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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.

To contact the reporter on this story: Diane Davis in Washington at ddavis@bna.com

 To contact the editor responsible for this story: Jay Horowitz at jhorowitz@bna.com

For More Information

 Full text at: http://www.bloomberglaw.com/public/document/Mukamal_v_Citibank_NA_In_re_Kipnis_No_1411370RAM_2016_BL_284869_B

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