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One of the rare legal issues in which bankruptcy practitioners usually are able to speak to clients in absolute terms to provide clear legal advice is the limitations period concerning the pursuit of avoidable transfers in bankruptcy proceedings. Section 546 of the Bankruptcy Code is clear that a trustee has two years after the order for relief to bring an avoidable transfer action. Section 548 of the Bankruptcy Code equally is clear that the trustee may pursue avoidable transfers that occurred within two years prior to the filing of a bankruptcy petition. And Section 544(b) of the Bankruptcy Code provides the trustee with “strong-arm” powers to avoid a transfer that is voidable “under applicable law” by a creditor holding an unsecured claim. This means that the trustee may look to non-bankruptcy law (usually state law) and deploy any avoiding power that the trustee finds there. The most common use of Section 544(b) is to give the trustee a right of action under state fraudulent transfer law. These are most often useful to the trustee because of the longer reach-back period available under state law, which generally range from three to six years prior to the petition date.
So, for avoidable transfers that occurred outside the state law avoidable transfer period, generally the wisdom imparted to clients is that those are outside the reach of trustees and the bankruptcy court. That is, unless the Internal Revenue Service is a creditor at the time of the transfer and has filed a proof of claim in the bankruptcy case. In such instances, the majority line of cases enable a trustee to go beyond the state law limitations period in order to use the IRS recovery period — which runs 10 years after the date of tax assessment — to pursue avoidable transfers for the benefit of the bankruptcy estate.
This issue is not some drop in the bucket merely for academia to ponder its theoretical implications. The effect is real and should be substantial to provide immediate improved dividends to creditors in bankruptcy cases, as discussed in a recent bankruptcy case from the Southern District of Florida. Practice pointers also are relevant to discuss in relation to this improved creditor recovery tool and potentially increased exposure for debtors and their transferees.
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