MAXON ENGINEERING SERVICES INC v. ALEX HORNEDO ROBLES & ASSOC

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IN THE UNITED STATES BANKRUPTCY COURT
FOR THE DISTRICT OF PUERTO RICO
In re: :
:
MAXON ENGINEERING SERVICES, INC., : Case No. 04-04781 (GAC)
:
Debtor : Chapter 7
___________________________________:
:
MAXON ENGINEERING SERVICES, INC., :
:
Plaintiff, :
:
v. :
:
ALEX HORNEDO ROBLES & ASSOC., : Adv. No. 07-150
COLOCO READY MIX INC., : Adv. No. 07-161
POWER POLES INC., : Adv. No. 07-169
SINDICATO DE CAMIONEROS INC., : Adv. No. 07-171
SUPER ROOF & GENERAL CONTRACTOR, : Adv. No. 07-178
TURBO CARE, : Adv. No. 07-180
MATOS PUMPING SERVICE, : Adv. No. 07-201
INDUSTRIAL LIGHTING SERVICES, : Adv. No. 07-218
P & W ENGINEERING INC., : Adv. No. 07-219
:
Defendants :
___________________________________:
DECISION AND ORDER
BACKGROUND
The debtor filed a voluntary petition under Chapter 11 on May
4, 2004. The debtor filed schedules on May 24, 2004 and disclosed
payments made within ninety days of the filing of the petition
(dkt. #40 at pp. 114-135). The case was converted to Chapter 7 on
June 13, 2006 and Noreen Wiscovitch Rentas was appointed interim
trustee on June 14, 2006. On June 11, 2007, the Chapter 7 trustee
filed various adversary proceedings for recovery of preferential
payments made to the defendants on account of prepetition debts.
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The defendants were primarily suppliers to the debtor corporation.
All of the defendants have sought dismissal of the complaints,
contending that they are time barred. The trustee has opposed the
motions to dismiss, contending that the statute of limitations was
equitably tolled. The trustee alleges that, in a predetermined
strategy, the debtor’s representative extended and prolonged the
Chapter 11 case until the limitations period expired to prevent the
trustee from exercising avoiding powers and suing insiders, who
allegedly transferred millions of dollars to the Dominican
Republic, and others.
DISCUSSION
The Bankruptcy Code includes limitations on the trustee’s
ability to avoid prepetition preferences. Section 546 provides
that:
(a) [a]n action or proceeding under section ... 547 ...
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 . . . if
such election occurs before the expiration of the
period specified in subparagraphs (A); or
(2) the time the case is closed or dismissed.
11 U.S.C. § 546(a). Thus, the limitations period is two years
after the order for relief or one year after the appointment of a
Chapter 7 trustee, if the trustee is appointed within the initial
two year period.
The present adversary proceedings were not filed within two
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years after the entry of the order for relief nor were they filed
within one year after the appointment of the first trustee.
Moreover, the appointment of the trustee did not occur within two
years after the entry of the order for relief. The actions would
be time barred under a strict application of the statute of
limitations found in 11 U.S.C. § 546(a). The trustee’s ability to
obtain relief hinges on an equitable tolling of the statute of
limitations.
The doctrine of equitable tolling was first recognized by the
United States Supreme Court in Bailey v. Glover, 88 U.S. 342
(1874). Of relevance here, in Bailey, the Supreme Court held that
where fraud is concealed by the other party or where because of its
nature, the fraud remains secret, the statute of limitations does
not commence to run until the fraud is discovered. Id. Thus, the
essence of the doctrine of equitable tolling is that a statute of
limitations does not run against a plaintiff who, through no fault,
has no knowledge of the cause of action. The United States Supreme
Court subsequently concluded that the equitable tolling doctrine
must be read into every federal statute of limitations. Holmberg
v. Armbrecht, 327 U.S. 392 (1946). Thus, while the Bankruptcy Code
does not expressly contain a tolling provision, courts considering
the matter have recognized that 11 U.S.C. § 546 is subject to the
doctrine of equitable tolling. See e.g. In re M&L Business Mach.
Co., Inc., 75 F.3d 586 (10th Cir. 1996); In re United Ins.
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Management, Inc., 14 F.3d 1380, 1384 (9th Cir. 1994).
