On March 16, 2011, George L. Miller, Chapter 7 Trustee for the estates of Marty Shoes Holdings, Inc. commenced Chapter 5 preferential transfer recovery litigation with the filing of 98 complaints in the United States Bankruptcy Court for the District of Delaware. The Trustee makes a gutsy admission in his preference complaints: “The Trustee finds himself in an extraordinary situation as he has been deprived of the Debtors’ books and records, though he has taken the necessary steps to locate these records.” As a result, the complaints fail to identify the antecedent debt as required to plead a prima facie case under recent Delaware Bankruptcy Court decisions.

The Statute of Limitations

The lack of books and records likely was the cause of the Chapter 7 Trustee pushing the statute of limitations to the absolute limit.  For some, it may appear that the Trustee pushed beyond the limit.   Unfortunately, at least in Delaware, the Trustee can take advantage of yet another situation in which the statute of limitations gets expanded.

The statute of limitations for bringing preference actions is in Section 546(a) of the Bankruptcy Code. Under that section, the statute of limitations is “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)… .”

Two Years from the Date of the Trustee’s Permanent Appointment

In Marty Shoes, the debtors filed Chapter 11 petitions on September 12, 2008, the cases were converted to Chapter 7 on February 2, 2010, and George Miller was appointed by the US Trustee as interim trustee on February 3, 2010. If February 3, 2010, the date of appointment of the interim trustee, were the controlling date for calculating the statute of limitations, the complaints would have been time barred. However, that is not the law in Delaware.

In the Third Circuit (which includes Delaware), the date of appointment of the permanent trustee under Section 702 is the controlling date for purposes of the statute of limitations. Singer v. Franklin Boxboard Co. (In re American Pad & Paper ), 478 F.3d 546 (3rd Cir. 2007) Under Section 702, the interim trustee appointed by the US Trustee on or about the date of the conversion of a case to Chapter 7, automatically becomes the permanent trustee at the Section 341 meeting of creditors if creditors do not elect a trustee under Section 702.

Seeming to anticipate the statute of limitations defense, the Marty Shoes preference complaints include the allegations that:

8. On March 18, 2010, the Trustee conducted and concluded a meeting of creditors pursuant to section 341 of the Bankruptcy Code (the “341 Meeting”).

9. Pursuant to section 702(d) of the Bankruptcy Code, the Trustee’s appointment in these cases was finalized with the conclusion of the 341 Meeting without the election of another trustee.

The Statute of Limitations

The statute of limitations for bringing preference actions is in Section 546(a) of the Bankruptcy Code. Under that section, the statute of limitations is “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)… .”

In Marty Shoes, the debtors filed Chapter 11 petitions on September 12, 2008, the cases were converted to Chapter 7 on February 2, 2010, and George Miller was appointed by the US Trustee as interim trustee on February 3, 2010. If February 3, 2010, the date of appointment of the interim trustee, were the controlling date for calculating the statute of limitations, the complaints would have been time barred. However, that is not the law in Delaware.

In the Third Circuit (which includes Delaware), the date of appointment of the permanent trustee under Section 702 is the controlling date for purposes of the statute of limitations. Singer v. Franklin Boxboard Co. (In re American Pad & Paper ), 478 F.3d 546 (3rd Cir. 2007) Under Section 702, the interim trustee appointed by the US Trustee on or about the date of the conversion of a case to Chapter 7, automatically becomes the permanent trustee at the Section 341 meeting of creditors if creditors do not elect a trustee under Section 702.

Seeming to anticipate the statute of limitations defense, the Marty Shoes preference complaints include the allegations that:

8. On March 18, 2010, the Trustee conducted and concluded a meeting of creditors pursuant to section 341 of the Bankruptcy Code (the “341 Meeting”).

9. Pursuant to section 702(d) of the Bankruptcy Code, the Trustee’s appointment in these cases was finalized with the conclusion of the 341 Meeting without the election of another trustee.