The following is a case update written by the Hon. Meredith Jury (United States Bankruptcy Judge, C.D. Cal, Ret.), analyzing a recent decision of interest:
Ruling on an issue for which there are no reported precedential cases, a bankruptcy court in the Western District of North Carolina determined that a chapter 7 trustee could step into the shoes of the IRS and utilize the Uniform Voidable Transactions Act (UVTA) to avoid fraudulent transfers of real property for transactions that occurred ten years before the petition date, using the ten year statute of limitations accorded to the IRS under 26 U.S.C. § 6502. Mitchell v Zagaroli, 2020 WL 6495156 (Bankr. W.D. N.C. 11/3/20).
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Chapter 7 trustee Richard Mitchell (Trustee) alleges that in December 2010 and June 2011 debtor Peter Zagaroli transferred multiple parcels of real property to parents David and Nancy Zagaroli (defendants) for no consideration when he was insolvent. On May 21, 2018, debtor filed a voluntary chapter 7 bankruptcy, and, after an inter-division transfer, Mitchell was appointed Trustee. On November 8, 2018 the IRS filed a proof of claim in the unsecured amount of $4261.27. On January 20, 2020, Trustee filed an adversary against defendants, later amended, which asserted that 11 U.S.C. § 544(b) allowed him to avoid the 2010 and 2011 transfers. In a motion to dismiss, defendants asserted that the four year statute of limitations under the UVTA barred the claim.
The bankruptcy court held that § 544(b) allowed the Trustee to step into the shoes of the IRS and utilize the ten year statute available to it to avoid the nine year old transfers.
The court first looked to the exact language of § 544(b)(1): 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.” Since the IRS had filed an unsecured claim, the court reasoned that the Trustee could step into its shoes, using not only the substantive law of UVTA but also the procedural law of the Internal Revenue Code which at § 6502 provides an extended look back period of ten years to avoid transfers.
Acknowledging that the few reported cases (all at bankruptcy court level) favored the Trustee by looking only at the words of the statute, defendants urged the court to look at the overall statutory scheme, legislative history, and consideration of other relevant statutes. They essentially asked the court to employ a totality of circumstances approach to decide whether Congress intended a bankruptcy trustee to exercise the extended limitations period given specifically only to the taxing authority. The court rejected those arguments, focusing instead on the cardinal rule of statutory construction which compels a court to apply the plain language of the statute when the language of the statute is not open to interpretation. Here, the plain language was clear that the Trustee could stand in the shoes of the IRS and, in doing so, acquired all the rights which it held. The court also relied heavily on the reasoning of a South Carolina bankruptcy case which reached the same result, Vieira v. Gaither (In re Gaither), 595 B.R. 201 (Bankr. D. S.C. 2018).
The rein on relying on the plain language of a statute in interpreting legislative intent is “except when doing so would create an absurd result.” That sound bite accompanies the plain language maxim almost every time it is used, yet no case has defined exactly what is an “absurd result.” Maybe it is one those “you know it when you see it” definitions. There are some aspects of this decision that strike me as bordering on an absurd result if the court here is saying that Congress intended for a trustee in bankruptcy to hold by implication the special extended look back period which had been explicitly given by statute to the IRS to use in collecting taxes owed to the government.
Think about what is being challenged here: a family transfer of property from child to parents which occurred ten years before the avoidance action was filed, based on the fact that the debtor had not paid the IRS less than $5000. Yes, but for the bankruptcy, if the IRS was keen on collecting its $4200 it had up to ten years to go after the parents. And, for that matter, it had already had eight years to do so before the bankruptcy was filed but it had chosen not to do so. Plus, no stay prevented the IRS from taking action against the parents. Now, by dint of the plain language of § 544(b), the trustee might use the same avoidance action to recover an unknown sum to pay claims in this chapter 7 estate in an amount not designated. Is that what Congress intended?
Congress knew how to give specific priorities accorded to taxing entities to the Trustee. See, for example §§ 724 (b)(1) and (2). If it had wanted the Trustee to benefit from the IRS’s ten year statute, it could have done so explicitly. But it did not. Perhaps this is what we call an absurd result.
These materials were written by the Hon. Meredith Jury (United States Bankruptcy Judge, C.D. Cal, Ret.), a member of the ad hoc group, with editorial contributions by Monique D. Jewett-Brewster, a shareholder-elect with Hopkins & Carley, ALC, a member of the ad hoc group and 2018-19 Chair of the CLA Business Law Section. Thomson Reuters holds the copyright to these materials and has permitted the Insolvency Law Committee to reprint them. This material may not be further transmitted without the consent of Thomson Reuters.