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Decade Old Transactions Potentially Subject to Bankruptcy Clawback in Massachusetts

Transfers and transactions up to ten years old may be scrutinized, unwound and recovered by a trustee, the bankruptcy court sitting in Massachusetts recently held in the NECCO (think chalky wafer candy) bankruptcy case. The ruling, in a case of first impression in Massachusetts, expands the reach back period from the typical four-year period for fraudulent transfer recovery, so long as the IRS is a creditor in the case. 

Bankruptcy Code § 544(b)(1) permits a debtor (or trustee) to avoid any transfer of an interest in a debtor’s property, or any obligation incurred by a debtor, that is voidable under “applicable law.”  Debtors typically rely on state fraudulent transfer laws, which often include a four-year reach back period, to challenge transfers within four years preceding the bankruptcy filing.  In an effort to broaden its challenge window, the NECCO trustee sought to rely on ten and six-year reach back periods in certain IRS collection and enforcement statutes, arguing such statutes constituted “applicable law” under § 544(b)(1).  

The Court agreed holding that:

[T]o 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.

Further, the Court held that the size of the IRS’s claim is irrelevant to the debtor/trustee’s potential recovery.  In other words, so long as the IRS is a creditor in the case, and regardless of the size of the IRS’s claim, the ten-year reach back period may be available to debtors/trustees seeking to pursue fraudulent transfers in a Massachusetts bankruptcy case.  While a debtor/trustee would still need to prove the elements of the fraudulent transfer claim, including insolvency, the ruling potentially imperils transfers previously thought to be insulated from scrutiny.

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Eric R. Blythe is a Mintz attorney with deep capabilities in commercial litigation and lending, debt restructuring and workouts, distressed debt advising, and corporate and municipal reorganization. His clients have included lenders, secured and unsecured creditors, corporate borrowers, and bondholders.