Section 108 Toll or Trap

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Jun 2001

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One of the most frequently asked questions by persons ensnared in a bankruptcy for the
first time is the bankruptcy's effect on a creditor's right to pursue a claim against
the debtor. Often overlooked by debtors and creditors alike, <a href="http://www.westlaw.com/find/default.asp?rs=CLWP2.1&vr=1.0&cite=… U.S.C. §108</a><a href="#1" name="1a">1</a>

prescribes the extensions to non-bankruptcy time limitations afforded to the parties of
a bankruptcy case.

The bulk of §108 addresses the time extensions provided for the benefit of the
bankruptcy trustee. Section 108 (a) provides:

<blockquote>
If applicable non-bankruptcy law, an order entered in a non-bankruptcy
proceeding, or an agreement fixes a period within which the debtor may commence
an action, and such period has not expired before the date of the filing the
petition, the trustee may commence such action only before the later of (1)
the end of such period, including any suspension of such period occurring on or
after the commencement of the case, or (2) two years after the order for
relief.
</blockquote>

Subsection (a) applies to "actions" only. A chapter 7 or 13 trustee is
granted an extension of non-bankruptcy federal law limitation periods, provided time is
still pending at the time of the bankruptcy filing. The two-year extension recited
in subsection (a)(2) applies even if the underlying statute of limitations, statute
of repose, etc. provides for a term of less than two years. In <a href="http://www.westlaw.com/find/default.asp?rs=CLWP2.1&vr=1.0&cite=…
Environmental Waste Corporation v. Stephens, Berg and Lasaster (In re National
Environmental Waste Corp.), 200 F.3d 1266 (9th Cir. 2000)</a>, the
court of appeals held that a professional malpractice action for which the state
prescribed a one-year statue of limitations could be initiated within two years of the
commencement of the debtor's case. In the course of its opinion, the court was
careful to emphasize that the date of the commencement of the case, and not the date
of plan confirmation or the date upon which the property of the estate revested in
the debtor, was determinative in calculating the extension period. <a href="http://www.westlaw.com/find/default.asp?rs=CLWP2.1&vr=1.0&cite=…; at 1268</a>.
Under §348 of the Code, the extension period would run from a debtor's original
filing date, notwithstanding a subsequent conversion to another chapter. See

§348(a).

It is noteworthy that subsection (a) is not a tolling provision, but an extension
or moratorium provision. Judicial decisions have been fairly consistent on this issue.
See Aegis Healthcare PA v. Shared Medical Systems Corp., 2000 U.S. Dist.
LEXIS 8775 (N.D. Texas 2000), citing <a href="http://www.westlaw.com/find/default.asp?rs=CLWP2.1&vr=1.0&cite=… re Phillip, 948 F.2d
985 (5th Cir. 1991)</a>.

To illustrate, if a debtor files for bankruptcy with a year outstanding on a state
law unfair trade practice claim, the two-year extension does not work to both toll
the outstanding pre-petition period remaining under the state law limitation and extend
a two-year moratorium. In Aegis Healthcare, a case with facts similar to those
described above, the district court granted a motion to dismiss when the action was
commenced beyond two years from the commencement of the bankruptcy case.

The trustee's ability to pursue the rights of a debtor on an extended basis is
addressed in §108(b), which provides:

<blockquote>
Except as provided in subsection (a) of this section, if applicable
non-bankruptcy law, an order entered in a non-bankruptcy proceeding, or an
agreement fixes a period within which the debtor or an individual protected under
§1201 or 1301 of this title may file any pleading, demand, notice or
proof of claim or loss, cure default or perform any other similar act, and
such period has not expired before the date of the filing of the petition, the
trustee may only file, cure or perform, as the case may be, before the later
of (1) the end of such period, including any suspension of such period
occurring on or after the commencement of the case, or (2) 60 days after
the order for relief.
</blockquote>

Subsection (b) is distinguished from subsection (a) in that it applies to matters
other than litigation; for instance, subsection (b) has been applied to deadlines
for filing administrative claims (see <a href="http://www.westlaw.com/find/default.asp?rs=CLWP2.1&vr=1.0&cite=… vs. United States of America, 126
F. Supp. 2d 1012 (S.D. Texas 2000)</a>) and contract rights or claims
(see <a href="http://www.westlaw.com/find/default.asp?rs=CLWP2.1&vr=1.0&cite=… Development Inc. v. Old Kings Interchange Inc. (In re Yates
Development Inc.), 241 B.R. 247 (Bankr. M.D. Fla. 1999)</a>.

