On July 29, 2011 and July 30, 2011, Alfred Thomas Giuliano, Chapter 7 Trustee in the DHP Holdings II Corporation aka DESA Bankruptcy, commenced Chapter 5 preferential transfer recovery litigation with the filing of 145 complaints in the District of Delaware.  The complaints are meticulous. Relationship pleading abounds. The identification of transfers crosses every “t” and dots every “i”.  When everything is pleaded with such attention to detail, the omission of a key fact tends to stick out. The omitted fact in these complaints – the date the interim Trustee’s appointment became permanent. Only the date of his interim appointment is pleaded.

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. See Bankruptcy Preference Claims Timing – The Statute of Limitations, Other Factors.

While the bankruptcy case docket notes the scheduling of the 341 meeting on October 14, 2010, there is no indication it was held of that date. In fact, docket entries on January 7, 2011 and January 31, 2011 indicate continuing, unsuccessful efforts to hold the meeting. Not until February 17, 2011 is there a docket entry that the Section 341 meeting was “held and concluded”. If the Trustee’s appointment became permanent after December 29, 2010, the statute of limitations on these preference actions would have expired.

It is too early to decide that a statute of limitations problem definitely exists. There may be an explanation or argument that is not apparent from the docket. However, there is also the possibility that the Trustee has decided to go forward with this mass preference action even if the statute of limitations has expired.

Federal Rule of Civil Procedure 8(c)(1) lists the statute of limitations as an affirmative defense. As an affirmative defense, the statute of limitation must be properly raised or it is lost. For those who do not file a motion to dismiss and file an answer leaving out the statute of limitations defense, the Trustee’s position will be that the defense is waived.

And then there are all those small and mid-market defendants who will try and settle the claim themselves.

Related Materials: