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Seventh Circuit Denies Challenge to Trustee Default Appointment After Conversion - In re Draiman

April 24, 2013

Vincent Howard and our Moreno Valley consumer bankruptcy lawyers were interested to see a case resolving a legal ambiguity: whether the statute of limitations for filing an avoidance action in a bankruptcy case is extended when an interim trustee is appointed as trustee. The case, In re Draiman, involves an interim trustee who became permanent trustee by default after creditors failed to elect another. Four subsequent avoidance actions, a type of lawsuit seeking to void a transaction involving the bankruptcy filer, were filed after the trustee became permanent, at a time that would normally be past the statute of limitations. But the statute of limitations is extended if the trustee is appointed during the first two years of the case, and trustee Richard Fogel argued that he was, counting from his initial appointment as interim trustee. The Seventh U.S. Circuit Court of Appeals disagreed, saying the rule could allow creditors to game the system.

Nachshon Draiman filed for Chapter 11 bankruptcy on May 14, 2009 and converted to a Chapter 7 on May 13, 2011, one day shy of two years later. Fogel was appointed as interim trustee on the latter date. By law, Fogel became permanent trustee after a failed creditors' election on June 30, 2011. He then filed several avoidance proceedings. Normally, no avoidance cases can be filed after two years from the initial bankruptcy filing--which in this case would be May 14, 2011, one day after Fogel was appointed. But by law, the period is extended to one year after the election or appointment of the first trustee, if that happens within the initial two-year period. If the appointment happens after the initial two years, there is no extension of the statute of limitations. Fogel argued that his appointment date was May 13, 2011, thus extending the deadline; the creditors argued that he was not appointed until the date he became permanent trustee, which would not extend the deadline. The bankruptcy court sided with Fogel.

The creditors won special leave to appeal because their question of law had no controlling precedent. The Seventh Circuit noted that the part of the Bankruptcy Code that extends the statute of limitations makes no mention of interim trustee appointments. Only two appellate cases have considered this issue; one, which sided with the bankruptcy court in the current case, involved an obsolete section of law. The other is distinguishable because the trustee in that case was elected after the two-year period expired, the Seventh said. Fogel argues that because the permanent trustee statute refers to the "election" of the trustee and says nothing about permanent appointments, the statute of limitations must start from when he was appointed as interim trustee. But the Seventh found that the permanent trustee statute could mean nothing else than an automatic "appointment." It noted that if Fogel had been elected, he would be unable to file his avoidance actions, and said this difference in results would make little sense. And it said under the bankruptcy court's interpretation, creditors would have an incentive to delay the trustee election.

This opinion acknowledges that it isn't clear whether permitting more avoidance actions is a good thing or a bad thing for bankruptcy filers. In the experience of Vincent Howard and our Costa Mesa individual bankruptcy attorneys, it depends on the deal that the trustee is trying to undo. In a lot of recent cases involving foreclosure, for example, the underlying mortgage is not necessarily a great deal for the bankruptcy filer because it was made during the bubble, at inflated prices and with a high interest rate. However, it's important to realize that any value the trustee gets from avoiding a mortgage goes to pay the creditors. This may be good for the filer if it's just a question of which creditor gets the house, but it won't allow the homeowner to keep the home. Because the trustee's job is to advocate for creditors, we strongly recommend that you talk to Vincent Howard and our Fontana personal bankruptcy lawyers if you want someone whose job is to advocate for your own interests.

Howard Law, P.C., represents Californians of all backgrounds who are exploring bankruptcy as a way to deal with overwhelming debts. For a case evaluation or to learn more, call us today at 1-800-872-5925 or send us a message through our website.

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