Stretching The Limits To Avoid Fraudulent Transfers – Equitable Tolling Under Section 546 Of The Bankruptcy Code

Section 546 of the United States Bankruptcy Code, 11 U.S.C. § 101-1532 (the "Code"), establishes a statute of limitations within which an avoidance action, including a fraudulent transfer action under Code section 548 (or section 544 applying applicable state fraudulent transfer law), may be brought. Generally, in Chapter 11 cases actions to avoid fraudulent transfers must be commenced within later of two years of the entry of the order for relief or one year after the appointment of a trustee if the appointment occurs within the two-year period. While the statute is plainly worded, courts have often applied the doctrine of equitable tolling to expand the time limits within which a fraudulent transfer action under section 548 may be brought. See, e.g., Fogel v. Shabat, (In re Draiman), 714 F.3d 462 (7th Cir. Apr. 8, 2013); Jackson v. Astrue, 506 F. 3d 1349 (11th Cir. 2007); Jobin v. Boryla (In re M & L Bus. Mach. Co.), 75 F.3d 586 (10th Cir. 2007); Pugh v. Brook (In re Pugh), 158 F. 3d 530 (11th Cir. 1998); Ernst & Young v. Matsumoto (In re United Ins. Mgmt., Inc.), 14 F. 3d 1380 (9th Cir. 1994); cf. Bailey v. Glover, 88 U.S. (21 Wall.) 342 (1874).

Courts frequently apply the doctrine of equitable tolling to expand the statute of limitations if the filing of a timely suit was prevented by fraudulent concealment or misrepresentation. Barr v. Charterhouse Group International, Inc. (In re Everfresh Beverages Inc.), 238 B.R. 558 (Bankr. S.D.N.Y. 1999). Even if the fraud was not fraudulently concealed, courts have equitable tolled the statute of limitations if the fraudulent transfer was not discoverable within the applicable time limits. The Mediators Inc. v. Manney (In re The Mediators Inc.), 190 B.R. 515 (S.D.N.Y. 1995).

Equitable tolling has also been applied when the entity to which the cause of action belonged was adversely dominated preventing the action from being timely brought to the detriment of another interested party. Freeland v. Enodis Corp., 540 F.3d 721 (7th Cir. 2008). In a bankruptcy proceeding, a fraudulent transfer action usually may only be brought by the trustee or debtor in possession. However, courts often grant derivative standing to committees or other third parties to bring the action if the trustee or debtor in possession has unjustifiably refused or abused its discretion by not bringing the suit. Unsecured Creditors Comm. v. Noyes (In re STN Enters.), 779 F.3d 901 (2d Cir. 2001).

An illustration of the application...