Avoiding Pitfalls in Bankruptcy: Advanced Issues in Avoidance Litigation

By: Russell L. Munsch
Presented at American Bankruptcy Institute
January 1, 2000

I. INTRODUCTION
The focus of this article are selective advanced, current issues and developments in avoidance action litigation. Due to the potentially unlimited breadth of the topics covered, we have not sought to be exhaustive of all such issues. We furthermore presume basic familiarity with the statutes and fundamental concepts implicated in bankruptcy avoidance actions.

A. Setting the Stage: The Growing Significance of Avoidance Actions
Calendar Years 2001, 2002 and 2003 all posted record breaking bankruptcy filing rates.1 While total filings increased in each of these successive years, business filings slightly declined while consumer filings have continued their increase – sufficient to offset the drop in business filings.2 Accounts of the impetus behind these statistics include some rush to the courthouse, despite a mending economy, to resort to the bankruptcy process prior to the possible enactment of proposed reform promising to make it more difficult for consumers to erase debts under Chapter 7 of the Bankruptcy Code ("Code") rather than making periodic payments under Chapter 13, or on the other hand, or for another example, deeper socio-economic issues confronting a progressively more fragile middle class may explain the growing use of the bankruptcy process by individuals, as Harvard professor Elizabeth Warren has argued.3 In any event, these are beyond the scope of this article.

Suffice it for our purposes to note that as the use of the bankruptcy process has grown, so has the volume of ancillary litigation that bankruptcy cases generate, the bulk of which is comprised of avoidance actions. While it appears that we may be slowly surmounting the crest of the aforementioned wave of bankruptcy filings, certainly at least as to business bankruptcies, this is not the case with respect to avoidance actions. The reason for this is the (typically) two year statute of limitations that applies to the commencement of such actions under Code section 546. Accordingly, accepting the fact that bankruptcy case filings peaked through the end of 2003 (and into 2004), we can expect a high rate of avoidance actions to stem from these cases through 2005-2006.

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