JOHN T. LEE, TRUSTEE, PLAINTIFF-APPELLANT,
V.
NATIONAL HOME CENTERS, INC., DEFENDANT-APPELLEE.
| [1] | United States Bankruptcy Appellate Panel FOR THE EIGHTH CIRCUIT |
| [2] | No. 00-6055 WA |
| [3] | Keywords: equitable tolling, statute of limitations, Chapter 13,
Chapter 7, conversion, convert |
| [4] | September 25, 2000 |
| [5] | IN RE: RONALD BODENSTEIN AND BARBARA BODENSTEIN, DEBTORS. JOHN T. LEE, TRUSTEE, PLAINTIFF-APPELLANT, V. NATIONAL HOME CENTERS, INC., DEFENDANT-APPELLEE. |
| [6] | Before Koger, Chief Judge, Kressel and Schermer, Bankruptcy Judges |
| [7] | The opinion of the court was delivered by: Schermer, Bankruptcy Judge |
| [8] | Appeal from the United States Bankruptcy Court for the Western
District of Arkansas |
| [9] | Submitted: August 10, 2000 |
| [10] | Trustee John T. Lee ("Chapter 7 Trustee") appeals the
bankruptcy court *fn1 order granting
summary judgment in favor of Defendant National Home Centers, Inc.
("Defendant") in connection with the Chapter 7 Trustee's
avoidance action. In his complaint, the Chapter 7 Trustee seeks to avoid
as preferential pursuant to 11 U.S.C. § 547 certain mortgages granted
by debtors Ronald Bodenstein and Barbara Bodenstein
("Debtors") to the Defendant. The bankruptcy court dismissed
the complaint as untimely. We have jurisdiction over this appeal from
the final order of the bankruptcy court. See 28 U.S.C. § 158(b). For
the reasons set forth below, we affirm. |
| [11] | ISSUE |
| [12] | The issue on appeal is whether the Chapter 7 Trustee's complaint to
avoid preferential transfers to the Defendant is time barred by the
statute of limitations set forth in 11 U.S.C. § 546(a) where the
adversary proceeding was initiated more than two years after the
commencement of the bankruptcy case, which was filed under Chapter 13
and later converted to Chapter 7, or whether the statute of limitations
was equitably tolled during the pendency of the Debtors' Chapter 13
case. We conclude that the statute of limitations was not equitably
tolled during the pendency of the Debtors' Chapter 13 case and the
adversary proceeding is time barred by 11 U.S.C. § 546(a). |
| [13] | BACKGROUND |
| [14] | On November 21, 1996, the Debtors filed a voluntary petition for
relief under Chapter 13 of Title 11 of the United States Code (the
"Bankruptcy Code") in the Western District of Arkansas.
Shortly before filing their bankruptcy petition, the Debtors executed
several mortgages in favor of the Defendant encumbering various parcels
of real estate. |
| [15] | In the Statement of Financial Affairs filed by the Debtors in
connection with their Chapter 13 petition, in response to the request to
disclose all payments aggregating more than $600 to any creditor made
within ninety days immediately preceding the filing of the bankruptcy
petition, the Debtors inserted the following language: "Numerous
payments fitting this category have been made, and due to their volume
they are not available at filing[.] As Debtor intends to pay all
creditors in full, it is expected that avoidance of preferences will not
be an issue in this case." In response to a request to disclose
property repossessed, foreclosed, transferred in lieu of foreclosure, or
returned within one year immediately preceding the commencement of the
case, the Debtors disclosed that "NHC . . . ha[s] picked up certain
property and ha[s] reduced [its] debt by that amount" and that
"Other returns have beenmade to NHC and are simply too numerous to
prepare before filing as Debtor has done $400,000 in business with them
over the last year." In response to a request to disclose all
assignments of property for the benefit of creditors within 120 days
preceding the bankruptcy filing, the Debtors disclosed that
"National Home Center has been assigned $200,000 in mortgages on a
debt of 190,000, which was to have satisfied their claim" and
identified the terms of the assignment as "to be paid upon sale of
houses." |
| [16] | David D. Coop served as trustee in the Debtor's Chapter 13 case. As a
result of his prior appointment as standing Chapter 13 Trustee in the
Eastern and Western Districts of Arkansas, Mr. Coop's (hereinafter
"Chapter 13 Trustee") appointment as Chapter 13 Trustee in the
Debtors' case became effective on November 21, 1996, the date the
Debtors' Chapter 13 petition was filed. |
| [17] | The Debtors owned numerous parcels of real estate. They intended to
sell the properties and to use the sale proceeds to pay their creditors.
