2021 Zagaroli North Carolina Opinion Voidable Transactions And Fraudulent Transfers Limitations

 

VOIDABLE TRANSACTIONS

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2021 - Zagaroli - North Carolina

Extinguishment/Limitations

 

Mitchell v. Zagaroli (In re Zagaroli), 2020 WL 6495156 (Bk.W.D.N.C., Nov. 3, 2020).

 

United States Bankruptcy Court, W.D. North Carolina, Statesville Division.

 

IN RE: Peter Lawrence ZAGAROLI, Debtor.

 

Richard M. Mitchell, Trustee for the Bankruptcy Estate of Peter Lawrence Zagaroli, Plaintiff,

 

v.

 

David Zagaroli and Nancy Zagaroli, Defendants.

 

Bankruptcy Case No. 18-50508

 

Adversary Proceeding No. 20-05000

 

Signed November 3, 2020

 

Attorneys and Law Firms

 

John W. Taylor, John W. Taylor, P.C., Charlotte, NC, for Plaintiff

 

Samantha K. Brumbaugh, Darren A. McDonough, Ivey McClellan Gatton Siegmund LLP, Greensboro, NC, for Defendants

 

ORDER DENYING MOTION TO DISMISS AMENDED COMPLAINT

 

Laura T. Beyer, United States Bankruptcy Judge

 

*1 THIS MATTER is before the court on the Defendants’ April 22, 2020 Motion to Dismiss Amended Complaint (“Motion”). The court held a hearing on the Motion on July 10, 2020. John W. Taylor, attorney, appeared on behalf of the Plaintiff; Darren A. McDonough, attorney, appeared on behalf of the Defendants. For the reasons set forth below, the Motion is denied.

 

Background

 

1. On May 21, 2018, the Debtor, Peter Lawrence Zagaroli (“the Debtor”), filed a voluntary Chapter 7 bankruptcy petition in the United States Bankruptcy Court for the Middle District of North Carolina. By order entered July 18, 2018, the United States Bankruptcy Court for the Middle District of North Carolina transferred the bankruptcy case to this district.

 

2. On November 8, 2018, the Department of the Treasury – Internal Revenue Service (the “IRS”) filed a proof of claim in the Debtor’s bankruptcy case in the unsecured amount of $4,261.27.

 

3. On December 4, 2018, the IRS amended the amount of its claim to the amount of $4,161.27.

 

4. On January 20, 2020, the Plaintiff, Chapter 7 Trustee Richard M. Mitchell, filed this Adversary Proceeding asserting that 11 U.S.C. § 544(b) allows him to avoid certain transfers of real property to the Defendants, David Zagaroli and Nancy Zagaroli, who are the parents of the Debtor.

 

5. The Trustee alleges that on December 16, 2010, and again on June 1, 2011, the Debtor transferred multiple parcels of real property to the Defendants for no consideration while he was insolvent.

 

6. On February 7, 2020, the Defendants filed a Motion to Dismiss asserting that the Trustee may not avoid the transfers of real property. On March 6, 2020, the court held a hearing on the Defendants’ Motion to Dismiss at which it granted the Defendants’ Motion to Dismiss without prejudice and granted the Trustee leave to amend his complaint. The court entered its written order on March 10, 2020.

 

7. On April 9, 2020, the Trustee filed his Amended Complaint seeking to set aside the above transfers of real property to the Defendants.

 

8. On April 22, 2020, the Defendants filed the Motion. The Defendants filed their memorandum of law in support thereof on May 14, 2020.

 

9. On July 6, 2020, the Trustee filed his Plaintiff’s Memorandum of Law in Opposition to the Defendants’ Motion to Dismiss Amended Complaint.

 

10. On July 10, 2020, the court held a hearing on the Motion.

 

Analysis

 

11. The court must determine whether 11 U.S.C. § 544(b) allows the Trustee to step into the shoes of the IRS and utilize the North Carolina Uniform Voidable Transactions Act (“NCUVTA”) to avoid the prepetition transfers of real property to the Defendants, which Debtor allegedly made to the Defendants for no consideration while Debtor was insolvent. The Trustee “may avoid any transfer of an interest of the debtor in property or any obligation incurred by the debtor that is voidable under applicable law by a creditor holding an unsecured claim that is allowable under section 502 of this title or that is not allowable only under section 502(e) of this title.” § 544(b)(1). The NCUVTA has a statute of limitations of four years, but 26 U.S.C. § 6502 of the Internal Revenue Code (“IRC”) provides an extended look back period of ten years to avoid transfers, and the IRS is exempt from the NCUVTA’s statute of limitations. Since the transfers at issue were more than four years prior to the filing of the bankruptcy case, the court must further determine if the Trustee can utilize the extended look back period of ten years under the IRC.

