense, where no affirmative relief is sought.” 143 B.R. 734, 737-38. 

The Sixth Circuit’s reliance on three decisions rendered in the context of claims litigation ends with a problematic result for trustees and creditors alike and requires us to question whether the language of § 502(d) should apply to motions for relief from stay.   The trustee in McKenzie succeeded in defeating the creditor’s motion for relief.  However, because his preference action is time-barred, he cannot avoid the lien and any sale of the assets in question will result in the creditors’ lien attaching to the proceeds of sale.  The result of the opinion may be simply to require secured creditors whose liens may have been preferential transfers to await abandonment of the property or a closing of the case before exercising their lien rights. 

September 23, 2013

May a Bankruptcy Trustee Assert, Under 11 U.S.C. Sec. 544(b), the IRS’ Ten Year Statute of Limitations to Collect Taxes—No, According to the Bankruptcy Court for the District of New Mexico

Section 544(b) empowers a bankruptcy trustee to avoid transfers that are avoidable under state law by a creditor holding an unsecured claim against the bankruptcy estate.  If a fraudulent transfer claim is barred by the state’s statute of limitations, may a bankruptcy trustee take advantage of the ten year statute of limitations in the Internal Revenue Code and pursue the claim, provided the IRS is an
unsecured creditor of the estate? 

Disagreeing with a number of its sister bankruptcy courts, the United States District Court for the District of New Mexico held that bankruptcy trustee may not avail herself of the ten year statute of limitations for collecting federal taxes for a fraudulent transfer claim that is otherwise barred under state law.  Wagner v. Ultima Homes, Inc. (In re Vaughn Company Realtors), 2013 WL 4479939
(Bankr. D. N.M. 2013).

In Vaughn, the trustee sought to recover transfers made by the debtor more than four years before filing bankruptcy.  Because the trustee’s ability to recover was barred by the four year state statute of limitations, the trustee argued that she could still avoid the transfers under § 544(b) because the IRS was an unsecured creditor of the estate, and section 6502 of the Internal Revenue Code[1]
provides the IRS a ten year statute of limitations in collection of taxes.  The court noted that a number of bankruptcy court decisions supported the trustee’s position.

However, the Bankruptcy Court for the District of New Mexico rejected the trustee’s argument, basing its decision on several Tenth Circuit opinions and one U.S. Supreme Court opinion.  The commenced its analysis by noting that the longer limitations for the collection of taxes by the government is based on the doctrine of nullum tempus occurrit regi, which provides that the United States is not bound by state statutes of limitations in enforcing its rights.  However, the court stated that this doctrine is not without limits, as immunity from state statutes of limitation is a sovereign power of the United States.  Alaska Dept. of Environmental Conservation v. E.P.A., 540 U.S. 461 (2004).  The court held that the benefit of the longer limitations in the Internal Revenue Code existed only for the enforcement of public rights and to protect public interest. Bd. Of County Comm’rs for Garfield County, Colo. V. W.H.I., Inc., 992 F.2d 1061, 1065 (10th Cir. 1993).  Consequently, an action brought by the United States that does not involve public rights or interest will be subject to the state statutes of limitations. Marshall v. Intermountain Elec. Co., Inc., 614 F.2d 260, 263, n.3 (10th Cir. 1980).  

Based on these decisions from the Supreme Court and the Tenth Circuit, the bankruptcy court concluded that Congress did not intend § 544(b) to vest sovereign powers in a bankruptcy trustee and thereby immunize her claims from state statutes of limitations that would otherwise bar her
claims simply because the IRS happens to be an unsecured creditor of the bankruptcy estate.  Because the IRS is protected by the longer limitations period in order to perform the governmental
function of tax collection, the court concluded that the bankruptcy trustee was likewise limited under § 544(b).

