In Chapter 7 bankruptcy cases, the trustee is empowered to take back money or property that was improperly removed by the debtor before filing. This power, known as the “clawback period” allows a trustee to recover assets that rightly belong to the debtor’s bankruptcy estate, but were hidden or moved out of the trustee’s reach through actions of the debtor. Recently, the bankruptcy case for the New England Confectionary Company (NECCO) presented Judge Hoffman of the U.S. District Court for the District of Massachusetts with an issue of first impression in Massachusetts extending the clawback period up to ten years as provided by the Bankruptcy Code.
Bankruptcy Code § 544(b)(1) permits a bankruptcy trustee to avoid obligations incurred by a debtor or transfers of an interest in a debtor’s property that are voidable under applicable law. The applicable law referred to in the statute has generally been interpreted to mean state fraudulent transfer law, which in this case includes the Massachusetts Uniform Fraudulent Transfer Act (“MUFTA”), M.G.L. c,109A. State laws like MUFTA include only a four-year clawback period to challenge transfers within four years prior to the bankruptcy filing.
Here, the trustee sought to stand in the shoes of the IRS and assert its rights under § 544(b). In cases where the IRS is a creditor, the IRS may claim the benefit of statutes including 26 U.S.C. § 6502 and 28 U.S.C. § 3306(b) that allows the IRS to seek recovery of transfers made within ten and six years of the bankruptcy filing. These statutes only prescribe time limitations for IRS recovery actions, which means the IRS or the trustee, derivatively, must establish transferee liability through an independent cause of action under state or federal law. Judge Hoffman adopted the reasoning of In re Kaiser, Hillen v. City of Many Trees, LLC (In re CVAH, Inc.), 570 B.R. 816, 831 (Bankr. D. Idaho 2017) that held although 26 U.S.C. § 6502 and 28 U.S.C. § 3306(b) do not create causes of action, they constitute “applicable law” under Bankruptcy Code §544(b). Most importantly, Judge Hoffman ruled:
“Thus, to the extent the trustee is able to stand in the shoes of the IRS and assert fraudulent transfer claims, he may apply the ten and six year reach back periods under the respective statutes.”
The Court noted that the size of the IRS claim does not limit the amount recoverable by the trustee. The right to recover may even be available if the claim is nominal. In other words, this ruling establishes that in Massachusetts bankruptcy cases, the ten year clawback period may be available to a trustee where the IRS is a creditor, regardless of the size of the IRS’ claim. This ruling does not change the burden of proof on a trustee to establish the elements of a fraudulent transfer claim under state law, but does allow the trustee to reach transfers that would otherwise be beyond the range of the state law limitations period.
Decade Old Transactions Potentially Subject to Bankruptcy Clawback in Massachusetts