 

*2 12. The Defendants contend that § 544(b)(1) does not grant a trustee the power to bring avoidance actions that are grounded in tax evasion claims that are only available to the United States outside of the bankruptcy arena and that a trustee should not be able to take advantage of the immunity of the United States from state statutes of limitation. The Defendants further contend that the Plaintiff did not receive required authorization to bring the action under section 7401 of the Internal Revenue Code and that the Plaintiff’s claims violate the Tax Anti-Injunction Act and the separation of powers provisions of the Constitution.

 

13. The Plaintiff relies on the decisions in Vieira v. Gaither (In re Gaither), 595 B.R. 201 (Bankr. D.S.C. 2018) and Hillen v. City of Many Trees, LLC (In re CVAH, Inc.), 570 B.R. 816 (Bankr. D. Idaho 2017). These decisions represent the majority view of courts that have addressed the issue and hold that the plain language of § 544(b)(1) permits the Trustee to step into the shoes of the IRS.

 

14. The Defendants acknowledge that the majority view favors the Plaintiff, however, the Defendants contend that only looking at a statute’s language is insufficient. In support of their position, the Defendants point to a recent decision of the United States Court of Appeals for the Fourth Circuit that explains:

 

“[T]he Supreme Court has often emphasized the crucial role of context as a tool of statutory construction. For example, the Court has stated that when construing a statute, courts must not be guided by a single sentence or member of a sentence, but look to the provisions of the whole law, and to its object and policy.” As a result, “the traditional rules of statutory construction to be used in ascertaining congressional intent include: the overall statutory scheme, legislative history, the history of evolving congressional regulation in the area, and a consideration of other relevant statutes.”

 

Kumar v. Republic of Sudan, 880 F.3d 144, 154 (4th Cir. 2018) (quoting Brown & Williamson Tobacco Corp. v. FDA, 153 F.3d 155, 162 (4th Cir. 1998)). The Defendants argue that the court must avoid focusing solely on the language of § 544(b) to the exclusion of other provisions of the Bankruptcy Code, other statutes, and the Constitution and that the court should not disregard the Supreme Court’s admonition to avoid interpretations that lead to absurd results or conflict with other statutory provisions. The Defendants then further rely on a motion to dismiss filed by the United States in Cook v. Roberts (In re Yahweh Center, Inc.), Ch. 11 Case No. 16-04306-5, Adv. No. 18-00082-5 (Bankr. E.D.N.C. Sept. 24, 2018), ECF No. 69. In its motion, the United States argues that a trustee is required to obtain authorization to bring an action under section 7401 of the IRC.

 

15. The court finds the Defendants’ arguments unpersuasive. “When the language of the statute is not open to interpretation, this court’s task is simple: apply the plain language.” In re Usery, No. 15-30017, slip op. at 5 (Bankr. W.D.N.C. Oct. 5, 2020). Likewise, in holding that the trustee may step into the shoes of the IRS and utilize the collection powers available to the IRS, the Gaither court explained that “the determination of the issue is essentially a task of statutory construction. The Supreme Court of the United States has held that ‘[t]he task of resolving [a] dispute over the meaning of [a statute] begins where all such inquiries must begin: with the language of the statute itself.’ ” 595 B.R. at 209 (quoting United States v. Ron Pair Enters, Inc., 489 U.S. 235, 241 (1989)) (alterations in original).

 

*3 16. Moreover, the Defendants’ position would result in leaving both the Trustee and the IRS without the right to avoid offending transfers. As the CVAH court explained:

 

If Trustee were not allowed to exercise IRS’s rights, a curious, and potentially inappropriate, result would obtain. Because of a debtor’s bankruptcy filing, individual creditors, like IRS, are prevented by the Code from exercising its [sic] right to pursue transferees of avoidable transfers; only the bankruptcy trustee can pursue avoidance actions. However, IRS benefits from the operation of the bankruptcy laws because its statutory representative, the trustee, can pursue recovery of the transfers standing in its shoes, unconstrained by state-law extinguishment statutes. While the defendants argue against this model, under their approach, IRS would be deprived of its statutory right to recover the transfers the defendants received, and the trustee would be unable to do so, to the extent the avoidance action came too late under state law.

