Summit Securities, Inc. v. Sandifur (In re Metropolitan Mortgage & Securities Co.)

Citations: 344 B.R. 138; 2006 Bankr. LEXIS 1533; 46 Bankr. Ct. Dec. (CRR) 187Docket: Bankruptcy No. 04-00757-WLL; Adversary No. 06-80035-PCW

Court: United States Bankruptcy Court, E.D. Washington; June 13, 2006; Us Bankruptcy; United States Bankruptcy Court

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Two Chapter 11 debtors, Summit Securities, Inc. and Metropolitan Mortgage Securities Co. Inc., have filed an adversary lawsuit against Helen Sandifur, former wife of Paul Sandifur, claiming she benefited from preferential and fraudulent transfers that should be invalidated under bankruptcy and state law. Sandifur has moved for judgment on the pleadings, arguing that the second cause of action regarding two specific transfers is barred by the statute of limitations. 

The first transfer, a check for $450,000 dated July 30, 2001, cleared on August 2, 2001, while the second transfer, a check for $1,620,000 dated February 11, 2002, is assumed to have occurred on that same date. The debtors allege these transfers are avoidable under 11 U.S.C. § 544(b), which allows Chapter 11 debtors to exercise the same rights as a Chapter 7 trustee to set aside transfers under applicable non-bankruptcy law, specifically Washington's Uniform Fraudulent Transfer Act (RCW 19.40).

Under RCW 19.40.091(b), claims based on RCW 19.40.041(a)(2) or 19.40.051(a) must be filed within four years of the transfer. The deadlines for the claims are August 2, 2005, for the first transfer and February 11, 2006, for the second. The lawsuit was filed on February 2, 2006, rendering the claim for the August 2, 2001 transfer extinguished prior to the lawsuit, while the claim for the February 11, 2002 transfer was timely.

The debtor corporations' second cause of action is based on the 'strong arm powers' under 11 U.S.C. § 544(b), which allows trustees to pursue certain claims. The statute of limitations for such actions is governed by 11 U.S.C. § 546, which states that a lawsuit cannot be initiated after the earlier of two years following the order for relief or one year after the first trustee’s appointment, or when the case is closed or dismissed. In this case, since the bankruptcy cases remain open and no Chapter 11 Trustee has been appointed, the relevant limitation period is two years from the order for relief.

If a state law cause of action is extinguished after bankruptcy begins but before the two-year period in 546(a)(1)(A) expires, the question arises as to which statute of limitations applies. The strong arm powers are only available after a bankruptcy case is filed, meaning that absent bankruptcy, the plaintiffs would not have rights under relevant state law (RCW 19.40). Thus, the limitation period under § 546(a) governs. A trustee can pursue a cause of action under § 544(b) if the state law cause hasn't expired at the start of bankruptcy, provided the action is commenced within the § 546(a) timeframe.

Prior cases, such as In re Mahoney and In re Dry Wall Supply, emphasize that the two-year limit in § 546(a) applies even if the state law limitations period ends after the bankruptcy petition is filed. In this instance, the bankruptcy petition was filed on February 4, 2004, and the adversary lawsuit was initiated on February 2, 2006, making the claim timely under the Bankruptcy Code. Consequently, Ms. Sandifur's Motion for Judgment on the Pleadings regarding the second cause of action is denied. The motion initially aimed to dismiss the third cause of action, but it was agreed that it was not pertinent to the two transfers under consideration. Relevant state law indicates that a transfer is fraudulent if made without reasonably equivalent value, especially if the debtor was insolvent at the time.