No Equitable Tolling for Section 727(a)(2) Look-Back Period

Posted by NCBRC - June 30, 2016

The one-year look-back period for fraudulent transfers is not subject to equitable tolling. DeNoce v. Neff (In re Neff), No. 14-60017 (9th Cir. June 9, 2016).

In October, 2008, Douglas DeNoce obtained a $310,000.00 dental malpractice judgment against Robert Neff. Neff filed a chapter 13 bankruptcy petition in March, 2010, and the following month he quitclaimed property he owned to a revocable living trust that he had created. His bankruptcy was dismissed, and he filed a second chapter 13 petition in June, 2010, listing the revocable trust on his schedules. In August, 2010, he transferred the property back to himself. Neff subsequently voluntarily dismissed that bankruptcy case. In October, 2011, Neff filed a third bankruptcy petition, this time in chapter 7. DeNoce filed an adversary complaint under section 727(a)(2) arguing that the 2010 quitclaim of the property to the trust was a fraudulent transfer. The court granted Neff’s motion for summary judgment on the basis that the transfer had occurred more than one year prior to his chapter 7 bankruptcy. The BAP for the Ninth Circuit affirmed. In re Neff, 505 B.R. 255 (B.A.P. 9th Cir. 2014).

On appeal to the Ninth Circuit, DeNoce argued that the one year look-back period of section 727(a)(2) should have been tolled during the pendency of Neff’s two chapter 13 bankruptcies.

The court noted that there is a presumption of tolling when the statute at issue is a statute of limitations. That presumption does not apply to other time limitations, however. Therefore, the case turned on whether section 727(a)(2)’s one year fraudulent transfer statute was a statute of limitations.

The court found the nature of a statute of limitations is restraint on the time within which a person may bring a claim against another, “encouraging plaintiffs to prosecute their actions promptly or risk losing rights.” To determine whether the one-year look-back period fell within that category the court turned for guidance to two Supreme Court cases dealing with the nature of limitations periods. In Young v. United States, 535 U.S. 43 (2002), the Court found section 507(a)(8)(A)(i)’s provision rendering nondischargeable tax liabilities that were due within three years of bankruptcy, was equivalent to a statute of limitations because it put an onus on the IRS to pursue its rights within a specified time period. In contrast, the environmental law addressed in Hallstrom v. Tillamook County, 493 U.S. 20, (1989), which prohibited bringing an action in fewer than sixty days after giving notice of the violation, was not a statute of limitations because it was “not triggered by the violation giving rise to the action.”

The court turned to the “functional characteristics” of the one-year time period set forth in section 727(a)(2) and found that the fundamental purpose of the statute was to prevent dishonest debtors from abusing the bankruptcy process to defraud their creditors. The penalty of deprivation of the right to discharge furthers the goal of motivating debtors to reveal assets. On the other hand, in contrast to a statute of limitations, the statute does not serve the purpose of motivating a creditor to pursue a claim and, in fact, places no burden on the creditor whatsoever. Because the statute does not cut off a creditor’s rights and, in fact, serves other policies, the court concluded that it is not a statute of limitations and therefore not entitled to the presumption of equitable tolling. Nor did Congress indicate an intent to have equitable tolling apply to the time limitation. Rather, application of the statute is clearly tied to the petition date.

Where incursions into a debtor’s fresh start are interpreted narrowly the Ninth Circuit concluded that equitable tolling does not apply and affirmed the decision below.

Neff 9th Cir opinion June 2016

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