During the course of the Chapter 13 case, the Debtors filed a series of
plans before ultimately confirming a plan. One version of the Debtors'
plan contained a provision that all mortgages which may potentially be
avoided as preferential shall not be paid at closing and instead the
funds shall be paid to the Chapter 13 Trustee pending an adjudication of
the potential preferences. *fn2 Six
later versions of the Debtors' plan, including the plan which was
ultimately confirmed, each indicate that all creditors will be paid in
full and therefore no preference actions can be brought. *fn3 |
| [18] | Three later versions of the Debtors' plan, including the confirmed
plan, contain additional language that expressly states that in the
event all creditors are not paid in full by a certain date, all
available causes of action including preference avoidance actions shall
be available to any party in interest who has legal standing to pursue
such causes of action. *fn4 |
| [19] | During the course of Chapter 13 case, the Debtors obtained authority
from the bankruptcy court to sell various parcels of real estate. The
sale proceeds from the properties encumbered by mortgages in favor of
the Defendant were held by the Chapter 13 Trustee pending a
determination as to whether the Defendant's mortgages were valid.
Ultimately, the bankruptcy court entered three consent judgments
relating to the sales of three separate properties in which the
Defendant asserted a security interest. Each judgment provided for the
payment of the Defendant's mortgage on the respective property from the
respective sale proceeds and contained the following finding of fact:
"That pursuant to 11 U.S.C. § 547(b)(5)(A), there are no
preference issues to litigate because no creditor should receive less
than full payment on allowed claims." *fn5 |
| [20] | The Chapter 13 Trustee did not file any preference actions against the
Defendant. By order dated August 25, 1998, the Debtors' case was
converted from Chapter 13 of the Bankruptcy Code to Chapter 7. The
Chapter 7 Trustee was appointed as interim trustee for the Debtors'
converted Chapter 7 case on August 25, 1998. On February 12, 1999, the
Chapter 7 Trustee initiated this adversary proceeding by filing his
complaint to avoid preferential transfers to the Defendant. |
| [21] | STANDARD OF REVIEW |
| [22] | We review the bankruptcy court's grant of summary judgment de novo.
Clark v. Kellogg Co., 205 F.3d 1079, 1082 (8 th Cir. 2000); First Bank
of Marietta v. Hogge, 161 F.3d 506, 510 (8th Cir. 1998). Summaryjudgment
in favor of the Defendant is appropriate where there is no genuine issue
of material fact and the Defendant is entitled to judgment as a matter
of law. Clark, 205 F. 3d at 1082; Hogge, 161 F. 3d at 510. |
| [23] | DISCUSSION |
| [24] | Pursuant to Section 547 of the Bankruptcy Code, a trustee can avoid
certain preferential transfers made by a debtor to a creditor prior to
the filing of the debtor's bankruptcy petition. Pursuant to Section
546(a) of the Bankruptcy Code, an avoidance action under Section 547 may
not be commenced until after the earlier of |
| [25] | (1) the later of - |
| [26] | (A) 2 years after the entry of the order for relief; or |
| [27] | (B) 1 year after the appointment or election of the first trustee
under section 702, 1104, 1163, 1202, or 1302 of this title if such
appointment or such election occurs before the expiration of the period
specified in subparagraph (A); or |
| [28] | (2) the time the case is closed or dismissed. 11 U.S.C. §546(a). |
| [29] | In order to determine if the Chapter 7 Trustee initiated the adversary
proceeding against the Defendant in a timely manner, we apply the
formula set forth in Section 546(a) of the Bankruptcy Code to the facts
at hand. The Debtors filed their petition on November 21, 1996 and the
order for relief was entered that same day. In accordance with Section
547(a)(1)(A), the period of two years after the entry of the order for
relief expired on November 21, 1998. The first trustee in this case, the
Chapter 13 Trustee, was appointed on the petition date; therefore the
alternate period enumerated in Section 547(a)(1)(B) of one year after
the appointment of the first trustee expired on November 21, 1997. The
later of these two dates is November 21, 1998. Accordingly, the time to
initiate an avoidance action pursuant to Section 547 expired on November
21, 1998. |
| [30] | The Chapter 7 Trustee did not initiate this adversary proceeding
against the Defendant until February 12, 1999, after the limitations
period expired. Therefore the Chapter 7 Trustee's complaint is time
barred. *fn6 |
| [31] | Notwithstanding the foregoing, the Chapter 7 Trustee asserts that the
statute of limitations set forth in Section 546(a) of the Bankruptcy
Code was equitably tolled during the pendency of the Debtor's Chapter 13
proceeding. Equitable tolling prevents the limitations period of Section
546(a) from expiring when the trustee, despite the exercise of due
diligence, is prevented from asserting a cause of action because the
trustee is unaware of the cause of action as a result of fraud or
because of extraordinary circumstances beyond the trustee's control
which make it impossible to file the action within the limitations
period. Jobin v. Boryla (In re M & L Business Machine Company,
Inc.), 75 F. 3d 586, 591 (10 th Cir. 1996); Ernst & Young v.
