Statute of Limitations

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.

Summary

In a 14 page decision signed September 30, 2013, Judge Walsh of the Delaware Bankruptcy Court provided a primer on one of the limitations of standing provided in the bankruptcy code in his opinion granting a motion to dismiss.  Judge Walsh’s opinion is available here (the “Opinion”).

Background

On May 21, 2004, the Circuit Court for Montgomery County, Maryland entered four separate judgments pursuant to a civil action against Richard and Graciela Redden (“Debtors”).  All four judgments were transferred on July 15, 2004 to the Superior Court of Delaware in New Castle County, at which time they became judgment liens against the primary residence of Debtors.

On August 12, 2004, the Debtors filed a joint Chapter 7 bankruptcy petition.  The order of discharge was entered on September 2, 2005.  Their case was reopened and they filed a complaint to avoid and recover a preferential transfer from one of the four judgment creditors.  The Court granted the Debtors motion to avoid the judgment lien and the case was again closed on October 29, 2006.  The other three judgment liens remained outstanding.

On November 3, 2009, the Debtors conveyed their residence to the plaintiffs in this case (“Plaintiffs”).  After the three remaining judgment creditors informed the plaintiffs of their intent to foreclose on the property, the Plaintiffs filed a motion to reopen the bankruptcy case and filed a complaint to avoid the three remaining liens.  The case was reopened and the judgment lien holders filed a motion to dismiss the adversary complaint.  Judge Walsh issued his opinion and order granting the motion to dismiss.

Judge Walsh’s Opinion

In granting the motion to dismiss, Judge Walsh provided direction concerning the Plaintiffs’ standing to avoid a preferential transaction and the statute of limitations for preference actions.

Standing

Judge Walsh begins his analysis of the Plaintiffs’ standing by reviewing §§ 522 and 547 of the Bankruptcy Code.  These sections provide the Trustee and Debtor in a bankruptcy standing to bring an adversary case to avoid preferential transfers.  Judge Walsh cites Hartford Underwriters Ins. Co. v. Union Planters Bank, 530 U.S. 1, 7 (2000), in which the Supreme Court considers the exclusivity implied by similar language in § 506 of the Bankruptcy Code.  Opinion at *5.  Judge Walsh states that “[t]he rights given explicitly to the trustee in § 547(b) preclude Plaintiffs, as non-trustees, from exercising avoidance power.”

Judge Walsh then considered whether the Plaintiffs might have derivative standing to pursue their preference claim.  He cited to the Third Circuit’s extensive analysis of derivative standing in The Official Comm. of Unsecured Creditors of Cybergenics Corp. v. Chinery (Cybergenics II), 330 F.3d 548, 558 (3d Cir. 2003).  In that case, The Third Circuit focused on the distinction between a suit to benefit the estate and a suit initiated for the moving party’s “own direct benefit.”  Opinion at *7-8.  In the instant case, however, Judge Walsh notes that the Plaintiffs’ complaint could have no possible effect on the bankruptcy estate, and thus determined this argument was not relevant for the Plaintiffs.

Statute of Limitations

Judge Walsh next considered the statute of limitations for preference actions.  11 U.S.C § 546(a) provides that an action to avoid a preference payment may not be commenced after the earlier of:

(1) the later of –

(A) 2 years after the entry of the order for relief; or

(B) 1 year after the appointment or election of the first trustee under section 702, 1104, 1163, 1202, or 1302 of this title if such appointment or such election occurs before the expiration of the period specified in subparagraph (A); or

(2) the time the case is closed or dismissed.

The Court quickly determines that the statute of limitations had long passed in this case.  Judge Walsh then examined the Plaintiffs’ request that the complaint relate-back to the preference action filed by the Debtor in 2006.  However, this complaint was not an amendment, and thus the relation-back doctrine was inapplicable.  Opinion at *12.

