By: Scott B. Riddle, Esq.

This opinion could by very important in Chapter 11 (or 13) cases that are nearing their two-year anniversary and in danger of conversion.

In Singer, Trustee v. Franklin Boxboard Co. (In re American Pad & Paper, Co.), No. 05-1379, 2007 Bankr. LEXIS 4792 (3rd Cir. March 2, 2006), the Chapter 11 Order for Relief for the Debtor was entered on January 14, 2000 (via voluntary petitions filed after involuntary petitions).  The case was converted to a Chapter 7 case on January 3, 2002. On the same date, an interim Chapter 7 trustee was appointed pursuant to 11 U.S.C. § 701. (note that the first sentence on p. 8 of the opinion contains an error stating that the appointment date was January 14, 2002; obviously, that sentence only makes sense if the correct date of January 3, 2002 is assumed).

The Section 341 meeting was scheduled for February 13, 2002.  At the meeting, certain creditors requested the appointment of a "permanent" Chapter 7 trustee under 11 U.S.C. §702(b).  A new trustee was, accordingly, appointed.  Importantly, this was more than two years after the Order for Relief was entered on January 14, 2000.

The Trustee subsequently filed approximately 150 avoidance actions under §547 of the Code, and several defendants sought dismissal based upon the statute of limitations set forth in 11 U.S.C. §546(a), which provides the following:

An action or proceeding under section 544, 545, 547, 548, or 553 of this title may not be commenced after the earlier of–

(1) the later of–

(A) 2 years after the entry of the order for relief; or

(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

(2) the time the case is closed or dismissed.

The Bankruptcy Court and District Court dismissed some proceedings based upon the statute of limitations.  The issue, a question of law of first impression in the Circuit, was whether the Trustee’s actions were barred because the Order for Relief was entered more than two years before the election of the Trustee.  The Third Circuit said yes —

Singer did not bring the first of his actions until August of 2002, almost seven months past the two-year statutory period. As we noted earlier, Singer’s election as trustee under section 702 did not take place until February 13, 2002, approximately a month after "the expiration of the period specified in subparagraph (A)," i.e., the expiration of the initial two-year period. See 11 U.S.C. § 546(a)(1)(B). Thus, from a plain reading of the statute of limitations, and as the Bankruptcy and District Courts held, Singer’s avoidance actions are time-barred. "When [a] statute’s language is plain, the sole function for the courts — at least where the disposition required by the text is not absurd — is to enforce it according to its terms." Robert Wood Johnson Univ. Hosp. v. Thompson, 297 F.3d 273, 284 (3d Cir. 2002) (internal quotation marks and citations omitted); In re First Merchs. Acceptance Corp. v. J.C. Bradford & Co., 198 F.3d 394, 403 (3d Cir. 1999) (only absurd results and the most extraordinary showing of contrary intentions justify a limitation on the plain meaning of the statutory language); see also 5 Collier on Bankruptcy P 546.02[2] ("If a trustee is appointed or elected within two years of the entry of the order for relief, the trustee is afforded one additional year from its appointment or election to commence avoidance actions. If a trustee is not appointed or elected prior to the expiration of the initial two-year period, commencement of avoidance actions is time-barred, even if a trustee is subsequently appointed or elected in the case.") (emphasis added).

The court dismissed the Trustee’s argument that the appointment of the interim trustee pursuant to 11 U.S.C. § 701, prior to the two-year anniversary of the Order for Relief, triggered the additional one-year period in §546(a)(1)(B). 

Reading the appointment of an interim trustee under section 701 as an event that triggers the additional one-year period has no basis in the language of the statute. See Hartford Underwriters Ins. Co. v. Union Planters Bank, N.A., 530 U.S. 1, 6-7, 120 S. Ct. 1942, 147 L. Ed. 2d 1 (2000) (noting the general inappropriateness, as a matter of statutory construction, of assuming that a catalogue of empowered parties in a statute is nevertheless a nonexclusive list, as where "a statute . . . names the parties granted [the] right to invoke its provisions, . . . such parties only may act") (internal quotation marks and citation omitted); United States v. Landmesser, 378 F.3d 308, 313 n.8 (3d Cir. 2004) ("The canon of expressio unius est exclusio alterius means that explicit mention of one thing in a statute implies a congressional intent to exclude similar things that  were not specifically mentioned.") (internal quotation marks and citation omitted); see also Turner v. J.P. Bolduc et al. (In re Crowe Rope Indus., LLC), 311 B.R. 313, 314 (Bankr. D. Me. 2004) (concluding there is no need to "invent[] a reference to § 701" in section 546(a)(1)(B), and rejecting argument that the one-year period ran from the date of the appointment of the interim trustee under section 701, instead of from the date of the section 341 meeting at which the interim trustee is appointed the trustee by operation of law pursuant to 702(d) if no trustee is elected); Styler v. Conoco, Inc. (In re Peterson Distrib., Inc.), 176 B.R. 584, 591 (Bankr. D. Utah 1995) ("The Bankruptcy Reform Act of 1994 also clarifies that the limitations period does not run from the appointment of an interim trustee. There is no added reference to § 701.").

As an aside, the Court also stated the following –

We do not gainsay that appellant had no time to investigate and prosecute any avoidance actions. However, other parties in interest could arguably have brought avoidance actions before the running of the two-year period from the entry of the order of relief. See Official Comm. of Unsecured Creditors of Cybergenics Corp. ex rel. Cybergenics Corp. v. Chinery, 330 F.3d 548, 580 (3d Cir. 2003) (en banc) (in Chapter 11, bankruptcy court may grant derivative standing to a creditor or creditors’ committee to pursue avoidance claims); 5 Collier on Bankruptcy P 547.11[2][c][i] ("In its capacity as a debtor in possession, a chapter 11 debtor may seek to avoid and recover preferential transfers.")…

Ironically, many courts that have criticized the Third Circuit’s opinion in Cybergenics, allowing derivative standing for parties other than the debtor or trustee, have done so based on the "plain meaning" principle noted by the Supreme Court in Hartford Underwriters Insurance.  They note that the planing meaning of the Code provides that only trustees (or debtors with the powers of a trustee) may pursue avoidance actions.  Is Third Circuit’s reasoning in this case inconsistent with its prior opinion in Cybergenics?

That subject, however, is a post for another day….