By Ryan C. Wood
It pays to ask questions every now and then. One such question turned into a quest for more information regarding Section 544 of the Bankruptcy Code and a trustee’s power to step into the shoes of a particular creditor, the mighty Internal Revenue Service (IRS). Section 544 gives trustees certain avoidance powers. The following information is more applicable to bankruptcy attorneys that file business bankruptcy cases than consumer cases, but the following scenario could still play out in a consumer bankruptcy case. Please see the end of the article for various case citations regarding a trustee’s ability to step into the shoes of the Internal Revenue Service.
Bankruptcy Code Section 544 Trustee as lien creditor and as successor to certain creditors and purchasers:
(b)
(1) Except as provided in paragraph (2), 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.
Bankruptcy Code Section 502 provides:
(a) A claim or interest, proof of which is filed under section 501 of this title, is deemed allowed, unless a
party in interest, including a creditor of a general partner in a partnership that is a debtor in a case under
chapter 7 of this title, objects.
(e)
(1) Notwithstanding subsections (a), (b), and (c) of this section and paragraph (2) of this subsection, the court shall disallow any claim for reimbursement or contribution of an entity that is liable with the debtor on or has secured the claim of a creditor, to the extent that—
(A) such creditor’s claim against the estate is disallowed;
(B) such claim for reimbursement or contribution is contingent as of the time of allowance or disallowance of such claim for reimbursement or contribution; or
(C) such entity asserts a right of subrogation to the rights of such creditor under section 509 of this title.
(2) A claim for reimbursement or contribution of such an entity that becomes fixed after the commencement of the case shall be determined, and shall be allowed under subsection (a), (b), or (c) of this section, or disallowed under subsection (d) of this section, the same as if such claim had become fixed before the date of the filing of the petition.
Trustee Avoiding Fraudulent Transfers By Stepping Into The Shoes of The Internal Revenue Service
Part of the analysis of whether a trustee may step into the shoes of a creditor is whether that creditor holds an unsecured claim that is allowable under Section 502 or not allowable under Section 502(e). Let us assume none of the circumstances in 502(e) apply. In some circumstances, like an individual bankruptcy case, the IRS may only have a present claim against the debtor for unpaid taxes at the time the case is filed. The IRS may also have a present claim and a future claim against the debtor if the debtor is an operating business. Post-filing the debtor may continue to incur tax liabilities. If the IRS is both a present and future creditor during the relevant times of the purported fraudulent transfers by the debtor the court will most likely allow the trustee to step into the shoes of the IRS. The term “actual” is also described as the IRS as a creditor given the IRS could hold an allowable prepetition priority claim under Section 502 as well. For example, a business debtor may have continually incurred Federal Unemployment Tax Act (FUTA) liabilities for many years prior to the bankruptcy case being filed and then continue to incur FUTA liabilities post-petition.
So What Is The Look Back Period For Avoiding Fraudulent Transfers?
Here is where the law gets nasty for debtor bankruptcy lawyers. You probably have never heard of the “Golden Creditor.” The more common term used to describe this type of creditor is apparently “Triggering Creditor.” I like golden creditor given what you are about to read. The look back period is ten years. Yes, 10-years. A trustee receives the IRS’ 10-year limitations period when the IRS has an unpaid claim for federal taxes and the trustee steps into the IRS’ shoes under Section 544(b). The trustee in California would also be relying upon the California Uniform Fraudulent Transfer Act (CUFTA). The IRS may bring a state law fraudulent transfer claim under federal law to pursue its own cause of action to collect the unpaid FUTA taxes. Because the IRS would have a 10-year look-back period in an action under state law to recover fraudulent transfers, a trustee standing in the shoes of the IRS has the same 10-year look-back period. Did I lose you? I do not provide the exact law that provides the 10-year look-back, but just take my word for it for now, it exists.
Even More Troubling: What About The Amount of the Claim Discussed Already?
If a trustee gets a look-back period of 10-years potentially avoiding millions of dollars of fraudulent transfers the amount of the underlying claim from our “Golden Creditor” the IRS should matter right? Nope. The IRS claim allowed under Section 502 could be as little as $10.00 and trigger millions of dollars in avoided fraudulent transfers by the debtor dating back 10-years.
See below for various case citations for the information provided in this article.
(1) Allowing trustee to step into the shoes of the IRS and receive a 10-year look-back period. Finkel v. Polichuk (In re Polichuk), No. 10-0031ELF, 2010 Bankr. LEXIS 4345, at **16-17 (Bankr. E.D. Pa. Nov. 23, 2010)
(2) “The parties have thoroughly briefed this issue, but it bears repeating: every court to consider the issue has held that a trustee receives the IRS’ 10-year limitations period when the IRS has an unpaid claim for federal taxes and the trustee steps into the IRS’ shoes under Section 544(b).” United States v. Gleneagles Inv. Co., Inc., 565 F. Supp. 556, 583 (D. Md. 1983); Finkel v. Polichuk (In re Polichuk), No. 10-0031ELF, 2010 Bankr. LEXIS 4345, at **16-17 (Bankr. E.D. Pa. Nov. 23, 2010); Pate v. Hunt (In re Hunt), 136 B.R. 437, 450-51 (Bankr. N.D. Tex. 1991); Shearer v. Tepsic (In re Emergency Mon. Techs., Inc.), 347 B.R. 17, 18-19 (Bankr. W.D. Pa. 2006); Osherow v. Porras (In re Porras), 312 B.R. 81, 96-97 (Bankr. W.D. Tex. 2004); Alberts v. HCA Inc. (In re Greater Southwest Cmty. Hosp. Corp. I), 365 B.R. 293, 301-02 (Bankr. D.D.C. 2006); Levey v. Gillman (In re Republic Windows & Doors, LLC), No. 10-2513, 2011 WL 4852263, at **10-11 (Bankr. N.D. Ill. Oct. 12, 2011).
(3) Moore v. Bay, 284 U.S. 4 (1931), which held that a bankruptcy trustee may avoid all transfers, regardless of their amounts, once the trustee has established a creditor into whose shoes the trustee may step, without regard to the size of that creditor’s claim. The rule of Moore v. Bay was codified by Section 544(b). In re Tronox Inc., 464 B.R. 606, 615-16 (Bankr. S.D.N.Y. 2012); Kaliner v. MDC Sys. Corp., LLC, No. 2:09-MC-00005-JD, 2011 U.S. Dist. LEXIS 5377, at *19 (E.D. Pa. Jan. 19, 2011) (“In fact,‘an entire transfer can be set aside even though the creditor’s claim is nominal and even though the avoidance may provide more funds than necessary to pay the creditors and the administrative expenses of the case,” quoting 5 COLLIER ON BANKRUPTCY, ¶ 544.06[4] (16th ed. 2010) and citing Moore v. Bay)
