In re Consolidated Partners Inv. Co.
| Decision Date | 26 July 1993 |
| Docket Number | Bankruptcy No. B89-4851,Adv. No. B92-1301. |
| Citation | 156 BR 982 |
| Parties | In re CONSOLIDATED PARTNERS INVESTMENT CO., Debtor. Joel H. RATHBONE, Trustee, Plaintiff, v. John LAKE, et al., Defendants. |
| Court | U.S. Bankruptcy Court — Northern District of Ohio |
Michael P. Harvey, Cleveland, OH, for plaintiff.
Thomas A. Kondzer, Westlake, OH, for defendant.
In this Chapter 7 proceeding, the case trustee, Joel H. Rathbone, (the Trustee), seeks to avoid certain prepetition and postpetition transfers of real property and further seeks to sell the same property once avoided.
The dispositive issues before the Court are (1) whether the subject real property transfers are avoidable postpetition transfers in view of the doctrine of equitable tolling, and, (2) whether such transfers constituted a violation of the automatic stay of § 362(a) of the Bankruptcy Code. In its earlier ruling, the Court granted partial summary judgment to the Defendant regarding §§ 544 and 548 complaint allegations.
Consolidated Partners, Investment Company (the Debtor) is owned and operated by one Melvin W. Mitchell. The nature of the Debtor's business is buying and selling real estate. The Debtor's operating capital is generated primarily through loans from individuals who would make such loans in exchange for the Debtor's promissory note at a specified rate of interest. Defendant John Lake (Lake) was one of several individuals who loaned the Debtor funds for its real estate investment purposes. The Debtor made periodic payments to Lake on the attendant loan notes. By February 13, 1990, the amounts loaned by Lake to the Debtor exceeded $78,000.00.
By late 1988 or early 1989, the Debtor experienced cash flow problems causing it to default on interest payments due on the outstanding notes owed to its several investors. In order to alleviate this situation, the Debtor embarked on a plan to liquidate its real estate holdings and use the proceeds to pay down the debt to its investors. Additionally, it encouraged its note holders to exchange their notes for real estate owned by the Debtor. This latter practice was engaged between early 1989 and early 1990.
On November 24, 1989, three of the Debtor's note holders filed an involuntary petition for relief against the Debtor. An order for relief was entered on February 26, 1990. During the period between the petition filing date and the Court's entry of an Order of Relief, Defendant Lake agreed with the Debtor to exchange a portion of his notes for certain property owned by the Debtor. To effectuate this effort, the Debtor caused the preparation of three deeds which were executed on February 15, 1990. One of the deeds was recorded on February 22, 1990, while the others were recorded in December of 1990. This proceeding ensued on April 20, 1992 with the Trustee's Complaint To Avoid Transfers.
In view of its clarity, an exercise of this Court's equitable powers to toll the limitation period would be unwarranted and such relief is hereby denied. This lack of timely action is, in some respect, analogous to the U.S. Supreme Court's ruling regarding the trustee's duty to timely object to exemptions claimed by a debtor. Taylor v. Freeland & Kronz, 503 U.S. ___, 112 S.Ct. 1644, 118 L.Ed.2d 280 (1992). Even where there is no colorable legal basis for the claim, a trustee's failure to timely object (or avoid) precludes prosecution beyond the limitation period. The equitable tolling standard for this Court was enunciated in Chrysler Workers Assn. v. Chrysler Corp., 663 F.Supp. 1134 at ¶ 1151 (N.D. Ohio W.D.1986). Therein, the following elements are required to be proved by the party seeking the equitable tolling:
The present cause of action to avoid is time-barred by § 549(d)(1) of the Code which requires that the avoidance action be commenced by the trustee no later than two years after the date of transfer, regardless of when the trustee was appointed. Generally, courts strictly enforce this statute of limitation. In re Metropolitan, 125 B.R. 556, 557 (Bankr.D.Minn.1991); In re 31-33 Corp., 100 B.R. 744 (Bankr. E.D.Pa.1989). Even where a case undergoes conversion to another chapter under the Bankruptcy Code, as occurred in the present case, § 549(d)'s statute of limitations is not tolled during the pendency of the case preconversion. See, In re H.I.A. of Mt. Vernon, 80 B.R. 944 (Bankr.S.D.Ill. 1987). ( ).
