Darcy D. Williamson, Tr. v. Smith (In re Smith)
| Decision Date | 02 June 2022 |
| Docket Number | 19-40964,Adv. 22-07002 |
| Parties | In Re: Brian G. Smith, Debtor. v. Brian G. Smith, et al., Defendants. Darcy D. Williamson, Trustee, Plaintiff, |
| Court | U.S. Bankruptcy Court — District of Kansas |
In this adversary proceeding, the Chapter 7 Trustee of the estate of Debtor Brian G. Smith brings claims against ten separate defendants claiming under various theories that they owe money or property to the estate. Count VI of the Amended Complaint alleges that several transfers, apparently made for financial planning purposes over a period in excess of ten years prepetition, are avoidable as fraudulent under 11 U.S.C § 544(b). The Trustee asserts that to avoid the transfers she may step into the shoes of the Internal Revenue Service, alleged to be the holder of a $21, 000 unsecured claim against the Debtor, and, when doing so, proceed under two alternative laws: (1) the Kansas Uniform Fraudulent Transfer Act, [1] in which case the Trustee argues the state law four year look back period would not apply; or (2) the Federal Debt Collection Practices Act, [2] which contains a six year look back period. The Count VI defendants seek dismissal[3] in part on two grounds. First, they argue if the Trustee proceeds under state law, the Kansas four year look back period limits the transfers subject to recovery. Second, they argue that the federal act does not apply under § 544(b). As explained below, the Court holds: (1) when proceeding under Kansas law, the Kansas look back period does not apply and is replaced by the federal ten year limitation period; and (2) the Trustee may proceed under the Federal Debt Collection Practices Act and utilize its six year look back period.
I. Standard for dismissal under Rule 12(b)(6)
Defendants' motion to dismiss is brought under Rule 12(b)(6) [4] which provides that a party may assert the defense of "failure to state a claim upon which relief can be granted" by motion. A claim has been sufficiently stated under Rule 12(b)(6) when the complaint presents factual allegations, when assumed to be true, that "raise a right to relief above the speculative level," and "state a claim for relief that is plausible on its face."[5] A claim is facially plausible "when the plaintiff pleads factual content that allows the court to draw the reasonable inference that the defendant is liable for the misconduct alleged."[6] Although the statute of limitations is an affirmative defense, it can be resolved under a Rule 12(b)(6) motion when the dates alleged in the complaint make it clear that the right sued on has been extinguished.[7] II. Procedural history
Debtor Brian Glen Smith ("Debtor")[8] filed for relief under Chapter 7 on August 1, 2019. The Chapter 7 Trustee originally assigned resigned, and Darcy D. Williamson ("the Trustee")[9] was appointed as successor trustee.
The Trustee filed this adversary proceeding on January 12, 2022, seeking to recover assets as property of the estate. It requests orders against ten defendants under seven counts.[10] Defendants Amy J. Smith; the Amy J. Smith Trust; BAS Enterprises, LLC; Moon River Properties, LLC; and B&N Investments, LLC moved to dismiss Counts V, VI, and VII for failure to state a claim upon which relief can be granted under Federal Rule of Civil Procedure 12(b)(6).[11] They presented issues of adequacy of the pleadings and the statute of limitations applicable to the § 544(b) fraudulent transfer claim.
The Trustee responded by filing an Amended Complaint alleging the same causes of action against the same defendants but with more specificity. She also filed a response to the motion to dismiss. The moving defendants filed a second motion to dismiss, [12] but acknowledged that the Amended Complaint cured their contentions of improperly vague pleadings in Counts V, VI, and VII. By separate order, the Court has denied the motion to dismiss Counts V and VII and the pleading specificity objection to Count VI.
Amy Smith and BAS Enterprises, LLC ("BAS") (collectively "Defendants") in their reply provided additional arguments with respect to the only remaining issues raised in the motion to dismiss - (1) the look back period applicable to the Count VI § 544(b) claim when relying on state fraudulent conveyance law; and (2) whether the Trustee may alternatively rely on federal fraudulent conveyance law. This memorandum addresses those issues.
