In re Afco Development Corp.
| Decision Date | 22 August 1986 |
| Docket Number | Bankruptcy No. 82C-00578,Civ. P. No. 85PC-0795. |
| Citation | 65 BR 781 |
| Parties | In re AFCO DEVELOPMENT CORPORATION, Debtor. Frank K. STUART, Trustee, Plaintiff, v. James H. PINGREE and George A. Miller, Defendants. |
| Court | U.S. Bankruptcy Court — District of Utah |
Roger G. Segal, Cohne, Rappaport & Segal, P.C., Salt Lake City, Utah, for plaintiff.
Lewis S. Livingston, Salt Lake City, Utah, for defendants.
This matter came before the Court on the defendants' motion to dismiss the trustee's complaint to avoid an alleged preferential transfer from the debtor, Afco Development Corporation, to the defendants. The Court is called upon to decide whether a trustee appointed under Chapter 11 of the Bankruptcy Code, who is subsequently appointed to serve as Chapter 7 trustee upon conversion of the case, has two years after the date of his second appointment within which to commence a proceeding under Section 547 of the Code.
The essential facts of this case are undisputed. On March 8, 1982 the debtor filed a petition for voluntary relief under Chapter 11. On April 20, 1982, Frank K. Stuart was appointed trustee pursuant to 11 U.S.C. § 1104. The case was converted to a case under Chapter 7 by order dated July 27, 1983. Stuart was appointed interim trustee on July 29, 1983 and on August 22, 1983 became permanent trustee pursuant to 11 U.S.C. § 702.
The trustee commenced this adversary proceeding to avoid an alleged preferential transfer to the defendants on July 26, 1985, some three years and three months after his initial appointment as Chapter 11 trustee, but three days short of two years following his second appointment as Chapter 7 trustee. On August 30, 1985, defendants filed a motion to dismiss the trustee's complaint on the ground that the two-year statute of limitations provided by Section 546(a) of the Bankruptcy Code begins to run from plaintiff's appointment as Chapter 11 trustee, and is not extended for two years following his appointment as Chapter 7 trustee. The parties presented oral argument on October 24, 1985, and the matter was taken under advisement. The Court now renders its decision as follows.
The defendant argues that the trustee's action is untimely under Section 546(a) of the Bankruptcy Code, which provides:
The trustee maintains that the action is timely because each trustee appointed under one of the sections enumerated under Section 546(a)(1) enjoys two years within which to commence avoidance actions. Essentially, the trustee is asking the Court to determine that the words "a trustee" in § 546(a)(1) mean "each trustee," while the defendant urges the Court to conclude that the words mean "any trustee." In this Court's view, the trustee's position is the correct one. The Court reaches its conclusion for two reasons, the first is historical and the second is based on policy.
Prior to the enactment of Section 546(a), there was no separate statute of limitations for the trustee's avoiding powers. 4 COLLIER ON BANKRUPTCY ¶ 546.021, at 546-4.1 (15th ed. 1985). Section 11(e) of the Bankruptcy Act, former 11 U.S.C. § 29(e) (repealed) provided a general two-year statute of limitations for suits brought by the receiver or trustee:
A receiver or trustee may, within two years subsequent to the date of adjudication or within such further period of time as the Federal or State law may permit, institute proceedings in behalf of the estate upon any claim against which the period of limitation fixed by Federal or State law had not expired at the time of the filing of the petition in bankruptcy. Where, by any agreement, a period of limitation is fixed for instituting a suit or proceeding upon any claim, or for presenting or filing any claim, proof of claim, proof of loss, demand, notice, or the like, or where in any proceeding, judicial or otherwise, a period of limitation is fixed, either in such proceeding or by applicable Federal or State law, for taking any action, filing any claim or pleading, or doing any act, and where in any such case such period had not expired at the date of the filing of the petition in bankruptcy, the receiver or trustee of the bankrupt may, for the benefit of the estate, take any such action or do any such act, required of or permitted to the bankrupt, within a period of sixty days subsequent to the date of adjudication or within such further period as may be permitted by the agreement, or in the proceeding or by applicable Federal or State law, as the case may be.
Subsection (e) was added to Section 11 by the Chandler Act in 1938. Its purpose was "to extend to the trustee a fixed period within which he might file all suits which he . . . inherited from the debtor unless it were the policy of the state to give him even a longer time." McBride v. Farrington, 60 F.Supp. 92, 95-96 (D.Ore.1945). See H.R.Rep. No. 1409, 75th Cong., 1st Sess. 22 (1937); S.Rep. No. 1916, 75th Cong., 3d Sess. 13 (1938).
