Disagreeing with a district court in Texas, the Ninth Circuit held that the one-year window for loss of discharge under Section 727(a)(2) for commission of a transfer with actual intent to hinder creditors is not a statute of limitations and is therefore not equitably tolled by the filing of successive bankruptcy petitions.
A patient got a $300,000 malpractice judgment against a dentist. A month before the dentist filed a chapter 13 petition, he transferred a home to a trust he created for himself. He did not disclose the transfer in his first bankruptcy.
The first bankruptcy was quickly dismissed, followed by a second chapter 13 filing. While the second case was pending, the dentist disclosed and transferred the home back into his own name. Later, the dentist voluntarily dismissed the second bankruptcy.
After the dentist filed his third petition, this time under chapter 7, the patient filed a complaint to deny discharge under Section 727(a)(2) for commission of a fraudulent transfer with “actual intent.” The third bankruptcy filing came more than one year after the initial fraudulent transfer.
The bankruptcy court denied the objection to discharge and was upheld by the Ninth Circuit Bankruptcy Appellate Panel. On a second appeal, the patient contended that the filing of the successive bankruptcy petitions equitably tolled the running of the statute of limitations in Section 727(a)(2).
In her opinion for the Court of Appeals, Circuit Judge Sandra S. Ikuta confronted the question of whether Section 727(a)(2) indeed erects a statute of limitations. She held that it does not.
Judge Ikuta disagreed with a district judge in Texas who held in In re Womble in 2003 that Section 727(a)(2) is a statute of limitations. The Fifth Circuit upheld the district court on other grounds, so there is no split of circuits.
Judge Ikuta said that Section 727(a)(2) is a penalty imposed on debtors for failing to retain assets for the benefit of the bankrupt estate. Unlike a statute of limitations, it is not designed to encourage creditors to prosecute claims. Indeed, she said, it does not “encourage (or require) a creditor to take any action at all.”
Because Section 727(a)(2) is not a statute of limitations, there is no presumption of equitable tolling, Judge Ikuta said. Since exceptions to discharge are construed narrowly, and since the statute contains no suggestion of an intent by Congress to make equitable tolling applicable, Judge Ikuta concluded that successive filings do not toll the one-year window in Section 727(a)(2). As support for her conclusion, she cited the Fourth Circuit’s opinion in Tidewater Financial Co. v. Williams for the proposition that Section 727(a)(8) does not contain a statute of limitations.
Under the Supreme Court’s decision this term in Husky International Electronics Inc. v. Ritz, the patient may have been able to bar the discharge of the $300,000 debt to him on the theory that the absence of a fraudulent misrepresentation does not preclude excepting a debt from discharge for “actual fraud” under Section 523(a)(2)(A). Likewise, any of the dentist’s creditors could have sought to bar discharge of their debts on the same theory.