A claim held by the Internal Revenue Service that was paid after filing cannot be used as a predicate claim to extend the statute of limitations for 10 years, according to Bankruptcy Judge John T. Dorsey of Delaware.
For reasons Judge Dorsey explained in a footnote at the end of his February 22 opinion, a ruling the other way would expand the statute of limitations to 10 years for all avoidance actions by a corporate debtor.
The (Paid) IRS Claim
The chapter 7 trustee had filed several fraudulent transfer complaints under Section 544(b) that Judge Dorsey previously dismissed because the four-year statute of limitations under Delaware law had expired.
The trustee sought leave to file amended complaints, contending that a claim by the IRS was a predicate claim under Section 544(b) extending the statute of limitations to 10 years.
A few critical facts explain why Judge Dorsey denied the motion to file an amended complaint.
The debtor did not schedule the IRS as a creditor, nor did anyone else file a claim on behalf of the IRS. The IRS had not filed a claim, for a simple reason: The debtor paid the IRS claim shortly after filing.
The defendants opposed the motion to file an amended complaint, contending that a predicate creditor must have filed a proof of claim.
The outcome turned on the language of two sections in the Bankruptcy Code.
Section 544(b)(1) permits a trustee to “avoid any transfer of an interest of the debtor in property . . . that is voidable under applicable law by a creditor holding an unsecured claim that is allowable under section 502 . . . . “ [Emphasis added.]
Section 502(a) says that a “claim or interest, proof of which is filed under section 501 of this title, is deemed allowed, unless a party in interest . . . objects.” [Emphasis added.]
More particularly, the defendants based their argument on the reference in Section 544(b)(1) to a claim “that is allowable under section 502” and the reference to a filed claim in Section 502.
Judge Dorsey cited one bankruptcy court that allowed an unfiled claim to be a predicate claim, based on the idea that Section 544(b)(1) referred to an “allowable” claim. However, he cited “[n]umerous other courts [that] have come to the opposite conclusion.”
“[I]n order to be considered an allowable claim for purposes of Section 544(b)[,] there must be a proof of claim filed as required by Section 502,” Judge Dorsey said. He believes that “Congress intended that for a trustee to pursue potential fraudulent transfers under Section 544(b)[,] an allowable claim only includes those claims for which a proof of claim has been filed.”
“Thus,” Judge Dorsey said, “if no proof of claim is filed, it is not an allowable claim under Section 502.”
“Since the IRS did not file a proof of claim . . . and the Debtors did not schedule an IRS claim,” Judge Dorsey held that “the Trustee cannot rely on the IRS as a predicate creditor for purposes of pursuing fraudulent conveyance claims beyond the four-year lookback period” under Delaware law.
The Decision Makes Good Policy
In a footnote at the end of the opinion, Judge Dorsey added several more pertinent facts.
On the filing date, the claim of the IRS was for payroll taxes on wages paid before filing. However, an employer does not remit payroll taxes to the IRS with every payroll. Rather, payroll taxes are paid periodically. In this case, the debtor paid the payroll taxes after filing, presumably under a first-day order.
Had he ruled otherwise, Judge Dorsey said that “every business bankruptcy case would automatically have a ten-year lookback period for fraudulent transfers under Section 544(b)” because debtors with employees would virtually always owe payroll taxes on the filing date.
Giving a 10-year lookback to all employers “cannot be what Congress had in mind when enacting Section 544(b),” Judge Dorsey said.
A claim held by the Internal Revenue Service that was paid after filing cannot be used as a predicate claim to extend the statute of limitations for 10 years, according to Bankruptcy Judge John T. Dorsey of Delaware.
For reasons Judge Dorsey explained in a footnote at the end of his February 22 opinion, a ruling the other way would expand the statute of limitations to 10 years for all avoidance actions by a corporate debtor.
The chapter 7 trustee had filed several fraudulent transfer complaints under Section 544(b) that Judge Dorsey previously dismissed because the four-year statute of limitations under Delaware law had expired.
The trustee sought leave to file amended complaints, contending that a claim by the IRS was a predicate claim under Section 544 b extending the statute of limitations to 10 years.