312-263-2200

Section 546(a) of the Bankruptcy Code sets a two-year time limit for the commencement of avoidance actions on behalf of the bankruptcy estate.  This provision was amended in 1994 to provide an additional year for such actions running from the date of the appointment or election of certain trustees, if such appointment or election occurs before the expiration of the aforementioned two-year period.  Specifically, §546(a) provides, in pertinent part:

(a) An action or proceeding under section 544, 545, 547, 548, or 553 of this title may not be commenced after the earlier of—

(1) 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); or

(2) The time the case is closed or dismissed.

The language in Section 546(a)(1)(B) of the Code has resulted in a split among the bankruptcy courts.  Specifically, §546(a)(1)(B) refers to the “appointment or election” of the first trustee, while at the same time referring only to Section 702 of the Code, not Section 701 of the Code.[1]  Section 702, however, contains no concept of appointment of trustees, a term which does appear anywhere in §702.  Instead, §702 provides that in the absence of the election of a trustee, a trustee previously appointed under §701 may become the permanent trustee.  Thus the question – when should the additional year start under §546(a)(1)(B)?  When there is an interim trustee who, by application of Section 702(d) of the Bankruptcy Code becomes the permanent trustee?

In In re American Pad & Paper Company, 478 F.3d 546 (3rd Cir.2007), an involuntary Chapter 11 petition was filed against the debtor on January 10, 2000.  On January 14, 2000, the bankruptcy court entered an order for relief.  Almost 2 years later, on December 21, 2001, the bankruptcy court entered an order granting a motion made by the creditors’ committee to convert the case to a Chapter 7 proceeding.  By the terms of the order, the conversion to Chapter 7 was to be effective on January 3, 2002.  On January 2, 2002, the bankruptcy court appointed the interim trustee.  A notice dated January 15, 2002, scheduled the meeting of creditors pursuant to Section 341 of the Bankruptcy Code for February 13, 2002.  Hence, the creditors’ meeting was scheduled for a date more than 2 years after the entry of the order for relief.  At the meeting of creditors, an election of a trustee pursuant Section 702 of the Bankruptcy Code occurred, i.e., a new trustee was elected.  The election also occurred more than 2 years after the entry of the order of relief.

The new trustee argued that because the interim trustee under Section 701 of the Bankruptcy Code was appointed on January 3, 2002, prior to the expiration of the initial 2-year period, the permanent trustee should have received an additional 1-year period to file his avoidance actions, running from January 3, 2002.  The Third Circuit disagreed.  The court noted that the plain language of the statute of limitations does not include §701 interim trustees, and makes reference only to “1 year after the appointment or election of the first trustee under section 702, 1104, 1163, 1202, or 1302[.]”  In other words, reading the appointment of an interim trustee under §701 as an event that triggers the additional 1-year period had no basis in the language of the statute. Id. at 552.[2]

The court noted that when Congress wished to include interim trustee appointed under §701 in a provision in the Code, it had explicitly done so, citing to 11 U.S.C. §507(a)(1)(C) which provides that, where a “trustee is appointed or elected under section 701, 702, 703, 1104, 1202, or 1302,” the administrative expenses of the trustee shall be paid before payment of claims that benefit domestic support claims” under subparagraphs (A) and (B), to the extent that the trustee administers assets that are otherwise available for the payment of such claims.”

In In re Brownlee, 606 B.R. 109 (Bankr.M.D.Ga.2019), the Debtors had filed a Chapter 11 petition on March 21, 2017.  The Court converted the case to a Chapter 7 proceeding on March 7, 2018.  Upon conversion, the United States Trustee appointed the Trustee as the interim trustee.  The Trustee conducted the § 341 meeting on April 10, 2018 without creditors requesting an election.  The Trustee filed his avoidance action on April 9, 2019, one day less than a year after conducting the § 341 meeting.

Applying the relevant language in §546(a) to this case, the Court was required to determine when “the first trustee” was appointed under § 702.  That is, did the statute of limitations begin to run when the trustee was appointed as the interim trustee (which is governed by § 701)?  Or, did it begin after the creditors declined to elect a trustee at the § 341 meeting (governed by § 702(d))?

The court ruled that the 1 year extension ran from the date of the §341 meeting.  While it recognized that §702(d) did not use the word “appoint” or “appointment”, it stated that the term should be interpreted broadly to include designating or assigning the interim trustee as the permanent trustee.

This is exactly §702(d) ‘s function.  The subsection chooses the interim trustee to serve on a permanent basis as the case trustee after the §341 meeting.  In the Seventh Circuit’s words, “what could [§546(a)] mean except that the interim trustee is automatically appointed permanent trustee in consequence of the creditors’ failure to elect a trustee.” In re Draiman, 714 F.3d at 465.[3]

Secondly, the court noted that the interim trustee does not continue his original appointment when creditors decline to elect a trustee.  Rather, the Code creates a clear point of transition upon conducting the §341 meeting.  “At that point, the interim trustee is terminated and the permanent trustee assumes his obligations.  Although it is true that an interim trustee has all the powers and obligations of a permanent case trustee, the interim trustee’s role has a defining limitation: the duration of his service is limited. The title of the position, the “interim trustee,” is indicative of this fact.” Id. at 114.  The word “interim” means occurring within “an intervening time.” Interim, Black’s Law Dictionary (11th ed. 2019).  From this description alone the court concluded that the Code indicates that interim trustee’s position will terminate.