In the leading case of Herget v. Central National Bank & Trust Co., 324 U.S. 4, 65 S.Ct. 505, 89 L.Ed. 656 (1945), the Supreme Court held that where the trustee's claim arose under the Bankruptcy Act itself, as in the case of a voidable preference, the suit was governed exclusively by the two years prescribed by Section 11(e). Herget, the trustee of the estate of N.L. Rogers & Company, Inc., commenced an action under Section 60 of the Bankruptcy Act, former 11 U.S.C. § 96, to set aside and recover as a voidable preference certain payments totaling more than $300,000.00. Although the trustee's lawsuit was brought more than two years after the date of the adjudication in bankruptcy, an Illinois state statute of limitations permitted "all civil actions not otherwise provided for to be commenced within five years . . . after the cause of action accrued." The district court dismissed the trustee's complaint, rejecting the trustee's argument that the state's five-year limitation was controlling since it fell within the provision of § 11(e) allowing suits "within such further time as the federal or state law may permit." The Court of Appeals affirmed. The Supreme Court concluded that the trustee could not look to statutes of limitations outside of the Bankruptcy Act for bringing suits arising under the Act itself. In affirming the lower courts, the Supreme Court reviewed the historical development of two-year statutes of limitations on suits by and against trustees, which began with the Bankruptcy Act of 1841. Such statutes, the Court wrote, "have long been integral parts of our federal bankruptcy statutes." 324 U.S. at 5, 65 S.Ct. at 506.
Section 261 of the former Bankruptcy Act, 11 U.S.C. § 661 (repealed),1 tolled the two-year statute of limitations provided in Section 11(e) of the Act during the pendency of a Chapter X reorganization. Under Chapter X a disinterested trustee was always appointed if the fixed and non-contingent debt was more than $250,000.00. See generally In re Jeppson, 66 B.R. 269, 282 (Bkrtcy.D.Utah 1986). A Chapter X trustee had standing to sue to recover preferences and commence other actions under the avoiding powers, but Section 261 recognized the possibility that either no such action would be taken or the pertinent facts would not be discovered before conversion to a liquidation case. 6A COLLIER ON BANKRUPTCY ¶ 15.011, at 824 (14th ed. 1977).
The precise issue facing this Court was raised before the Court of Appeals for the Ninth Circuit under the former Bankruptcy Act. In Davis v. Security National Bank of Nevada, 447 F.2d 1094 (1971), an involuntary petition was filed against the debtor, Midwest Livestock Commission Company, which was adjudicated a bankrupt on March 26, 1964. The debtor filed a petition under Chapter X on April 17. On June 9, 1965, the Chapter X case was dismissed and the original bankruptcy case was reinstated. An action to set aside a preference was commenced by the bankruptcy trustee on September 9, 1966, more than two years after adjudication but less than two years elapsed time if the period during the pendency of Chapter X was not included. The court applied Section 261 to suspend the operation of Section 11(e) during the Chapter X case. The court concluded that Section 261 was designed for two purposes: (1) for the protection of creditors; and (2) to preserve any action which might be undertaken by a subsequent bankruptcy trustee. Moreover, the court observed, "there is nothing in the Act which even remotely suggests that the Chapter X trustee is required to exercise all of the powers of a general trustee in bankruptcy." 447 F.2d at 1097-98.
The bankruptcy reform bill proposed in 1973 by the Commission on the Bankruptcy Laws of the United States did not contain a statute of limitations, nor did Section 546 of H.R. 8200, as reported to the House Committee on the Judiciary. Section 546(a), in its present form, appeared originally as Section 546(c) of the Senate bankruptcy reform bill, S. 2266. The Senate report says very little about the two-year statute of limitations:
Subsection (c) later renumbered as subsection (a) adds a statute of limitations to the use by the trustee of the avoiding powers. The limitation is two years after his appointment, or the time the case is closed or dismissed, whichever occurs later.
S.Rep. No. 95-989, 95th Cong., 2d Sess. 87 (1978), reprinted in 1978 U.S.Code Cong. & Admin.News, pp. 5787, 5873. The joint explanatory statement of the floor managers of the compromise bill notes only that Section 546(a) was derived from Section 546(c) of the Senate bill. 124 Cong.Rec. S 17,413-14 (daily ed. Oct....
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