In re Kipnis, 555 BR 877 (Bankr. S.D. Fla. 2016)
In re Kipnis, 555 BR 877 (Bankr. S.D. Fla. 2016). A bankruptcy court in Florida has held that a bankruptcy trustee had the power to use the Internal Revenue Service’s 10 year statute of limitations in pursuing fraudulent transfer litigation on behalf of the bankruptcy estate, instead of the shorter statute of limitations (usually 4 years if recorded transfer, or 7 years if not recorded transfer).
Kipnis is contrary to an earlier bankruptcy case, In re Vaughan, 498 B.R. 297, at 304 (Bankruptcy Court D. New Mexico 2013), which cites to Marshall v. Intermountain Elec. Co., Inc., 614 F.2d 260, 263 n.3, 7 O.S.H. Cas. (BNA) 2149, 1980 O.S.H. Dec. (CCH) P 24202 (10th Cir. 1980) (“An action which, although brought in the name of the United States, involves no public rights or interests may be subject to a state statute of limitations.”) and S.E.C. v. Calvo, 378 F.3d 1211, 1218, Fed. Sec. L. Rep. (CCH) P 92879 (11th Cir. 2004) (“Where … the government’s action vindicates a private interest, the [state statute of limitations] defense is typically available.”)).
Discussion of Kipnis: 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.
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.
AUTHOR’S 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…
Here, since the IRS (one of the unsecured creditors) had the power to challenge the transfers, the trustee succeeded to those powers, for the benefit of all of the creditors. This is the ancient rule of “void against one, void against all,” as articulated in Moore v. Bay, 284 U.S. 4, 5, 52 S.Ct. 3, 76 L.Ed. 133 (1931).
It will be very interesting to see if this obscure bankruptcy court opinion results in a huge upheaval in the world of fraudulent transfer litigation, as the court has predicted.