Late-Discovered Fraudulent Transfer Claims Can Proceed

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By Diane Davis

March 3 — A bankruptcy court incorrectly applied the doctrine of equitable tolling when it dismissed fraudulent transfer claims as untimely because of the trustee's alleged lack of diligence after discovery of the fraudulent transfers, the U.S. Bankruptcy Appellate Panel of the Ninth Circuit held Feb. 24.

Bankruptcy Code Section 546(a)(1)(A) provides a two-year statute of limitations for avoidance actions. According to the BAP, the statute of limitations may be subject to equitable tolling. “Under the equitable tolling doctrine, where a party ‘remains in ignorance of [a wrong] without any fault or want of diligence or care on his part, the bar of the statute does not begin to run until the fraud is discovered, though there be no special circumstances or efforts on the part of the party committing the fraud to conceal it from the knowledge of the other party,” the BAP said, citing Ernst & Young v. Matsumoto (In re United Ins. Mgmt., Inc.), 14 F.3d 1380 (9th Cir. 1994).

Equitable tolling simply “extends the statute of limitations period by the length of time the plaintiff could not discover the injury,” the BAP said, citing the “stop-clock” rule in Socop-Gonzalez v. Immigration & Naturalization Service, 272 F.3d 1176 (9th Cir. 2001). According to the BAP, a plaintiff would receive the benefit of the full statutory period after the discovery of the fraudulent transfer.

If the trustee ignored public disclosures or warning signs about the existence of the cause of action, equitable tolling won't apply, and some courts also require that the defendant have some role in the concealment or other wrongdoing supporting the request for equitable tolling, according to , pt. II, ch. 74 (D. Michael Lynn et al. eds., 2016).

This case is important because the Ninth Circuit applied equitable tolling without regard to the trustee's diligence in pursuing claims after discovery. If the trustee was diligent in discovering the claims, then she should receive the benefit of the full limitations period after discovery of the fraudulent transfer, the BAP said.

Misapplication of Ninth Circuit Law

Judge Robert J. Faris affirmed in part, vacated in part, and remanded the case for further proceedings and concluded that the bankruptcy court misapplied Ninth Circuit law.

Appellants Patricia and Cresswell Templeton III contended that, based on equitable tolling, the adversary complaint filed in September 2014 was timely. Appellees Jon A. Milby, D&J Trucking Co., Sandra Milby, Sanjon, Inc., 5th St. Condo, LLC, Charlene Milby, and Charlene's Transportation, Inc. argued that trustee Sandra K. McBeth was dilatory after the discovery of the fraudulent transfers such that she should be denied the benefit of equitable tolling.

Under Ninth Circuit precedent, a court shouldn't look at the trustee's post-discovery diligence when considering whether equitable tolling should be applied, the BAP said. “If the trustee was diligent in discovering the claims, then he should receive the benefit of the full limitations period after discovery of the fraudulent transfers,” the BAP said.

Chapter 7 Filing

Debtor Charlene M. Milby is a materials hauling broker who conducts business operations through a wholly-owned company Charlene's Transportation, Inc. (CTI). The debtor filed for Chapter 7 bankruptcy in which nonexempt assets are liquidated and the proceeds are distributed to creditors.

The appellant Templetons filed a proof of claim for $2.7 million in the debtor's case. Because the debtor had a history of concealment and refusal to produce relevant information, the Templetons filed an adversary proceeding to deny discharge under Section 727 and determine the dischargeability of the debtor's debts to the Templetons under Section 523.

According to the Templetons, the debtor's discharge should be denied because she knowingly made false and deceptive statements in her schedules and testimony, failed to disclose assets, failed to produce documents requested by the trustee, and was unable to explain the loss of assets.

The deadline to commence actions to recover avoidable transfers was two years after the bankruptcy filing, or Sept. 22, 2013. Three days before the deadline the statute of limitations was set to expire, the trustee brought an adversary proceeding against the debtor's father and one of his companies to avoid and recover fraudulent transfers, preferential transfers, and unauthorized post-petition transfers. The trustee's avoidance action didn't state claims based on the transfers identified by the Templetons because the trustee said she didn't have adequate documentation or supporting evidence about those transfers and was concerned about the debtor's track record of non-cooperation in discovery and the potential litigation costs to the estate.

The trustee negotiated a settlement of the trustee's avoidance action with the parties stipulating to narrow the scope of the releases. The bankruptcy court approved the settlement agreement with the narrowed releases.

The Templetons then filed an adversary proceeding asserting claims on behalf of themselves, the debtor's estate, including derivative claims for CTI. They alleged claims for actual fraud under Section 544(b), and California Civil Code § 3439.04(a)(1), constructive fraud under Section 544(b) and California Civil Code § 3439.04(a)(2) and 3439.05, aiding and abetting fraudulent transfers, and unjust enrichment.

Does Equitable Tolling Apply?

The appellees moved for summary judgment on the basis of the two-year statute of limitations in Section 546(a)(1). According to the appellees, equitable tolling doesn't apply because there were no extraordinary circumstances that prevented her from bringing suit within two years after the debtor filed for bankruptcy.

The Templetons contended that the debtor's misconduct and evasion were “extraordinary circumstances” hindering the trustee, and that the trustee first learned of the allegedly fraudulent transfers in September 2013 from the Templeton's attorney and didn't have sufficient evidence of the fraudulent transfers.

The bankruptcy court granted the appellee's motion for summary judgment. According to the court, the Templetons' allegations didn't state a plausible claim. The court found that the trustee had been diligent, but was “dilatory in seeking relief after discovering facts” regarding certain transfers and ultimately made a conscious decision not to pursue the transfers on behalf of the estate.

Chief Judge Frederick P. Corbit of the U.S. Bankruptcy Court for the Eastern District of Washington, sitting by designation, and Judge Laura S. Taylor joined the opinion.

Daniel Joseph McCarthy of Hill, Farrer & Burrill, LLP represented appellants Patricia A. Templeton and G. Cresswell Templeton III; Karen L. Grant represented appellees Jon A. Milby, D&J Trucking Company, Sandy Holder Milby, Sanjon, Inc., 5th St. Condo, LLC, Charlene M. Milby, and Charlene's Transportation, Inc.

To contact the reporter on this story: Diane Davis in Washington at

To contact the editor responsible for this story: Jay Horowitz at