Creditors’ recoveries often hinge on claw-back lawsuits that trustees bring under bankruptcy law and non-bankruptcy law.[1] Trustees can file claims based on non-bankruptcy law because Bankruptcy Code section 544(b) allows them to assert claims that creditors have standing to file outside of bankruptcy. This powerful tool enables trustees to challenge transactions that date back years before a bankruptcy filing.[2]
Section 544(b) states that trustees “may avoid a transfer of an interest of the debtor that is voidable under applicable law by a creditor holding an [allowable] unsecured claim.” (Emphasis supplied.) The most common statute that trustees invoke is state fraudulent transfer law. But do other statutes – federal or state – apply as well?
One statute that has come up in the case law is the Federal Debt Collections Practices Act (“FDCPA”). It is utilized for debts owed to the United States and its agencies and departments. Its reach-back period is six years. But in MC Asset Recovery LLC v. Commerzbank A.G. (In re Mirant Corp.), 675 F.3d 530 (5th Cir. 2012), the Fifth Circuit Court of Appeals held that the FDCPA did not qualify as “applicable law” under Bankruptcy Code section 544(b). Mirant concluded that the legislative history of section 544(b) didn’t support allowing a bankruptcy trustee to sue under the FDCPA.
Other courts, however, have faulted the Fifth Circuit’s analysis and conclusion. See Vierira v. Gaither (In re Gaither), 595 B.R. 201 (Bankr. D.S.C. 2018); Hillel v. City of Many Trees, LLC (In re CVAH, Inc.), 570 B.R. 816 (Bankr. D. Idaho 2017); Gordon V. Harrison (In re Alpha Protective Services, Inc.), 531 B.R. 889 (Bankr. M.D. Ga. 2015); and Tronox Inc. v. Kerr McGee Corp. (In re Tronox Inc.), 503 B.R. 239 (Bankr. S.D.N.Y. 2013). Generally, these courts have concluded that the phrase “applicable law” in section 544(b) should be read more broadly than how the Fifth Circuit interpreted it.
The most recent decision was issued last week in a chapter 7 case, In re Grobner, No. 17-90819, 2019 Bankr. LEXIS 1450 (Bankr. C.D. Ill. May 8, 2019). Six years before the bankruptcy, the debtors had transferred a home to their daughter for $100. The home was worth more than $350,000. The debtors also owed the U.S. Small Business Administration (“SBA”) $418,000 on a loan. The Court noted that the SBA was the "triggering creditor" that made the FDCPA applicable to this case.
The chapter 7 trustee sued the daughter to void the transfer of the...
