By: Donald L Swanson
A helpful analysis of statute of limitations issues for fraudulent transfer claims brought by a bankruptcy trustee under § 544(a)&(b) is provided in a recent Circuit opinion.
- The opinion is Lewis v. Takacs (In re Stone Pine Investment Banking, LLC), Case No. 21-1423, U.S. Tenth Circuit Court of Appeals (decided 12/19/2023).
Overview
The Tenth Circuit case arises from an adversary proceeding, within Debtor’s Chapter 7 case, in which the Chapter 7 Trustee obtains a judgment avoiding fraudulent transfers under § 544 of the Bankruptcy Code and Colorado’s Uniform Fraudulent Transfer Act.
Section 544 empowers a Chapter 7 trustee to avoid pre-petition transfers under state fraudulent transfer laws. Such power is significant—but it is also limited by both federal and state laws.
Appellants in this Tenth Circuit case—the fraudulent transfer defendants—challenge the judgment that avoids several transactions.
The Tenth Circuit affirms. And in doing so, it provides a primer on statute of limitations issues relating to claims under § 544(a)&(b) of the Bankruptcy Code.
Facts
The facts begin thirty years ago.
In 1994, Debtor’s principal begins conducting a series of investment banking and asset management activities under the name “Stone Pine Companies”—a collective of businesses using common letterhead, a common office, common business cards, and a common domain name.
In 1997 and 1998, Debtor’s principal reorganizes the Stone Pine Companies into three new corporate entities, including Stone Pine Investment Banking, LLC—the Debtor here.
Then, lots of litigation happens, resulting in a $1.4 million attorney fees judgment against Debtor and its insiders.
After the judgment, lots more litigation and appeals happen, as do a number of transfers among insiders.
In October of 2010, after waiting for the 4-years statute of limitations on fraudulent transfer claims to expire on various transfers, Debtor’s principal puts Debtor into a voluntary Chapter 7 bankruptcy. And a Chapter 7 Trustee is appointed.
Nearly two years after the bankruptcy filing, the Chapter 7 Trustee initiates adversary proceedings against Debtor’s insiders to recover fraudulent transfers under § 544(a)&(b) of the Bankruptcy Code and Colorado’s Uniform Fraudulent Transfer Act, with its 4-years statute of limitations.
Fraudulent Transfer Avoidance Under § 544(a)&(b)
Under § 544 of the Bankruptcy Code, a trustee may avoid transactions, using state fraudulent transfer laws:
- as a hypothetical creditor under § 544(a), utilizing powers of a lien creditor existing as of the bankruptcy filing (no proof is required of any such actual creditor); or
- as an actual, unsecured creditor under § 544(b), utilizing rights that preexist the bankruptcy filing (the trustee must prove the existence of an actual creditor, on the transfer date, that is still a creditor at the bankruptcy filing—and step into that creditor’s shoes).
The rights and avoiding powers of a trustee under § 544(a)&(b) are granted by federal law, but the extent of fraudulent transfer rights and powers the trustee might exercise is measured by state law—including the statute of limitations applicable to such claims.
Here, the substantive state law is the Colorado Uniform Fraudulent Transfer Act (Colo. Rev. Stat. §§ 38-8-101 et seq.), which authorizes transfer avoidance for:
- “actual intent to hinder, delay, or defraud any creditor of the debtor” (§ 38-8-105(1)(a)); and
- with a statute of limitations, under § 38-8-105(1)(a), of:
- “four years after the transfer was made”; or
- “if later, within one year after the transfer or obligation was or could reasonably have been discovered by the claimant” (Colo. Rev. Stat. § 38-8-110(1)(a))
Bankruptcy Court Ruling—Hypothetical v. Actual Creditor Claims
The Chapter 7 Trustee brings fraudulent transfer claims against multiple parties.
In April 2020, the bankruptcy court issues findings of fact and conclusions of law. Here’s a summary of the Bankruptcy Court’s ruling, as later described by the Tenth Circuit.
