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Bonnie Finkel, As Chapter 7 Trustee of the v. Len Polichuk

June 8, 2011

BONNIE FINKEL, AS CHAPTER 7 TRUSTEE OF THE ESTATE OF LEONARD POLICHUK, PLAINTIFF,
v.
LEN POLICHUK, DEFENDANT.



The opinion of the court was delivered by: DuBOIS, J.

MEMORANDUM

I. INTRODUCTION

In this action, several defendants in a suit pending in the United States Bankruptcy Court for the Eastern District of Pennsylvania seek leave of this Court to challenge a portion of the Bankruptcy Judge's order denying in part their partial motion to dismiss. For the reasons that follow, their Motion for Leave to Appeal is denied.

II. BACKGROUND

The factual background of this case is complex and will only be repeated in this Memorandum as is necessary to explain the Court's ruling on the instant motion. In 2008, debtor Len Polichuk filed a voluntary petition in the United States Bankruptcy Court for the Eastern District of Pennsylvania for relief under Chapter 7 of the Bankruptcy Code. Bonnie Finkel was subsequently appointed the Chapter 7 Trustee. In January 2010, Finkel brought an action against Polichuk, his wife and others, seeking, inter alia, to use her power as trustee to avoid certain transactions that she alleges were fraudulent. See 11 U.S.C. § 544(b) (stating that, with certain exceptions not applicable in this matter, "the trustee may avoid any transfer of an interest of the debtor in property or any obligation incurred by the debtor that is voidable under applicable law by a creditor holding an unsecured claim that is allowable under section 502 of this title or that is not allowable only under section 502(e) of this title.").

Defendants in the bankruptcy action ("the bankruptcy defendants") moved to dismiss as time barred the avoidance counts to the extent they raised claims arising more than four years before the filing of the bankruptcy petition. The four-year limitations period was based on the Pennsylvania Uniform Fraudulent Transfer Act, 12 Pa. Cons. St. § 5101 et seq., which provides the underlying state authority for the Trustee's avoidance action. See 12 Pa. Cons. St. § 5109 ("A cause of action with respect to a fraudulent transfer or obligation under this chapter is extinguished unless action is brought . . . within four years after the transfer was made or the obligation was incurred or, if later, within one year after the transfer or obligation was or could reasonably have been discovered by the claimant.").

Finkel raised several arguments in response. Of importance to the instant motion, she argued that the applicable statute of limitations should be extended to at least 10 years because the Complaint alleged that the IRS was a creditor, and the IRS can make use of more generous statutes of limitation to collect unpaid taxes. See 26 U.S.C. §§ 6501-02. Specifically, the Trustee alleged that the debtor "took in excess of $800,000 in unreported taxable distributions, and in excess of $80,000 of unentitled tax deductions" related to his automobile dealerships and thus owes a substantial debt to the IRS. (Compl. ¶ 160.)

The bankruptcy defendants countered -- and the Trustee acknowledged -- that the IRS never assessed a tax for the alleged unlawful distributions and deductions. In other words, defendants argued, the IRS is not an actual creditor but only a hypothetical creditor which could assert a claim against the debtor only if it audited him and decided to assess a tax. The bankruptcy defendants went on to argue that the Trustee does not have the power to conduct the audit or determine the debtor's tax liability.

The Bankruptcy Judge disagreed and denied the relevant part of the bankruptcy defendants' motion to dismiss. He wrote:

Here, the Trustee has alleged that the United States, specifically the Internal Revenue Service ("the IRS"), was an actual creditor of the Debtor at the time the transfers at issue occurred and has pleaded additional facts which, if proven, support the allegation. The IRS has at least a ten year lookback period, and its rights supersede any statute of limitations under state law. Because the Trustee may step into the shoes of the IRS, she may seek to avoid transfers that occurred as far back as January 31, 1998.

In re Len Polichuk, No. 10-31, slip op. at 14 (Bankr. E.D. Pa. Nov. 23, 2010) (order granting in part and denying in part motion to dismiss) (internal citations omitted).

The Bankruptcy Judge did not address the Trustee's alternative arguments for extending the typical four-year period in which fraudulent transfer claims can be filed. Those arguments are as follows: First, the Trustee argued, the transfers were concealed and thus claims to avoid them could be brought "within one year after the transfer or obligation was or could reasonably have been discovered by the claimant," even if the transfers occurred more than four years before the filing of the bankruptcy petition. 12 Pa. Cons. St. § 5109(1). Second, the Trustee alleged that the doctrine of equitable tolling would apply in this case to extend the applicable limitations period. Third, the Trustee averred that pre-petition fraudulent conveyance actions were already pending in state court, giving the Trustee the power to avoid transactions that were timely challenged in those matters, even if the transfers occurred more than four years before the bankruptcy petition was filed.

The bankruptcy defendants moved on December 7, 2010 for leave to appeal the Bankruptcy Judge's order denying in part their motion to dismiss. The motion became fully ...


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