Statute of Limitations Question

[dan829]

Hypo: Elderly debtor transfers property to wife for estate planning purposes on Aug. 10, 2011. 3 months later entity 1 (of which debtor is a part) defaults on a loan that debtor guarantied. Creditor knew of transfer at that time. On Aug. 10, 2015, the last day to file suit under state law, creditor seeks to assert claims for fraudulent conveyance. On Sept. 1, 2015 debtor seeks bankruptcy protection.

Question: Is creditor’s claim now barred by the 2 year look back under bk law or, if the trustee applies state law statute of limitations, has the 4 years run because creditor has to file a new complaint in bankruptcy court and it is now time barred because it’s beyond the 4 year statute to file? Or, does the fact that creditor filed in state court within the statute prior to bk filing preserve its rights in bankruptcy court?

[despritfreya]

Unfortunately, it appears that you do not understand bankruptcy law.

Assuming you have filed or will file a Chapter 7 or 13, the right to bring a fraudulent conveyance action belongs to the Trustee.

In general, a trustee has two options in bringing such an action. He/she can utilize 11 USC §544 or 11 USC §548. Since the transfer occurred more than two years ago, Section 548 probably would not apply. However, Section 544 most likely does and the Trustee has two years in which to file such an action either against you or your spouse (or both). Under 544 the Trustee stands in the shoes of a hypothetical creditor and looks to state law for the ability to go after the conveyance:

544. Trustee as lien creditor. . .

(a) The trustee. . . may avoid any transfer of property of the debtor. . . that is voidable by. . . a creditor that extends credit to the debtor. . . and that obtains. . . a judicial lien on all property on which a creditor on a simple contract could have obtained such a judicial lien. . .

(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. . .

546. Limitations on avoiding powers

(a) An action or proceeding under section 544. . . of this title may not be commenced after . .

(A) 2 years after the entry of the order for relief. . .

Even if you wait past the 4 year mark to file your bk (9/1/15 in your post), most state fraudulent conveyance statutes have a built-in extension for a creditor (in your case, the trustee) who could not have known about the transfer in time to file an action. That provision usually gives an extra year to file the action under state law. For example, in my state, if the transfer was done with the intent to hinder, delay or defraud, you have the following. . .

44-1009. Extinguishment of claim for relief

Under section 44-1004, subsection A, paragraph 1 within four years after the transfer was made or the obligation was incurred or, if later, within one year after the fraudulent nature of the transfer or obligation was or through the exercise of reasonable diligence could have been discovered by the claimant.

Only time will tell if your trustee will seek to recover the conveyance. Certainly, in my district, if pushed by the creditor, the trustee will at least investigate to determine if an action under 544 makes sense. In addition, do not expect the creditor to just "go away". If there is bad blood, expect the creditor to file any objection to your case he/she/it can along with a complaint to determine if the debt is non-dischargeable. The motions/complaint may not have merit but, if filed, you will have to defend them.

Des.