In re Kipnis, ___BF___, 2016 Westlaw 4543772 (Bankruptcy Court. S.D. Fla. 2016)
A bankruptcy court in Florida has held that a trustee had the power to borrow the Internal Revenue Service’s 10 year statute of limitations in pursuing fraudulent transfer litigation on behalf of the estate.
FACTS: An individual owed back taxes to the Internal Revenue Service. In an attempt to avoid paying those assessments, he allegedly engaged in fraudulent transfers of his assets. Roughly 10 years after those transfers, he filed a bankruptcy petition. His trustee then asserted fraudulent transfer claims against his transferees under 11 U.S.C.A. §544(b). They moved to dismiss on the ground that the claims were time barred, since the alleged transfers have occurred more than seven years prior to the filing of the bankruptcy petition.
REASONING: The bankruptcy court denied the motion to dismiss on the ground that the trustee was empowered to step into the shoes of the IRS. Under federal law, the IRS enjoyed a 10 year window for the avoidance of transfers made by taxpayers. The court recognized that there was little authority on point and that there was a split among the lower federal courts on this issue.
The court acknowledged that this ruling could have a very substantial impact:
The IRS is a creditor in a significant percentage of bankruptcy cases. The paucity of decisions on the issue may simply be because bankruptcy trustees have not generally realized that this longer reach-back weapon is in their arsenal. If so, widespread use of § 544(b) to avoid state statutes of limitations may occur and this would be a major change in existing practice.
COMMENT: The court is absolutely right that this opinion, if widely followed, could be a game-changer. Further, I predict affirmance, since the plain language of §544(b) means exactly what it says:
[T]he 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….
NOTE: Under California state law, transfers can only be avoided as fraudulent transfers if made within 4 years before the bankruptcy case is filed, and under rare circumstances up to 7 years, but NEVER 10 years back (except for self settled trusts set up by debtor, with debtor as beneficiary), so this would be a huge change in California.
[review of this case is from the California State Bar, Business Law Section, Insolvency Law Committee, but NOTE is added by attorney March]