Expanding the Fraudulent Conveyance Look Back Period

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Nicholas C. Rigano

By: Nicholas C. Rigano, Esq.

LaMonica Herbst & Maniscalco LLP Wantagh, New York

Nicholas C. Rigano is an Associate with LaMonica Herbst & Maniscalco. He has extensive experience representing key constituents in Chapter 7 and 11 bankruptcies (including trustees, debtors and creditors) and complex commercial litigations. He has been nominated Super Lawyers Rising Star in 2013, 2014, 2015 and 2016. Mr. Rigano graduated cum laude from both St. John's University School of Law and the School of Management at Binghamton University. He is also an Eagle Scout.

Section 548 of the Bankruptcy Code permits a trustee or debtor-in-possession (“ DIP”) to avoid fraudulent transfers made by a debtor within two (2) years of the petition date. Transfers made outside of the two (2) year period may be avoided by use of Section 544(b)(1) of the Code in conjunction with applicable state law.

Trustees and DIPs often rely on the ability to “look back” at pre-petition transfers made by a debtor to determine whether those transfers may be avoided under applicable fraudulent conveyance law. These look back periods are codified by state statute of limitations and, absent an exception, range from three (3) to six (6) years from the date of the transfer. New York generally recognizes a six (6) year look back period, codified by the statute of limitations set forth in section 213(1) of the New York Civil Practice Law and Rules (“ CPLR”).

A trustee or DIP may be afforded the use of an expanded look back period where:

  • i. At the time of the transfer, the debtor, was, and as of the petition date remained, indebted to the Internal Revenue Service (“ IRS”);
  • ii. At the time of the transfer, the debtor was a defendant to a litigation which resulted in a money judgment against it that remains unsatisfied as of the petition date; or
  • iii. The debtor made the transfer with actual fraud and at least one of its existing creditors could not have discovered the transfer within a specified period prior to the petition date.

 

This article discusses the circumstances under which an expanded look back period may be applicable.

IRS as the Triggering Creditor

The IRS is afforded a ten (10) year statute of limitations to collect a tax. See26 U.S.C. §6502(a). This statute of limitations accrues from the date of the assessment of the tax. See id. The United States Supreme Court has held that the ten (10) year statute of limitation applies where the IRS asserts a fraudulent conveyance claim under applicable state law against a party that accepted a transfer from the delinquent taxpayer. SeeUnited States v. Summerlin, 310 U.S. 414, 416 (1940); United States v. Holmes, 727 F.3d 1230 (10th Cir. 2013).

A majority of courts have held that a trustee or DIP may stand in the shoes of the IRS to utilize a look back period of up to ten (10) years where a debtor was indebted to the IRS at the time of a transfer and remained indebted to the IRS as of the petition date. SeeEbner v. Kaiser (In re Kaiser), 525 B.R. 697 (Bankr. N.D. Ill. 2014); Levey v. Gillman (In re Republic Windows & Doors LLC), 2011 BL 262923, (Bankr. N.D. Ill. 2011); Finkel v. Polichuk (In re Polichuk), 2010 BL 285320 (Bankr. E.D. Pa. 2010); Osherow v. Porras (In re Porras), 312 B.R. 81 (Bankr. W.D. Tex. 2004); Shearer v. Tepsic (In re Emergency Monitoring Technologies Inc.), 347 B.R. 17 (Bankr. W.D. Pa. 2006); Alberts v. HCA Inc. (In re Greater Southeast Comm. Hospital Corp.), 365 B.R. 293 (Bankr. D.D.C. 2006); see alsoG-I Holdings, Inc. v. Et. Al. Parties (In re G-I Holdings, Inc.), 313 B.R. 612 (Bankr. D. N.J. 2004) (allowing a bankruptcy trustee to use the ten (10) year look back period available to a federal environmental agency).

However, a minority of courts have held that the trustee may not stand in the shoes of the IRS because the rights of the IRS are that of a government function, not a private cause of action. See, e.g.,Wagner v. Ultima Homes Inc. (In re Vaughn Co.), 498 B.R. 297, 304-06 (Bankr. D.N.M. 2013).