The Trustee brings claims under three sections of Colorado’s Uniform Fraudulent Transfer Act:
- § 38-8-105(1)(a)—transfers made with actual fraudulent intent;
- § 38-8-105(1)(b)—transfers made for less than reasonably equivalent value; and
- § 38-8-106(2)—transfers made to insiders while the debtor was insolvent;
–State Law
The Bankruptcy Court, under Colorado state law:
- finds that certain transactions occurred with actual intent to hinder, delay or defraud creditors under § 38-8-105(1)(a), based on the eleven factors identified in § 38-8-105(2)(a)-(k);
- does not consider the other two grounds of liability (based on § 38-8-105(1)(b) or § 38-8-106(2)) because the statute of limitations for such other two grounds expired pre-petition;
- explains that the statute of limitations for fraudulent transfers (in § 38-8-110) provides for tolling the normal 4-years limitation period when the creditor could not have known about the transfer within that 4-years period—but such tolling:
- applies only as to transfers made with actual fraudulent intent (under § 38-8-105(1)(a)); and
- does not apply to § 38-8-105(1)(b) transfers for less than a reasonably equivalent value or to § 38-8-106(2) transfers to insiders during insolvency;
–Bankruptcy Law
The Bankruptcy Court explains a hypothetical creditor v. actual creditor distinction for fraudulent transfer claims under Bankruptcy Code § 544(a)&(b):
- Hypothetical creditor claims. § 544(a) allows a trustee to assert fraudulent transfer claims under state law that could have been asserted on the petition date by the following types of creditors, whether any such creditor actually exists or not—(i) a judicial lienholder, (ii) an unsatisfied execution creditor, and/or (iii) a bona fide purchaser of real property; and
- Actual creditor claims. § 544(b) allows a trustee to assert pre-petition fraudulent transfer claims under state law that are actually held by an actual creditor of the debtor.
For hypothetical creditor claims under § 544(a), Colorado’s 4-years statute of limitations does not begin to run until the bankruptcy case is filed. The conclusion, therefore, is that the Trustee’s fraudulent transfer claims under § 544(a) are timely filed.
For actual creditor claims under § 544(b), Colorado’s 4-years statute of limitations expires for the trustee when that statute of limitations expires for the actual creditor. That statute of limitations arguably expired pre-petition in this case for the Trustee’s § 544(b) claims.
–Equitable Tolling
Even though more than 4-years passed after the transfers in question and before the bankruptcy filing, the Trustee’s § 544(b) claims are preserved by the doctrine of “equitable tolling.” This doctrine is different, separate and distinct from the could-not-have-known provision of Colorado’s Uniform Fraudulent Transfer Act for extending the statute of limitations deadline.
The fraudulent transfer Defendants argue to the Bankruptcy Court that their press release about the transfers in question is “sufficient to put a reasonable creditor on notice of the transactions.” Not so, says the Bankruptcy Court:
- “In order to provide notice that starts the statute of limitations, the notice must reveal the fraudulent nature of the transaction,” not just the transaction itself; and
- Defendants’ press release fails to reveal the fraudulent nature of the transactions at issue.
So, the doctrine of “equitable tolling” makes the Chapter 7 Trustee’s § 544(b) claims viable, notwithstanding the pre-petition expiration of Colorado’s 4-years statute of limitations.
Moreover, Debtor’s actual creditor had “actively pursued judicial remedies within the period of limitations” but was prevented, by external circumstances over which it had no control, from taking the precise steps needed within the limitations period.
Standards of Review
The Tenth Circuit provides the following explanation of standards of review applicable to issues in this case:
- We review the bankruptcy court’s decision under the same standard of review as the district court;
- We assess de novo the bankruptcy court’s legal conclusions and review its factual findings for clear error—a finding is clearly erroneous when the reviewing court on the entire evidence is left with the definite and firm conviction that a mistake has been committed;
- A bankruptcy court’s factual findings should not be disturbed absent the most cogent reason appearing in the record; and
- We review the applicability of equitable doctrines like tolling for an abuse of discretion—and although we may look to the district court’s intermediate appellate analysis to inform our review, we owe no deference to that court’s decision.
Tenth Circuit Ruling
“[W]e discern no basis to disturb the bankruptcy court’s judgment.”
The 4-years limitation in Colo. Rev. Stat. § 38-8-110(1)(a) is a statute of limitations, to which the law of equitable tolling is available.
A Chapter 7 Trustee, under § 544(a), pursues the rights and powers of a hypothetical creditor. And the Bankruptcy Court finds that a hypothetical creditor “could not have discovered” the fraudulent transfers prior to the bankruptcy filing because:
- the transfers were concealed; and
- Defendants participated in a wrongful scheme to evade and delay creditors’ efforts “for the specific purpose of avoiding the statute of limitations.”
Accordingly, the Bankruptcy Court deems equitable tolling appropriate, saying—”We discern no abuse of discretion in this conclusion” because:
- Under Colorado law, equitable tolling is proper when a “defendant’s wrongful conduct prevented the plaintiff from asserting his or her claims in a timely manner”;
- We have endorsed that principle in various prior opinions;
- “The factual record developed before the bankruptcy court evinces many examples of the Appellants’ obstruction”; and
- The actual creditor “did not sleep on its rights” and “pursued the Defendants to the fullest extent it could”—and “we impute to the Trustee this same diligence.”
“Therefore, the judgment of the district court upholding the bankruptcy court’s decision is AFFIRMED.”
Conclusion
Here’s a “Thank you” to the Tenth Circuit for its primer on statute of limitations laws relating to fraudulent transfer claims under § 544(a)7(b).
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