A U.S. bankruptcy judge in Delaware has held that the two-year "look-back" period in which a transfer occurring within two years of the bankruptcy petition filing date may be avoided, under Section 548 of the U.S. Bankruptcy Code, cannot be equitably tolled. After some inconsistent orders about whether the courts may broaden the look-back period, this decision should give greater certainty to lenders when evaluating their exposure upon the commencement of a bankruptcy case by a borrower.
Under the federal fraudulent conveyance statute in Section 548 of the Bankruptcy Code, a transfer made within two years of the date of commencement of the bankruptcy case is subject to avoidance by the debtor or trustee. As the bankruptcy judge noted, this look-back period relating to the transfer event differs from the procedural limitations on when an action may be brought. The latter is governed by Section 546(a) of the Bankruptcy Code, which contains the statute of limitations for the commencement of avoidance actions and may be tolled by agreement or equitably, or waived by failing to assert it as a defense.
Equitable tolling has been applied to allow a claim to be filed outside the applicable statute of limitations when some action by the defendant renders the plaintiff unaware that the cause of action exists. Statutes of limitations are customarily equitably tolled to avoid technical forfeitures that would unfairly thwart a trial on the merits, unless tolling would be inconsistent with the text of the relevant statute.
In In re Pitt Penn Holding Co., Inc.,1 the plaintiff-debtor sought to avoid transfers that occurred several months beyond the look-back period, arguing that the defendants concealed certain facts and participated in a scheme to deplete the debtor's assets. The Delaware bankruptcy court noted that the two-year look-back period is not a statute of limitations that regulates a procedure, such as the filing of a lawsuit, but rather a substantive statutory element of a fraudulent conveyance claim. It is part of the statutory grant of the avoidance power of the trustee. Accordingly, the court held that the two-year look back period cannot be equitably tolled.
While this bright-line test is helpful, dealmakers should be aware that under state statutes, fraudulent conveyance actions often have a longer look-back period.