While courts in the Second Circuit have surprisingly not expressly addressed this issue, the Bankruptcy Court for the Southern District of New York has concluded that a DIP (and by implication, a trustee) may use an expanded look back period by standing in the shoes of the United States. In Tronox Inc. v. Kerr Mcgee Corp. (In re Tronox Inc.), 503 B.R. 239 (Bankr. S.D.N.Y. 2013) the court considered whether the United States may be a triggering creditor under section 544(b)(1) of the Bankruptcy Code with respect to a fraudulent conveyance claim brought by a DIP under Oklahoma law, which maintains a four (4) year look back period. As the transfers at issue were made outside of the four (4) year period, the DIP attempted to stand in the shoes of the United States, as an unsecured creditor of the debtor, and use the six (6) year look back period codified by the statute of limitations set forth in the Federal Debt Collection Procedure Act (the “ FDCPA”). The court permitted the DIP to use the six (6) year statute of limitations and rejected the defendant's argument that “only the United States can avail itself of the avoidance powers of the FDCPA.” Id. at 273. The court held that “Defendants' contention that the United States cannot be a triggering creditor is [] without substance.” Id. at 275, n.44. In support of its ruling, the court cited Cambridge Meridian Group, Inc. v. Connecticut Nat’l Bank (In re Erin Food Services, Inc.) , 117 B.R. 21, 25 (Bankr. D. Mass. 1990) a case where the IRS was permitted to serve as the triggering creditor pursuant to section 544(b)(1) of the Bankruptcy Code. Therefore, a reasonable inference may be drawn that courts in the Second Circuit stand with the majority and would permit a trustee or DIP to use the IRS as a triggering creditor, enabling a look back period of up to ten (10) years.

As set forth in the next section, the trustee and DIP may be afforded use of the ten (10) year look back period in conjunction with section 273-a of the New York Debtor and Creditor Law (the “DCL”) to avoid having to prove a debtor's insolvency more than six (6) years prior to the petition date.

Section 273-a of the DCL

Section 273-a of the DCL in conjunction with section 544(b)(1) of the Bankruptcy Code permits a trustee or DIP to avoid a transfer made by a debtor while the debtor was a defendant to a litigation that resulted in an unsatisfied money judgment against it, so long as the debtor received less than fair consideration for that transfer. Significantly, proof of the debtor's insolvency is not required for a plaintiff to prevail on this claim.

The New York Appellate Division for the Second Department has held in multiple instances that “the six year limitations period for a cause of action pursuant to Debtor and Creditor Law §273-a begins to run on the date of entry of the judgment.” State Ins. Fund v. P.S.G. Const. Co., 91 A.D. 3d 643, 644 (N.Y. App. Div. 2nd Dep't 2012); Coyle v. Lefkowitz, 89 A.D.3d 1054, 1056 (N.Y. App. Div. 2nd Dep't 2011). That is, the date of the judgment, not the date of the transfer, is the applicable accrual date for statute of limitations purposes.

Accordingly, a transfer made by a debtor more than six (6) years prior to the petition date is attackable so long as: (i) the debtor was a defendant as of the date of the transfer, and (ii) the judgment against the debtor was entered within the six (6) year period prior to the petition date. Consider the following hypothetical:

January 1, 2000 Plaintiff sues defendant for money damages. January 2, 2000 Defendant gifts $100,000.00 to spouse and receives nothing in exchange. January 1, 2010 Final non-appealable judgment is entered in plaintiff's favor against defendant. January 1, 2015 Defendant files its bankruptcy petition. At the time of the bankruptcy filing, the judgment is unsatisfied.

Since the debtor in the above hypothetical filed within six (6) years of the judgment date, the transfer made approximately fifteen (15) years prior to the petition date is potentially avoidable pursuant to section 273-a of the DCL.

Taking this a step further, a trustee or DIP may be afforded the dual use of the ten (10) year look back period, discussed supra, in conjunction with section 273-a if the IRS filed a tax lien against the debtor before the date of the transfer. While no court appears to have expressly considered whether a trustee or DIP may be afforded this dual benefit, at least one court in the Second Circuit has held that a tax warrant issued by a taxing authority satisfies the judgment element of section 273-a. Mendelsohn v. Nat'l Westminster Bank U.S.A. (In re Frank Santora Equipment Corp.), 256 B.R. 354, 374 (Bankr. E.D.N.Y. 2000) (citing NYC Code §11-712 and holding “a docketed tax warrant is the equivalent of a docketed judgment of a court of record.”); see alsoUnited States v. Irving Fried & Newburger, Leb & Co., 70-2 USTC Para. 9582, 70-2 USTC 84,431 (E.D.N.Y. 1970) (referencing section 273-a with respect to the avoidance of certain transfers made by a tax lien debtor for the benefit of the IRS). This is notable as section 273-a enables a party to avoid a transfer without requiring proof of the debtor's insolvency, which may be a major benefit when seeking to avoid transfers more than six (6) years prior to the petition date.

