Closing a chapter 11 case quickly after confirmation avoids continuing liability for fees of the U.S. Trustee, but there’s a hidden cost: barring the filing of new avoidance actions after the case is closed.
The chapter 11 debtor scheduled about $320,000 in payments to a supplier within 90 days of filing. The creditors confirmed a liquidating plan that created a liquidating trust assigned with the chore of pursuing avoidance actions.
Less than a year after filing, the liquidating trustee filed a motion to enter a final decree and close the case. The bankruptcy court closed the case three weeks later.
The final decree provided that the bankruptcy court would retain jurisdiction over pending adversary proceedings.
In the meantime, the liquidating trustee had resigned and a new trustee was selected. On motion of the new trustee five months after the case was closed, the bankruptcy court modified the final decree to provide that the bankruptcy court would also retain jurisdiction over “future” adversary proceedings.
Less than two years after the original chapter 11 filing, the new trustee sued the supplier for receipt of $320,000 in preferences.
In an opinion on May 29, Bankruptcy Judge David T. Thuma of Albuquerque, N.M., dismissed the preference suit, holding that the claim was barred by the statutes of limitations. Judge Thuma’s opinion is a nifty summary of the loopholes in the statutes of limitations contained in Sections 546(a) and 550(f). Sadly for the trustee, none of the loopholes saved the preference suit from extinction.
Section 546(a) provides that an avoidance action “may not be commenced after the earlier of” (1) two years after the order for relief or one year after the appointment of a trustee under chapter 11, “or (2) the time the case is closed or dismissed.”
Dealing with the liability of a transferee of an avoided transfer, Section 550(f) similarly provides that a suit “may not be commenced after the earlier of” (1) one year after avoidance of the transfer, “or (2) the time the case is closed or dismissed.”
Judge Thuma held that the preference action was barred by the “plain language” of the two sections. He quoted a predecessor on the bench in New Mexico who said that “actions to avoid preferences may not be filed after the case is closed.”
Judge Thuma outlined three exceptions to the hard-and-fast rule in Sections 546(a) and 550(f).
First, some courts have employed the “properly closed exception,” which can apply when a debtor fails to disclose a transfer before the case is closed. They read Section 546(a) to mean “properly and finally” closed. They also hold, in substance, that a suit otherwise barred by Section 546(a) may be pursued when an asset was unknown or undisclosed to the trustee, because the case was not properly closed.
Second, courts have used Bankruptcy Rule 9024 to set aside a final decree and allow prosecution of an avoidance action if there was mistake or inadvertence.
Third, equitable tolling has been invoked if there was fraud or concealment.
None of the exceptions applied, Judge Thuma said, because the debtor had disclosed the potential preference.
Likewise, the modified final decree did not save the day because it only preserved the bankruptcy court’s post-closing jurisdiction. Judge Thuma said “it did not address the statute of limitations problem by closing the case prematurely.”
Judge Thuma dismissed the preference suit. To “obtain effective relief,” he said that the trustee “would have to obtain a court order setting aside the final decree ab initio.”
Question
If there are unasserted avoidance actions, can a final decree provide that Sections 546(a) and 550(f) may not be invoked so long as the suits are commenced within two years of the filing date?
Answer: Probably not. To avoid invocation of the statutes of limitations, the trustee probably needs a tolling agreement with the potential defendants.
Closing a chapter 11 case quickly after confirmation avoids continuing liability for fees of the U.S. Trustee, but there’s a hidden cost: barring the filing of new avoidance actions after the case is closed.
The chapter 11 debtor scheduled about $320,000 in payments to a supplier within 90 days of filing. The creditors confirmed a liquidating plan that created a liquidating trust assigned with the chore of pursuing avoidance actions.
Less than a year after filing, the liquidating trustee filed a motion to enter a final decree and close the case. The bankruptcy court closed the case three weeks later.
The final decree provided that the bankruptcy court would retain jurisdiction over pending adversary proceedings.
In the meantime, the liquidating trustee had resigned and a new trustee was selected. On motion of the new trustee five months after the case was closed, the bankruptcy court modified the final decree to provide that the bankruptcy court would also retain jurisdiction over “future” adversary proceedings.
Less than two years after the original chapter 11 filing, the new trustee sued the supplier for receipt of $320,000 in preferences.