The Plaintiffs’ last argument was that the Court should equitably toll the statute of limitation.  However, the Plaintiffs did not explain why they waited three years from the purchase of the property to file their action.  Thus, a claim of equitable tolling was not supported.  Opinion at *14.  Judge Walsh also notes that a title search would have revealed the three lien claims.  Since the remedy of equitable tolling “is lost upon a lack of showing of diligence to preserve a claim” the Plaintiffs “cannot support a claim of equable [sic] tolling in their favor.” Opinion at *14.

In this era of computers and organized records, it is more important than ever to do your due diligence before purchasing a major asset, like property.  The Plaintiffs who filed this complaint would have been better served if they had hired an attorney before buying the property.  As any estate attorney I have spoken with will confirm, it is far less expensive and much more pleasant to prepare for the possible risks than it is to try and fix a deal after the fact.

Summary

In an 8 page decision signed January 6, 2012, Judge Walrath of the Delaware Bankruptcy Court allowed a plaintiff to amend a preference complaint to include additional transfers, even though the statute of limitations had expired. Judge Walrath’s opinion is available here (the “Opinion”).  Numerous posts on this blog discuss other opinions issued by the Delaware Bankruptcy Court dealing with preference payments, as can be seen here:  Preference Opinion Posts.

Background

The Debtors, filed for bankruptcy on November 25, 2008, and the Court converted the cases to chapter 7 and appointed the Trustee, Jeoffrey L. Burtch, on March 5, 2009. On November 19, 2010, the Trustee filed a complaint against Henry Production, Inc., d/b/a Pumps and Service (the “Defendant”) for recovery of any preference payments. In the original complaint, the Trustee specifically identified only one transfer as a preference payment, but included a spreadsheet showing all of the transactions between the Debtor and the Defendant. This spreadsheet included payments made within the preference period for which the Trustee was unable to identify a check or wire transfer payment (the “October Transfers”). Opinion at *2.

On July 6, 2011, in the course of discovery, the Defendant provided the Trustee with credit card receipts evidencing payment of the October Transfers. The Trustee then waited until November 8, 2011, well after the expiration of the statute of limitations to bring preference complaints, to file his motion to amend the complaint in order to include the October Transfers. The Defendant objected, and the Court issued the Opinion to decide the conflict.

Judge Walrath’s Opinion

As her opinions always do, this opinion of Judge Walrath begins with a legal analysis of the standard for the requested relief. Opinion at *4. She begins by citing the legal standard of FRCP 15(a), which provides that absent a few specific situations, leave to amend “should be freely given.” She then cites Coventry v. United States, 856 F.2d 514, 519 (3d Cir. 1988) for the proposition that the “potential for undue prejudice [to the other party] is the touchstone for the denial of the leave to amend.” Opinion at *4. Additionally, FRCP 15(c)(1)(B) provides that if the conduct set out in the original pleading gave rise to the additional claims in the amended pleading, the amendment will relate back to the date of the initial pleading. Opinion at *5.

The main argument of the Defendant in this matter is that the amendment should not relate back, as the October Transfers were made by a different method than the other alleged preference transfer and was not part of a payment schedule such that it would be considered to have arisen out of the same conduct, transaction, or occurrence. This argument finds some measure of support in MCB Greenhouse Co. v. CTC Direct, Inc., 307 B.R. 787, 792-93 (Bankr. D. Del. 2004). Opinion at *7.

Judge Walrath does not provide much credence to this defense, however, holding that the Defendant needed to show that it would be prejudiced if the amendment was allowed. Opinion at *7. Because the Trustee included the list of transactions, which included the October Transfers, in the complaint in which it made clear that it sought to avoid all preference transfers, the Defendant received adequate notice and would not be prejudiced by allowing the amendment to be related back to the time of the initial filing of the complaint. Judge Walrath then provided the Trustee 14 days to file an amended complaint.

When prosecuting or defending a preference action, it is very important to be aware of the relevant bankruptcy statutes and rules. However, lacking a knowledge of relevant case law can sink a party in a preference case. For this reason, it is vital that defendants and trustees, or their counsel, are well versed in current case law for the district and court in which a preference action is prosecuted.