Chapter V Affirmative Defenses

• Jurisdiction: United States

Chapter V Affirmative Defenses

A. Statute of Limitations Defenses

Making an underlying transfer outside of the applicable limitations period is a defense to a fraudulent transfer claim under the Bankruptcy Code or applicable state law. However, different limitations periods may apply depending on the type of fraudulent transfer action being asserted. In order to prosecute a fraudulent transfer claim under § 548 of the Bankruptcy Code, the transfer at issue must have occurred within two years preceding the date that the bankruptcy petition was filed.

On the other hand, fraudulent transfer claims asserted pursuant to § 544(b) and applicable state law may seek the avoidance of transfers made even earlier, and in many cases up to six years prior to the bankruptcy filing. Regardless of the applicable "look-back" period, a fraudulent transfer action brought pursuant to either § 548 or 544(b) must be asserted within two years from the entry of the order for relief.

The relevant limitations period can be extended where the fraudulent conduct surrounding the transfer has been concealed. Moreover, Bankruptcy Code limitations periods applicable to fraudulent transfers can be extended, modified or entirely waived based on agreements between the relevant parties. Accordingly, invoking the defense that a fraudulent transfer action is barred by governing statutes of limitations requires a number of considerations.

1. Look-Back Periods

a. 11 U.S.C. § 548(a)

Under 11 U.S.C. § 548(a)(1), only fraudulent transfers that are "made or incurred on or within two years before the date of the filing of the petition" are subject to avoidance under that provision.⁵²² That two-year period applies to both intentional and constructive fraudulent transfers under § 548(a).⁵²³

Section 548(a)'s two-year look-back period must be read in connection with § 548(d) of the Bankruptcy Code, which defines when a transfer is "made" for purposes of avoidance under § 548(a).⁵²⁴ In short, § 548(d)(1) provides that a transfer is "made" when it becomes "so perfected" that it is enforceable by the transferee against a subsequent bona fide purchaser of the debtor.⁵²⁵ It should be noted, however, that if a transfer becomes perfected after the petition date, such a transfer is deemed to have been made immediately before the date of the filing of the peti-tion.⁵²⁶

b. 11 U.S.C. § 548(e)

Section 548(e)(1) permits the trustee, debtor in possession or other appropriate estate representative to avoid transfers within the 10 years preceding the petition date if such transfers were (1) made by the debtor (2) to a self-settled trust or "similar device" of which the debtor is also a beneficiary, and (3) with the actual intent to hinder, delay or defraud the debtor's present or future creditors.⁵²⁷ Congress enacted § 548(e) as part of the Bankruptcy Abuse Prevention and Consumer Protection Act of 2005 to address the enactment by certain states of laws permitting debtors to shield their assets from creditors by transferring them into self-settled, or "asset protection," trusts.⁵²⁸ At the time § 548(e) was enacted, five states — Alaska, Delaware, Nevada, Rhode Island and Utah — had enacted such laws.⁵²⁹

The Bankruptcy Code does not define what a "similar device" is within the meaning of Section 548(e). In In re Porco Inc.,⁵³⁰ the bankruptcy court held that Congress intended "similar device" to refer to express trusts, which are intentionally created by the settlor, and not implied trusts, such as resulting or constructive trusts.⁵³¹

A "transfer" for purposes of § 548(e)(1) includes transfers made by the debtor in anticipation of a money judgment, settlement, civil penalty, equitable order or criminal fine that the debtor incurred, or believed it would incur, for a violation of federal or state securities laws, or for fraud or manipulation in a fiduciary capacity or in connection with the purchase or sales of registered securities.⁵³²

c. 11 U.S.C. § 544(b)

Under § 544(b) of the Bankruptcy Code, a trustee, debtor in possession or other estate representative has standing to assert fraudulent transfer actions available to a debtor's unsecured creditors under applicable state law.⁵³³ The limitations period for a fraudulent transfer action under § 544(b) is determined by reference to the relevant state's fraudulent transfer law. Significantly, most states' fraudulent transfer laws provide for look-back periods longer than the two-year period under § 548. Some states' laws, including New York, permit avoidance of a transfer that occurred up to six years preceding the petition date.