III. Count VI allegations
In Count VI the Trustee alleges numerous transfers by Debtor to Defendants. BAS was created in 2008 and was funded with capital contributed by Debtor. Debtor and Amy Smith were the original members. In 2007, Debtor and Amy Smith purchased two farms for $359, 000, and on June 9, 2009, ownership was transferred to BAS. In addition, the Trustee alleges that Debtor's funds were used prepetition to acquire interests by Amy Smith or BAS in various entities, that the Debtor's interest in two entities were transferred to BAS, and that distributions from Debtor's businesses were transferred to Amy Smith or BAS. Debtor's interest in BAS was allegedly transferred to Amy Smith in 2008, 2009, and 2012, such that he had no interest in BAS when the case was filed. Count VI alleges that Debtor received no consideration in exchange for the foregoing transfers, some of which were made more than ten years before the bankruptcy filing.
When seeking to avoid the foregoing transfers by the Debtor under § 544(b), [13] the Trustee alleges she may step into the shoes of the Internal Revenue Service ("IRS"). For purposes of resolving the motion to dismiss, the IRS holds an allowable unsecured claim, as evidenced by proof of claim no. 4 for 2018 federal income taxes, in the amount of $20, 574.08, plus a penalty of $797.20.[14] Relying on this assessment, the Trustee contends she has authority to avoid fraudulent transfers made either within six years prior to bankruptcy under federal law[15] or "any applicable transfer, regardless of when made, "[16] under Kansas fraudulent transfer law.[17]
IV. Analysis
The Bankruptcy Code in § 544(b) provides in part: "[T]he trustee may avoid any transfer of an interest of the debtor in property . . . that is avoidable under applicable law by a creditor holding an unsecured claim that is allowable under section 502 of this title." The limitations for avoidance under § 544(b) are governed by §546(a).
Section 544(b) grants the trustee the avoidance powers held by creditors of the estate when the case was filed. The trustee has the burden to demonstrate the existence of an actual creditor with an allowable avoidance claim, often referred to as the "triggering" creditor.[18] The triggering creditor's potential right to avoid transfers under applicable law defines the trustee's rights as successor to that creditor. Most frequently the applicable law is the state fraudulent transfer statute, but when the triggering creditor has avoidance rights under federal law, the trustee likewise has such rights.[19]
Here the Trustee has identified the IRS as the triggering creditor and alleges that the transfers identified in Count VI are avoidable under the Kansas Uniform Fraudulent Transfer Act ("UFTA)"[20] and the Federal Debt Collection Procedure Act ("FDCPA").[21] The Kansas UFTA provides that a claim to avoid a transfer is extinguished if not filed within four years after the transfer was made, [22] and the FDCPA provides a claim with respect to a fraudulent transfer is extinguished if the action is not filed within six years after the transfer was made.[23] These four and six year periods will be referred to as the "look back" periods. They are the focus of the present controversy.
The Trustee contends that when proceeding under the UFTA, she is not subject to the state law four year look back period, and either there is no look back period or, if there is such a period, it is ten years after the tax assessment against the Debtor. If proceeding under the FDCPA, the Trustee contends she may avoid any applicable transfer made within six years prior to the bankruptcy petition, or after August 1, 2013.
For purposes of the motion to dismiss, the Defendants do not challenge the Trustee's assertion that she may step into the shoes of the IRS, as the holder of an allowable unsecured claim, [24] but do challenge the Trustee's position as to the applicable look back date under the Kansas UFTA and whether the Trustee may invoke the FDCPA.
1. When federal income taxes are collected by the IRS from transferees of a taxpayer under a state UFTA outside of bankruptcy, the statute of limitations is 26 U.S.C. § 6502.
Transferee liability for an assessed tax "has traditionally been applied where taxpayers have transferred assets in order to avoid their application to a tax liability."[25] Under 26 U.S.C. § 6901, such transferee liability is enforced under law or equity in the same manner as in the case of the income tax being collected. However, the tax code "was not intended to create a body of substantive transferee liability law in addition to the existing federal and state statutes that permit the government to reach transferred property, but merely to simplify the process of collecting against a transferee under other laws."[26] Thus, the IRS may use state fraudulent conveyance statutes and other laws to collect the tax from a person receiving property from the taxpayer.
When proceeding under state law...
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