Discovery Rule

Courts in the Second Circuit have recognized the “discovery rule”, which may serve to extend the look back period for transfers made with actual fraud. Specifically, section 213(8) of the CPLR provides “an action based upon fraud; the time within which the action must be commenced shall be the greater of six years from the date the cause of action accrued or two years from the time the plaintiff or the person under whom the plaintiff claims discovered the fraud, or could with reasonable diligence have discovered it. ” CPLR §213(8) (emphasis added); see also CPLR §203(g).

Courts in the Second Circuit also recognize the doctrine of equitable tolling and equitable estoppel, which may similarly serve to extend the look back period. The equitable tolling doctrine tolls the statute of limitations where: (1) the defendant wrongfully conceals a fact, (2) that prevents the plaintiff's discovery of the nature of the claim within the limitations period, and (3) the plaintiff was diligent in pursuing discovery of the claim. SeeButala v. Agashiwala, 916 F. Supp. 314, 319 (S.D.N.Y.1996); In re Fischer, 308 B.R. 631 (Bankr. E.D.N.Y. 2004). Similarly, the equitable estoppel doctrine “precludes a party from raising a statute of limitations defense when his own misconduct has caused the other party to delay in bringing an action.” In re Fischer, 308 B.R. 631, 656 (Bankr. E.D.N.Y. 2004) (citing In re FYM Clinical Laboratory, Inc.,1997 BL 10822 (S.D.N.Y.1997)). “Under federal law, equitable estoppel differs from fraudulent concealment in that it is invoked in cases where the plaintiff knew of the existence of his cause of action but the defendant's conduct caused him to delay bringing his lawsuit.” Statistical Phone Philly v. NYNEX Corp., 116 F. Supp.2d 468, 484 (S.D.N.Y. 2000).

Trustees and DIPs are afforded an expanded look back period based on the CPLR, equitable estoppel and/or equitable tolling where the transfer: (i) was made with actual fraud; and (ii) was either: (a) not discovered, and could not have been discovered with reasonable diligence, or (b) was only discovered, and could have only been discovered with reasonable diligence, by at least one unsecured creditor within two (2) years of the petition date. See CPLR §§213(8), 203(g); Picard v. Cohmad Sec. Corp. (In re Bernard L. Madoff Inv. Sec. LLC, 454 B.R. 317, 338 (Bankr. S.D.N.Y. 2011); see alsoPhillips v. Levie, 593 F.2d 459, 462 n.12 (2d Cir. 1979); Silverman v. United Talmudical Acad. Torah Vyirah, Inc. (In re Allou Distribs., Inc.), 446 B.R. 32, 67 (Bankr. E.D.N.Y. 2011) (“New York state law fixes the limitations period for claims under the DCL. A claim based on actual fraud under DCL Section 276 must be brought within the later of six years from the date of the fraud or conveyance, or two years from the date that the fraud should have been discovered.”).

Accordingly, a transfer made by a debtor with actual fraud more than six (6) years prior to the petition date may be avoidable where such transfer could not have been discovered by at least one category of unsecured creditors. Notably, a trustee need only identify a category of unsecured creditors who could not have discovered the transfer at issue within two (2) years of the petition date, not a specific unsecured creditor. See, Madoff, 454 B.R. at 339 (denying a motion to dismiss with respect to claims seeking to avoid transfers made more than six (6) years prior to the petition date because the complaint contained the following allegation: “[a]t all times relevant to the Transfers, the fraudulent scheme perpetrated by BLMIS was not reasonably discoverable by at least one unsecured creditor of BLMIS.”). Also, courts in the Second Circuit typically hold that adjudicating the viability of the discovery rule is premature at the motion to dismiss stage. SeeMadoff, 454 B.R. at 339; see alsoSchmidt v. McKay, 555 F.2d 30, 37 (2d Cir. 1977) (holding whether a plaintiff knew or should have known of a fraud is a mixed question of law and fact that “ordinarily should not be disposed of by summary disposition.”).

Conclusion

At first glance, the look back period in New York is six (6) years; however, there are several conditions which may extend this period and consequently may entitle a trustee or DIP to avoid substantial pre-petition transfers. When conducting their avoidance action analysis, trustees and DIPs should review whether the avenues discussed above may give rise to an expanded look back period.