Court: United States Bankruptcy Court, D. New Mexico; August 20, 2013; Us Bankruptcy; United States Bankruptcy Court
Judith Wagner, the Chapter 11 Trustee for the Vaughan Company Realtors, filed a Motion to Amend her complaint to recover transfers made to Ultima Homes, Inc. related to the construction of Douglas Vaughan’s personal residence. Ultima opposed the motion. The court evaluated the motion under the liberal standards set forth in Fed. R. Civ. P. 15(a), which allows for amendments before trial unless there is undue delay, bad faith, repeated failures to correct deficiencies, undue prejudice, or futility. The court determined that the proposed amendment was futile, as it failed to state a claim upon which relief could be granted. Specifically, the court emphasized that an amendment is considered futile if it does not cure the deficiencies identified in the complaint. To survive a motion to dismiss, a complaint must contain sufficient factual allegations that make a claim plausible on its face. The court must evaluate the specific allegations in light of the applicable legal standards, ensuring all necessary elements of the legal theory are adequately pleaded.
Douglas Vaughan operated VCR as a Ponzi scheme for several years before 2010, concealing the fraud until his imprisonment and the eventual shutdown of the business. Between May and July 2005, VCR paid Ultima $501,849.38 for constructing Vaughan's personal residence. Although Ultima's Defined Benefit Pension Plan invested in VCR’s promissory notes, Ultima did not directly partake in such investments. On February 22, 2010, VCR filed for Chapter 11 bankruptcy, and a Trustee was appointed on April 29, 2010. Following her appointment, the Trustee reconstructed VCR’s records to investigate the fraud. On February 14, 2012, she initiated an adversary proceeding against Ultima, the Ultima Plan, and its trustee to recover allegedly fraudulent transfers under 11 U.S.C. §§ 544 and 548, as well as state law. The initial Complaint indicated Ultima was included as a defendant based on its involvement with the Ultima Plan, which may not be legally recognized, and highlighted that Ultima received significant payments from VCR without providing consideration. The original Complaint did not specify counts related to Ultima or the construction of Vaughan’s residence. On May 17, 2013, the Trustee filed a Motion to Amend, introducing a First Amended Complaint with eighteen additional allegations concerning the transfers to Ultima for the construction project and included two new counts for actual and constructive fraud under New Mexico law concerning transfers made within four years before the bankruptcy filing. The IRS submitted a proof of claim for $972,597.36 in the bankruptcy case, which included both unsecured priority and non-priority claims. Over 500 claims totaling approximately $69 million have been filed against the estate, with the majority being unsecured non-priority claims. The Trustee has objected to the IRS claim, which remains pending.
The Trustee seeks to amend the Complaint to add counts against Ultima for fraudulent transfer under state law, but Ultima argues that these amendments would be futile due to the statute of limitations. The Trustee claims immunity from the usual four-year limit on state law fraudulent transfer claims, citing Section 544(b) which allows her to utilize the IRS's ten-year look back period for tax collection. This section permits the trustee to avoid debtor transfers that are voidable under applicable law by an unsecured creditor. The Trustee references the New Mexico Uniform Fraudulent Transfer Act (UFTA), which typically has a four-year look-back period, noting that the transfers to Ultima occurred in 2005, well before the bankruptcy petition filed on February 22, 2010. While acknowledging that these claims are generally barred, the Trustee argues that Section 544(b) allows her to invoke the ten-year limitations period applicable to the IRS, as supported by multiple bankruptcy cases. Thus, the Trustee contends she can recover the fraudulent transfers made within ten years prior to the bankruptcy filing, as long as the IRS is considered an unsecured creditor of the estate.
An estate representative can exercise the rights of unsecured creditors to avoid transactions under Section 544(b) if those creditors can do so under state law, even if a statute of limitations exists. The ability for an unsecured creditor, such as the IRS, to bypass state statutes of limitations stems from sovereign immunity principles, specifically the doctrine of nullum tempus occurrit regi. This doctrine allows the United States to enforce public rights without being bound by state limitations, as seen in various court rulings. However, this immunity does not extend to a bankruptcy trustee acting on behalf of the IRS in contexts that do not involve public rights. If the action does not serve a public interest, state statutes of limitations may apply. The court emphasizes that Section 544(b) does not grant bankruptcy trustees sovereign powers that would exempt them from state laws when pursuing private interests.
