Fraudulent Transfers – Extended Look Back Period, FDCPA, and The IRS
Section 544(b) of the Bankruptcy Code enables a bankruptcy trustee (or Debtor in Possession) to avoid any transfer of an interest of the debtor in property that is voidable under “applicable law” by a “qualified creditor”. This kind of action by a trustee is often referred to as an “avoidance action”.
Before a trustee can maintain an avoidance action, the trustee must demonstrate the existence of a qualified creditor – meaning a creditor that: (a) has a right to avoid the transfers; and (b) holds an “allowable” unsecured claim.
Assuming that the trustee can demonstrate the existence of a qualified creditor, the trustee we then turn to the question of what is the “applicable law”? The scope of “applicable law” is undefined and there have been recent developments in this area.
Usually, a trustee seeking to pursue an avoidance action will have the option of using the longer of the two-year statute of limitations found at Section 546(a)(1) of the Bankruptcy Code, or the applicable state fraudulent transfer statute of limitations provision – which under Ind. Code § 32-18-2 is four (4) years. The applicable statute of limitations is often referred to as the “look back period”.
Transactions that occurred more than four (4) or even six years (6) before a bankruptcy filing, may still be subject to an avoidance action for recovery of a fraudulent transfer.
The extended look back period is good for trustees (who earn a percentage of whatever the recover) as well as creditors (who otherwise may receive nothing from a bankruptcy filing). However, the extended period is often unfortunate for the defendants of the avoidance actions that often end up paying twice for the same transactions.
Extended Look Back Periods
The extended look back periods usually is the result of either the statute of limitations provision found in the Federal Debt Collection Procedures Act (FDCPA), 28 U.S.C. §§ 3001-3308 (six years), or the recovery under the Internal Revenue Code (IRC), 26 U.S.C. §§ 6501, 6502 (10 years). However, whether courts will approve the use of a longer statute of limitations as authorized under an “applicable law” does not have a clear answer.
FDCPA – Six (6) year look back period
Among other things, the FDCPA permits the recovery of judgment debts owed to the United States and enables, as part of such recovery, the avoidance of certain transactions. The FDCPA provides the federal government with a procedure to recover on or secure obligations owed to it. The procedure provided under the FDCPA relieves the federal government of the need to rely on and comply with the multitude of various state substantive and procedural laws. Under FDCPA section 3001(a) acts as “the exclusive civil procedures for the United States (1) to recover a judgment on a debt; or (2) to obtain, before judgment on a claim for a debt, a remedy in connection with such claim.” U.S.C. § 3001(a). The FDCPA does not contain a private right of action and is only applicable in situations where the United States (or federal agency) is attempting to collect a “debt” as defined under the FDCPA. The FDCPA contains a six-year look back period for, among other things, pursuing fraudulent transfer claims authorized under the FDCPA. (28 U.S.C. § 3306.)
The lack of a private right of action has been relied upon by various courts in finding that the FDCPA is not “applicable law” under section 544 of the Bankruptcy Code. See e.g. In re Mirant Corp., 675 F.3d 530 (5th Cir. 2012) (holding that both the statutory language and the legislative history of the FDCPA indicate it is not “applicable law” under section 544(b)); see also In re Bendetti, 131 F. App’x 224 (11th Cir. 2005) (confirming bankruptcy court finding in two separate proceedings – an avoidance proceeding and a discharge proceeding – that the Chapter 7 Trustee’s actions were barred by the state statute of limitations and that the Chapter 7 Trustee could not sue the six-year statute of limitations provided by section 3306 of the FDCPA because he was a private party.
Several other courts conclude the opposite and permit the debtor’s estate to use the FDCPA as “applicable law.” The opinions that permit the debtor’s estate to do so, discussed below, lack the rigor and exhaustive approach taken by the courts above. See In re Pfister, 2012 WL 1144540 (Bankr. D.S.C. Apr. 4, 2012)(holding that “because the debtor was indebted to the IRS at the time of the transfer”, the Chapter 7 Trustee could use the look back period provided under the FDCPA and was not limited to the aggregate amount of the IRS claims but could recover the entire value of the transfer); See also In re Porter, 2009 WL 902662 (Bankr. D.S.D. Mar. 13, 2009) (holding that the Trustee could step into the shoes of the SBA); In re Walter, 462 B.R. 698, 703-04 (Bankr. N.D. Iowa 2011) (holding that the United States did not need to be owed a debt the at the time of the alleged fraudulent transfer for the FDCPA to be “applicable law.”).
IRS – Ten (10) year look back period
Recently courts have held that under section 544(b), the trustee may use the statute of limitations available to any actual creditor of the debtor as of the commencement of the case. This is significant because if the IRS is a creditor, the applicable look back period could be as long as ten (10) years. See In re Polichuk, 2010 WL 4878789 (Bankr. E.D. Pa. Nov. 23, 2010)(“Finding that the IRS has at least a ten-year lookback period, and because the Trustee may step into the shoes of the IRS, she may seek to avoid transfers that occurred as far back as January 31, 1998.”); see also In re Kipnis (2016 WL 4543772); In re Republic Windows & Doors, LLC, 2011 WL 5975256 (Bankr. N.D. Ill. Oct. 17, 2011); In re Greater Se. Cmty. Hosp. Corp. I, 365 B.R. 293, 297-315 (Bankr. D.D.C. 2006), and In re Greater Se. Cmty. Hosp. Corp. I, 2007 WL 80812 (Bankr. D.D.C. Jan. 2, 2007).
The applicable statute of limitations or look back period may be much longer than the two (2) to four (4) years provided under most state statutes and the mere passage of such time periods no longer provides the comfort that an avoidance action for recovery of a fraudulent transfer is barred. As a result, debtors’ counsel, creditors’ counsel, and trustees should look at the creditors involved in a matter when making a determination as to the applicable look back period.