In this post we examine the statute of limitations applied to a bankruptcy trustee’s ability to pursue fraudulent asset transfer claims also known as “clawback” claims. (This is distinct from preferential payments received by a creditor within 90 days of the debtor’s bankruptcy filing – a time period where the law presumes the debtor to be insolvent.) Particular emphasis is placed on law established by the Third Circuit U.S. Court of Appeals, the United States District Court for the District of New Jersey, and the United States Bankruptcy Court for the District of New Jersey.
In Butner v. United States, 440 U.S. 48, 99 S.Ct. 914, 59 L.Ed.2d 136 (1979), the United States Supreme Court stated that “property interests are created and defined by state law. Unless some federal interest requires a different result, there is no reason why such interests should be analyzed differently simply because an interested party is involved in a bankruptcy proceeding.” 440 U.S. at 55. Thus, as the Third Circuit Court of Appeals remarked In re Bridge, 18 F.3d 195, 200 (3d Cir. 1994), “[A]lthough the trustee’s strong arm powers arise under federal law, the scope of those avoidance powers vis-à-vis third parties is governed entirely by the substantive law of the state in which the property in question is located as of the bankruptcy petition’s filing.” See also In re Alston, 322 B.R. 265, 268 (Bankr. D.N.J. 2005)(citing Lewis v. Diethorn, 893 F.2d 648, 650 (3d Cir. 1990)).
A bankruptcy trustee’s ability to pursue fraudulent asset transfers premised on state law is found at 11 U.S.C. § 544(b)(1), which 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 that is allowable under section 502 of this title or that is not allowable only under section 502(e) of this title.
Id. (Emphasis added). In order for the trustee to invoke this power, there must be an identifiable creditor with the capacity to bring an action under state law as of the petition date. In re Bernstein, 259 B.R. 555, 560 (Bankr. D.N.J. 2001). Under 11 U.S.C. § 544(b), a trustee succeeds to the rights of an unsecured creditor in existence at commencement who may avoid the transfer or obligation under state or federal law. See G-I Holdings, Inc. v. Those Parties Listed On Exhibit A (In re G-I Holdings, Inc.), 313 B.R. 612, 632 (Bankr D.N.J. 2004).
4 Year Limitations Period Under New Jersey Law or Within 1 Year of Discovery of the Fraud
Under the New Jersey Uniform Fraudulent Transfer Act, N.J.S.A. 25:2-20, et seq. (“UFTA”), a fraudulent transfer is defined to include a transfer or obligation made or incurred “[W]ith actual intent to hinder, delay, or defraud any creditor of the debtor.” N.J.S.A. 25:2-25(a)
There are time limits for creditors to file a fraudulent transfer action under the UFTA. N.J.S.A. 25:2-31, “Extinguishment of cause of action,” states:
A cause of action with respect to a fraudulent transfer or obligation under this article is extinguished unless action is brought:
a. Under subsection a of R.S. 25:225, within four years after the transfer was made or the obligation was incurred or, if later, within one year after the transfer or obligation was discovered by the claimant;
Id. In other words, a creditor pursuing a fraudulent transfer claim under N.J.S.A. 25:2-25)(a) has to file suit within 4-years after the transfer was made, or within 1-year of the discovery of the transfer. The initial 4-year period begins to run from the date of the transfer. SASCO 1997 NI, LLC v. Zudkewich, 166 N.J. 579 (2001).
A “transfer” is defined as “every mode, direct or indirect, absolute or conditional, voluntary or involuntary, of disposing of or parting with an asset or an interest in an asset, and includes payment of money, release, lease, and creation of a lien or other encumbrance.” N.J.S.A. 25:2-22. For cases involving real property, “transfer” has been defined as the date real property is recorded. See N.J.S.A. 25:2-28(a)(1); Boardwalk Regency Corp. v. Burd, 262 N.J. Super. 162, 165 (App. Div. 1993).
Extended Statute of Limitations Afforded to Bankruptcy Trustees Provided the State Law Fraudulent Transfer Claim has not Expired When Bankruptcy is Filed
Bankruptcy trustees are bound by these same time limitations with one exception; namely, that pursuant to federal bankruptcy law, 11 U.S.C. § 546(a), a trustee can file a fraudulent transfer claim predicated under state law upon the later of 2 years from the date of the bankruptcy filing or within 1-year after his appointment. 11 U.S.C. § 546(a)(1)(A), (B).
However, a bankruptcy trustee cannot utilize Section 546 to extend the time limitations when the state law fraudulent conveyance claim is stale. In other words, if the statute of limitations to file a fraudulent transfer claim under New Jersey law has expired by the time the bankruptcy petition is filed, see N.J.S.A. 25:2-31(a), supra, then a bankruptcy trustee cannot utilize Bankruptcy Code Section 546 to resuscitate an expired claim even if he files a fraudulent asset complaint within 2 years of the bankruptcy filing or within 1-year of his appointment. See In re Princeton-New York Investors, Inc., 219 B.R. 55, 64-65 (D.N.J. 1998)(The district court concluded that actions brought under 11 U.S.C. § 544 are governed by 11 U.S.C. § 546(a) which expands the time during which the trustee can exercise avoidance rights, so long as the state statute of limitations has not run prior to the bankruptcy petition.). If, on the other hand, the state statute of limitations has not run prior to the bankruptcy filing then a bankruptcy trustee receives the benefit of the extension provided by Section 546(a). See In re Princeton-New York Investors, Inc., 255 B.R. 366, 375 (Bankr. D.N.J. 2000) (the statute of limitations is severable from the UFTA once a petition in bankruptcy is filed if the statute of limitations had not expired prior to the bankruptcy petition.). See also In re Buildings by Jamie, Inc., 230 B.R. 36, 45 (Bankr. D.N.J. 1998).
Statute Limitations Bankruptcy Trustee Clawback Claims NJ
If your company gets sued by a bankruptcy trustee in New Jersey for a clawback claim predicated on a fraudulent asset transfer, you should consult with an experienced bankruptcy attorney to determine whether the claim may be barred by the applicable statute of limitations.
This article is for informational purposes only and is not intended to create an attorney-client relationship with LoFaro & Reiser, LLP. Nor is this article intended to be an exhaustive review of its subject matter.