Magazine article Business Credit

Statute of Limitations Wins the Day for Preference Defendants

Magazine article Business Credit

Statute of Limitations Wins the Day for Preference Defendants

Article excerpt

The Third Circuit Court of Appeals has determined that the statute of limitations within which to commence preference actions is clearly stated and cannot be expanded beyond its own plain language. On March 2,2007, the Chapter 7 trustee in the case of American Pad and Paper lost his long battle to convince the courts that the statute of limitations set forth in § 546(a) of the Bankruptcy Code should be interpreted to include the appointment of an interim trustee under § 701 of the Bankruptcy Code.

Background of the Case

The pertinent timeline in American Pad and Paper consists of the following items:

1. An involuntary petition in bankruptcy was filed by creditors on January 10, 2000.

2. The debtor consented to a Chapter 11 proceeding and on January 14,2000 the Order for Relief was entered.

3. These cases did not remain in Chapter 11. A motion to convert the Chapter 11 proceeding to a Chapter 7 case was granted and an Order Converting the Chapter 11 cases to cases under Chapter 7 was signed by the Court on December 21,2001. The Order included a directive that the conversion would be effective on January 3, 2002.

4. An interim trustee under § 701 of the Bankruptcy Code was appointed on January 3,2002, within two years of the date of the Order for Relief. Note: there were only 11 days remaining in the original twoyear statute of limitation.

5. Creditors sought to elect a trustee under § 702 of the Code. The election took place on February 13,2002 and the elected § 702 trustee was ultimately appointed by Notice of the U.S. Trustee dated June 19, 2002, a date well past the two-year statute of limitations.

The Preference Lawsuits

The permanent trustee filed almost 150 preference actions between August and December 2002. Almost all the defendants filed timely answers asserting one or more of the typical and common defenses to an alleged preference.

1. That such transfer was (A) intended by the debtor and the creditor to or for whose benefit such transfer was made to be a contemporaneous exchange for new value given to the debtor; and (B) in fact was a substantially contemporaneous exchange.

2. To the extent that such transfer was (A) in payment of a debt incurred by the debtor in the ordinary course of business or financial affairs of the debtor and the transferee; (B) made in the ordinary course of business or financial affairs of the debtor and the transferee; and (C) made according to ordinary business terms.

3. That after the transfer, such creditor gave new value to or for the benefit of the debtor (A) not secured by an otherwise unavoidable security interest; and (B) on account of which new value the debtor did not make an otherwise unavoidable transfer to or for the benefit of such creditor.

In addition, however, many of the preference defendants picked up on the fact that there is a difference between an interim trustee appointed under § 701 of the Bankruptcy Code and a permanent trustee appointed or elected under § 702 of the Bankruptcy Code. Those alert preference defendants filed their necessary answers and simultaneously moved the court to dismiss the preference actions on the grounds that the actions were time barred because the statute of limitations had lapsed. Had these cases remained in Chapter 11, the initial statute of limitations under § 546(a)(1)(A) would have lapsed on January 14,2002, two years after the date on which the Orders for Relief were entered.

The Lapsed Statute of Limitations

The statute of limitations, with respect to certain types of actions including preference actions under § 547 of the Bankruptcy Code, is set forth in § 546 of the Bankruptcy Code which says:

(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) two years after entry of the order for relief; or

(B) one year after the appointment election of the first trustee under section 702,1104,1163,1202 or 1302 of this title if such appointment or such election occurs before the expiration of the period specified in subparagraph (A). …

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