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Equitable Tolling in Bankruptcy for Debtor's Bad Behavior

The Ninth Circuit Court of Appeals in In re Charlene Milby, Nos. 16-60022 and 16-60023, reversed the bankruptcy court and affirmed the BAP's decision, but on other grounds, to hold that the two year statute of limitations for avoidance actions could be equitably tolled based on the debtor's bad behavior, even when the trustee learned of the avoidance action before the running of the two year statute of limitations. In Milby, the debtor fraudulently conveyed assets before her bankruptcy filing and did not disclose the transfers in her bankruptcy. Just a few days before the expiration of the SOL, some of the debtor's creditors learned of the transfers and advised the debtor's trustee. The trustee did not file an action to avoid the transfers but the creditors did so almost a year later, after the trustee agreed to the creditors being appointed to challenge the transfers.

The Ninth Circuit said that the bankruptcy court's interpretation that failing to file a complaint after extraordinary circumstances cease but before the limitations period runs is dispositive on the question of equitable tolling is too narrow but the BAP's interpretation that post-discovery diligence is never relevant to whether equitable tolling applies is too broad. Rather, the key consideration is the diligence exercised during the existence of an extraordinary circumstance, such as a debtor's misbehavior and concealment of the transfers.

If you have any questions, please contact Melissa Lowe or any of the other attorneys at Shulman Hodges & Bastian LLP at 949.340.3400. For the full opinion, please click here.

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