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Bankruptcy, Dismissal & Statutes of Limitation: A Landmine For The Unwary

The clock starts ticking the date the contract is breached.

− Bankruptcy, Dismissal & Statutes of Limitation: A Landmine For The Unwary

 

A recent opinion issued by the North Carolina Court of Appeals should serve to remind all creditors of the necessity of vigilance when a debtor is in bankruptcy.

In Person Earth Movers, Inc. v. Buckland,N.C. App. , 525 S.E.2d 230 (2000), the Court reviewed a matter in which a contractor performed work which was billed in a lump sum in August, 1989. The bill was not paid and in March, 1992, the contractor filed a petition for bankruptcy seeking protection under Chapter 13 of the United States Bankruptcy Code. In his petition, the debtor, who disputed the amount owed, did not list Person Earth Movers as a creditor. Aware ofthe bankruptcy, Person Earth Movers went ahead and filed a Proof of Claim which was allowed by the Trustee. Over the course of the bankruptcy, the Trustee made payments totaling approximately 10% of the debt. The debtor’s bankruptcy was dismissed in March, 1994 and Person Earth Movers filed a state court action to collect the debt in December, 1994. The trial court denied the debtor’s motion to dismiss the matter. The motion was based on the affirmative defense that the statute oflimitations within which the action could be brought had run. After an award for Person Earth Movers, the debtor appealed, based upon the trial court’s denial of the motion to dismiss. The Court of Appeals agreed with the debtor and ordered that this matter be dismissed, i.e. no award for Person Earth Mover.

So, what does this mean for creditors? It means that a creditor has three years in which to bring an action on a contract, unless the contract is signed under seal. The clock starts ticking the date the contract is breached. If a debtor files for protection from the bankruptcy court, then the clock essentially stops ticking, a sort of suspended animation. The key is that if the debtor does not complete the bankruptcy and is dismissed, as opposed to having the debt discharged, then the clock instantly begins ticking again, at the precise point in time where it stopped. Using Person Earth Movers as an example, the breach occurred the day the bill was due and went unpaid (August, 1989). The clock ticked up to the date the bankruptcy was filed – the Court computed this as being two years and 267 days. Simple math tells us that 98 days remained on the clock at the time the bankruptcy was filed. When the debtor’s bankruptcy was dismissed on March 4, 1994, the clock began to tick again. In mid-June, the statute of limitations, the time in which the creditor could bring the lawsuit expired. As noted earlier, the creditor did not bring the action until December 1, 1994.

The primary argument the creditor raised in attempting to overcome the statute of limitations problem was that the payments made by the Trustee served to re-affirm the debt and start the statute of limitation clock again. The Court rejected this argument. Re-affirmation requires a voluntary action by the debtor which essentially serves as an admission that the money is owed. The Court determined that the debtor has no control over what debts the Trustee decides to pay and therefore, the debtor cannot be said to have re-affirmed the debt. The Trustee is not an agent of the debtor. Therefore, there is no re-affirmation by the debtor and the statute of limitations is not re-started.

The moral of this story is, “always monitor bankruptcies carefully and be very aware of the statutes of limitations”. It is not all that unusual for a Chapter 11 or Chapter 13 bankruptcy to be dismissed, so to preserve a claim, creditors must be vigilant in watching for notices of dismissal and know the difference between a “dismissal” and a “discharge”.

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About James Vann

James’ law practice concentrates on creditors’ rights, unmanned aircraft systems, business law and planning and succession, civil commercial litigation, estate planning and business succession planning. Through his family business, James learned at an early age the value of sound business judgment and values. When representing his clients, James strives to consider business and economic issues, as well as the legal issues.
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