While the courts are split, the majority permit a trustee using the so-called strong-arm power under Section 544(b) to extend the statute of limitations to six or 10 years by stepping into the shoes of the government as a creditor with claims under the Federal Debt Collection Practices Act and the IRS Code.
Chief Bankruptcy Judge Laura K. Grandy of East St. Louis, Ill., decided that the trustee could use the FDCPA to recover an inheritance that the debtor had validly disclaimed under state law.
The debtor’s parents created an irrevocable trust in 1995, naming their four children as beneficiaries. The surviving parent died in 2019, leaving the debtor entitled to an inheritance of $375,000 from the trust. Four months later, the debtor disclaimed his interest in the trust.
Consequently, the debtor’s seven children received the inheritance.
More than one year after the disclaimer, the debtor filed a chapter 7 petition. The debtor scheduled the IRS as having a $143,000 secured claim and a $6,400 unsecured priority claim.
To recover the $375,000, the trustee filed an avoidance action under Section 544(b) against the debtor’s children. The trustee said he was stepping into the shoes of the IRS to recover the disclaimed inheritance as a fraudulent transfer under the FDCPA.
Section 544(b) provides that
the trustee may avoid any transfer of an interest of the debtor in property or any obligation incurred by the debtor that is voidable under applicable law by a creditor holding an unsecured claim that is allowable under section 502 of this title.
Sections 3304(a)(1) and 3304(b)(1) of the FDCPA, 28 U.S.C. §§ 3304(a)(1) and 3304(b)(1)(A), contain provisions similar to Section 548 of the Bankruptcy Code for the recovery of actual or constructively fraudulent transfers.
The children responded with a motion to dismiss. They reasoned that there was no estate property to recover because the debtor had validly disclaimed the inheritance under Illinois law.
In her March 17 opinion, Judge Grandy denied the motion to dismiss.
Judge Grandy said that the FDCPA was similar to state fraudulent transfer statutes “with one marked difference”: The statute of limitations is six years.
There is a “split of authority” on whether the FDCPA is “applicable law” under Section 544(b), Judge Grandy said.
According to Judge Grandy, the Fifth Circuit and a minority of lower courts do not see the FDCPA as “applicable law.” See MC Asset Recovery LLC v. Commerzbank A.G. (In re Mirant Corp.), 675 F.3d 530 (5th Cir. 2012). She said that the Fifth Circuit had conducted an “extremely limited statutory analysis.”
Judge Grandy “respectfully” disagreed with the Fifth Circuit and noted that an “overwhelming majority” recognize the FDCPA as “applicable law.”
Judge Grandy observed that Section 544(b) is “quite broad.” She alluded to the Supreme Court, which said that “applicable nonbankruptcy law” is construed broadly. Patterson v. Shumate, 504 U.S. 753, 758 (1992).
Judge Grandy addressed the children’s contention that the debtor never had an interest in the inheritance because he had validly disclaimed the inheritance. Because the debtor never had an interest in the property, they argued that he made no transfer that the trustee could recover.
Indeed, the Seventh Circuit held in a bankruptcy case not involving the FDCPA that there is no property to recover when the debtor has disclaimed an inheritance. Jones v. Atchison (In re Atchison), 925 F.3d 209 (7th Cir. 1991).
That’s where the FDCPA comes into play together with its broad definition of “property.” Under 28 U.S.C. § 3002(12), “property” includes “any present or future interest” and “property held in trust.”
Under the Supremacy Clause of the U.S. Constitution and the FDCPA’s own supremacy clause, Judge Grandy said that Illinois law didn’t control. Under the controlling FDCPA, she said that the debtor disposed of a “present interest” or a “future interest” in “property held in trust.” Therefore, the disclaimed inheritance “became property recoverable under” Section 541(a)(1).
“As the IRS would obviously not be constrained by state law property considerations when acting under the FDCPA, neither then is a trustee when proceeding under § 544(b)(1),” Judge Grandy said.
Judge Grandy buttressed her conclusion about the powers of the IRS by referencing United States Small Business Administration v. Bensal, 835 F.3d 992 (9th Cir. 2017). In a nonbankruptcy case, the Ninth Circuit didn’t honor a disclaimer under state law given preemption by the FDCPA.
Judge Grandy denied the motion to dismiss, taking sides with the majority by holding that the FDCPA is “applicable law.”
While the courts are split, the majority permit a trustee using the so-called strong-arm power under Section 544(b) to extend the statute of limitations to six or 10 years by stepping into the shoes of the government as a creditor with claims under the Federal Debt Collection Practices Act and the IRS Code.
Chief Bankruptcy Judge Laura K. Grandy of East St. Louis, Ill., decided that the trustee could use the FDCPA to recover an inheritance that the debtor had validly disclaimed under state law.
The debtor’s parents created an irrevocable trust in 1995, naming their four children as beneficiaries. The surviving parent died in 2019, leaving the debtor entitled to an inheritance of $375,000 from the trust. Four months later, the debtor disclaimed his interest in the trust.
Consequently, the debtor’s seven children received the inheritance.
More than one year after the disclaimer, the debtor filed a chapter 7 petition. The debtor scheduled the IRS as having a $143,000 secured claim and a $6,400 unsecured priority claim.
To recover the $375,000, the trustee filed an avoidance action under Section 544(b) against the debtor’s children. The trustee said he was stepping into the shoes of the IRS to recover the disclaimed inheritance as a fraudulent transfer under the FDCPA.