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In re Bernstein

259 B.R. 555 (D. N.J. 2001)

BANKRUPTCY; LIENS; FRAUDULENT TRANSFERS—If there is at least one theoretical creditor that could avail itself of the one year tolling (after discovery) period under the Fraudulent Transfer Act, then a trustee in bankruptcy can pursue a fraudulent transfer claim even if more than four years have passed since a suspect real property transfer took place.

Slightly more than four years before filing for bankruptcy, a debtor transferred his interest in his personal residence to his wife for no consideration. The trustee in bankruptcy sought to avoid the transfer of the debtor’s interest in the residence as fraudulent pursuant to the New Jersey Uniform Fraudulent Transfer Act (UFTA) and Bankruptcy Code section 544(b). The debtor argued that the UFTA contained a four year statute of limitations. The trustee argued that, under bankruptcy law, the statute of limitations of the UFTA was inapplicable, and only the two year limitation for avoidance actions of the Bankruptcy Code applied. The bankruptcy trustee was relying on a previous case where a bankruptcy petition had been filed before the end of the four year UFTA period, but the action to avoid the transfer took place after the four year period. In that case, the court held that so long as the bankruptcy petition was filed within the four year period, the fact that the avoidance action was initiated more than four years after the transfer would not serve to avoid the action. The debtor in the earlier case maintained that because the Bankruptcy Court had rendered the statute of limitations within the UFTA inoperable, the entire UFTA should have been inoperative because the statute of limitations was not severable without affecting the liability of the entire Act. The court in the prior case held that the statute of limitations was severable. On that basis, the trustee in the current case argued that the statute of limitations under the UFTA must always be severed, and thus rendered inoperable in bankruptcy proceedings. If that were true, then the only time constraint under the trustee’s view would be the one created by section 546 of the Code, which requires the trustee to institute any avoidance actions within two years of the entry of the order for relief. The Court rejected the trustee’s reading of the prior law by stating that the prior case held that “the statute of limitations is severable from the UFTA once the petition in bankruptcy is filed if the statute of limitations had not expired prior to the bankruptcy petition.” Here, the four year statute of limitations expired more than a month before the bankruptcy petition. Consequently, the trustee was precluded from prosecuting the action, unless the one-year tolling provision of the UFTA applied. The trustee then argued (in the alternative) that even if the four-year statute of limitations expired before the bankruptcy petition was filed, he could still prosecute the action under the one-year tolling provision. Under the UFTA, “an action to avoid a fraudulent transfer must be commenced within four years of the transfer ‘or, if later, within one year after the transfer ... was or could reasonably have been discovered by the claimant ... .’ Under New Jersey law, the critical issue as to the one-year tolling provision is “when an objectively reasonable claimant would have discovered the transfer.” Under prior case law, the New Jersey Supreme Court found that a reasonable creditor would perform an asset search when a loan goes into default. Applying the holding in a prior case, the Bankruptcy Court concluded that “there is at least one unsecured creditor with a claim that arose within one year of the Petition Date ... .” If that claim met the criteria for the one-year tolling provision as articulated under New Jersey case law, the trustee’s complaint would be timely under Code section 546(a) and case law thereunder. Further, although the actual creditor to whom the trustee referred must have had the ability to institute an action under the UFTA as of the petition date, “the standard of review on a motion to dismiss” prevents dismissal “unless it appears beyond doubt that the plaintiff can prove no set of facts in support of his claim which would entitle him to relief.” Since the trustee might be able to prove that the unsecured creditor could have availed itself of the one-year tolling provision to file a timely UFTA complaint as of the petition date, the debtor’s motion to dismiss was denied.

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