Southern California Bankruptcy Law Blog

Tolling A Statute Of Limitations In Bankruptcy

Posted in Chapter 11, Chapter 11 for Individuals & Married Couples, Chapter 7

Multiple clocksI recently had an email exchange regarding statute of limitations tolling in bankruptcy, with a friend who is a fellow bankruptcy attorney.  My friend posed a couple of questions based on an interesting fact pattern.  Herewith I offer a slightly edited version of the exchange.

First, here is my friend’s email:

Salient Facts:   Chapter 7 case filed.  Debtor has some accounts receivable.   On the petition filing date, there are 4 months left on the Statue of Limitations to bring an action on the accounts receivable.  The Chapter 7 Trustee sold the accounts receivable to someone we’ll call, Doug.

Questions:

1.  How long does Doug have to bring suit on the accounts receivable he purchased from the Trustee?

2.  Section 108(a) gives the Trustee 2 years from the petition date to commence an action.  It also seems to extend the statute of limitations by some period, which I used to assume was the pendency of the bankruptcy case, ending when it closed.  But now that I read the language, it is not at all clear.  Section 108(a)(1) has the statement:  “[I]ncluding any suspension of such period occurring after the commencement of the case…”; What the heck does that mean?  Does there need to be a formal suspension, or is it automatic, and if so, for how long?

Before I give you my response, here is some helpful background.

 

I.              Statutes Of Limitations

At the risk of gross oversimplification, we can think of noncriminal law as a mechanism for resolving competing interests.  In particular, litigation is the means we use for resolving disputes without the parties resorting to duels.  If only Aaron Burr had resolved his dispute with Alexander Hamilton through litigation.

One of the goals in this process is to resolve disputes in a reasonably timely fashion, before the witnesses’ memories become distorted with the passage of time.  Therefore, the statutes under which plaintiffs bring their suits contain time windows during which the actions must be initiated.  If a plaintiff fails to take action within the relevant time window, the suit is time-barred.  The plaintiff is said to have “slept on his rights.”

 

II.              The Bankruptcy Estate

When a person files for bankruptcy protection under any chapter, a bankruptcy estate is automatically created.  See 11 U.S.C. § 541(a).  The estate initially consists of everything the debtor owns or has an interest in.  Among the assets in the estate are any rights the debtor has to sue someone.  In a case in which the debtor is an individual — as opposed to a business — the debtor can remove an asset from the estate by appealing to the appropriate exemption table.

The prepetition debts the debtor had become claims against the estate, and the Trustee (or debtor-in-possession in a Chapter 11 case) is empowered to liquidate nonexempt assets for the benefit of creditors.  See, e.g., 11 U.S.C. § 363(b).  Therefore, if the debtor had a prepetition right to sue someone in a collection action, that right is an asset that the Trustee can sell.

 

III.            Extending The Statute Of Limitations

If the debtor files for bankruptcy protection shortly before the statute of limitations on a right to sue expires, the Trustee may have very little time to file the lawsuit.  Therefore, the Bankruptcy Code has an important provision that extends, or “tolls”, the statute of limitations.  The portion that is relevant to my friend’s questions is 11 U.S.C. § 108(a):

If applicable nonbankruptcy law, an order entered in a nonbankruptcy proceeding, or an agreement fixes a period within which the debtor may commence an action, and such period has not expired before the date of the filing of the petition, the trustee may commence such action only before the later of—

(1) the end of such period, including any suspension of such period occurring on or after the commencement of the case; or

(2)two years after the order for relief.

 

With the above as a backdrop, here is my response to his questions.

 

IV.              Section 108(a)’s Statute Of Limitations Extension Only Applies To Trustees And Debtors-In-Possession

The Fifth Circuit case, United States for Use of American Bank v. CIT Constr. Inc. of Texas, 944 F. 2d 253 (5th Cir. 1991) establishes that 11 U.S.C. § 108(a) extends only to trustees and debtors-in-possession.

In American the debtor, P.B. Elders Corporation (“Elders”), borrowed money prepetition from American Bank (“American”).  The loan was secured, in part, by Elders’ accounts receivable.  Elders subsequently filed for Chapter 11 protection.  American was granted relief from the automatic stay  and initiated an action under the Miller Act (40 U.S.C. §§ 3131–3134), in the Federal District Court, against some of Elders’ subcontractors.  The District Court held that it lacked jurisdiction because American hadn’t filed its suit within the one-year statutory period of the Miller Act (40 U.S.C. § 3133(b)(4)).

In its appeal, American argued, inter alia:

that the district court incorrectly concluded that section 108(a) of the Bankruptcy Code did not apply to extend the Miller Act limitation period.  American foreclosed its security interest on Elders’s accounts receivable and, on July 19, 1988, brought this Miller Act claim as successor in interest to the claims of Elders.  American asserts that section 108(a) extends the one-year Miller Act limitational period two years beyond the date of the September 1987 order for relief, thus bringing its July 1988 filing date well within the desired limitation period ending in September 1989.

American, 944 F. 2d at 259.

