In the recent case of Mitchell v Zagaroli, 2020 WL 6495156 (Bankr. W.D.N.C. 2020), 2020 WL 6495156 (Bankr. W.D.N.C. 2020), the bankruptcy court ruled that a chapter 7 trustee under 11 U.S.C. § 544(b) could “step into the shoes” of the IRS as an actual creditor to avoid a fraudulent transfer of property occurring up to ten years prior to the petition date.
Under section 544(b) of the Bankruptcy Code, the trustee of a bankruptcy estate may “avoid” (or colloquially, “claw back”) certain transfers of property. According to section 548 of the Bankruptcy Code, the reach back period for the trustee prior to the bankruptcy filing to avoid transfers is two years. However, section 544(b) allows a trustee to avoid any fraudulent transfer “that is voidable under applicable law by a creditor holding an unsecured claim.” Generally, this has been applied to a trustee employing avoidance powers under applicable non-bankruptcy law (i.e. State law), typically extending the look back period by a few years. In Zagaroli, the Court ruled that, if the IRS is an unsecured creditor of the bankruptcy estate, the look back period may extend to ten years prior to the petition date.
In Zagaroli, the debtor allegedly transferred multiple parcels of real property to his parents for no consideration in December 2010 and June 2011. In May 2018, the debtor filed a chapter 7 petition. The IRS filed a proof of claim in the debtor’s case. Thereafter, the trustee filed an action to avoid the debtor’s 2010 and 2011 transfers to his parents. The trustee claimed that section 544(b) allowed the trustee to use section 6502 of the Internal Revenue Code to avoid transfers as far back as ten years before the debtor’s petition filing.
To determine the merits of this claim, the court relied on the plain meaning of Bankruptcy Code section 544(b). As the IRS had an unsecured claim in the debtor’s estate, the court determined that the plain language of section 544(b) allowed the trustee to “step into the shoes” of the IRS (an “actual creditor”) and use section 6502 of the Internal Revenue Code to avoid the debtor’s real estate transfers. To support this conclusion, the court relied heavily on In re Gaither, 595 B.R. 201 (Bankr. D.S.C. 2018), which determined that section 544(b) similarly permitted the trustee to step into the IRS’s shoes and that courts should not look beyond the plain meaning of this provision. Zagaroli cited other cases as well and characterized this as the “majority rule.”
It does appear that the majority of cases in the nation ruling on this issue have come to the same conclusion as Zagaroli, though some courts have disagreed. For example, in In re Vaughan Co., 498 B.R. 297 (Bankr. D.N.M. 2013), the court relied more heavily on congressional intent and determined that a trustee should not be permitted to use the unique powers of the IRS. The Vaughan Co. court opined that the federal government was not meant to be used as a “mere conduit for the enforcement of private rights which could have been enforced by the private parties themselves.” Id. at 304 (citing Marshall v. Intermountain Elec. Co., 614 F.2d 260 (1980)). Thus, under this court’s analysis, a trustee could step into the IRS’ shoes but would still be barred by the state’s statute of limitations, unlike the IRS. Id. at 305.
Despite the few opposing decisions, the holding in Zagaroli suggests that courts are continuing to extend trustees’ avoiding powers by extending the look back period when the IRS is an unsecured creditor of the bankruptcy estate. At this time, however, there is no binding authority on this issue from the Ninth Circuit.