Two Means Two: Delaware Bankruptcy Court Confirms that the Two-Year Look-Back Period for Fraudulent Transfers Is Non-Negotiable

Contributed by Doron P. Kenter.

“Then, shalt thou count to [two], no more, no less.  [Two] shalt be the number thou shalt count, and the number of the counting shalt be [two].  Four shalt thou not count, nor either count thou [one], excepting that thou then proceed to [two].  Five is right out. . .”  — Monty Python and the Holy Grail [as revised]

In a recent decision in the Bankruptcy Court for the District of Delaware, the court held that the statutory “look-back” period for fraudulent transfers is etched in stone, and may not be expanded or tolled, even for compelling equitable reasons.

Section 548 of the Bankruptcy Code empowers a trustee in bankruptcy (or a debtor in possession) to avoid certain fraudulent transfers that were “made or incurred on or within 2 years before” the commencement of the debtor’s bankruptcy case.  These avoidance powers, which are premised on a theory that certain creditors should not unfairly benefit at the expense of other creditors, can yield significant recoveries for a debtor’s estate, even where there are no other assets available for distribution.
In Industrial Enterprises of America v. Burtis (In re Pitt Penn Holding Co., Inc.), the court reflected on a series of adversary proceedings commenced by the debtor to recover allegedly fraudulent transfers under section 548 of the Bankruptcy Code.  In some of those proceedings, the debtor had argued that the doctrine of equitable tolling, which allows claims to be filed outside any applicable statute of limitations where the defendant had caused the plaintiff to be unaware that the cause of action had existed, should “extend” the two-year look-back period.  The debtor suggested that the court, “as one of equity,” should not permit those defendants – who were insiders of the debtor – to benefit from a statute of limitations as a result of their own alleged actions to conceal the existence of such avoidance claims.
Though the court agreed that equitable tolling should be invoked where defendants have caused plaintiffs to miss applicable statutes of limitations, it noted that the two-year look-back period under section 548 is, in fact, not a statute of limitations.  The court observed that a statute of limitations “regulates” how far into the future a litigant may bring a claim, while the look-back period is an essential element of an avoidance action under section 548.  In other words, the look-back period is “baked-in to the actual substance of a section 548 action,” and is a part of the “grant of power” to the debtor – rather than a statute of limitations regulating the exercise of such power.
The court went on to note that this distinction becomes even more clear when viewed in light of section 546 of the Bankruptcy Code, which provides the statute of limitations for such avoidance actions – a statute of limitations which is, incidentally, also two years (in most cases).  Accordingly, the court recognized that section 546 dictates procedure, while section 548 dictates the actual substance of avoidance claims.  In observing this distinction, the court rejected one decision to the contrary (which held that the look-back period may be equitably tolled, but did not recognize the differences between elements of a claim on the one hand, and procedures regulating the assertion of such a claim on the other).  Instead, the court concluded that equitable tolling may be invoked to modify procedural requirements, but that such equitable concerns cannot alter the essential elements of a cause of action, such as the two-year look-back period for avoidance actions under section 548.
Accordingly, the court indicated that it would dismiss all claims to avoid transfers made outside the two-year look-back period, regardless of any equitable considerations or alleged bad acts by the defendants.  Though the defendants’ actions could conceivably form the basis for other claims, Burtis reminds us that a court’s equitable powers cannot alter the substance of a claim, and that the Bankruptcy Code “meant what it said and said what it meant” when it established the two-year look-back period for avoidance actions.