Broadly speaking, state fraudulent transfer laws fall into three categories: (1) laws based on the UFTA, which has been enacted by 43 states including Delaware, California, Texas, Florida and Massachusetts;⁵³⁴ (2) laws based on the UFCA, the predecessor to the UFTA, which remains in effect in New York and Maryland; and (3) the general common law of fraudulent transfers, which applies in Alaska, Kentucky, Louisiana, South Carolina and Virginia.

i. UFTA

The UFTA has been adopted by 43 states and the District of Columbia. It contains different limitations periods that vary depending on the type of fraudulent transfer asserted. Under the UFTA, intentional fraudulent transfers (i.e., transfers made or obligations incurred with the intent to hinder, delay or defraud creditors) must be asserted within four years from the date the transfer was made or obligation incurred, or within one year after the transfer or incurred obligation was, or could reasonably have been, discovered.⁵³⁵ Constructive fraudulent transfers (i.e., transfers made by an insolvent debtor or that render the debtor insolvent, and for which the debtor did not receive reasonably equivalent value in return) must be asserted within four years after the transfer was made or obligation incurred.⁵³⁶

ii. UFCA

The UFCA "was a codification of the 'better' decisions applying the Statute of 13 Elizabeth"⁵³⁷ and is commonly known as the first codification of fraudulent transfer law in the U.S. Significantly, the UFCA does not provide a limitations period for asserting fraudulent transfer claims thereunder. As such, limitations periods under other applicable state law apply in the two states that still follow the UFCA: New York and Maryland.

In New York, constructive fraudulent transfer actions must be commenced within six years from the date of the transfer, while intentional fraudulent transfer actions must be commenced either within six years from the date of the transfer, or within two years from the date that the creditor discovers (or should have discovered) the fraud.⁵³⁸ In Maryland, the relevant limitations period for fraudulent transfers is three years.⁵³⁹

d. Common Law

Among the states that follow the common law of fraudulent transfers, applicable limitations periods range from three years (Louisiana) to six years (Alaska and South Carolina).⁵⁴⁰ Notably, Virginia has no statute of limitations on fraudulent conveyances, but instead relies on the equitable doctrine of laches, whereby a plaintiff must prove that it has brought its complaint within a reasonable time frame that is not overly burdensome to the defendant.⁵⁴¹

2. Statute of Limitations Under § 546(a)

Section 546(a)(1)(A) of the Bankruptcy Code provides a statute of limitations for all fraudulent transfer actions pursued under the Bankruptcy Code.⁵⁴² Specifically, a fraudulent transfer action brought pursuant to either § 548(a) or 544(b) must be commenced within two years from the date that the order for relief is entered, which, in voluntary bankruptcy cases, is the date that the bankruptcy petition was filed.⁵⁴³ However, if a trustee is appointed in a chapter 11 case pursuant to § 1104 prior to the expiration of the two-year limitations period, § 546(a)(1)(B) provides the trustee with an additional year to commence any fraudulent transfer actions.⁵⁴⁴

As discussed, the limitations periods for asserting fraudulent transfer actions under state law are calculated from the time of the transfer at issue. However, § 546(a), as a federal statute that prevails over conflicting state law, has the effect of tolling the limitations period for two years from the date of the order for relief if the limita-tions period under state law would otherwise expire during that two-year period.⁵⁴⁵ For example, if the limitations period under the applicable state's law is four years from the date of the transfer, an action under § 544(b) to avoid a transfer pursuant to that law is timely, so long as the transfer occurred within four years prior to the petition date and the action is commenced within two years after the petition date. Conversely, if the limitations period under the applicable state's law is six years from the date of the transfer, and the transfer occurs within one year of the petition date, the action must still be commenced by the trustee, debtor in possession or other estate representative within two years after the petition date in order to be timely.

a. Equitable Tolling Doctrine

Many courts have held that the two-year limitations period in § 546(a)(1)(A) can be tolled under the so-called "equitable tolling doctrine."⁵⁴⁶ The equitable tolling doctrine, which applies to all federal statutes, traces its roots to the U.S. Supreme Court's decision in Bailey v. Glover, 88 U.S. 342 (1874). In that case, the Court held that principles of equitable tolling prevent the invocation of a statute of limitations defense in two situations.⁵⁴⁷ First, if fraudulent conduct has been intentionally or negligently concealed by the perpetrator, a statute of limitations will not bar relief, provided that the suit is brought "within proper time after the discovery of the fraud"'⁵⁴⁸ Second, so long as a plaintiff is not at fault in exercising diligence and care, the statute of limitations is tolled until the fraud is discovered.⁵⁴⁹

In other words, the equitable tolling doctrine tolls the running of the statute of...