One routine example of the type of right or claim asserted by a trustee under
§108(b) is the exercise of a right of redemption in connection with a mortgage
foreclosure. This issue was addressed recently in In re Veltre, 2000 Bankr.
LEXIS 1409 (Bankr. D. N.J. 2000). In Veltre, the mortgage lender
was the successful bidder at the foreclosure sale, after which the mortgagee filed for
protection under chapter 13. The filing was prior to the expiration of the redemption
period. Nonetheless, the court awarded the lender relief from the automatic stay when
the debtor failed to redeem the property within 60 days of his bankruptcy filing.
In contrast, in a case where the mortgagor filed one day before the expiration of
the redemption period, the bankruptcy court reasoned that the involuntary transfer of
ownership resulting from a foreclosure action is the type of proceeding that the
automatic stay was intended to forestall. See <a href="http://www.westlaw.com/find/default.asp?rs=CLWP2.1&vr=1.0&cite=… re Frazer, 238 B.R. 262
(Bankr. D. Vt. 1999)</a>. Accordingly, the court concluded that §362 prevented
the lapse of the redemption period until the closing of the case or the award of
relief from the automatic stay. Although not stated in the opinion, it would appear
that in order to reach this decision, the court implicitly determined that §362
trumped the "procedural" provisions of §108(b). In all likelihood, the court's
conclusion also stemmed from its disinclination to allow a substantive legal right of
the debtor to pass without the benefit of a formal hearing.

The provisions of §108 may also work to the detriment of a trustee. This point
is illustrated in <a href="http://www.westlaw.com/find/default.asp?rs=CLWP2.1&vr=1.0&cite=… v. HHS (In re Ludlow Hospital Society Inc.), 124
F.3d 22 (1st Cir. 1997)</a>. In this case, the court of appeals upheld
a ruling that the trustee's failure to take the steps necessary to qualify for capital
asset reimbursement from the government within the 60 days prescribed under §108(b)
precluded an extension of the right to pursue such a recovery beyond 60 days from
the case's filing. Indeed, the 60-day provision was deemed sufficient to override
any equitable interests under §105 that might justify extending the trustee's deadline
beyond the prescribed 60-day timeframe.

While §108(b) may provide for an extension of contractual performance, it will
not necessarily alter the effect of the corresponding delay. In <a href="http://www.westlaw.com/find/default.asp?rs=CLWP2.1&vr=1.0&cite=… Development
Inc. v. Old Kings Interchange Inc. (In re Yates Development Inc.), 241
B.R. 247 (Bankr. M.D. Fla. 1999)</a>, the debtor entered into a
pre-petition contract that contained a "time is of the essence" provision, as well
as a daily purchase-price escalation clause. When the debtor was unable to close on
the contract by the specified deadline, it filed for bankruptcy. It then sought to
go forward with the contract within the 60-day extension period of §108(b)
without incurring the effect of the escalation clause on the purchase price. The court
reasoned that the "relation-back theory" espoused by the debtor would be unfair to the
non-bankruptcy party to the contract and would run afoul of the clear statutory
language of §108, which was interpreted only to extend an obligation and not to
modify the obligation.

Finally, §108(c) addresses civil claims brought or that were or could have been
brought against the debtor at the time of the bankruptcy filing:

<blockquote>
Except as provided in §524 of this title, if applicable non-bankruptcy law,
an order entering in a non-bankruptcy proceeding, or an agreement fixes a period
for commencing or continuing a civil action in a court other than a bankruptcy
court on a claim against the debtor, or against an individual with respect to
which such individual is protected under §1201 or §1301 of this title,
and such period has not expired before the date of the filing of the petition,
then such period does not expire until the later of (1) the end of such
period, including any suspension of such period occurring on or after the
commencement of the case, or (2) 30 days after notice of the termination
or expiration of the stay under §§362, 722, 1201 or 1301 of this
title as the case may be, with respect to such claim.
</blockquote>

The language of subsection (c) does not limit its reach to claims against a
debtor. There is a specific reference to "a claim against an individual with respect
to which such individual is protected under §§1201 or 1301." [emphasis added]
Therefore, co-debtors under chapters 12 and 13 are subject to the extended period
of liability exposure provided by §108(c).

Generally speaking, creditors are afforded 30 days after notice of the termination
or expiration of the automatic stay provisions of §§362, 722, 1201 or
1301. Any extensions under this provision are limited to claims arising under
non-bankruptcy law. See <a href="http://www.westlaw.com/find/default.asp?rs=CLWP2.1&vr=1.0&cite=… v. U.S.A. (In re Palmer), 219 F.3d 580
(6th Cir. 2000)</a>. It is non-bankruptcy proceedings, such as a foreclosure
deficiency petition, to which §108(c) is intended to apply. See <a href="http://www.westlaw.com/find/default.asp?rs=CLWP2.1&vr=1.0&cite=… v.
Integra National Bank North, 106 F.3d 506 (3rd Cir. 1997)</a>.

