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Under Section 547 of the Bankruptcy Code, a trustee or debtor-in-possession is empowered to recover certain payments made to creditors during various periods prior to bankruptcy. One basis offered to justify this result is a presumption that such payments were made while the debtor was in financial distress and thus should be returned to the estate for distribution to creditors on a pro rata basis. While in theory this sounds reasonable, in reality, many practitioners know that the proceeds recovered from preference actions often go to paying professionals and other administrative creditors as opposed to the unsecured creditors from whom such money was taken. Therefore, given the realities of preference litigation, it is particularly important for counsel to seek out every defense reasonably available to prevent a creditor from having to repay monies received for services rendered or goods delivered to the debtor before bankruptcy. That brings us to the point of today’s column. One of the many defenses that may be available involves the application of the statute of limitations set forth in 11 U.S.C. Section 546(a). On its face, the statute appears rather straightforward in that within two years of the commencement of a bankruptcy proceeding, preference actions generally must be filed. This, however, can become tricky in the event that there is an appointment of a trustee within either a Chapter 11 or Chapter 7. In a recent memorandum opinion issued on March 15, visiting Judge Judith K. Fitzgerald for the U.S. Bankruptcy Court for the District of Delaware considered the issue of when the Section 546 statute of limitations expires in a Chapter 7 case, Steven Singer, Chapter 7 Trustee, v. Kimberly-Clark Corp. d/b/a Neenah Papers, Defendant, Adv., where a trustee was elected by the creditors pursuant to Section 702 of the Bankruptcy Code. The facts in the Singer case are not complicated. On Jan. 10, 2000, an involuntary Chapter 11 petition was filed against American Pad and Paper Co. On Jan. 14, 2000, an order for relief was entered. The case was subsequently converted to Chapter 7 on Dec. 21, 2001. On Jan. 3, 2002, an interim trustee was appointed pursuant to Section 701 of the Bankruptcy Code. Under the terms of the Bankruptcy Code, the creditors have the right to elect a permanent trustee thereafter pursuant to Section 702. Apparently, such an election occurred on Feb. 13, 2002, at which time Steven G. Singer was elected. It is important to note that this date was more than two years following the entry of the order for relief, which again, occurred on Jan. 14, 2000. On Nov. 15, 2002, the preference action at issue was commenced. In the memorandum opinion, Fitzgerald referred to a prior decision dated Oct. 28, in which she considered a similar case in which she ruled that the statute of limitations contained within Section 546(a)(1)(B) bars the preference action filed by the trustee. Fitzgerald noted, however, that in a subsequent decision issued on or about Oct. 31 by Judge Charles G. Case in Re Allied Digital Technologies Corp., the court recognized that the statute of limitations contained within Section 546(a)(1)(B) commences to run with the appointment of the interim trustee. Fitzgerald, however, distinguished the Allied Digital case from the one before her because that case was filed within one year following the appointment of the interim trustee by a successor trustee. The Allied Digital court recognized that “the two year statute of limitations continues to run from the appointment of the first trustee, regardless of subsequent conversions or appointments of new trustees.” In contrast, Fitzgerald pointed out that the interim trustee in the Singer case never became the permanent trustee pursuant to Section 702(d). Moreover, the election of the permanent trustee occurred more than two years after the order for relief was issued on Jan. 14, 2000. Fitzgerald noted that Section 546(a)(1)(B) does not refer to Section 701, but rather refers solely to Section 702(d) and provides as follows: “An action or proceeding under Section . . . 547 . . . of this title may not be commenced after the earlier of the later of two years after the entry of the order for relief; or one year after the appointment or election of the first trustee under Section 702 . . . if such appointment or such election occurs before the expiration of the period specified in subparagraph (A) . . . “ Pursuant to Section 702(d), the interim trustee serves as permanent trustee in the case if a trustee is not elected pursuant to that section. Should the interim trustee remain as the case trustee and in the event the interim trustee files an action within one year of being appointed then, assuming such appointment occurred within two years after commencement of the bankruptcy, such action would be timely under Section 702(d). Because, however, the permanent trustee was not elected until more than two years after the order for relief was entered, the language of Section 546(a)(1)(B) does not grant to such elected trustee an extension of time. Thus, while that section does refer to “the first trustee under Section 702,” it goes on to provide that “such appointment or election” must occur prior to the expiration of the limitations period contained within Section 546(a)(1)(B). As part of her analysis, Fitzgerald acknowledged the absence of “helpful” legislative history. Moreover, the recent Supreme Court decision in Lamie v. U.S. Trustee appeared to impact the court’s decision making in the Singer case. The Lamie decision involved Section 330 of the Bankruptcy Code, which was amended to delete a reference to payment of counsel for the debtor. As a result, a dispute arose over whether counsel for Chapter 7 debtors can be paid under Section 330 of the code if they have not been appointed under Section 327. In the Lamie decision, the Supreme Court identified an “apparent legislative drafting error.” Nevertheless, the Lamie court did not find an ambiguity notwithstanding its belief that “the statute is awkward, and even ungrammatical” with such language even possibly being “surplusage.” The Lamie court refused to accept the petitioner’s argument, which would have resulted in the insertion of omitted language. Rather, the Supreme Court relied on a “plain language” reading of the statute. Consistent with the Supreme Court’s view of Section 330, Fitzgerald found that Section 546(a)(1)(B) presents interpretative problems in light of its failure to reference Section 701 but was constrained to apply the language of the statute as it is written. Therefore, the court refused to insert a reference to Section 701 into Section 546(a)(1)(B), regarding the appointment of an interim trustee who does not become the permanent trustee. This decision is instructive to counsel that represent creditors defending against preference actions. At the outset of every case a review of the Section 546 statute of limitations issue should take place. My experience is that this defense is often more available then one might expect. Conversely, for debtor’s counsel, if a failed Chapter 11 case is to be converted to Chapter 7, then arguably such conversion should be done so that there is sufficient time for an interim trustee to be appointed and, thereafter, for an election pursuant to Section 702 before the Section 546 deadline expires. Similarly, an interim trustee must remain cognizant of the potential expiration of the statute of limitations and move to trigger an early election if one is to occur at all, or commence any preference actions that may exist prior to such time. Otherwise, the estate runs the risk of losing the ability to pursue preference actions as well as other Chapter 5 avoidance actions. Francis J. Lawall, a partner in the Philadelphia office of Pepper Hamilton, concentrates his practice in national bankruptcy and reorganization matters. He routinely lectures to various creditor groups concerning general bankruptcy issues, including preferences, reclamation, the role of creditors’ committees and related issues.

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