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Parker Poe Wins Issue of First Impression in Federal Bankruptcy Court Involving the Golden Creditor Rule

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  • November 15, 2022

Charlotte, NC – Parker Poe Adams & Bernstein LLP is pleased to announce the firm recently won a motion involving an issue of first impression that could have broader implications for government entities attempting to use the Federal Debt Collection Procedures Act (FDCPA) and bankruptcy trustees attempting to extend the statute of limitations based upon such golden creditor rule. In the bankruptcy court lawsuit – known as an adversary proceeding - the Chapter 7 trustee, acting on behalf of the debtor’s estate, sought to avoid and recover certain transfers as fraudulent. At issue was whether the trustee’s claims were timely or, instead, barred by the applicable statute of limitations. More specifically, the issue was whether the trustee could avail itself of the golden creditor rule – a rule which bankruptcy trustees are increasingly using to recover claims that otherwise would be past their statute of limitations.

The golden creditor rule permits a Chapter 7 trustee to step into the shoes of an unsecured creditor to recover transfers that the unsecured creditor would have been able to recover outside of bankruptcy. The rule does not itself create a substantive cause of action but instead allows the trustee to assume causes of actions available to other creditors outside of bankruptcy. The golden creditor rule is critical to many fraudulent transfer actions in bankruptcy because, if applicable, it permits the trustee to use the often longer statute of limitations that would apply to the chosen golden creditor.

Using the golden creditor rule, the trustee can step into the shoes of the government and recover, for the benefit of the debtor’s estate, a debt owed to the government under the FDCPA. That allows the trustee to extend the statute of limitations to six years, up from either two or four in many cases. The concept has grown popular in recent years to increase the amount of money that can be recovered, especially when the trustee is stepping into the shoes of the Internal Revenue Service (IRS).

The majority of courts have said a trustee can use the golden creditor rule to step into the shoes of the IRS to take advantage of the longer statute of limitations provided by the FDCPA and Internal Revenue Code (IRC). However, no court had ruled on whether a trustee can step into the shoes of the Pension Benefit Guaranty Corporation (PBGC). In fact, no court had ruled on whether the PBGC itself could recover monies using the FDCPA.

The PBGC is a government corporation that pays certain pension benefits covered by the Employee Retirement Income Security Act (ERISA) if the pension plans in question run out of money. The PBGC is statutorily empowered to terminate such plans and become the statutory trustee of such plans. In this role, the PBGC is authorized to collect any amount due to the terminated plan on behalf of its beneficiaries.

In a case before the U.S. Bankruptcy Court for the Western District of North Carolina, the trustee attempted to recover more than $1.45 million from three defendants that Parker Poe represented. The claims would have otherwise been outside the statute of limitations of Section 548 of the Bankruptcy Code and the North Carolina Uniform Voidable Transactions Act. However, the trustee sought to step into the shoes of the PBGC in order to take advantage of the six-year limitations period provided in the FDCPA.

Parker Poe argued that the golden creditor rule should not apply because, even assuming the trustee could step into the shoes of the PBGC, the PBGC itself could not use the FDCPA to recover the allegedly fraudulent transfers. Specifically, Parker Poe argued that the FDCPA only applies to a debt owed to the government, and there was no “debt” owed to the PBGC such that the PBGC could ever use the FDCPA. Similar to a bankruptcy trustee, the PBGC cannot recover money for itself but can only recover for the beneficiaries of the trust.

The firm cited appellate rulings that reached similar conclusions with respect to collections by the National Labor Relations Board and the Federal Deposit Insurance Corporation. In those cases, the courts held that there was no debt owed to the government because any recovery would not flow to the federal treasury.

The bankruptcy court agreed. Writing that the “fact that the PBGC itself is a government corporation does not matter,” the judge concluded: “The critical determination is whether the debt is owed directly to the United States. Here, the debt is owed to the Freedom Plan and its beneficiaries, not to the United States.”

“The bottom line is I think a trust is a trust is a trust,” the judge added in a supplemental holding from the bench. He compared PBGC’s recovery efforts to the bankruptcy trustee’s efforts in this case, saying: “He is doing so as the trustee of a bankruptcy estate with beneficial interest held by the creditor body and not by himself. It’s not his money. I don’t think you can be simultaneously the trustee for the trust and claim to own the beneficial interest in the money.”

The motion to dismiss saved Parker Poe’s clients from having to pay back more than $1.45 million, and it prevented them from going through an expensive, arduous discovery process. It also took away the trustee’s ability to sue for more than $3.56 million total in related claims. Its implications may go beyond the bankruptcy context as well, as it not only limits the use of the golden creditor rule but also limits the use of the FDCPA by the PBGC going forward.

The team at Parker Poe in Charlotte that represented the defendants was led by partner Ashley Edwards and associate Phillip Fajgenbaum, and included partner Michel Vanesse.

About Parker Poe
Parker Poe Adams & Bernstein LLP has more than 275 lawyers in eight offices in North Carolina, South Carolina, Georgia, and Washington, DC. The firm provides legal counsel to many of the largest companies and local governments in the Southeast.

Parker Poe is a member of two leading international legal networks: TerraLex and the Employment Law Alliance. TerraLex and the ELA have chosen Parker Poe to help guide clients through the challenges of global business.