Scott Riddle over at the Georgia Bankruptcy Law Blog has an informative post on the decision by the U.S. Court of Appeals for the Third Circuit last week in the American Pad & Paper Company case. The case involved Section 546(a) of the Bankruptcy Code, which extends the standard two-year statute of limitations for bringing preference and other avoidance actions by up to one additional year if, before the two-year period expires, a trustee is appointed or elected.
The Third Circuit’s Holding. In short, the Third Circuit decided that the appointment during this two year window of an interim trustee under Section 701 of the Bankruptcy Code does not trigger the additional one year extension. Instead, the Third Circuit held that Section 546(a)(1)(B) specifically refers to Section 702 of the Bankruptcy Code and not Section 701. As a result, in a Chapter 7 case, a permanent trustee must be appointed or elected under Section 702, before the two-year period expires, for the one year extension to kick in.
When Does This Come Up? Although not an everyday occurrence, this situation can arise when a case originally filed under Chapter 11 is converted to Chapter 7 after almost two years. In the American Pad & Paper Company case, the selection of a permanent trustee under Section 702 was delayed (the creditors decided to elect a permanent trustee instead of letting the interim trustee become the permanent trustee), resulting in the expiration of the two-year statute of limitations before it could be extended for one additional year. The impact? The court held that the permanent trustee’s preference actions were all time-barred.
What Creditors Should Watch For. Defendants in preference or other avoidance actions in cases that were converted to Chapter 7 after a couple of years in Chapter 11 should carefully review the sequence of events surrounding the trustee’s appointment to see if the statute of limitations expired. Likewise, if a Chapter 11 case converts to Chapter 7 more than two years after the case was originally filed (technically, after the "order for relief" was entered), and no preference actions were brought in the Chapter 11 case, the trustee will be barred by the statute of limitations from bringing any avoidance actions.