The doctrine of equitable tolling is inapplicable to the matter at bar. Although, the Bankruptcy Court is a court of equity, its equitable powers should not be exercised where the Congress has clearly manifested its intent in a manner opposite to that which equitable relief is sought. There exists no evidence, or insufficient evidence to show where the Defendant John Lake concealed, or committed a fraud relative to the subject transfers of real property during the gap period. In fact, he caused each transfer to be duly recorded. Under § 303(f), the Debtor, as an involuntary Debtor, was authorized to continue its business operations unrestrained by the provisions of § 363 of the Code.
Section 549(d)'s language is clear to provide a two-year limit on the type of avoidance actions presently sought by the Trustee. The Trustee was appointed in August of 1990. The subject transfers occurred on February 15, 1990. The Trustee's appointment as permanent Trustee occurred within the two-year limitation period, on August 14, 1990, allowing him more than sufficient time to exercise his avoidance powers under § 549(a), if warranted. That did not occur. Even prior to the Trustee's appointment as permanent Trustee, an interim trustee was appointed once the case was reconverted to Chapter 7 from a case under Chapter 11. During this latter period, the interim trustee could have timely sought avoidance of the subject transfers, had the interim trustee desired to do so. No such action was taken. The statutory tolling of limitation periods addressed under 11 U.S.C. 108 are not applicable. Section 549(d) of the Code provides an unambiguous expression of Congress' intent to restrict such avoidance actions to a two-year period from the date of transfer:
In an effort to circumvent the import of § 549(d), the Trustee caused his original complaint to be amended to allege a violation of the automatic stay under § 362(a) of the Code. Such an effort is not a novel approach, and it is also unavailing in this action. Even where violations of the automatic stay are generally void, postpetition transfers of estate property which violate the stay are only voidable, at the trustee's discretion, since § 549 provides that the trustee "may avoid" such a transfer. In re Clark, 79 B.R. 723, 725 (Bankr. S.D.Ohio 1987). Thusly, § 549 provides an exception to § 362(a) since § 549 would be rendered useless if postpetition transfers were treated as being absolutely void. In re Brooks, 79 B.R. 479, 480 (9th Cir. BAP 1987), aff'd., 871 F.2d 89 (9th Cir.1989). At bar, however, there was no violation of the automatic stay. The subject transfers were made voluntarily by the Debtor. The transfers did not constitute an act against the Debtor or property of the Debtor. Therefore, no violation of § 362(a) occurred. In brief, § 549 is the exclusive means of avoiding postpetition transfers of estate property.
Relevant Testimony:
In this action, the Trustee was appointed on August 14, 1990. Once appointed, he retained the services of a real estate broker to retrieve and examine the Debtor's office records. The nature of the Debtor's business was buying and selling real estate. His investigation of those records began approximately three months after the first meeting of creditors. (Rathbone, Direct).
On cross-examination, the Trustee testified that he first reviewed the Debtor's records in 1990 or 1991, whenever his broker received the records. He has no recollection of ever speaking with the Defendant, John Lake, Melvin Mitchell or Tilden regarding the three real estate transfers (Id.). Regarding the West 114th Street property transferred to Lake (Ex. CCC), the Trustee did not know when the deed was delivered (Id.), but believed it was transferred in February of 1990. Upon examination, this deed shows a recording date of February 22, 1990. In earlier testimony, the Trustee said that the basis for his concealment allegation was premised on his understanding that the subject deeds were not filed until long after the transfers occurred. Clearly, Ex. CCC, the West 114th Street deed, shows otherwise, with a recording date one week after the deed was executed. Once this exhibit was demonstrated to the Trustee, he testified that this particular deed was part of a pattern of concealment, yet the evidence was to the contrary. (Rathbone, Cross-Exam.).
Similarly, the St. John Street property (Ex. AAA) voluntarily transferred by the Debtor to Lake, shows a February 15, 1990 transfer, with a recording date of December 4, 1990. Although filed as a matter of public record, the Trustee considered this deed as a concealment. The third property transferred by the Debtor to Lake was the Thompkins Avenue property (Ex....
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