Section 548 of the Bankruptcy Code provides the bankruptcy trustee (or the debtor-in-possession) with the ability to set aside certain transfers of the debtor's interest in property (or the fraudulent incurring of an obligation) that were made voluntarily or involuntary within two years before the bankruptcy filing. The doctrine of equitable tolling allows a claim to be filed after the statutory period has expired if inequitable circumstances have prevented the plaintiff from bringing the action within the applicable statute of limitations.

The debtor, Industrial Enterprises of America, Inc., argued that although the defendants' transfers occurred more than two years before the bankruptcy filing, their alleged bad acts concealed the section 548 claim. Therefore, the debtor argued that the Court should equitably toll the two-year look-back period so that it could bring a section 548 claim.

The Court rejected this argument, holding that equitable tolling cannot be applied to the substantive elements of a section 548 claim. Although the Court recognized that equitable tolling can apply to a statute of limitations, section 548's two-year look-back period is not a statute of limitations. The Court explained that a statute of limitations caps or regulates how far into the future a plaintiff may bring a claim. In contrast, a look-back provision is a substantive element of a section 548 claim, defining the universe of transfers that are avoidable under section 548. It does not refer to any act which is within the plaintiff's control, such as filing a complaint.

The Court found further support for its reasoning in that section 546 of the Bankruptcy Code is the actual statute of limitations provision for section 548 fraudulent transfer claims. Equitable tolling may be applied to section 546, but it was not the statute of limitations timing for bringing a fraudulent transfer action that the debtor missed. Rather, it was the timing element of section 548 itself, requiring the transfers to have occurred within two years of the bankruptcy filing.

This case serves as a reminder that equitable tolling can only be applied to procedural requirements. Bankruptcy courts cannot use their equitable powers to alter the substantive statutory elements of a claim. Therefore, creditors now have greater certainty that the two-year look-back period for fraudulent transfer liability under section 548 of the Bankruptcy Code is a bright-line test. However, when evaluating their exposure to this liability they should consider that state fraudulent transfer statutes, which also apply inside bankruptcy, often have longer look-back periods.

For more information on fraudulent transfers in bankruptcy, see Practice Notes, Fraudulent Conveyances in Bankruptcy: Overview and Fraudulent Conveyances: Issues and Strategies for Lenders and Private Equity Sponsors.