Difficulty in obtaining the names of John Doe defendants won’t prevent a statute of limitations from elapsing, Bankruptcy Judge Marvin Isgur of Houston said in the wake of the aborted reorganization of ATP Oil & Gas Corp.
When ATP’s chapter 11 case converted to chapter 7, the newly appointed trustee knew he had claims to recover payments made before bankruptcy to holders of preferred stock. When the one-year statute of limitations was expiring on fraudulent transfer actions, the trustee had only succeeded in identifying the banks and brokerages that were the nominal owners of the preferred stock.
The day before the statute expired, the trustee therefore filed a complaint naming John Does 1 through 553 as defendants with beneficial ownership of the preferred stock.
Some 14 months after the statute expired, the trustee filed an amended complaint naming the beneficial owners of the preferred stock as defendants in their real names. The stock owners filed a motion to dismiss and won, in Judge Isgur’s May 16 opinion.
The trustee argued that he was entitled to an equitable tolling of the statute of limitations, given the difficulty in learning the identities of the beneficial owners.
Judge Isgur said that equitable tolling applies when the defendants have actively or passively prevented the trustee from discovering their identities. Tolling also applies if the trustee can show delay resulting from “extraordinary circumstances.”
Judge Isgur said there were no extraordinary circumstances because the trustee had not exercised the “full extent of his discovery powers.” When identifying defendants is difficult, he said that “filing suit early to obtain discovery rights is crucial.”
Concealment didn’t work, either. Even if the banks and brokers had improperly withheld or delayed revealing the names of the beneficial stock owners, Judge Isgur said there is no “justification for extending the concealment rationale to a non-defendant, non-debtor.” He said it would “work an injustice to a defendant to refuse them entitlement to a statute of limitations defense because of the behavior of a party over which they have no control.”
Judge Isgur conceded that the trustee had been diligent, but he said that “diligence alone does not support equitable tolling.” He said there must be either concealment or extraordinary circumstances.
Since there was neither concealment nor extraordinary circumstances, Judge Isgur dismissed the suit as to the former John Doe defendants.
Judge Isgur’s opinion included an offer the defendants might not refuse.
The suit fell within the ambit of Stern v. Marshall, precluding Judge Isgur from entering a final order of dismissal. Although the trustee had consented to final adjudication in bankruptcy court, the defendants had not.
Judge Isgur gave the defendants a choice: They could consent, in which event dismissal would be merged in the final judgment and appealable at that time. Or, Judge Isgur said he would issue a report and recommendation to the district court when he comes down with a final judgment in the adversary proceeding.
Presumably, the defendants will consent, unless they fear the trustee will win on appeal from the dismissal order.