Equitable tolling can permit a trustee to maintain a fraudulent transfer action when statutes of limitations expired under both state and federal law, as explained in an October 16 opinion by Bankruptcy Judge Patricia M. Mayer of Reading, Pa.

The owner sold his company in 2007, in return for an agreement to pay him about $6,000 a month for the remainder of his life. The company stopped making payments in August 2019.

Creditors filed an involuntary chapter 7 petition in October 2020, followed by an order for relief in December 2020. The chapter 7 trustee’s problems soon began.

The debtor’s principal refused to cooperate in the preparation and filing of schedules and the statement of affairs. Among other things, the principal was sanctioned twice, and discovery hearings were rescheduled five times. At one point, the bankruptcy judge even directed the U.S. Marshall to apprehend the principal.

After travail, the schedules were filed in March 2023, more than two years after the petition date and the order for relief. In October 2023, the chapter 7 trustee sued the former owner for receipt of actual and constructive fraudulent transfers under state law and Section 548. The defendant filed a motion to dismiss, contending that state and federal statutes of limitations had all expired.

Judge Mayer said that the motion was “sensible,” given that the complaint came more than three years after the petition and the order for relief.

The Statutes of Limitations

The statute of limitations for state fraudulent transfers was four years. Given that the trustee was filing suit under Section 544, Judge Mayer said that “11 U.S.C. § 546 then controls whether those avoidance actions brought in a federal bankruptcy proceeding are timely.”

Section 546(a)(1)(A) provides that a trustee may file suit under Sections 544 and 548 within “2 years after the entry of the order for relief.” Judge Mayer said that “[c]ourts have roundly rejected the argument that state law statutes can cut the § 546 limitation period short, regardless of whether the state statute was one of limitations or repose.”

Because the trustee was suing to recover transfers under state law less than four years before the order for relief, Judge Mayer said that “these claims would have been timely on the petition date, [since] the limitations period of § 546 applies to preserve those claims.”

Given that the limitations periods had run before the trustee filed the complaint, Judge Mayer said that “the timeliness of the Trustee’s state law avoidance claims turns on an application of equitable tolling to § 546.” For the same reason, she said that the timeliness of the Section 548 claims depended on equitable tolling.

Equitable Tolling

Citing the Supreme Court, Judge Mayer said, “Equitable tolling is presumed to apply to all federal statutes of limitations, including 11 U.S.C. § 546.” Citing the Collier treatise, she added:

Equitable tolling may be applied “when a trustee, exercising due diligence, has been prevented from asserting a cause of action” because he or she remains unaware of the action due to fraud or misrepresentation, or when “extraordinary circumstances beyond [the trustee’s] control [make] it impossible to file claims on time.”

Again citing the Supreme Court, Judge Mayer said that “‘a litigant seeking equitable tolling bears the burden of establishing two elements: (1) that he has been pursuing his rights diligently, and (2) that some extraordinary circumstance stood in his way.’”

For the trustee, the rest was downhill. Judge Mayer recited how she had granted seven extensions of time to file the schedules and had directed the U.S. Marshall to arrest the debtor’s principal “for his repeated noncompliance with the Trustee and court orders.”

The defendant argued that the trustee could have used other methods for discovering the necessary information, but Judge Mayer said that the “trustee must be allowed to weigh the limited resources of the estate.” Doing otherwise, she said, “would . . . incentivize involuntary debtors’ noncompliance with the trustee during the two-year period after filing.” She therefore found as a fact that the trustee had acted “diligently” and had been facing “extraordinary circumstances.”

The defendant contended that equitable tolling should not apply because the delay was occasioned by the debtor’s principal, not by the defendant. Citing decisions from bankruptcy courts, she rejected the argument, saying that “equitable tolling can apply based solely on the actions of a debtor and its principal, notwithstanding a lack of obstruction or bad acts by the defendant.”

Judge Mayer denied the motion to dismiss based on the statutes of limitations.