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Bankruptcy Preemption of Statute of Repose
In the article, “Preemption of Statutes of Repose” published in the Norton Journal of Bankruptcy Law and Practice, Vol. 24 No. 4, David Kupetz explains how federal bankruptcy law trumps inconsistent state law. The article discusses the case of Rund v. Bank of America (In re EPD Investment Co.), where the Ninth Circuit’s Bankruptcy Appellate Panel (the “BAP”) addressed the issue of whether Bankruptcy Code section 546(a) preempts a state-law fraudulent transfer statute of repose.
A statute of limitations creates an affirmative defense if a party fails to initiate an action within a specified period of time. In contrast, a statute of repose extinguishes a party’s claim after set period of time which is usually measured from one of the defendant’s acts. In the EPD Investment Company case, the chapter 7 bankruptcy trustee, in the context of what was alleged to have been a Ponzi scheme, sought to avoid certain fraudulent transfers to various defendants (a number of financial institutions) pursuant to Bankruptcy Code section 544(b) and California Civil Code sections 3439-3439.12.
The bankruptcy court found that the California fraudulent transfer provision in California Civil Code section 3439.09(c) is a statute of repose and held that the trustee could reach back only to those transfers occurring up to seven years prior to the filing of his complaint, not the bankruptcy petition date. In reversing the bankruptcy court’s ruling that the seven year period reaches back from the date an avoidance action is commenced, the BAP held that section 546(a) (giving the trustee and additional two years to investigate and file an action) preempts California’s section 3439.09(c)’s statute of repose, and that its seven year reach back provision is thus measured from the petition date, rather than the later date on which the trustee commences an avoidance action. In so holding, the BAP reasoned that section 546(a) is designed to provide a trustee with sufficient time to decide whether to commence an avoidance action.
Federal bankruptcy law coexists with and incorporates state fraudulent transfer law through the trustee’s strong arm power granted under section 544. State law and federal bankruptcy law conflict, however, when a state fraudulent transfer law statute of repose would extinguish a claim earlier than the deadline for a bankruptcy trustee to bring an avoidance action under section 546(a). This raised the question in the EPD Investment Company case of whether the deadline under state law the deadline or federal bankruptcy law for bringing the action should govern. The conclusion, as discussed in greater detail in the article, is that under the Supremacy Clause, the state statute of repose must yield to conflicting federal bankruptcy law.