There is a split of circuits in the offing because two bankruptcy courts in less than one year have differed with the Fifth Circuit by holding that a bankruptcy trustee can couple the rights of the Internal Revenue Service with Section 544(b)(1) to sue for the recovery of fraudulent transfers going back as much as 10 years.
The newest decision was handed down on May 2 by Bankruptcy Judge Jim D. Pappas of Boise, Idaho. He agreed with Mukamal v. Citibank NA (In re Kipnis), 555 B.R. 877 (Bankr. S.D. Fla. 2016), where Bankruptcy Judge Robert A. Mark of Miami ruled in August 2016 that the statute of limitations for a trustee to bring an avoidance action is 10 years, not three to six years as typically provided by state laws, whenever the IRS is an unsecured creditor. Click here to read ABI’s discussion of Kipnis.
On the other side of the fence, aligned with the Fifth Circuit, is Bankruptcy Judge Robert H. Jacobvitz of Albuquerque and his 2013 opinion in 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?” The Fifth Circuit opinion is MC Asset Recovery LLC v. Commerzbank A.G. (In re Mirant Corp.), 675 F.3d 530 (5th Cir. 2012).
The case before Judge Pappas involved the bankruptcy of a company that did not file federal tax returns for several years. When the business failed and later filed a chapter 7 petition, the company owed the IRS $1.5 million.
The trustee mounted several fraudulent transfer lawsuits alleging that the company had paid personal liabilities of an owner. The transfers were not within the reach of the two-year lookback period under Section 548(a)(1) or the four years under the Idaho version of the Uniform Fraudulent Transfer Act.
The defendants moved to dismiss, contending that the trustee was not entitled to rely on the longer statutes of limitations available to the IRS.
Judge Pappas denied the dismissal motions, saying that the plain language of Section 544(b)(1) allows the trustee to step into the shoes of the IRS to avoid transfers going back six to 10 years under the IRS Code and Federal Debt Collection Procedures Act. Section 544(b)(1) enables a trustee to avoid a transfer that “is voidable under applicable law by a creditor holding an unsecured claim that is allowable under Sectio 502 of this title or that is not allowable only under Section 502(e).”
In short, Judge Pappas held that the IRS Code and the FDCPA together with their longer statutes of limitations are “applicable law,” allowing the trustee to step into the shoes of the government.
Recognizing that he was in disagreement with the Fifth Circuit and a substantial number of lower courts, Judge Pappas explained in detail why he rejected a plethora of arguments proffered by the defendants that would have precluded the trustee from using the longer statutes of limitations available to the IRS.
We recommend reading Judge Pappas’ opinion in full text. To read the opinion, click here.