United States: A Ten Year Look Back Period For Fraud

Last Updated: September 23 2016
Article by Stephen Stapleton

On August 31, 2016, Judge Robert Mark of the United States Bankruptcy Court for the Southern District of Florida, issued an opinion that offered bankruptcy trustees seeking to avoid fraudulent transfers an opportunity to avoid such transfers occurring in the previous ten years.1

The facts are straightforward: Donald Jerome Kipnis, the debtor, was in the construction business and claimed certain losses in his 2000 and 2001 personal income tax returns. In 2003, the IRS notified the debtor that his taxes for those years were under investigation and in 2005 issued an examination report and assessment declaring a deficiency. The debtor filed an appeal and in 2012, the Tax Court ruled in favor of the IRS, disallowing the losses.

In 2005, the debtor allegedly transferred a bank account previously titled solely in his name to an account titled in both his name and that of Analia Kipnis. Later, the debtor attempted to quitclaim his interest in a condominium to Ms. Kipnis pursuant to a premarital settlement agreement entered into by the parties on July 5, 2005.

The debtor filed a voluntary bankruptcy petition in 2014 under Chapter 11 and the IRS filed a claim, of which $25,629.51 was unsecured. The trustee sought to avoid both of the debtor's 2005 transfers, notwithstanding that the avoidance actions were filed outside of Florida's four-year statute of limitations, which would have expired in 2009. The trustee asserted, however, that under section 544(b) of the Bankruptcy Code he was entitled to rely on the 10 year limitations period available to the government for the avoidance of fraudulent transfers.

In ruling on motions to dismiss the adversary proceedings, the bankruptcy court discussed the issue and sided with the trustee and the majority of courts who have considered the issue. In so holding, the court disagreed with the only court that has concluded a bankruptcy trustee may not rely on the government's 10 year limitations period.

Section 6502(a)(1) of the Internal Revenue Code states that the IRS may collect a tax "by levy ... but only if the levy is made ... -- (1) within 10 years after the assessment of the tax...." Section 544(b) of the Bankruptcy Code states in pertinent part that a "trustee may avoid any transfer ...that is voidable under applicable law by a creditor holding an unsecured claim...." Although the IRS must prove that a particular transfer is similarly avoidable under applicable state law, the limitations period for the government is governed by federal law; as a result, the IRS has 10 years to collect their tax.

The trustee argued that as the IRS could have filed a timely complaint under section 6502(a)(1) to avoid the transfers, the trustee, under section 544, can step into the government's shoes to avoid these transfers. The court, siding with the trustee, noted that only one court has concluded otherwise. In Wagner v. Ultima Holmes, Inc. (In re Vaughan Co.), 498 B.R. 297 (Bankr. D.N.M. 2013), the court held that the IRS immunity from state statutes of limitation is a public right that cannot be invoked by a bankruptcy trustee under section 544. The Vaughan court found that the IRS is not bound by state law statutes of limitation because of the concept of nulum tempus occurrit regi, meaning "no time runs against the king." Id. at 304. The Vaughan court held that it did not believe that these sovereign powers could be vested in a bankruptcy trustee.

The Kipnis court held however that Vaughan failed to apply the appropriate methods of statutory interpretation, beginning with the statute's plain meaning. If the statute is clear on its face, which the Kipnis court said it was, that is the end of the inquiry. There is no need to investigate further; there is no need to inquire as to policy considerations or legislative intent. Because there is no limitation on the meaning of the phrase "applicable law" or on the type of unsecured creditor a trustee may choose as a triggering creditor under §544(b), the trustee was fully within his rights to utilize the ten year limitations period available to the IRS.

The court noted in conclusion that "Vaughan may be right in believing that Congress intended that §544(b) be limited to avoidance actions that only non-governmental creditors could bring," and were trustees to routinely use a ten year limitations period whenever the IRS asserted an unsecured claim this change in practice could "be a major change in existing practice." However, because the statute does not tie a trustee's hands this way, neither would the court.

Footnote

1. Mukamal v. Citibank (In re Kipnis), Adv. No. 16-01044 (Bankr.S.D.Fla., Aug. 31, 2016).

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