Under the Bankruptcy Code, a lawsuit to recover avoidable preference payments must be filed prior to the expiration of the statute of limitations. Specifically, such lawsuits must be commenced before the later of 1. two years after the commencement of the case or 2. one year after the appointment or election of the first Trustee, provided that the two-year period has not already expired. This means that if no trustee has been appointed once two years have elapsed, transferees who have not been sued are generally "off the hook." In a case where a Trustee is appointed, parties must look to the date of appointment to determine when the deadline will expire. The deadline cannot be longer than three years.

However, a recent case highlights the doctrine of equitable tolling, which in certain instances may provide a Trustee with an exception that would allow him to pursue preference actions notwithstanding the expiration of the deadline. Opus East was a member of a large network of real estate companies, and filed for relief under chapter 7 in 2009. A Trustee was appointed to oversee the administration of the case upon the filing. The Trustee brought suit against a number of entities related to the Debtor to avoid certain pre-petition transfers shortly before the expiration of the applicable deadline. The Trustee’s complaint set forth each cause of action and the amount allegedly recoverable from each defendant. While conducting discovery, the Trustee learned about additional transfers made to two additional related entities. In March 2013, the Trustee filed a motion to amend his complaint to add the two new defendants to the action based upon the newly discovered transfers. These new defendants objected to the amendment due to the passing of the applicable statute of limitations.

In considering the motion to amend, the court first analyzed whether the amendment could relate back to the initial complaint that had been filed prior to the deadline. The applicable rules of civil procedure allow for amendments to relate back to the original complaint under certain circumstances. Among these circumstances is where the “amendment asserts a claim or defense that arose out of the conduct, transaction, or occurrence set out—or attempted to be set out—in the original pleading.” The Trustee argued that the claims against the new defendants satisfied this requirement.

The court rejected the Trustee’s argument on this point and ruled that the new causes of action did not have a factual nexus with the original claims and, in particular, lacked any allegations regarding the relevant loans that were at issue. Thus, the court found that the facts alleged in the amended complaint were completely new and used to support new and different claims than those raised in the original complaint. The court also rejected the Trustee’s argument that the new defendants were already on notice of his claims.

The court next considered the Trustee’s argument that equitable tolling should apply to prevent the statute of limitations from expiring. Equitable tolling is a judge-made doctrine that allows a court to find that the expiration of the statute of limitations should be delayed or extended under certain circumstances. Generally, equitable tolling may be applied to prevent the statute of limitations from expiring in three situations: 1. where the defendant has actively misled the plaintiff regarding the plaintiff’s cause of action, 2. where the plaintiff in some extraordinary way has been prevented from asserting his rights, or 3. where the plaintiff has timely asserted his rights mistakenly in the wrong court. If one of these situations is present, the statutory period may be tolled until the plaintiff knows, or should reasonably be expected to know, the concealed facts supporting the claim.

In support of his argument to apply equitable tolling, the Trustee relied upon the Debtor’s Statement of Financial Affairs (SOFA) and asserted that the Debtor’s negligent concealment of the relevant transfers on that document was sufficient to permit equitable tolling. The SOFA, among other things, is required to list all payments to creditors within 90 days of the petition date, and all payments to insiders within one year of the petition date. In this case, the Debtor has failed to list the transfers at issue on its SOFA. The Trustee therefore asserted that he could not reasonably have been expected to learn about the transfers without some indication that they existed. The new defendants asserted that the Trustee was required to do more than simply rely on the Debtor’s statement since the Trustee was in possession of the books and records well before the expiration of the statute and had an affirmative duty to investigate the financial affairs of the Debtor.

Ultimately the court agreed with the Trustee and applied the doctrine of equitable tolling. The court found that the failure to list the transfers on the SOFA constituted an act of concealment on the part of the Debtor. In doing so, the court found that the new defendants’ conduct (i.e., the fact that they had not engaged in any concealment) was not relevant to the analysis and that the Debtor’s concealment was sufficient to continue the analysis. The court further concluded that it was reasonable for the Trustee to rely on the information provided given that there was no indication that the schedules or statements were inaccurate. The court noted that the Trustee was not required to “conduct an overwhelming search to specifically seek out transfers that were not listed on the Debtor’s sworn schedules” and “should not be expected to reconstruct the Debtor’s financial affairs on a hunch of possible concealment.” The fact that the Debtor had listed more than 1,400 transfers was important to the court in considering the Trustee’s reliance on the schedules and statements. Thus, the court found that the Trustee could not reasonably have been expected to learn of the applicable transfers until discovery had begun in his action against the related entities and the court ordered that the statute was tolled.

The Opus East case highlights the doctrine of equitable tolling and provides a warning to recipients of transfers. In particular, the actual defendant does not have to actively conceal information in order for tolling to apply. Rather, it may be sufficient for the Debtor to have concealed information, and the Trustee to have reasonable relief on information provided by the Debtor.