If the case goes up and the Fourth Circuit agrees with Bankruptcy Judge Laura T. Beyer of Charlotte, N.C., there will be a split of circuits on the question of whether 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 10 years.
In the case before Judge Beyer, the debtor filed a chapter 7 petition in 2018. In 2010 and 2011, the debtor had allegedly transferred real property to his parents for no consideration when he was insolvent.
Based on a claim of tax evasion, the Internal Revenue Service had filed an unsecured claim for about $4,200.
Utilizing Section 544(b), the trustee sued the parents for receipt of constructively fraudulent transfers under Section 548(a)(1)(B). The parents filed a motion to dismiss, arguing that the transfer was beyond the statutes of limitations under both the Bankruptcy Code and the North Carolina Voidable Transactions Act.
Judge Beyer denied the motion to dismiss in an opinion on November 3, holding that the trustee was entitled to utilize the statute of limitations available to the IRS.
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 Section 502.” The trustee contended that the IRS represented the required unsecured creditor and that the IRS was entitled to avoid transactions going back 10 years under 26 U.S.C. § 6502.
The courts are split on the result. The Fifth Circuit and a minority of lower courts hold that a trustee may not adopt the statute of limitations belonging to the IRS. See MC Asset Recovery LLC v. Commerzbank A.G. (In re Mirant Corp.), 675 F.3d 530 (5th Cir. 2012); 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?”
Judge Beyer liberally cited and quoted the leading decision authored by Bankruptcy Judge Jim D. Pappas of Boise, Idaho. In Hillen v. City of Many Trees LLC (In re CVAH Inc.), 570 B.R. 816 (Bankr. D. Idaho 2017), Judge Pappas held that the plain language of Section 544(b)(1) allows the trustee to step into the shoes of the IRS and avoid transfers going back six to 10 years. To read ABI’s report on CVAH, click here.
Judge Pappas, by the way, agreed with Mukamal v. Citibank NA (In re Kipnis), 555 B.R. 877 (Bankr. S.D. Fla. 2016). Whenever the IRS is an unsecured creditor, Bankruptcy Judge Robert A. Mark of Miami had ruled in 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. Click here to read ABI’s discussion of Kipnis.
Judge Beyer rejected the defendants’ contention that the court should look beyond the language of the statute. She said that the “Trustee is permitted to step into the shoes of the IRS and invoke the applicable law that the IRS could use outside of bankruptcy to avoid the targeted transfers to the Defendants.”
More particularly, she said that “the applicable law that the Trustee seeks to invoke is the [North Carolina fraudulent transfer law] and the [Internal Revenue Code], both of which the IRS could have used to seek to avoid the transfers outside of bankruptcy.”
Judge Beyer denied the defendants’ motion to dismiss.
If the case goes up and the Fourth Circuit agrees with Bankruptcy Judge Laura T. Beyer of Charlotte, N.C., there will be a split of circuits on the question of whether 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 10 years.
In the case before Judge Beyer, the debtor filed a chapter 7 petition in 2018. In 2010 and 2011, the debtor had allegedly transferred real property to his parents for no consideration when he was insolvent.
Based on a claim of tax evasion, the Internal Revenue Service had filed an unsecured claim for about $4,200.
Utilizing Section 544(b), the trustee sued the parents for receipt of constructively fraudulent transfers under Section 548(a)(1)(B). The parents filed a motion to dismiss, arguing that the transfer was beyond the statutes of limitations under both the Bankruptcy Code and the North Carolina Voidable Transactions Act.
Judge Beyer denied the motion to dismiss in an opinion on November 3, holding that the trustee was entitled to utilize the statute of limitations available to the IRS.