Bankruptcy Court Holds Trustee’s Avoidance Action Untimely and Not Determined by State Law

Bankruptcy Court Holds Trustee’s Avoidance Action Untimely and Not Determined by State Law

Debtor filed his Chapter 7 petition on July 25, 2014. Plaintiff was appointed as the Chapter 7 Trustee on July 26, 2014.

Less than one month after filing the petition, Debtor amended his Statement of Financial Affairs on August 15, 2014. That amendment states as follows:

DEBTOR TRANSFERRED HIS 33.33% INTEREST IN PB&J LLC TO HIS WIFE ON OR ABOUT 1/1/2013. THE 33.33% INTEREST HAD NO VALUE AT THE TIME OF THE TRANSFER.

On December 28, 2018 the trustee filed an adversary proceeding naming the Debtor and other third parties as Defendants. The Complaint consists of two counts: (1) fraudulent transfer pursuant to 11 U.S.C. § 544 and (2) civil conspiracy. Specifically, Count I alleges that the January 1, 2013 transfer by Debtor of his 33.33% interest in PB&J LLC to his wife, was a fraudulent transfer under the Alabama Uniform Fraudulent Transfer Act, Ala. Code §§ 8-9A-1 through 8-9A-12) (hereinafter “AUFTA”).

On February 26, 2019, the Defendants filed a motion to dismiss the adversary with prejudice as it was time barred. The Defendants argued that the Trustee filed the adversary beyond the two-year limit set forth in 11 U.S.C. § 546(a). That section states in pertinent part

(a) An action or proceeding under section 544, 545, 547, 548, or 553 of this title 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…: or (2) the time the case is closed or dismissed.

11 U.S.C. § 546(a).

Plaintiff argued that the adversary was timely filed under Section 544(b)(1) and the AUFTA. Section 544(b)(1) provides

(b)(1) Except as provided in paragraph (2), 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 that is allowable under section 502 of this title or that is not allowable only under section 502(e) of this title.

11 U.S.C. § 544. Under the AUFTA, claims based on fraudulent transfers of personal property must be brought within six years after the transfer of the personal property was made. Ala. Code § 8-9A-9(2).

Plaintiff argued that since the Alabama statute of limitation provides a six-year limit, the bankruptcy court should ignore the limit set in Section 546.

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