Samuel Lipshitz v. Richard Fogel

In the
United States Court of Appeals
For the Seventh Circuit
Nos. 12-3888, 12-3902, 12-3903, 12-3904
IN RE:
N ACHSHON D RAIMAN,
Debtor.
R ICHARD M. F OGEL, Trustee,
Plaintiff-Respondent,
v.
R ONALD S HABAT, et al.,
Defendants-Petitioners.
Petitions for Leave to Appeal from
the United States Bankruptcy Court for the
Northern District of Illinois, Eastern Division.
Nos. 12 A 799 through 12 A 802—Timothy A. Barnes, Judge.
S UBMITTED JANUARY 29, 2013—D ECIDED A PRIL 8, 2013
Before P OSNER, R IPPLE, and H AMILTON, Circuit Judges.
P OSNER, Circuit Judge. Four defendants in adversary
actions brought by a trustee in bankruptcy ask us for
leave to appeal to this court directly from the bank-
2 Nos. 12-3888, 12-3902, 12-3903, 12-3904
ruptcy court. We may grant leave if the bankruptcy
court has certified, so far as pertains to this case, that
the ruling sought to be appealed from “involves a
question of law as to which there is no controlling deci-
sion of the court of appeals for the circuit or of the Su-
preme Court.” 28 U.S.C. §§ 158(d)(2)(A)(i), (B)(i). The
bankruptcy court has so certified; the question
presented is important; and so we grant leave to appeal.
The petitions and responses ventilate the question of
law adequately, and so we can proceed to decision
without requiring oral argument or further briefing.
The question presented by the appeals is whether the
bankruptcy court erred in ruling that the appointment of
an interim trustee can extend the statute of limitations for
avoidance actions in bankruptcy (a subset of adversary
actions, generally seeking to undo transactions that have
reduced the value of the debtor’s estate; see provisions
cited in 11 U.S.C. § 546(a)); the defendants argue that
it cannot, and so urge us to reverse.
Nachshon Draiman filed for Chapter 11 bankruptcy
on May 14, 2009, but converted his case to a Chapter 7
bankruptcy on May 13, 2011—one day short of two
years after his initial filing. That same day Richard
Fogel was appointed interim Chapter 7 trustee. 11 U.S.C.
§ 701(a). Draiman’s creditors met to elect a permanent
trustee on June 30, 2011, but the creditors failed to elect
one and by operation of law Fogel became the perman-
ent trustee on that date, § 702(d)—more than two
years after the initial bankruptcy filing.
The statute of limitations governing avoidance pro-
ceedings is two years from filing bankruptcy,
Nos. 12-3888, 12-3902, 12-3903, 12-3904 3
§ 546(a)(1)(A), and in this case the two years ended on
May 14, 2011. But the period is extended to one year
from the “appointment or election of the first trustee
under section 702…if such appointment or such election
occurs before the expiration of the period.” § 546(a)(1)(B).
The effect, when that condition is satisfied, is to extend
the statute of limitations from two years to between
two and three years. For example, if the trustee were
appointed or elected a year and 364 days after the
debtor filed for bankruptcy, which is to say one day
before the expiration of the two-year statute of limita-
tions, the limitations period would be three years minus
one day—the period from the filing of bankruptcy to
his appointment as trustee, plus one year. But if the
trustee were appointed or elected more than two
years after the bankruptcy filing, there would be no
extension; the limitations period would remain two
years from the date of the bankruptcy filing.
The defendants argue that the date of Fogel’s appoint-
ment was June 30, 2011, the date he became the
permanent trustee in accordance with section 702; and
that date was as we said more than two years after the
initial filing in bankruptcy. Fogel argues that he was
appointed on May 13, 2011, the date on which he
became interim trustee under section 701, and thus
within two years after the bankruptcy filing (by one day).
Section 546(a)(1), the provision of the Bankruptcy
Code that extends the statute of limitations for
avoidance actions when the trustee is appointed or
elected, makes no mention of section 701; nor does any
4 Nos. 12-3888, 12-3902, 12-3903, 12-3904
other provision of the Code extend the statute of limita-
tions when the trustee is merely an interim trustee.
The bankruptcy court held, however, that section
546(a)(1) is ambiguous and that the ambiguity is best
resolved by allowing the extension when the trustee is
an interim trustee who, because the creditors never
elected a permanent trustee, became the permanent
trustee under section 702(d) by default.
The judge acknowledged that his ruling was incon-
sistent with In re American Pad & Paper Co., 478 F.3d 546(3d Cir. 2007), the only appellate decision to decide the
issue, although in a case involving earlier versions of
the relevant provisions of the Bankruptcy Code another
court of appeals had, like the bankruptcy judge in
the present case, held that the appointment of the
interim trustee had triggered the extension of the statute
of limitations. In re Parmetex, Inc. 199 F.3d 1029, 1034 (9th
Cir. 1999). All the district court and bankruptcy deci-
sions that we’ve found, whether inside or outside the
Third Circuit, have followed American Pad & Paper rather
than Parmetex. See In re U.S. Wood Products, Inc., No. 00-
3198 (MFW), 2007 WL 778182 (D. Del. Mar. 13, 2007);
In re Allied Digital Technologies Corp., 341 B.R. 171, 173-77
(D. Del. 2006); In re Meyer’s Bakeries, Inc., 377 B.R. 229, 231-
32 and n. 1 (Bankr. W.D. Ark. 2007); In re Glamourette/OG,
Inc., No. 01-13025 (GAC), 2006 WL 3898322, at *2 (Bankr.
D.P.R. Jan. 13, 2006); In re Crowe Rope Industries, LLC, 311
B.R. 313, 314-15 (Bankr. D. Me. 2004); In re Goetz, 175
B.R. 743, 746 and n. 1 (Bankr. C.D. Cal. 1994); see also
5 Collier on Bankruptcy ¶ 546.02[2][a] (Alan N. Resnick &
Henry J. Sommer eds., 16th ed. 2012).
Nos. 12-3888, 12-3902, 12-3903, 12-3904 5
Actually American Pad & Paper itself is distinguishable
from this case, as the trustee points out in his brief. A
permanent trustee had been elected, in accordance
with section 702(b), but after the two-year deadline. It
would have been odd to allow the appointment of the
interim trustee to (in effect) toll the statute of limita-
tions, making him the placeholder for a different
person, the permanent trustee later elected; for section
546(a)(1) provides the one-year extension only
when a permanent trustee is appointed or elected
within the two-year statutory period. In the present
case the same person was interim and permanent
trustee, and in effect the bankruptcy court backdated
the trustee’s permanent appointment to his interim ap-
pointment—a wrench, given the statutory language,
but less so than would have been necessary to get
around the statute of limitations in the American Pad &
Paper case.
Still, the wrench is considerable. For there is no
intrinsic ambiguity in the statute—that is, no one just
reading the statute would think there was any basis for
the trustee’s claim. The permanent trustee must be
elected or appointed within the two-year statutory
period, and in this case the permanent trustee was ap-
pointed after that period had run. He had had a dif-
ferent status before then.
He agrees that the statute is not ambiguous, but he
reads it to mean that the one-year extension ran from
the date on which he was appointed interim trustee.
He argues, and the bankruptcy judge agreed, that it
6 Nos. 12-3888, 12-3902, 12-3903, 12-3904
could not run from the date on which the trustee
became the permanent trustee, because section 702 does
not provide for the “appointment,” but only for the
“election,” of the permanent trustee. Hence, he con-
cludes, when section 546(a)(1)(B) says that the limita-
tions period runs from the “appointment or election of the
first trustee under section 702” (emphasis added), it
must be referring to the appointment of the interim
trustee under section 701.
But that reading reads the reference to section 702
right out of section 546(a)(1)(B). And while it’s true
that section 702 does not use the word “appoint-
ment”—stating instead that “if a trustee is not elected
under this section, then the interim trustee shall serve
as trustee in the case,” 11 U.S.C. § 702(d)—what could
this mean except that the interim trustee is auto-
matically appointed permanent trustee in consequence
of the creditors’ failure to elect a trustee? Notice too
that under Fogel’s interpretation, had he been elected
permanent trustee (on June 30, 2011, the day he
became permanent trustee without being elected) he
would have lost the one-year extension for bringing
avoidance suits. What sense would such a difference
in results make?
His interpretation also would encourage creditors to
game the system in Chapter 11 cases that were con-
verted to Chapter 7 between one and two years after
they had been filed. In such cases, creditors might put
off their meeting to elect a permanent trustee until
the two years were nearly up, so that they obtain the
maximum limitations period secure in the knowledge
Nos. 12-3888, 12-3902, 12-3903, 12-3904 7
that if they waited too long they could meet without
electing a trustee, in which case the period would be
extended by one year from the date of appointment of
the interim trustee. In contrast, the statute as written
discourages creditors from dawdling after conversion to
Chapter 7, because any meeting of creditors convened
after the original two-year period would be too late.