The Fifth Circuit rejected this argument, holding (with emphasis added):

The purpose of section 108(a) dictates the conclusion that its rights extend only to trustees and debtors-in-possession, and not to creditors.  This is so because both trustees and debtors-in-possession have a fiduciary obligation to “all the creditors of the bankrupt.”  Natco Industries, Inc. v. Federal Insurance Co., 69 B.R. 418, 419 (S.D. N.Y. 1987).  Any “recoveries realized” by a trustee or debtor-in-possession “become part of the estate for the benefit of the creditors.”  Id.; see Northern Specialty Sales, Inc. v. INTV Corp., 57 B.R. 557, 558 n. 1 (D. Or. 1986) (§ 108(a) “designed to protect creditors, not debtors”).  American certainly did not bring this Miller Act suit as a fiduciary of Elders’s creditors under the control of the bankruptcy court.  Natco, 69 B.R. at 419.

American, 944 F. 2d at 260.

 

V.            While A Trustee’s Agent  Can Invoke Section 108(a) To Extend A Statute Of Limitation, A Mere Assignee Cannot

[W]hile an agent of the trustee or of the debtor-in-possession may, on behalf of its principal, invoke § 108, there is no precedent for, and it would be inconsistent with the plain language of the Bankruptcy Code, to allow a mere purchaser or assignee of a Chapter 7 debtor’s claims to take advantage of § 108.

Motor Carrier Audit & Coll. Co. v. Lighting Prod., 113 BR 424, 426 (N.D. Ill. 1989).

Assuming that Doug wishes to prosecute his collection action in California, the California appellate case, Zinnel v. Herman, C055686 (Cal. Ct. App. 2008), which adopted the Motor Carrier holding is apposite (with emphasis added):

[W]e agree with the authorities affirming that a trustee’s section 108(a)’s tolling rights are not transferable to mere assignees of debtor claims.  (Motor Carrier Audit & Collection Co. v. Lighting Products, Inc. (N.D. Ill. 1989) 113 B.R. 424, 426-427; 2 Collier on Bankruptcy (15th rev. ed.) (LexisNexis 2007) ¶ 108.02[3], p. 108-7.)  This view is supported by unanimous case law holding that debtors acting in their own interests may not invoke section 108, or its predecessor, section 29(e). (See Natco Industries, Inc. v. Federal Ins. Co. (S.D.N.Y. 1987) 69 B.R. 418, 419-420 (Natco Industries), citing In re Lawler (Bankr. N.D. Tex. 1985) 53 B.R. 166, 172; Burroughs v. Local Acceptance Co. (In re Dickson) (W.D.N.C. 1977) 432 F.Supp. 752, 756 (Burroughs), and other cases.)  Since Zinnel bought the lawsuit for his own account and not as a fiduciary or agent of the trustee, the reasoning of these cases would dictate that he is not entitled to exercise the tolling privileges accorded to trustees under section 108(a).

VI.      Application To Doug

Unless Doug is acting as an agent for the Trustee, and not merely as a self-serving assignee of the right to sue, he cannot appeal to § 108(a)’s statute of limitations extension.  Therefore, he must bring his action before the termination of the limitation period in the California statute that undergirds his claim.

 

VII.        “[I]ncluding Any Suspension Of Such Period Occurring After The Commencement Of The Case”

Finally, as to the question about the phrase:  “including any suspension of such period occurring after the commencement of the case” in § 108(a)(1), the case Matter of LaJet, Inc., 150 B.R. 648 (Bankr. E.D. La. 1993) refers to the “application of any relevant state tolling provision.”  Matter of LaJet, Inc., 150 B.R. at 655.  Since there is no bankruptcy provision that tolls the statute of limitations (other than § 108, of course), § 108(a)(1) is not referring to any bankruptcy law tolling.  Instead, it must refer to some nonbankruptcy tolling provision — whether under state, or federal law — that is, for some reason triggered after the bankruptcy is filed.

For example:

Pennsylvania law probably would incorporate common law tolling principles into its limitations periods for claims of conversion or fraudulent conveyance.  Specifically, state law may toll the limitations period as to prepetition claims by a corporation against those who control it.  Resolution Trust Corp. v. Farmer, 865 F.Supp. 1143 (E.D. Pa. 1994).  The equitable principle most germane to these proceedings has been referred to as the tolling doctrine of “adverse domination,” which was recently described as follows:

Under the doctrine of adverse domination, the statute of limitations is tolled for as long as a corporate plaintiff is controlled by the alleged wrongdoers…. The doctrine is based on the theory that the corporation which can only act through the controlling wrongdoers cannot reasonably be expected to pursue a claim which it has against them until they are no longer in control.

Id., at 1151; accord In re Lloyd Securities, Inc., 153 B.R. 677, 684-85 (E.D. Pa. 1993); see Askanase v. Fatjo; Saylor v. Lindsley, 302 F.Supp. 1174, 1184 (S.D. N.Y. 1969).

In re Harry Levin, Inc., 175 B.R. 560, 572 (Bankr. E.D. Pa. 1994).

 

If you are considering purchasing an asset from a Chapter 7 Trustee and need representation, or if you are a debtor facing overwhelming debt and need bankruptcy protection, contact an extremely knowledgeable and highly skilled bankruptcy attorney to guide you through the process.

 

 Image courtesy of Flickr (Licensed) byNick