Moreover, the court stated that the Code expressly limits the time in which the interim trustee serves the estate.  Section 701(b) states “[t]he service of an interim trustee under this section terminates when a trustee elected or designated under Section 702 of this title to serve as trustee.  “As §702 only provides for election (under §702(c)) or appointment (under §702(d)), §701(b)’s reference to “designa[tion]” must refer to §702(d).” Id.  Therefore, the extension began upon concluding the §341 meeting, when the trustee’s appointment as the interim trustee was terminated and he was appointed the permanent case trustee as provided in §702(d).

In In re Draiman, 483 B.R. 338 (Bankr.N.D.Ill.2012), the debtor commenced his bankruptcy case on May 14, 2009.  On May 13, 2011, the case was converted from a case under Chapter 11 to a case under Chapter 7.  That same day, Richard Fogel was appointed as interim chapter 7 trustee.  On June 30, 2011, a meeting of creditors under §341 took place.  No permanent trustee was elected at that meeting.

The court started its analysis by noting that §546(a)(1)(B) was ambiguous.  The ambiguity arises from the term “appointment” in §546(a)(1)(B), in that §702 makes reference only to elections and not appointments.  The court noted that as originally drafted in 1978, §546 always contained the concept of appointment in reference to §702, but did not contain the concept of election.  Congress clearly always intended appointment to have meaning in reference to §702.  It was the court’s opinion that pursuant to §546(a)(1)(B), Congress was clearly attempting to afford a bankruptcy trustee no less than a year to bring avoidance actions, while at the same time limiting the time period to no more than three years so as to not interfere with the overall prosecution of the bankruptcy case.  If §546(a)(1)(B) did not run from the appointment of an interim trustee whose role became permanent by operation of §702(d), then the purpose behind limiting §546(a)(1)(B) to the “first trustee” would be lost.  An interim trustee could fulfill its duties (which are no different than a permanent trustee’s duties and include therefore the ability to bring avoidance actions) for nearly two years, whereupon if made permanent by operation of §702(d), that very same trustee would be afforded an additional year to act.  That quite simply could not be Congress’s intent.

The court concluded:

The better approach is to recognize that there are, as the foregoing makes abundantly clear, two types of trustees under section 702, yet both have the same powers and responsibilities.  The permanent, elected trustee does not exist prior to its election.  If elected within two years from the order for relief, the permanent trustee should be afforded the year in section 546(a)(1)(B), running from the date of its election.  The interim trustee, however, does exist prior to the operation of section 702(d).  Its appointment predates the operation of section 702(d), and nothing in Congress’s drafting evidences an. intention to afford such a trustee more time than the elected trustee to consider section 546 claims.  If the interim trustee continues to serve pursuant to section 702(d) following the section 341 meeting of creditors, this trustee’s year must run, therefore, from the date of its appointment under section 701.  There is no other appointment to which section 546(a)(1)(B) could refer in this context.[4]

The court recognized that this meant that the additional year would run differently for elected versus appointed trustees.  But while that may be the case, this also meant that each trustee would be treated the same for the purposes of what time they were afforded in bringing §546 actions.  The interim trustee who becomes permanent would not be treated better than the elected trustee.  The court went on to note:

Last, the court recognizes that the different timing of the additional year may cause creditors to act differently at the meeting of creditors under section 341 if that meeting occurs outside of two years of the initial order for relief.  In such instances, the additional year is lost should such creditors elect a permanent trustee.  However, the additional year would not be lost if no trustee is elected and if the interim trustee had been appointed within two years of the order for relief.  Given that the alternative is for the additional year to be entirely lost, the court believes that imposing this choice upon the creditors is the lesser of two evils.[5]

 

Matthew T. Gensburg
mgensburg@gcklegal.com

 


[1] Section 701 of the Code provides:

(a)(1)      Promptly after the order for relief under this chapter, the United States trustee shall appoint one disinterested person that is a member of the panel of private trustees established under section 586(a)(1) of title 28 or that is serving as trustee in the case immediately before the order for relief under this chapter to serve as interim trustee in the case.

(2)           If none of the members of such panel is willing to serve as interim trustee in the case, then the United States trustee may serve as interim trustee in the case.

(b)           The service of an interim trustee under this section terminates when a trustee elected or designated under section 702 of this title to serve as trustee in the case qualifies under section 322 of this title.

[2]               The court cited to Turner v. J.P. Bolduc et. al. (In re Crowe Rope Indus., LLC), 311 B.R. 313, 314 (Bankr.D.Me.2004) (concluding there is no need to “invent[ ] a reference to §701” in §546(a)(1)(B), and rejecting argument that the one-year period ran from the date of the appointment of the interim trustee under §701, instead of from the date of the §341 meeting at which the interim trustee is appointed the trustee by operation of law pursuant to §702(d) if no trustee is elected.); and Styler v. Conoco, Inc. (In re Peterson Distrib., Inc.), 176 B.R. 584, 591 (Bankr.D.Utah 1995) (“The Bankruptcy Reform Act of 1994 also clarifies that the limitations period does not run from the appointment of an interim trustee.  There is no added reference to §701.)

[3]               Id. at 114.

[4]               Id. at 345.

[5]               Id. at 346.