Bankruptcy Judge Karen B. Owens of Delaware explained how a liquidating trust can file a fraudulent transfer suit seven years after the transfer when the statute of limitations is four years.
The Delaware bankruptcy court confirmed the debtor’s chapter 11 plan in December 2017, creating the liquidating trust. In January 2019, exactly two years after the chapter 11 filing in January 2017, the liquidating trustee filed a fraudulent transfer complaint attacking a $42 million transfer that had occurred in December 2011.
The trust sued under Section 544(b)(1), which permits a debtor or trustee to “avoid any transfer . . . that is voidable . . . by a creditor holding an [allowable] unsecured claim . . . .” Section 546(a)(1)(A) permitted the liquidating trustee to sue within two years of the chapter 11 filing.
Because the transfer occurred outside of the two-year time frame in Section 548(a)(1), the liquidating trustee asserted claims under Ohio’s or Florida’s versions of the Uniform Fraudulent Transfer Act. In both states, suit must be brought within four years of the transfer or within one year “after the transfer . . . was or could have been discovered by the claimant.”
The defendants filed a motion to dismiss, focusing on the one-year savings clause. Viewing the one-year clause as a statute of repose rather than a statute of limitations, the defendants argued that the trustee knew about the claim more than one year before filing the complaint because the trustee had access to the debtor’s books and records.
In substance, Judge Owens did not regard the trustee’s knowledge as pivotal. Rather, she explained that Section 544(b)(1) permits the liquidating trustee “to step into the shoes of the debtor’s unsecured creditor holding a state law avoidance claim” and pursue the claim on behalf of the estate.
For Judge Owens, the question was this: Were creditors barred from suing when the debtor filed the chapter 11 petition?
In the complaint, the liquidating trustee alleged there were more than 100 creditors who could have brought the suit on the filing date because they neither knew nor could have “reasonably” known about the allegedly fraudulent transfer. As a result, the complaint was unassailable on its face because the liquidating trustee was stepping into the shoes of creditors who were entitled to sue within one year of discovery.
With a sound theory behind the complaint, Judge Owens devoted the remainder of her opinion to the question of whether the complaint satisfied technical pleading requirements.
Judge Owens explained that the liquidating trustee had not made a “generalized statement.” Instead, the trustee listed the names of the creditors and explained why they were entitled to sue on the filing date under the one-year savings clause.
Judge Owens denied the defendants’ motion to dismiss. On a motion for summary judgment, she said the defendants could raise the question of whether the “predicate” creditors knew about or could have known about the transfer more than one year before filing.
Bankruptcy Judge Karen B. Owens of Delaware explained how a liquidating trust can file a fraudulent transfer suit seven years after the transfer when the statute of limitations is four years.
The Delaware bankruptcy court confirmed the debtor’s chapter 11 plan in December 2017, creating the liquidating trust. In January 2019, exactly two years after the chapter 11 filing in January 2017, the liquidating trustee filed a fraudulent transfer complaint attacking a $42 million transfer that had occurred in December 2011.
The trust sued under Section 544(b)(1), which permits a debtor or trustee to “avoid any transfer . . . that is voidable . . . by a creditor holding an [allowable] unsecured claim . . . .” Section 546(a)(1)(A) permitted the liquidating trustee to sue within two years of the chapter 11 filing.
Because the transfer occurred outside of the two-year time frame in Section 548(a)(1), the liquidating trustee asserted claims under Ohio’s or Florida’s versions of the Uniform Fraudulent Transfer Act. In both states, suit must be brought within four years of the transfer or within one year “after the transfer . . . was or could have been discovered by the claimant.”
The defendants filed a motion to dismiss, focusing on the one-year savings clause. Viewing the one-year clause as a statute of repose rather than a statute of limitations, the defendants argued that the trustee knew about the claim more than one year before filing the complaint because the trustee had access to the debtor’s books and records.