While the 30-day extension provision within §108(c) appears to be relatively
straightforward, counsel should be wary of the impact or effect of related but distinct
statutory provisions. For instance, a number of courts have read §§6501, 6502
and 6503 of the Internal Revenue Code together with §108(c) to convert it
into a tolling provision rather than a mere filing-extension provision. See In re
Fiels, 2001 Bankr. LEXIS 301 (Bankr. D. Md. 2001).

More pertinent to a day-to-day bankruptcy practitioner is the dichotomy between
§§108(c) and 546(b) of the Bankruptcy Code. While §108(c) would appear
to create a wholesale extension of any enforcement or perfection time limitations, a
creditor desiring to maintain or continue a lien in property under §108(c) could
face a dramatically different result under §546(b). Specifically, §546(b)
provides:

<blockquote>
(1) The rights and powers of a trustee under §§544, 545 and 549 of
this title are subject to any generally applicable law that (A) permits
perfection of an interest in property to be effective against an entity that
acquires rights in such property before the date of perfection, or (B)
provides for the maintenance or continuance of perfection of an interest in
property to be effective against an entity that acquires rights in such property
before the date on which action is taken to affect such maintenance or
continuation. 
(2) If (A) a law described in paragraph (1) requires seizure of such
property or commencement of an action to accomplish such perfection, or maintenance
or continuation of perfection of an interest in property, and (B) such
property has not been seized or such an action has not been commenced before the
date of the filing of the petition, such interest in such property shall be
perfected or perfection of such interest shall be maintained or continued by giving
notice within the time fixed by such law for such seizure or such commencement.
[emphasis added]
</blockquote>

In the mechanic's lien context, the interplay between these provisions can be
critical. Since §546(b) allows a creditor to continue a lien or take the steps
necessary to maintain the previously perfected interest by "giving notice within the time
fixed by [applicable non-bankruptcy law]," the failure to pursue the steps necessary
to continue or maintain a lien may preclude the creditor from exercising such rights
during the extension period prescribed in §108(c).

In Concrete Structures Inc. v. Tidewater Crane and Rigging Co. (In re
Concrete Structures Inc.), 2001 U.S. Dist. LEXIS 3675 (E.D. Va.
2001), the court reasoned that the question of whether to apply §108(c)
rather than 546(b) turned on whether a mechanic's lien enforcement or foreclosure
suit is part of the overall perfection process as opposed to being an enforcement
suit separate and distinct from the perfection of the lien. Id. at 21.
Specifically, if the commencement of an enforcement suit is not part of the
perfection process, the bankruptcy filing operates as a stay to an enforcement action,
and the mechanic's lien remains in effect for at least 60 days subsequent to the
termination of the automatic stay. Alternatively, if the commencement of an
enforcement action is required to maintain perfection, a creditor must furnish the
written notice specified in §546(b) within the original non-bankruptcy law
limitations. Failing the provision of such notice, the trustee would be entitled to
avoid the mechanic's lien under §544.

This fairly subtle distinction can work havoc upon the creditors' ability to maintain
or pursue a lien interest on a post-petition basis. If needed to maintain
perfection, a creditor must generate an appropriate written notice within the originally
prescribed non-bankruptcy time limitation. There is little guidance provided for the form
of notice, but creditors often use their proofs of claim for this purpose. This still
leaves unresolved the question of how or when the follow-up litigation is to be
commenced.

Similar issues arise in connection with prejudgment attachment liens (<a href="http://www.westlaw.com/find/default.asp?rs=CLWP2.1&vr=1.0&cite=… v.
Kasparian (In re Southern California Plasters Inc.), 165 F.3d 1243 (9th
Cir. 1999)</a>), landlord distress liens and repairman liens.

This brief review of recent caselaw with respect to the time extension provisions
of §108 reveals that §108 cannot be read in isolation. Its terms, if closely
observed, can be used as tools by trustees and creditors alike.

<hr>
<h3>Footnotes</h3>

<a name="1">1</a> Unless otherwise noted, all statutory references are to Title 11, U.S. Code. <a href="#1a">Return to article</a>

Journal Authors

David B. Wheeler

Journal Date

Friday, June 1, 2001 - 12:00

Bankruptcy Rule

2001