Eventually, we may have a split of circuits on the question of whether a trustee can step into the shoes of the Internal Revenue Service to bring fraudulent transfer suits going back 10 years under Section 544(b).

Chief Bankruptcy Judge Dale L. Somers of Topeka, Kan., split with the Fifth Circuit by holding that a trustee can use a tax claim of the IRS to stretch the statute of limitations up to 10 years before filing.

Both sides filed motions for interlocutory appeals to the Tenth Circuit Bankruptcy Appellate Panel, but the BAP denied the motions. Judge Somers must rule on the merits before the Section 544(b) question visits the BAP and, perhaps, the Tenth Circuit.

The IRS Claim

An individual debtor filed a chapter 7 petition in 2019. The IRS had an unsecured claim for more than $20,000 in unpaid federal taxes.

The trustee filed suit alleging that the debtor had denuded himself of his principal assets by making a string of fraudulent transfers going back 10 years. The trustee asserted that he could step into the shoes of the IRS and enjoy the 10-year statute of limitations for fraudulent transfer claims afforded to the IRS.

The defendants filed a motion to dismiss, contending that the trustee was limited to the four-year statute of limitations under Kansas law for fraudulent transfers. Judge Somers disagreed and denied the motion to dismiss, prompting both sides to file unsuccessful cross motions for interlocutory appeals to the BAP.

In his 25-page opinion on June 2, Judge Somers laid out decisions going both ways. The outcome turns on the interpretation of Section 544(b), which says that

the trustee may avoid any transfer of an interest of the debtor in property or any obligation incurred by the debtor that is voidable under applicable law by a creditor holding an unsecured claim that is allowable under section 502 of this title.

Judge Somers identified the IRS as the so-called triggering creditor holding an allowable unsecured claim. He said that the “triggering creditor’s potential right to avoid transfers under applicable law defines the trustee’s rights as successor to that creditor.”

Usually, Judge Somers said, applicable law is state fraudulent transfer law, “but when the triggering creditor has avoidance rights under federal law, the trustee likewise has such rights.” He went on to say that the transfers could be avoidable under both Kansas fraudulent transfer law and the Federal Debt Collection Procedures Act, 28 U.S.C. § 3001 et seq. Under Kansas law, the statute of limitations is four years, while it’s six years under the FDCPA.

The trustee contended that his claims under Kansas law would not be limited to the state’s four-year lookback nor to the six-year cutoff in the FDCPA. Instead, he pointed to 26 U.S.C. § 6502 for the proposition that he could employ the 10-year lookback afforded to the IRS. The section gives the IRS 10 years to commence an action to collect a tax, even an action against a third party to whom the taxpayer made a transfer.

The IRS, Judge Somers said, “is not subject to the applicable state limitations period.”

Judge Somers acknowledged that the Fifth Circuit and a minority of lower courts hold that a trustee may not adopt the statute of limitations belonging to the IRS. See MC Asset Recovery LLC v. Commerzbank A.G. (In re Mirant Corp.), 675 F.3d 530 (5th Cir. 2012); Vaughan Co. v. Ultimate Homes, Inc. (In re Vaughan Co.), 498 B.R. 297 (Bankr. D.N.M. 2013); and an article in the January 2017 edition of the American Bankruptcy Institute Journal by Peter Russin and Meaghan Murphy, “An Unlimited Reach-Back Period When IRS Is the Triggering Creditor?”

Judge Somers instead decided to follow “the majority position.” He held that stepping into the shoes of the IRS did not subject the trustee to the Kansas statute of limitations. To reach the conclusion, he relied on “the plain wording of Section 544(b).” The section, he said, grants “a trustee the rights of a creditor holding an allowable unsecured claim under applicable law.”

Judge Somers admitted that Congress “most likely” did not contemplate that Section 544(b) would extend statutes of limitations. “Unfortunately,” he said, “under current standards of statutory construction the Court is constrained to interpreting the plain language of § 544 without regard to these adverse consequences.” He therefore held, like the “majority of courts,” that the “ten-year period of 26 U.S.C. § 6502 applies.”

Similarly, Judge Somers concluded that the trustee was also eligible for the six-year statute under the FDCPA, even though the Fifth Circuit had held otherwise. Again, he followed the majority of courts by holding that a trustee could use the FDCPA. Section 544(b), he said, contains no limitation on the applicable law that a trustee may use.

Following the FDCPA “fulfills the plain language” of Section 544(b) and does not supersede or alter the Bankruptcy Code, Judge Somers said.

Judge Somers denied the defendants’ motion to dismiss, giving the trustee 10-year and six-year statutes of limitations to pursue fraudulent transfers.