Introduction

On September 6th and 7th, 2016, Nathan A. Schultz, as Distribution Trustee of the TER Trust (the “Trustee”) for the bankruptcy estate of Trump Entertainment Resorts, Inc. (the “Debtors”), filed 92 complaints in preference action cases.  The Trustee filed these actions in the Delaware Bankruptcy Court and argued that the defendants hold assets belonging to the Debtor and that the payments received by various defendants are avoidable and subject to recovery under 11 U.S.C. §§ 547, 548, 549 and 550 of the United States Bankruptcy Code.  The Trustee is represented by the law firms ASK LLC and Gibbons, P.C.

Background

The Debtors owned and operated two casino hotels located in Atlantic City, New Jersey: the Trump Taj Mahal Casino Resort (the “Taj Mahal”) and the Trump Plaza Hotel (the “Plaza”).  On October 2, 2015, the Court entered an order confirming the Debtors’ Third Amended Joint Plan of Reorganization Under Chapter 11 of the Bankruptcy Code as Modified (the “Confirmation Order” and “Plan,” respectively). [D.I. 1123].  The effective date of the Plan (the “Effective Date”) occurred on February 26, 2016. [D.I. 1902]. In accordance with the Plan and Confirmation Order, the TER Trust (the “Trust”) was established effective on the Effective Date of the Plan, and the Debtors and the Trustee entered into that certain Distribution Trust Agreement.

Pursuant to the Distribution Trust Agreement, the Trustee was tasked with prosecuting avoidance actions, including preference and fraudulent transfer actions.  The Debtor’s bankruptcy, as well as the preference actions, are before the Honorable Kevin Gross.

Defenses to a Preference Action

Preference actions are a form of litigation specifically provided for by the Bankruptcy Code which are intended to recover payments made by the Debtor within the 90 days prior to declaring bankruptcy.  The presumption is that the Debtor knew it was going to file bankruptcy, so any payments it made during this 90-day window went to friends and people it wanted to keep happy, and stiffed those the Debtor’s management didn’t like.   Recognizing that these payments aren’t always made for inappropriate reasons, the Bankruptcy Code provides creditors with many defenses to preference actions. Included among these are the “ordinary course of business defense” and the “new value defense.” For reader’s looking for more information concerning claims and defenses in preference litigation, attached is a booklet I prepared on the subject: “A Preference Reference: Common Issues that Arise in Delaware Preference Litigation.”

Because no recent opinions have been published by the Delaware Bankruptcy Court, I wanted to touch on a subject that is vital in nearly every preference or fraudulent transfer case:  The Statute of Limitations For A Preference Claim

A. Statute of Limitations

The debtor has two years from the date it filed its petition for bankruptcy to file a complaint seeking the recovery of a preference payment. However, if the court appoints a trustee, the limitations period for filing the lawsuit extends one year from the date the trustee was appointed.  Preference litigation cannot be commenced once the court closes or dismisses the debtor’s bankruptcy.

B. Service of the Summons and Complaint

The two-year time period, or statute of limitations, is not the only deadline governing the commencement of the preference action. The statute of limitations governs when the preference complaint must be filed with the court. The Federal Rules of Bankruptcy Procedure govern how long the plaintiff has to serve the complaint on the party receiving the payments (i.e. the defendant). Under the Federal Rules, the party filing the lawsuit must serve the defendant within 120 days.2

Note, however, that the party may request an extension of time in which to complete service. The party commencing the lawsuit can achieve service in a number of methods, including mailing the summons and complaint to the defendant by First Class mail.

Failing to file a complaint within the applicable statute of limitations is a sure-fire way for a party to lose its rights.  In any litigation, preference or otherwise, the first thing to check is whether a claim is time-barred.  We have published several posts concerning the statute of limitations:  Statute Of Limitations Posts.  If you would like additional information about the statute of limitations, or preference litigation generally, please take a look at our “Preference Reference” – available here.