Ch. 7 Trustee Has Longer ‘Reach-Back Weapon’ in Arsenal

By Diane Davis

A Chapter 7 trustee can “step into the shoes” of the Internal Revenue Service and pursue actions that are time-barred under state law, but ones that the IRS could have pursued under its 10-year period allowed for collection activities, a bankruptcy court in Florida held Aug. 31 ( Mukamal v. Citibank N.A. (In re Kipnis), 2016 BL 284869, Bankr. S.D. Fla., No. 16-01045-RAM, 8/31/16).

Judge Robert A. Mark of the U.S. Bankruptcy Court for the Southern District of Florida concluded that Bankruptcy Code Section 544(b) is broad enough to allow the bankruptcy trustee to step into the shoes of the IRS as an unsecured creditor to avoid transfers that occurred in 2005.

The IRS is a creditor in a “significant percentage of bankruptcy cases,” the court noted. The few cases addressing this issue may be because bankruptcy trustees haven’t “realized that this longer reach-back weapon is in their arsenal,” the court said. Widespread use of Section 544(b) to avoid state statutes of limitation would be a “major change in existing practice,” the court said.

Although there is a split of authority on the issue, the bankruptcy court sided with Ebner v. Kaiser (In re Kaiser) , 525 B.R. 697(Bankr. N.D. Ill. 2014), rather than Wagner v. Ultima Holmes, Inc. (In re Vaughan Co.) , 498 B.R. 297 (Bankr. D.N.M.2013). Kaiser found that the clear language in the text of Section 544(b) imposed no limitation on the meaning of “applicable law” or on the type of unsecured creditor the trustee can choose as a triggering creditor,” the court said. The Vaughan court found that the federal government, in defending public rights or servicing the public interest, shouldn’t be bound by state law statutes of limitations, the court said.

“The Kipnis case adds to the majority line of cases authorizing a bankruptcy trustee to utilize the IRS as a ‘triggering creditor’ under Section 544(b) to expand the bankruptcy estate’s reach to unwind avoidable transfers beyond the standard limitations period found under state law fraudulent transfer statutes,” Corali Lopez-Castro of Miami-based law firm Kozyak Tropin & Throckmortin, told Bloomberg BNA Sept. 8. Lopez-Castro argued the case on behalf of the plaintiff/trustee Chapter 7 Trustee Barry E. Mukamal.

“The potential impact of the ruling should increase the scope of allegedly avoidable transfers that a bankruptcy trustee may pursue for the benefit of the bankruptcy estate and its creditors,” Lopez-Castro told Bloomberg BNA. “The court in Kipnis went further than other majority line cases when it recognized the policy implications of its decision that trustees might pursue this remedy on an increased basis and could be a major change in existing practice,” she said.

“We appreciate the Court’s ruling and the point the Court made that the ‘Vaughan [decision] may be right in believing that Congress intended that 544(b) be limited to avoidance actions that only nongovernmental creditors could bring,’” Peter Russin, Meland, Russin, & Budwick, Miami, told Bloomberg BNA Sept. 12. Russin represented the defendant/debtor.

“Perhaps this consideration will find its way to the legislature and bring about a change in the statute’s language,” Russin said.

“Having said that, we also believe that the trustee’s rights standing in the shoes of the IRS under its 10 year ‘collection’ period does not equate to a ‘lookback’ period for purposes of fraudulent conveyance actions brought by trustees. We are considering filing a motion for reconsideration in that regard,” he said.

Corali Lopez-Castro, and Vincent F. Alexander, Coral Gables, Fla., represented plaintiff/Chapter 7 trustee Barry E. Mukamal; Peter D. Russin, Miami, represented defendant/debtor Analia Kipnis.

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Bankruptcy Trustee Can Have 10 Years To Go After Assets

By Carolina Bolado

A Florida bankruptcy judge ruled Thursday that bankruptcy trustees can use the IRS’ 10-year post-assessment recovery period to pursue fraudulent transfers, extending the life of the estate’s claims past the typically shorter state law statutes of limitations.

U.S. Bankruptcy Judge Robert Mark said Barry Mukamal, the Chapter 7 trustee in charge of the estate of construction consultant Donald Kipnis, could sue the debtor’s wife Analia Kipnis to recover money and a condominium that were transferred to her in 2005 in a move the trustee says was done to avoid creditors.

The ruling is the first on this issue out of a Florida bankruptcy court, and is one that Judge Mark hinted could be used by trustees to aggressively go after funds for bankruptcy estates.

“The IRS is a creditor in a significant percentage of bankruptcy cases,” Judge Mark said.

“The paucity of decisions on the issue may simply be because bankruptcy trustees have not generally realized that this longer reach-back weapon is in their arsenal. If so, widespread use of [Bankruptcy Code Section] 544(b) to avoid state statutes of limitations may occur and this would be a major change in existing practice.”

The judge said Section 544(b), which gives bankruptcy trustees the right to “step into the shoes of” creditors and sue on their behalf to recover funds, allows trustees to enjoy the 10-year period granted the IRS when suing on the agency’s behalf and does not constrain them to shorter state statutes of limitations.

Although several courts have ruled the same way, only one, in New Mexico, came to the opposite conclusion in 2013, in In re: Vaughan Co. The court in that case said Congress never intended to vest the sovereign powers of the federal government — which cannot be constrained by state law statutes of limitations — in a bankruptcy trustee and that allowing it would result in a dramatic change in the law.

Judge Mark said these concerns may be justified and Congress may have intended to limit 544(b) to avoidance suits that only nongovernmental creditors could bring, but that’s not what the plain language of the law says.

“The statute does not say that and this court cannot simply read such a limitation into the text,” the judge said. “To do so would require the court to ignore basic and important rules of statutory construction.”

Corali Lopez-Castro of Kozyak Tropin Throckmorton LLP, who represents the trustee, said this opens up for trustees “another avenue to pursue in an effort to provide a greater distribution to the creditors of an estate.”

She added that already several trustees in Florida have contacted her about the decision. An attorney for Analia Kipnis could not immediately be reached for comment Friday.  In the case of Donald Kipnis, the IRS holds a $1.9 million claim, almost all of which is secured, for back taxes and penalties from 2000 and 2001. The IRS investigated him in 2003 and told him in 2005 that he owed more than $1 million in taxes for the two years. A tax court upheld that decision in November 2012.

The trustee’s adversary suits target two transactions made after the IRS’ 2005 decision in which Donald Kipnis added his wife to a bank account of his and tried to transfer ownership of a Miami condominium to her.

Donald Kipnis is represented by Michael A. Frank of the Law Offices of Brooks Frank & De La Guardia. Analia Kipnis is represented by Peter D. Russin of Meland Russin Budwick.

The trustee is represented by Corali Lopez-Castro and Vincent F. Alexander of Kozyak Tropin Throckmorton LLP. Citibank is represented by Catherine E. Douglas and David B. Marks of Akerman LLP.

The adversary proceedings are Mukamal v. Citibank NA et al., case number 1:16-ap-01044, and Mukamal v. Kipnis, case number 1:16-ap-01045, in the U.S. Bankruptcy Court for the Southern District of Florida.

The bankruptcy is In re: Donald Jerome Kipnis, case number 1:14-bk-11370, in the same court.

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