Delegating sovereign powers to the Trustee would undermine the principle of nullum tempus, which protects the federal government from certain state laws. Even if the Trustee could exercise these powers, her argument would fail because the sovereign is not immune from state statutes of limitation in cases lacking public rights. The Trustee aims to invoke the ten-year statute of limitations in IRC Section 6502 to benefit VCR’s creditors, but this is limited to government functions under the IRS. Section 544(b) allows the Trustee to recover assets under state fraudulent conveyance laws, aligning with Congress’s intent to incorporate rather than subordinate state law. The IRS, as an unsecured creditor, would be impacted if the Trustee could recover transfers made within ten years before the bankruptcy petition, thereby nullifying the four-year look back period established by the Uniform Fraudulent Transfer Act (UFTA). The Court finds no indication that Congress intended such a significant change. Regarding the Trustee's claims of futility, she cites N.M.S.A.1978, 56-10-23(A), arguing that her inability to discover transfers until her appointment should extend the claim period. However, this argument fails, as the inquiry is based on when an unsecured creditor could have discovered the transfers, not the Trustee herself. The Trustee has not demonstrated that the transfers were undiscoverable by an unsecured creditor, thus the Court does not need to consider this issue further.
The Trustee claims that the statute of limitations under the Uniform Fraudulent Transfers Act (UFTA) was tolled until her appointment due to the theory of adverse domination, which posits that wrongdoers controlling a corporation cannot be expected to initiate legal action against themselves. The Trustee argues that Douglas Vaughan, who misused corporate funds, could not be expected to compel VCR to pursue a fraudulent transfer claim. However, it is noted that VCR, as the transferor, lacked standing to bring such a claim before its Chapter 11 case, as fraudulent transfer actions must be initiated by an unsecured creditor or a trustee. Consequently, the statute of limitations was not tolled.
Additionally, the Trustee contends that proposed amendments to the claims relate back to the date of the original complaint under Federal Rule of Civil Procedure 15(c), applicable to adversary proceedings via Federal Rule of Bankruptcy Procedure 7015. Relation back can only occur if the claims would have been timely in the original filing. The court determines that since the four-year statute of limitations applies to the Trustee's new claims and was not tolled, those claims would be untimely if included in the original complaint, thus making relation back inapplicable.
The court concludes that the proposed amendments would be futile and does not consider whether they would cause undue prejudice to Ultima. It assumes the facts in the Proposed Amended Complaint are true for this opinion. The bankruptcy court has the authority to take judicial notice of its own docket, and under Sections 544(b) and 550(a) of the Bankruptcy Code, a trustee can avoid fraudulent transfers that are voidable under state law. Therefore, the Motion to Amend is denied as futile, and the court will enter an order consistent with this decision.
The Internal Revenue Code (IRC) allows the collection of assessed taxes through levy or court proceedings within 10 years of the assessment, as outlined in 26 U.S.C. § 6502(a)(1). The IRS has a three-year window from the filing of a tax return to assess taxes owed, according to 26 U.S.C. § 6501(a). The doctrine of nullum tempus grants sovereign entities immunity from statutes of limitations when asserting public rights. However, this doctrine does not apply when the government acts in a proprietary capacity, as demonstrated in case law like Williams v. Infra Commerc Anstalt and City of Wichita v. U.S. Gypsum Co., where the respective parties were bound by state statutes of limitations.
In fraudulent transfer actions, Section 544 permits a trustee to recover transfers occurring within a four-year look-back period, consistent with the Uniform Fraudulent Transfer Act (UFTA). Various cases illustrate this point, including In re Moore, which established a four-year limitation under Texas law, and In re International Administrative Services, which acknowledged Florida's similar UFTA provision. The look-back period begins on the petition date and covers all transfers made in the preceding four years, providing the trustee an advantage by enabling recovery as if they were an unsecured creditor.
The excerpt establishes that a four-year lookback period is appropriate for state law fraudulent transfer actions, referencing multiple cases that support this timeframe. It cites New Mexico statutes outlining fraudulent transfers concerning both present and future creditors. Once a bankruptcy case is initiated, claims for fraudulent and preferential transfers are assigned to the trustee or committee, rather than the debtor. A debtor in possession has trustee-like powers to initiate avoidance actions under 11 U.S.C. § 1107(a). The court found that neither the discovery rule nor the adverse domination theory extended the statute of limitations under the Uniform Fraudulent Transfer Act (UFTA), thus not needing to consider whether the trustee might receive additional time under Section 546. Section 546(a) allows a trustee to act on claims only if the state statute of limitations has not expired at the time the bankruptcy case starts, and any action must be initiated within the limitations period specified in Section 546(a).