 

570 B.R. at 835–36 (citations omitted).

 

17. The court agrees with the reasoning of the Gaither and CVAH courts. Both courts express the majority view that under the plain language of § 544(b)(1), the Trustee is permitted to step into the shoes of the IRS and invoke the applicable law that the IRS could use outside of bankruptcy to avoid the targeted transfers to the Defendants.

 

18. As to whether the Trustee can utilize the extended look back period under the IRC, the Gaither Court explained:

 

In In re CVAH, the Bankruptcy Court for the District of Idaho held that the FDCPA constitutes “applicable law” and that “applicable law, as used in § 544(b)(1), should be construed to be a broad term, as the code contains no language limiting its meaning.” In re CVAH, 570 B.R. at 825 (internal quotation marks omitted). In that case, the trustee sought to “step into the shoes of the creditor IRS” and utilize the longer look back periods in the FDCPA under 28 U.S.C. § 3306 and the IRS under 26 U.S.C. § 6502 to avoid any transfers the debtor made within six years prior to filing its bankruptcy petition. Id. at 822. The defendants in that case argued that the trustee could not invoke the extended look-back periods of either the FDCPA or the Tax Code to avoid transfers under § 544(b)(1). Id. The court disagreed, stating that, “under the plain language of § 544(b)(1),” a trustee is permitted to “step into the shoes of the IRS and, accordingly, may invoke any ‘applicable law’ that [the] IRS could use outside of bankruptcy to avoid the targeted transfers to the defendants.” Id. at 825. Moreover, the court held that, “but for the [defendant’s] bankruptcy, IRS could have utilized both the FDCPA and the IRC as a legal basis to avoid the ... transfers.” Id. (emphasis added).

 

595 B.R. at 213 (alterations in original). Likewise, in the present case, the applicable law that the Trustee seeks to invoke is the NCUVTA and the IRC, both of which the IRS could have used to seek to avoid the transfers outside of bankruptcy.

 

Conclusion

 

For the reasons set forth above, as the IRS is an unsecured creditor in this case, the court concludes that the plain language of 11 U.S.C. § 544(b)(1) allows the Trustee to assert its rights under the NCUVTA and the IRC. As such, the court should deny the Defendants’ Motion to Dismiss Amended Complaint.

 

*4 THEREFORE, IT IS HEREBY ORDERED, ADJUDGED AND DECREED that the Defendants’ Motion to Dismiss Amended Complaint is DENIED. The Defendants shall have 30 days from the entry of this order to file their Answer to the Plaintiff’s Amended Complaint.

 

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____________________

Many more articles on voidable transactions law found here

 

UVTA - LOGICAL ORGANIZATION

(Designed For Litigators)

 

Click here to go to the Voidable Transactions Decision Chart

 

Overview of UVTA -- The process and result

 

Learn The Vocabulary Of The Act (Main Page)

 

Has A Voidable Transaction Occurred? (Main Page)

 

Does The Transferee Have A Defense? (Main Page)

 

What Remedies Are Available? (Main Page)

 

Other Helpful Provisions (Main Page)

 

UVTA - NUMERICAL ORGANIZATION

(Confusing & Difficult To Use)

 

The Uniform Law Commission's complete copy of the UVTA with comments in PDF format is available here. The webpage for the UVTA, showing states that have enacted and much other information regarding the Act is found here.

 

1 - Definitions

(1) Affiliate -- (2) Asset -- (3) Claim -- (4) Creditor -- (5) Debt -- (6) Debtor -- (7) Electronic -- (8) Insider -- (9) Lien -- (10) Organization -- (11) Person -- (12) Property -- (13) Record -- (14) Relative -- (15) Sign -- (16) Transfer -- (17) Valid Lien

2 - Insolvency - How insolvency is calculated

3 - Value - Issues relating to calculating value

4 - Transfer Or Obligation Voidable As To Present Or Future Creditor

(a)(1) {Intent Test} - To hinder, delay or defraud any creditor

(a)(2)(i) {Overextending Insolvency Test} - The debtor engages in a transaction for which it does not have the financial strength

(a)(2)(ii) {Sinking Insolvency Test} - The debtor is not technically insolvent but headed for insolvency

(b) {Badges of Fraud} - Circumstances available to prove the debtor's intent

5 - Transfer or Obligation Voidable As To Present Creditor

(a) {Insolvency Test} - The test preferred by creditors

(b) {Insider Preference Test} - Not really a fraudulent transfer test at all

6 - When Transfer Is Made Or Obligation Is Incurred - Determines the time of the transfer

7 - Remedies Of Creditor

      {Non-Money Judgment Remedies} - Avoidance, attachment, etc.