While the doctrine of equitable tolling may be applied in
situations where wrongful conduct prevents the plaintiff from
timely commencing the cause of action, the cases cited by the
trustee involve concealment of fraudulent conduct that gives rise
to the cause of action. See e.g. In re Olsen, 36 F.3d 71 (9th Cir.
1994)(trustee sought to void postpetition conveyances of debtors’
property to their son and daughter-in-law without court
authorization and without notice to the trustee); In re J&D
Sciences, Inc., 335 B.R. 791 (Bankr. S.D.Fla. 2006)(trustee sought
to avoid prepetition assignment of debtor’s interest in patent as
fraudulent transfer to debtor’s insider); In re McGoldrick, 117
B.R. 554 (Bankr. C.D.Cal. 1990)(trustee sought to avoid fraudulent
conveyance to spouse). The majority of cases considering the
application of equitable tolling have involved allegations of
concealment of a fraud, such as where a debtor fraudulently
transfers assets and conceals the transfers, which would not seem
to be applicable to a general preference claim, since the
preferential payment is not itself fraudulent.
The case law which states that the doctrine of equitable
tolling applies if the concealment is committed by any of the
parties, involves egregious conduct directly related to the
avoidance action. See e.g. In re Pomaville, 190 B.R. 632 (Bankr.
D.Minn. 1995)(allegations of fraudulent transfer of stocks to
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debtor’s former wife); In re Butcher, 72 B.R. 247 (Bankr. E.D.Tenn.
1987)(allegations that debtor had fraudulently concealed ownership
and transfer of property of the estate without valid
consideration). On the other hand, other courts have held that the
defendant must have participated in the fraud or be the party who
actually concealed the fraudulent conduct. See e.g. Schaefer v.
First National Bank of Lincolnwood, 509 F.2d 1287, 1296 (7th Cir.
1975)(in Rule 10b-5 securities fraud case, federal tolling doctrine
operates against “those who commit the alleged fraudulent acts and
those who negligently facilitate fraud”); Matter of Mediators,
Inc., 190 B.R. 515 (S.D.N.Y. 1995)(holding that statute of
limitations only tolled as to defendants who actively participated
in the concealment).
While this Court does not necessarily conclude that the
defendant must perpetrate the fraud or wrongful conduct, there must
be a nexus between the defendant and the wrongful conduct. In
other words, the defendant must have at least been a party to the
wrongful conduct. The present adversary proceedings are against
third party suppliers that had no connection with the debtor’s
alleged post-petition fraudulent conduct. The causes of action are
against general trade creditors for avoidance of preferences.
Accepting, the trustee’s allegations as true, the defendants were
owed money by the debtor prepetition and paid within the preference
period. The defendants received more money than they would have
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received in a Chapter 7, but there is no allegation of wrongful
conduct on their part or that their claims were paid fraudulently.
Moreover, the payments made to the debtor’s creditors within the
preference period, were disclosed in the debtor’s schedules.
The trustee alleges that the debtor’s representative
intentionally prolonged the Chapter 11 case until the limitations
period expired to prevent the trustee from exercising avoidance
powers and suing insiders and others. The insiders allegedly
transferred millions of dollars to the Dominican Republic. But,
this alleged conduct by debtor’s representative occurred after the
prepetition payments to the defendants and the post-petition
conduct of the debtor’s representative did not give rise to the
present causes of action for recovery of preferences. The causes
of action against the defendants are only based on prepetition
payments, not the debtor’s subsequent postpetition conduct. Unlike
the debtor’s insiders, who allegedly perpetrated and benefitted
from the purported fraud, the defendants are innocent third parties
as to the alleged post-petition misconduct.
The Court concludes that it would be inequitable to allow the
trustee to use the doctrine of equitable tolling to bring these
actions against general trade creditors for prepetition
preferences, since these defendants played no role in the alleged
wrongful conduct perpetrated by the debtor’s representative post-
petition. The Court concludes that these actions are time-barred
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pursuant to 11 U.S.C. § 546(a). Accordingly, the adversary
proceedings will be dismissed.
ORDER
WHEREFORE IT IS ORDERED that the motions to dismiss, filed by
the defendants, shall be, and they hereby are, GRANTED.
SO ORDERED.
San Juan, Puerto Rico, this 8th day of October, 2008.
BY THE COURT:
s/ Gerardo A. Carlo
_______________________
GERARDO A. CARLO
U.S. Bankruptcy Judge
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