Delaware Bankruptcy Court Declines To Dismiss Fraudulent Transfer Suit Filed Seven Years After Challenged Transaction Occurred

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The Bottom Line

In UMB Bank NA v. Sun Capital Partners V, LP (In re LSC Wind Down, LLC), Adv. Proc. No 19-50272 (Bankr. D. Del. Jan. 23, 2020), the Bankruptcy Court for the District of Delaware denied a motion to dismiss a liquidating trust’s fraudulent conveyance action as untimely, even though the suit was filed some seven years after the challenged transfer and even though the generally-applicable four-year statute of limitations under the Uniform Fraudulent Transfer Act (the “UFTA”) had expired before the debtor’s bankruptcy petition had been filed. The Court found that, in light of the UFTA’s discovery rule or savings clause (which allows for the extension of the four-year statute of limitations in certain circumstances), the plaintiff-trustee’s complaint had adequately plead the existence of unsecured creditors that had standing to sue as of the petition date —  thus satisfying the timeliness requirements of Section 544(b)(1) and 546(a) of the Bankruptcy Code.

What Happened?

On Jan. 17, 2019 (the “Commencement Date”), Plaintiff UMB Bank, N.A., as Plan Trustee of The Limited Creditors’ Liquidating Trust (the “Plaintiff”) filed a complaint (the “Complaint”) seeking to avoid and recover an alleged $42 million fraudulent transfer (the “Transfer”) made to the Defendants Sun Capital Partners V, LP, Sun Mod Fashions IV, LLC; Sun Mod Fashions V; and H.I.G Sun Partners Inc. (collectively, the “Defendants”) on Dec. 20, 2011 by debtor LS Wind Down, LLC. The Commencement Date was a little over seven years after the Transfer, and exactly two years after the debtor had filed for bankruptcy. The Defendants filed a motion to dismiss (the “Motion to Dismiss”) the Complaint as untimely because it was filed after the prescribed time period set forth by Florida state law.

Section 726.110(1) of the Florida Uniform Fraudulent Transfer Act (the “FUFTA”) provides that fraudulent transfer claims must be brought “within 4 years after the transfer was made or the obligation was incurred or, if later, within 1 year after the transfer or obligation was or could reasonably have been discovered by the claimant[.]” The latter timeframe is referred to as the “one-year savings clause.”  Thus, according to the Defendants, in order for the Complaint to be timely, it must have been filed within FUFTA’s one-year savings clause. The Defendants asserted that the one-year savings clause was inapplicable because the Plaintiff “had notice of the Transfer more than one year prior to the Commencement Date through its access to the Debtors’ books and records and public news reports.”  Id. at 3.

In response, the Plaintiff cited to Section 544(b)(1) of the Bankruptcy Code, and argued that so long as a single creditor — a “predicate” or “triggering” creditor — was entitled as of the Petition Date to assert a claim against the Defendants under the UFTA, then the Plaintiff could file a claim on the estate’s behalf on or before two years after the Petition Date pursuant to Section 546(a)(1)(A) of the Bankruptcy Code.

Section 544(b)(1) provides: “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 . . ." Under Section 546(a), a Section 544(b)(1) claim “may not be commenced after the earlier of — (1) the later of — (A) 2 years after the entry of the order for relief; or (B) 1 year after the appointment or election of the first trustee . . . ; or (2) the time the case is closed or dismissed.”

The Bankruptcy Court determined that if a predicate creditor existed as of the Petition Date, the Plaintiff met the requirements of Section 546(a), as the suit had been filed within two years of the Petition Date, as required by Section 546(a)(1)(A). However, the Court explained that it was premature to ascertain whether such a creditor existed at the motion to dismiss stage. “Rather, it must decide only whether the allegations in the Complaint show that the underlying fraudulent conveyance claim asserted by the Plaintiff was brought beyond the applicable statutory timeframe – i.e. that there were no creditors of the Debtors as of the Petition Date able to challenge the Transfer as fraudulent under UFTA and its one-year savings clause.”  Id. at 7. Notably, the Court rejected the Defendant’s attempt to distinguish a statute of repose from a statute of limitations for purposes of the application of Section 546(a).

The Court found that the Plaintiff adequately plead a predicate creditor as the Plaintiff alleged by name numerous unsecured creditors with standing and explained why such creditors are governed by UFTA’s one-year savings clause. Additionally, the Court noted that the Defendants dispute of the existence of any predicate creditor is an issue more appropriate for consideration by the Court on a motion for summary judgment.

Why This Case Is Interesting

This case is interesting because the Court joined the many other courts in holding that it is generally inappropriate to grant a motion to dismiss that is premised on the asserted lack of existence of a triggering creditor (particularly in this case, where the complaint had actually identified about 100 potential such creditors), and that instead the existence of a triggering creditor should generally be resolved after discovery. The Court also clarified the distinction between the case at hand and other cases such as In re Petters Co., Inc., 495 B.R. 887 (Bankr. D. Minn. 2013), where the plaintiff did not specifically name the creditors whose standing it sought to use but rather made a “generalized statement” that such creditors existed. Additionally, the Court explained that the timeframe set forth by Section 546(a) is not altered if the state law avoidance claim is governed by a statute of repose rather than a statute of limitations.

DISCLAIMER: Because of the generality of this update, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations.

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