8 - Defenses, Liability, And Protection Of Transferee Or Obligee

{Main Provisions} -The transferee's good faith for-value defense

(b) and (c) {Money Judgment Remedy} - Alternative remedy for creditors when avoidance is not good enough

9 - Extinguishment Of Claim For Relief - Similar to Statutes of Limitation

10 - Governing Law - Conflicts of Laws provisions

11 - Application To Series Organization - Applies to intra-series transfers

12 - Supplementary Provisions - Allows application of other law to issues unresolved by the UVTA

13 - Uniformity Of Application And Construction - Court opinions from other states may be looked to for guidance

14 - Relation To Electronic Signatures In Global And National Commerce - Waste of statutory space

15 - Short Title - From fraudulent transfers to voidable transactions

16 - Repeals; Conforming Amendment - Information for enacting legislatures

 

OTHER SOURCES OF

FRAUDULENT TRANSFER LAW

 

Fraudulent Transfers In Bankruptcy - Main Page

 

28 U.S.C. § 3301, et seq. - Where United States is the creditor

 

Common Law Fraudulent Transfer - Still exists in most states

 

Criminal Statutes -- Jurisdictions that criminalize fraudulent transfers

 

Fraudulent Conveyances Act of 1571 a/k/a Statute of 13 Elizabeth - The medieval statute to which the modern American UVTA traces some of its roots.

 

Statutes Of The U.S. Jurisdictions -- State and Territorial Voidable Transaction and Fraudulent Transfer Laws

 

TOPICAL COURT OPINIONS

 

DEFINITIONS

     Creditor Definition - Court opinions on the definition of creditor

     Debtor Insider Affiliate Relative Organization Person Definitions   - Court opinions on the definitions of debtor, insider, etc.

     Claim And Debt Definitions  - Court opinions on the definitions of claim and debt

     Asset And Property Definitions  - Court opinions on the definitions of assets and property

     Lien And Valid Lien Definitions  - Court opinions on the definitions of lien and valid lien

     Transfer Definition  - Court opinions on the definition of transfer

     Value And Reasonably Equivalent Value (REV) Definition  - Court opinions on the definitions of value and reasonably equivalent value

     Insolvency Definition  - Court opinions on the definition of insolvency

TESTS

     Insolvency Test  - Court opinions relating to the Insolvency Test

     Insider Preference Test  - Court opinions relating to the Insider Preference Test

     Overextending Insolvency Test  - Court opinions relating to the Overextending Insolvency Test

     Sinking Insolvency Test  - Court opinions relating to the Sinking Insolvency Test

     Intent Test  - Court opinions relating to the Intent Test

           Badges Of Fraud  - Court opinions relating to the Badges of Fraud

DEFENSES

     Extinguishment Periods a/k/a (incorrectly) Statute Of Limitations  - Court opinions relating to the extinguishment periods

     Transferee Good Faith  - Court opinions relating to the transferee good faith for-value defense

REMEDIES

     Non-Money Remedies  - Court opinions relating to avoidance and other non-money remedies

     Money Judgment Remedies  - Court opinions relating to money judgments

     Attorney Fees -- Court opinions relating to awards of attorney fees

     Punitive Damages - Court opinions relating to punitive and exemplary damages

OTHER

     Burdens of Proof  - Court opinions relating to the burdens of proof

     Conflict Of Laws  - Court opinions relating to conflict of laws

     Uniformity  - Court opinions relating to uniformity with the laws of other jurisdictions

     Supplementary Law  - Court opinions relating to the interplay of the UVTA with other law

     Jurisdictional Issues - Court opinions relating to jurisdiction of UVTA actions.

BANKRUPTCY

     Section 548  - Court opinions relating to 11 USC 548

 

OTHER RESOURCES

 

 

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  • Charging Orders - The confusing remedy against a debtor's interest in an LLC or partnership is explained in reference to the Uniform Partnership Act, the Uniform Limited Partnership Act, and the Uniform Limited Liability Company Act.

 

  • Protected Series - An examination of the single most complex statutory legal structure yet created, with particular reference to the Uniform Protected Series Act of 2017.

 

  • California Enforcement of Judgments Law - Considers the topic of judgment enforcement in California, including the California Enforcement of Judgments Law and other laws related to California creditor-debtor issues.

 

  • Anti-SLAPP Laws - A collection of and commentary about Anti-SLAPP laws and significant court decisions on the subject within the United States, and special section on California Anti-SLAPP.

 

 

Voidable Transactions:

Fraudulent Transfers In American Law

 

by Jay D. Adkisson (Available 2021)

 

Click here for more information

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