[1] 26 U.S.C. § 6502

August 26, 2013

Tenth Circuit Set Parameters of Application of UFTA Statute of Limitations on SEC Equity Receiver’s Claims for Fraudulent Transfer

In a recent opinion, the Tenth Circuit Court of Appeals addressed several issues relating to the application of the statute of limitations in the Uniform Fraudulent Transfer Act on fraudulent transfer
claims asserted by an equity receiver appointed in an SEC civil enforcement action.  The decision was rendered in Wing v. Buchanan (Tenth Circuit No. 12-4123, August 9, 2013). 

Wing was appointed receiver for VesCor Capital, Inc. and a number of its affiliates in connection with a civil enforcement action brought by the SEC.  Prior to the filing of the SEC action, VesCor Capital, Inc. filed a voluntary bankruptcy petition under chapter 11 of the Bankruptcy Code.  However, the affiliates involved in the receivership proceeding did not file bankruptcy petitions.  The bankruptcy court ordered the appointment of a chapter 11 trustee approximately seven months before the SEC action was commenced and ten months before the receiver was appointed. 

Wing filed an action against Buchanan seeking to recover payments made by VesCor Capital and several of its affiliates under the UFTA, alleging that VesCor operated a Ponzi scheme and, therefore, these payments were “by definition, made to hinder, delay or defraud creditors and/or investors of VesCor.”  The timing of the filing of the receiver’s complaint was a critical fact in the dispute:  it was filed more than four years after the transfers in question, more than one year after the appointment of the bankruptcy trustee, but within one year of the receiver’s appointment.  Buchanan alleged that the complaint was barred by the statute of limitations found at Utah Code § 25-6-10.  That statute provides that an action seeking to recover transfers based on allegations of actual fraud must be filed within four years after the transfer was made or, if later, within one year after the transfer was or could reasonably have been discovered by the claimant.  The district court rejected Buchanan’s argument and entered summary judgment in favor of the receiver.

The Tenth Circuit began its analysis by concluding that Utah would adopt the adverse domination theory so that the discovery period for such transfers would not begin to run until the bad actors controlling the entity were removed.  The adverse domination theory recognizes that control of the transferor by its bad actors precludes the possibility of filing suit because these individuals would have no motivation to reveal their fraud by filing suit to claw back fraudulent transfers.  The Tenth Circuit ruled that limitations did not begin to run until Val Southwick, the bad actor controlling
the VesCort entities, was removed from control.

That holding lead to the next question—whether Southwick was “removed” for purposes of the statute when the bankruptcy trustee was appointed in the VesCor Capital bankruptcy case, or whether it began running when the receiver was appointed in the SEC action.  Because some of the transfers were likely made by entities that had not been included in the bankruptcy proceedings, the Tenth Circuit vacated the summary judgment in favor of the receiver and remanded the case to the district court to determine which of the transfers could reasonably have been discovered by the bankruptcy trustee, thereby triggering the statute of limitations on the trustee’s appointment.

The receiver raised two arguments before the appellate court which were rejected.  First, he asserted that limitations could not begin running on the trustee’s appointment because the
receiver is the “claimant” for purposes of the UFTA.  The court rejected that argument, ruling that
it is the companies in receivership and their creditors who are claimants that benefit from the discovery rule, and if their claims are barred by limitations, a subsequent appointment of a receiver will not resurrect otherwise stale claims.  The court also noted that such an interpretation would enable receivers to manipulate the statute by causing a receivership entity to file a bankruptcy petition and thereby gain the commencement of a new statute of limitations on claims that may be barred in the receiver’s hands.  Wing also asserted that the district had equitable discretion to disregard the statute of limitations altogether, citing the Tenth Circuit’s statement in SEC v. VesCor Capital Corp., 599 F.3d 1189, 1194 (10th Cir. 2010) that a “district court has broad powers and wide discretion to determine relief in an equity receivership.”  The court stated that the receiver had
misinterpreted this prior language. The court explained that a district court sits in equity when determining the distribution of assets already in a receiver’s control, but that a district court does not sit in equity when adjudicating a receiver’s claims against third parties to recover property.