Matsumoto (In re United Insurance Management Inc.), 14 F. 3d 1380, 1385
(9 th Cir. 1994); see also Holmbergv. Ambrecht, 327 U.S. 392, 397
(1946)("This equitable doctrine [of tolling] is read into every
federal statute of limitation."). The key to when the limitations
period begins is the time whenthe plaintiff has reasonable notice of the
cause of action. One who fails to act diligently cannot evoke equitable
principles to excuse a lack of diligence. Baldwin County Welcome Center
v. Brown, 466 U.S. 147, 151 (1984); United Insurance Management, 14 F.
3d at 1386. |
| [32] | The bankruptcy court properly concluded that no fraud or other
extraordinary circumstances existed which would cause the statute
oflimitations to be equitably tolled. Lee v. National Home Centers, Inc.
( In re Bodenstein), 248 B.R. 808, 816-19 (Bankr. W.D. Ark. 2000). The
Debtors clearly did not conceal the potential preferential transfers to
the Defendant. To the contrary, the Debtors disclosed the transfers in
their original statement of financial affairs. The Chapter 13Trustee was
thus aware of the potentialcauses of action and simply chose not to
pursue them. The plan language does not alter this result, especially
where the confirmed plan expressly provided that preference avoidance
actions shall be available to any party in interest in the event all
creditors are not paid one hundred percent by April 1, 1998, more than
seven months before the expiration of the statute of limitations period.
Furthermore, at the time the Chapter 7 Trustee was appointed, almost
three months remained before the expiration of the statute of
limitations period. He likewise had notice of the potential causes of
action before the expiration of the statute of limitations period and
failed to timely act. |
| [33] | Summary judgment in favor of the Defendant is appropriate where the
evidence irrefutably demonstrates that the Chapter 13 Trustee and then
the Chapter 7 Trustee discovered or should have discovered the cause of
action but failed to file a timely complaint. Ernst & Young v.
Matsumoto (In re United Insurance Management Inc.), 14 F. 3d 1380,
1385-86 (9 th Cir. 1994). The existence of the potential preference
avoidance actions against the Defendant was clearly disclosed in the
Debtors' statement of financial affairs so both trustees were clearly on
notice before the expiration of the limitations period. |
| [34] | CONCLUSION |
| [35] | The bankruptcy court properly concluded that the statute of
limitations of 11 U.S.C. § 546(a) was not equitably tolled during the
course of the Debtors' Chapter 13 case. Accordingly the bankruptcy
court's order granting summary judgment in favor of the Defendant and
dismissing the Chapter 7 Trustee's complaint as untimely is affirmed. |
| [36] | A true copy. |
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| Opinion Footnotes | |
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| [37] | *fn1 The Honorable Robert F. Fussell,
United States Bankruptcy Judge for the Eastern and Western Districts of
Arkansas. |
| [38] | *fn2 The Debtors' plan dated
February 18, 1997, contains the following language: All mortgages after
8/21/96 that are not for value given at time of mortgage for antecedent
debts shall not be paid at closing of sale, but shall be paid into the
Chapter 13 Trustee pending adjudication of preference issues. |
| [39] | *fn3 Each of the Debtors' plans
dated July 10, 1997, September 5, 1997, November 24, 1997, January 30,
1997, March 13, 1997, and March 26, 1997, contains either the following
or virtually identical language: NOTE THAT DUE TO 11 U.S.C. 547(b)(5),
AND THE FACT THAT THERE ARE SUFFICIENT ASSETS TO PAY ALL CREDITORS 100%
(WHICH IS AS MUCH OR MORE THAN THEY WOULD BE PAID IN A CHAPTER 7 CASE),
NO PREFERENCES CAN BE AVOIDED IN THIS CASE, AND ALL PREPETITION
MORTGAGES WILL BE HONORED AND PAID AT FUTURE CLOSINGS. The March 26,
1998, plan was ultimately confirmed. |
| [40] | *fn4 The Debtors plans dated January
30, 1998, March 13, 1998, and March 26, 1998, each contain the following
language: IN THE EVENT THAT ALL CREDITORS ARE NOT PAID 100% OUT OF THE
PROPERTIES SOLD BY 4/1/98, ALL AVAILABLE CAUSES OF ACTION UNDER THE
BANKRUPTCY CODE OR CASE LAW INCLUDING BUT NOT LIMITED TO PREFERENCE
AVOIDANCE ACTIONS SHALL BE AVAILABLE TO ANY PARTY IN INTEREST WHO HAS
LEGAL STANDING TO PURSUE SUCH CAUSES OF ACTION. |
| [41] | *fn5 Each of these orders is dated
August 28, 1997, and relates to the distribution of proceeds of sales
previously authorized by the bankruptcy court. |
| [42] | *fn6 The plain language of Section
546(a) makes it clear that the statute of limitations runs from the date
the first trustee is appointed. Any subsequently appointed trustee is
subject to the original statute of limitations and does not receive a
new period within which to initiate avoidance actions. McCusky v.
Central Trailer Services, Ltd., 37 F. 3d 1329, 1332 (8 th Cir.
1994)(citing Ford v. Union Bank (In re San Joaquin Roast Beef), 7 F.3d
1413, 1416 (9th Cir. 1993)). |