A Longer Statute of Limitations Period for Pursuing Fraudulent Transfer Actions May Exist

Section 544(b) of the Bankruptcy Code empowers a bankruptcy trustee to avoid any transfer of an interest of the debtor in property that is voidable under “applicable law” by an unsecured creditor. Under the plain language of section 544(b), before a trustee can maintain an avoidance action, the trustee must demonstrate the existence of a qualified creditor, one who: 1) has a right to avoid the transfers; and 2) holds an “allowable” unsecured claim. Importantly, the scope of “applicable law” is undefined. Most commonly, a trustee seeking to pursue an avoidance action will have the option of using the longer of the two-year statute of limitations found at section 546(a)(1) of the Bankruptcy Code, or the applicable state fraudulent transfer statute of limitations provision (most of which are two-to-four years from the transfer date), in which to commence the action. Transactions that closed more than four or even six years post-transfer, nonetheless may be subject to an avoidance action for recovery of a fraudulent transfer. While this may be good news for debtors' estates looking for additional recoveries, defendants of such avoidance actions unfortunately may be reliving transactions they had long forgotten.