If there is any ambiguity that favors the trustee’s posi-
tion, it would have to be extrinsic—that is, an ambiguity
that emerges from the context of the text sought to be
interpreted rather than being discernible from the text.
See Reich v. Great Lakes Indian Fish & Wildlife Comm’n, 4
F.3d 490, 493-94 (7th Cir. 1993); In re Kahn, 133 F.3d 932(10th Cir. 1998); McConnell v. Pickering Lumber Corp., 217
F.2d 44, 47-48 (9th Cir. 1954). The bankruptcy judge
thought there was an extrinsic ambiguity, although he
didn’t use the term. He was worried that a debtor
would stave off conversion of the bankruptcy from
Chapter 11 to Chapter 7 (many bankruptcies that begin
in Chapter 11 end in Chapter 7, see Sarah Pei Woo,
“Simultaneous Distress of Residential Developers and
Their Secured Lenders: An Analysis of Bankruptcy &
Bank Regulation,” 15 Fordham Journal of Corporate and
Financial Law 617, 632-34 (2010); Ed Flynn & Phil Crewson,
“Chapter 11 Filing Trends in History and Today,” American
Bankruptcy Institute Journal 14, 65 (May 2009)) for two
years and a day in order to prevent a trustee from
bringing avoidance actions. For ordinarily there is no
trustee in a Chapter 11 bankruptcy; rather, the debtor
remains in possession of the bankrupt estate. The bank-
ruptcy judge did not explain what incentive the debtor
8 Nos. 12-3888, 12-3902, 12-3903, 12-3904
in possession would have to do that, since avoidance
actions if successful increase the value of the debtor’s
estate. But the debtor might oppose avoidance actions
that seek to undo either preferences—payments by the
debtor to his preferred creditors (who might for
example be members of his family or officers or share-
holders of the debtor), avoidance being sought on the
ground that the debtor had unlawfully favored those
creditors over others—or fraudulent transfers, which
could include the debtor’s hiding assets by paying
“debts” to patsies who intend to refund the money to
him. See 11 U.S.C. §§ 547, 548.
But the danger that a debtor in possession might
stave off conversion to Chapter 7 in an effort to stymie
legitimate creditors is not great enough to justify us
in ignoring clear statutory language—clear in this case
because section 546(a) extends the time for suit
following appointment of a trustee under section 702,
while an interim trustee is appointed under section 701.
The reason it isn’t grave enough to justify judicial
surgery on the statute is that creditors are not powerless
to prevent the running of the statute of limitations. A
creditor can move for the appointment of a trustee in
a Chapter 11 bankruptcy, see 11 U.S.C. § 1104; Starzynski
v. Sequoia Forest Industries, 72 F.3d 816, 821 (10th Cir.
1995); 5 Collier on Bankruptcy, supra, ¶ 546.02[2][a], and if
the ground of the motion is (as in the Starzynski case)
that the appointment is necessary to prevent creditors’
claims from being time-barred, the bankruptcy judge
would be remiss if he failed to grant the motion. Further-
more, the statute of limitations in 11 U.S.C. § 546(a) is
Nos. 12-3888, 12-3902, 12-3903, 12-3904 9
subject to equitable tolling. See, e.g., Jackson v. Astrue,
506 F.3d 1349, 1354-55 (11th Cir. 2007); In re Pugh, 158
F.3d 530, 537 (11th Cir. 1998); In re M & L Business
Machine Co., 75 F.3d 586, 591 (10th Cir. 1996); In re United
Insurance Management, Inc., 14 F.3d 1380, 1384-85 (9th
Cir. 1994); cf. Bailey v. Glover, 88 U.S. (21 Wall.) 342, 345-50
(1874). If without any laxity or other fault the creditors
can’t procure the appointment of a permanent trustee
within the statutory deadline, the doctrine of equitable
tolling would permit an extension. Thus the statute can
be read as written without prejudice to the rights of the
legitimate creditors of a Chapter 11 bankrupt.
Confirmation of this conclusion is found in the
trustee’s failure in his brief to endorse the bankruptcy
judge’s concern other than in passing. The only argu-
ment that the trustee develops is semantic—and uncon-
vincing.
R EVERSED.
4-8-13