9th Circ. Panel Bolsters Trustees’ Reach-Back Powers

In a recent decision, the United States Bankruptcy Appellate Panel of the Ninth Circuit resolved what it described as an issue of “first impression” in the Ninth Circuit — whether or not the two-year statute of limitations provided by Section 546(a) of the Bankruptcy Code “. . . preempts a state-law statute of repose such as California Civil Code § 3439.09(c).”  Rund v. Bank of America NA et al. (In re EPD Investment Co. LLC), 523 B.R. 680, 682 (B.A.P. 9th Cir. 2015).

The EPD Investment decision involved the application of the California Uniform Fraudulent Transfer Act (UFTA), set forth at Civil Code §§ 3439-3439.12, which allows a creditor to recover a fraudulent transfer from the transferee under various circumstances, including “actual fraud” and “constructive fraud.”  The statute of limitations provided in the UFTA, Civil Code § 3439.09, generally provides that claims must be brought within four years from the date of the transfer or in some cases, within one year of discovery of the claim.  The BAP found that despite the terms of Civil Code § 3439.09(c), if a claim existed under the UFTA on the date of the “order for relief,” the trustee had an additional two years to file a complaint with respect to that claim by reason of Sections 544(b) and 546(a) of the Bankruptcy Code.  EPD Investment, 523 B.R. 680 at 691-692.

The ruling is significant because it provides authority for the proposition that trustees (including in some cases debtors in possession and liquidating trustees or other plan agents or administrators) have two years from the “order for relief” to bring fraudulent transfer actions under state law for intentional fraudulent transfers that occurred up to seven years before the order for relief, so long as the other requirements of the UFTA have been satisfied.

The provisions of the UFTA are incorporated into a bankruptcy trustee’s rights by Section 544(b) of the Bankruptcy Code.  That section 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 . . . .”  Under Section 546(a) of the Bankruptcy Code, “An action or proceeding under section 544 . . . may not be commenced after the earlier of . . . 2 years after the entry of the order for relief; or [1 year from the appointment of a trustee if prior to expiration of the two-year period].”  However, Civil Code § 3439.09(c) provides:

Notwithstanding any other provision of law, a cause of action with respect to a fraudulent transfer or obligation is extinguished if no action is brought or levy made within seven years after the transfer was made or the obligation was incurred.

In the EPD Investment case, the trustee alleged that the debtor — together with its principal Jerrold S. Pressman, who had also filed a bankruptcy case and which case was substantively consolidated with that of EPD — had operated a “Ponzi scheme.”  Therefore, the trustee asserted a variety of claims, including that he was entitled to avoid certain payments as “actual” fraudulent transfers under § 3439.04(a)(1) of the UFTA.

Under the trustee’s theory, because these transfers were part of the Ponzi scheme and made with “actual intent,” the trustee could attack them so long as they had occurred up to seven years prior to the order for relief in the EPD Investment case, even though the filing date of the complaints was more than seven years from the date of the transfers in question.

The defendants named in the trustee’s suits, Bank of America and certain other financial institutions, moved to dismiss the trustee’s claims to the extent they arose more than seven years from the date of the filing of the complaints on the grounds that Civil Code § 3439.09(c) “. . . was a statute of repose, not limitations, and was not subject to tolling.”  Thus, because the claims the trustee sought to bring were more than seven years old by the time the trustee’s complaints were filed, the defendants argued that such claims should be dismissed as barred by the express provisions of that section of the UFTA.  EPD Investment, 523 B.R. 680 at 683.

On the other hand, the trustee asserted that Section 546(a) of the Bankruptcy Code gave him two years to file a complaint, and, when filed, the claims in the complaint could extend back seven years from the date of the order for relief (or the “petition date” in a voluntary bankruptcy case).  Although the bankruptcy court agreed with the defendants, the BAP reversed, finding that Section 546(a) of the Bankruptcy Code preempted any benefit that the defendants might otherwise have had under Civil Code § 3439.09(c).

Notably, and based on several decisions of the California state and federal courts, the BAP firmly held that Civil Code § 3439.09 was a “statute of repose” and not a “statute of limitations.”  As the BAP put it:

. . . a statute of limitations creates an affirmative defense if a party fails to initiate an action within a specific time period, whereas a statute of repose extinguishes a party’s claim after a fixed period of time, usually measured from one of the defendant’s acts.  The former involves a party’s diligence; the latter promotes a defendant’s peace from litigation.  [citation omitted].  “A statute of repose is thus harsher than a statute of limitations in that it cuts off a right of action after a specified period of time, irrespective of accrual or even notice that a legal right has been invaded.”  [Citation omitted.]

EPD Investment, 523 B.R. 680 at 687.

The BAP also noted that two unpublished opinions of the United States Court of Appeals for the Ninth Circuit in an earlier Ponzi scheme case appeared to rule opposite ways on the application of the seven-year rule as applied to avoidance claims brought by a trustee.  However, the BAP declined to rely on either of those decisions because they were unpublished.  The BAP went on to observe that there was very little case law regarding “. . . the interplay between section 546(a) and a state statute of repose.”  Id. at 688.

Ultimately, after reviewing decisions involving the laws of other states, the BAP found that those courts generally supported the view that “. . . the statute of repose in their respective state fraudulent transfer statute was preempted by § 544(b) and the statute of limitations set forth in § 546(a).”  Id. at 690.  Therefore, the BAP held that these sections of the Bankruptcy Code preempted the effect of Civil Code § 3439.09(c), and that the seven-year period for bringing claims would be calculated from the date of the entry of the order for relief instead of the date the complaint was filed.  The BAP found that holding otherwise would frustrate Congress’ stated intent under the Bankruptcy Code of maximizing the assets of bankruptcy estates.  Id. at 691-692.

Although the BAP’s opinion in EPD Investment is not necessarily binding on other bankruptcy courts, even in the Ninth Circuit, its well-reasoned opinion seems likely to carry the day.  We will have to wait for the ultimate resolution of the issue, because the defendants have appealed the BAP’s ruling to the Ninth Circuit.