In re Donald Jerome Kipnis

The Bankruptcy Code’s strong-arm provision (Section 544) provides a bankruptcy trustee the authority to “avoid any transfer of an interest of the debtor in property or any obligation incurred by the debtor that is voidable under applicable law by a creditor holding an unsecured claim that is allowable under section 502 of this title…” In many instances in which this authority is invoked, the trustee will rely on a state’s Fraudulent Transfers statutes, which generally permit the avoidance of transfers meant to permit a debtor to avoid financial obligations owed to its creditors. By invoking section 544 of the Bankruptcy Code, the trustee steps into the shoes of an unsecured creditor, but is then subject to the statute of limitations applicable to the collateral state statute. That is, of course, unless the unsecured creditor is the IRS – as recently confirmed by the U.S. Bankruptcy Court for the Southern District of Florida.

Debtor was a partner-owner of Miller & Solomon General Contractors, Inc., which had entered into an adjustable rate debt structure in order to increase its bonding capacity. That transaction resulted in large losses for the company, which the Debtor claimed on his 2000 and 2001 personal income tax returns. In 2003, the IRS audited those same returns and determined that the losses were not permitted and that Debtor had tax deficiencies of over $1 million. The U.S. Tax Court affirmed the IRS’s findings in November 2012, and Debtor petitioned for Chapter 11 bankruptcy protection in January 2014, thereafter converting it to Chapter 7. The IRS filed a proof of claim of $1,911,787.23, with just $25,629.51 of that amount recorded as unsecured, yet prioritized, pursuant to section 507(a)(8).

Prior to the Tax Court’s ruling, Debtor had in 2005 quit-claimed a Brickell Avenue condominium to his wife, pursuant to a pre-marital settlement agreement signed just a month earlier. On the same date as the condominium transfer, Debtor modified a bank account that was in his name only to one in which he and his wife became owners as tenants by the entireties. Upon learning of these transfers, the trustee filed adversary proceedings against the Debtor’s wife, seeking to avoid the transfers pursuant to Florida’s Fraudulent Transfers statutes (Title XLI, §§726.105 and 726.106). Debtor’s wife filed a motion to dismiss, arguing that the four year statute of limitation applicable to Florida’s Fraudulent Transfers statutes precluded the trustee’s lawsuits. In her motion, the wife relied upon Wagner v. Ultima Holmes, Inc. (In re Vaughan Co.), 498 B.R. 297 (Bankr. D.N.M. 2013), in which the Bankruptcy Court for the District of New Mexico held that while the IRS is a sovereign entity immune to state-based statute of limitations, “Congress did not intend to vest these sovereign powers in a bankruptcy trustee.”

In opposition to the wife’s motion, the trustee relied on a number of cases venued in Pennsylvania, the District of Columbia, Illinois, and Texas, all of which holding that Section 544 is clear and thus permits a trustee to step into the shoes of the IRS, inclusive of its right to rely on the more favorable 10-year statute of limitation that applies to its collection of taxes. The Court noted that none of the authorities presented by either the Debtor’s wife or the trustee were binding upon the Southern District of Florida, but did find the case of Ebner v. Kaiser (In re Kaiser), 525 B.R. 697 (Bankr. N.D. Ill. 2014), to be highly persuasive. Specifically, the Kaiser court “appropriately start[ed] its analysis with the text of §544(b).”

The court in Kaiser faced a trustee’s invocation of the Bankruptcy Code’s strong arm provision, via the State of Illinois’ Fraudulent Transfers statutes. Starting with a review of Section 544(b), the court noted that there was no limiting language on the text “applicable law” or on the type of unsecured creditor through whom a trustee could invoke the creditor’s rights. Further, and contrary to the underlying theme of In re Vaughan, the Kaiser court noted that the underlying policy question regarding the applicable statute of limitations is not “whether the trustee is performing a public or private function, but rather…whether the IRS, the creditor from whom the trustee is deriving her rights, would have been performing that public function if the IRS had pursued the avoidance under ‘applicable law.’” Kaiser, at 713. In other words, whereas the IRS may avoid a state’s statute of limitations based directly on its sovereign immunity (because it is performing a public function), the trustee may avoid the same limitation period by way of Section 544, which grants the trustee a derivative form of sovereign immunity derived from the IRS’s function of collecting taxes, which was at issue before the bankrutpcy.

Based on the persuasiveness of Kaiser, the Court denied the wife’s motion to dismiss, holding that the trustee was entitled to avoid the transfers pursuant to Section 544 and Internal Revenue Code, section 6502(a)(1), which provides a 10-year statute of limitation for the IRS’s efforts to collect taxes. Unlike the Kaiser court, however, the current Court worried that because the IRS is such a frequent creditor in bankruptcy matters, trustees may so frequently utilize the IRS as a triggering creditor as to completely subsume the states’ chosen statutes of limitations for fraudulent transfers.