Bankruptcy Court Applies Ten-Year Lookback Period for Tax Claims to Fraudulent Transfer Action

Fogel v. Specialty Industries II, LLC (In re Palmieri), No. 22-A-00177 (Bankr. N.D.Ill. May 15, 2023)

On May 15, 2023, the U.S. Bankruptcy Court for the Northern District of Illinois entered a memorandum opinion applying the ten-year lookback period for tax claims to a fraudulent-transfer action under Bankruptcy Code § 544.

The opinion concerns a dispute between Richard Fogel, the chapter 7 trustee for the estate of Michael J. Palmieri, on one hand, and Specialty Industries II, LLC, Karen Witt, and Nicholas R. Recchia, on the other hand. At the center of the case is Fogel’s motion to avoid what he alleges are fraudulent transfers of real property. He brings this claim under the Illinois Uniform Fraudulent Transfer Act (UFTA) and § 544 of the Bankruptcy Code. The defendants moved to dismiss the action as untimely.

The defendants argued that Fogel’s complaint is time-barred due to the UFTA’s four-year statute of limitations, whereas the transfers occurred outside this timeframe. Fogel, however, asserts that he can use the ten-year statute of limitations available to the IRS under 26 U.S.C. § 6502(a)(1) by virtue of § 544(b) of the Bankruptcy Code. This is in the context of the debtor’s own history of tax fraud.

Although there is a split of authority on the issue, the majority of courts have found that § 544(b) allows the trustee to use the extended statute of limitations. The defendants, referencing a case from the Bankruptcy Court in New Mexico, argue that the trustee is bound by the four-year statute of limitations. However, the court rejects this argument, pointing out the clear language of § 544(b) that allows the trustee to take advantage of the extended limitations period.

Lastly, the defendants contend that the complaint should be dismissed because the debtor did not personally own the property at the time of the transfer. But the court concluded that Fogel sufficiently alleged facts to state a reverse veil-piercing claim, thereby overcoming this objection.

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