Article Courtesy of Margaret G. Parker-Yavuz (Akin Gump Strauss Hauer & Feld LLP); Secondary Contributor Troy DeLeon (Akin Gump Strauss Hauer & Feld LLP)
Miller v. Fallas (In re J & M Sales Inc.), Nos. 18-11801 (JTD), 20-50775 (JTD), 2022 Bankr. LEXIS 434 (Bankr. D. Del. Feb. 22, 2022)
Bankruptcy trustee in a chapter 7 case sought to amend its complaint to allege time-barred constructive fraudulent conveyance claims under section 544(b) of the Bankruptcy Code on the ground that the IRS should be considered a predicate creditor, which would extend the statute of limitations up to ten years. The U.S. Bankruptcy Court for the District of Delaware denied the trustee’s motion, finding that the IRS could not be used as a predicate creditor because it did not file a proof of claim and the debtors did not schedule an IRS claim.
The bankruptcy trustee in a Chapter 7 bankruptcy proceeding sought to file an amended complaint to assert constructive fraudulent conveyance claims on behalf of the IRS. The claims related to transfers made several years prior to the bankruptcy and were time-barred under the Delaware Uniform Fraudulent Transfer Act’s four-year statute of limitations. The trustee sought to extend the statute of limitations by using the IRS – a federal governmental entity – as a predicate creditor. The IRS did not file a proof of claim in the bankruptcy case, and the debtors did not schedule a claim by the IRS. The trustee argued that it could rely on a first day motion seeking payment of outstanding payroll taxes (which were paid in full shortly after the petition date) as a basis to bring claims on behalf of the IRS under section 544(b) of the Bankruptcy Code.
The court denied the trustee’s motion, noting that section 544(b)(1) provides that a trustee may avoid a transfer that is voidable under applicable law by a creditor holding an unsecured claim that is allowable under section 502. It further noted that section 502(a) provides that a claim, proof of which is filed under section 501, is deemed allowed unless a party in interest objects. Citing several cases in which bankruptcy courts found that a claim must be filed in order to be allowable, the court concluded that, in order to be considered an allowable claim for purposes of section 544(b), a proof of claim must be filed as required by section 502. Accordingly, the court found that the trustee could not rely on the IRS as a predicate creditor for purposes of pursuing fraudulent conveyance claims beyond the four-year lookback period under the Delaware Uniform Fraudulent Transfer Act.
In a footnote to the opinion, the court noted that, since payroll taxes are not due to the IRS until some period of time after wages are paid depending on the employer’s tax filing status, virtually every business entity that files for bankruptcy will have accrued but unpaid payroll taxes. Under the trustee’s position, every business bankruptcy case could automatically have a ten-year lookback period for fraudulent transfers under section 544(b), which cannot have been Congress’ intent in enacting section 544(b).