In Judge Owens’s UMB Bank, N.A. v. Sun Capital Partners V, LP (In re LSC Wind Down, LLC), 2020 WL 377015 (Bankr. D. Del. Jan. 23, 2020) opinion, the Court denied Defendants’ 12(b)(6) motion to dismiss Plaintiff-Trustee’s attempt under section 544 to avoid and recover an alleged $42 million fraudulent transfer (the “Transfer”) made to Defendants more than five years prior to the Petition Date. The opinion is the first one issued by Judge Owens that pertains to avoidance actions; substantively, she found that because the Complaint alleged specific unsecured creditors of the applicable Debtor who could have avoided the Transfer as of the Petition Date, the motion to dismiss must be denied.
The Parties’ Positions
The Transfer at issue in the Complaint occurred on December 20, 2011, with the Debtors filing for bankruptcy relief on January 17, 2017. The Complaint was then filed on January 17, 2019 (referred to as the “Commencement Date” in the Opinion), two years after the Petition Date and a little over seven years after the date of the Transfer.
The issues largely revolved around the timing of the Complaint and the state law applicable to the same, given that it was brought pursuant to 11 U.S.C. § 544. Defendants argued that the Complaint was filed “well beyond the prescribed time period set forth by [the applicable] Florida state law, asserting Florida’s fraudulent transfer statute required such claims to be brought “within 4 years after the transfer was made or the obligation was incurred or, if later, within 1 year after the transfer or obligation was or could reasonably have been discovered by the claimant[.]” Since the Complaint was indisputably filed beyond the four year statute of limitations, only the one year savings clause could render it timely; Defendants argued that the savings clause could not apply, given that (i) Plaintiff had notice of the Transfer more than one year prior to the Commencement Date through its access to the Debtors’ books and records and public news reports, and (ii) the savings clause was not otherwise tolled.
In response, Plaintiff argued that the Complaint’s timeliness under the savings clause was not reliant on Plaintiff’s knowledge but rather that of the Debtors’ creditors. Because Plaintiff stepped into the shoes of the Debtors’ creditors to avoid the Transfer under section 544(b)(1), it argued that so long as one such creditor (a “Predicate Creditor”) was entitled as of the Petition Date to assert a claim against the Defendants under the Uniform Fraudulent Transfer Act (“UFTA”), then it may do so on or before two years after the Petition Date pursuant to section 546(a)(1)(A). As such, Plaintiff asserted the Complaint was timely, alleged the existence of sufficient Predicate Creditors under the savings clause, and the Complaint did not establish that every Predicate Creditor of the Debtors was time barred from bringing a state law avoidance claim against the Defendants as of the Petition Date.
The Court’s Findings
The Court began by noting the statute of limitations provided by the Bankruptcy Code under section 546(a) for causes of action brought via section 544. Judge Owens then found that despite “the Defendants’ contrary assertions, so long as an underlying state law avoidance claim is not time-barred as of the commencement of a bankruptcy case, a section 544(b)(1) claim may be brought provided that it is commenced within the time periods prescribed by section 546(a).” This approach made sense to the Court, “because it provides time for investigation and encourages value maximization.”
Against that backdrop, the Court found that Plaintiff complied with section 546(a), as the Commencement Date of the adversary proceeding was two years after the Petition Date. While it was Plaintiff’s burden to ultimately prove that a Predicate Creditor existed as of the Petition Date for 544(b) purposes, the Court found it premature to make such a ruling in addressing a timeliness defense contained in a motion to dismiss (an issue more typically raised in an answer).
Analyzing the Complaint, Judge Owens found that Plaintiff alleged that there was at least one unsecured creditor of the applicable Debtor who could have sought to avoid the Transfer as of the Petition Date, “and more specifically identifies by name over 100 of such creditors.” The Plaintiff “also alleges that these creditors did not know of and could not have reasonably known of the Transfer or its fraudulent nature prior to the Petition Date, thereby capturing the one-year savings clause under UFTA as applied by both Florida and Ohio law.” The Court highlighted the distinction between this specific naming of creditors and the case that Defendants primarily relied upon (In re Petters Co., Inc. 495 B.R. 887 (Bankr. D. Minn. 2013)), noting the latter plaintiff simply included a generalized statement with no identified creditors. Specific allegations are critical, as they “allow the Defendants ‘[t]o structure and pursue their opposition to’ the Plaintiff’s standing, a concern of the court [upon whose opinion Defendants’ relied].” Ultimately, then, the Court found Defendants’ arguments and supporting documentation more suitable for summary judgment than a motion to dismiss; accordingly, their relief was denied.
In addition to being Judge Owens’s first foray into avoidance litigation, her opinion is important for providing guidance to parties embroiled in a section 544 dispute, especially one involving a savings clause component. The Court found the specific naming of the creditors whose standing a plaintiff purports to use was a pivotal distinction between the instant case and the decision upon which Defendants relied. Also helpful is the Court’s overview of section 546(a)’s parameters as they apply to section 544.
A copy of the Opinion can be found here.