August 15, 2019, Middle District of Georgia– Debtors Kenneth and Janice Brownlee, initially filed the underlying bankruptcy case on March 21, 2017, as a Chapter 11 proceeding. The Trustee brought an adversary proceeding on April 9, 2019, one day less than a year after conducting the § 341 meeting. Defendant Stone & Baxter LLP is a law firm, and it also represented the Debtors in the bankruptcy case. The complaint alleged that the Debtors made pre-petition payments to the Defendant on account of an antecedent debt. The complaint sought to avoid the payments and recover the funds on the theories that the payments were either preference under § 547 and constructively fraudulent under § 548.
The Defendant filed a motion to dismiss, alleging that the Trustee’s causes of action, transfer avoidance under 11 USC. §§ 547 & 548, was time-barred under 11 USC. § 542(a). The issue revolved around the date from which the extension period began under § 546(a).
The Court determined that applying the relevant language in § 546(a) to this case; it must determine when was “the first trustee” first appointed under § 702. Did the statute of limitations begin to run when the Trustee was appointed as the interim Trustee (which is governed by § 701) or, did it start after the creditors declined to elect a trustee at the §341 meeting (governed by §702(d))?
The Defendant argued that § 546(a)—although referencing §702 and not §701—implicitly referred to the appointment of the interim Trustee, considering other Code provisions and the Code’s scheme of Chapter 7 administration. Reading §701 and §702 together, the Defendant argued that §702 does not appoint a new trustee, instead acknowledges the interim Trustee’s continuing obligations after conducting the §341 meeting. The Defendant reasoned that § 702 does not use the word “appointment.” Subsection 702(d), the only subsection addressing the Trustee’s status if no election occurs, states “if a trustee is not elected under this section, then the interim trustee shall serve as trustee in the case.” The Defendant’s interpretation rested on two arguments: (1) that § 702(d) does not independently make an appointment and (2) that the interim Trustee continues the § 701 appointment after the § 341 meetings.
However, the Court rejected these arguments as having no legal support. The Court stated that to begin with – the language of §702(d) makes an appointment. The subsection states that the interim trustee “shall serve as trustee in the case.”The Court added that the word “shall” in a statute is ordinarily instructive and indicative of a command. Citing In re Tennyson,611 F.3d 873, 877 (11th Cir. 2010) – the Court opined that the use of the word ‘shall’ ‘normally creates an obligation impervious to judicial discretion.'”. The Court opined that § 546(a) be read as instructing the interim trustee to “serve” in a particular capacity, i.e., as the case trustee after the § 341 meeting.
Further, the fact that §702(d) does not use the word “appoint” or “appointment” does not weaken the Court’s determination that the subsection nevertheless makes an appointment. According to the Court, the term should be interpreted broadly to include designating or assigning the interim trustee as the permanent trustee.
The Court added in the Seventh Circuit’s words, “what could [§ 546(a)] mean except that the interim trustee is automatically appointed as a permanent trustee in consequence of the creditors’ failure to elect a trustee.” In re Draiman, 714 F. 3d at 465.
The Court found that in the instant case, the Trustee was appointed between the first and the second year after the petition date. This entitled him an additional one-year extension to file any avoidance actions. The Court next added that the extension began upon concluding the §341 meeting when the Trustee’s appointment as the interim Trustee was terminated, and he was appointed the permanent case trustee as provided in § 702(d). The Court concluded that this result is governed by § 546(a)(1)(B), which sets the appointment under §702 as the date from which the one-year extension runs. Accordingly, the Trustee timely filed the complaint in this case, and the Defendant’s motion was denied.
The Court highlighted that under the sub-section, a two-year limitation applies unless “the first trustee” is “appointed or elected” under one of the subsections enumerated in §546(a)(1)(B) more than a year (but before two-years) from the petition date. If elected or appointed within this time, the Trustee is entitled to a one-year extension from his appointment. Accordingly, the Court ruled that the Trustee brought an action within the applicable statute of limitations and denied the Defendant’s motion. The Trustee’s avoidance actions under 11 USCS §§ 547 & 548 were not time-barred under 11 USCS §546(a).