Avoidable Transfers in Bankruptcy Law: Extending a Deadline Can Be Justified

Some transfers and payments made by a debtor prior to its filing bankruptcy may be “clawed back”, including preferential transfers and fraudulent conveyances. But action must be taken timely. 

Preferential transfers favor certain creditors over others by paying favored creditors.  Fraudulent conveyances are made by the debtor without receiving equivalent value in return. 

One of the utilities of filing bankruptcy under federal law is the possibility of recovering such transfers made prior to the filing of the case. The transfers are said to be “avoidable” if they meet certain criteria. 

Preferential transfers are governed by section 547 of the Bankruptcy Code. Fraudulent conveyances are addressed in section 548 of the Bankruptcy Code (or under applicable state law, as is incorporated under section 545 of the Code).  

In each case, the debtor or the trustee, if one has been appointed, has a limited window of opportunity to pursue such claims.

Determining when action must be taken is critical, or the opportunity to recover the transfer will be lost. We have previously issued legal alerts regarding counting of days and determining deadlines. See “When is it Due: A Cautionary Tale for Business and Legal Professionals”; “The Impact of Workouts on Deadlines to Act: Be Attentive to Statute of Limitations”; “Don’t Miss the Bar Date! The Importance of Timely Filing Bankruptcy Proofs of Claim”; “Excusable Neglect”: When Missing a Deadline May Not Be Fatal”; “Neglecting a Deadline May Be Excusable”; “Deadlines and Equity: Timeliness in Attacking Discharge of Debt and Debtors”.

However, under certain circumstances, that window to recover may be extended or equitably tolled.

In a recent case, Kokoszka v. Naguib (In re Naguib), Judge Baer of the Bankruptcy Court for the Northern District of Illinois, ruled that Rule 9006(b) and equitable tolling allowed for the extension of the two-year statute of limitations under Bankruptcy Code section 546(a) for the trustee to bring avoidance actions. Kokoszka v. Naguib (In re Naguib), Adversary No. 24 A 00229, 2025 Bankr. LEXIS 2751 (Bankr. N.D. Ill. Oct. 22, 2025).

The Trustee explained that there was cause to extend the statute of limitations pursuant to Federal Rules of Bankruptcy Procedure 9006(b) due to the obstructive tactics used to avoid discovery by both the Debtors and certain Insider Defendants. Id. at 31. 

The Court found that these tactics impeded the Trustee’s investigation into the debtor’s financial affairs and delayed him in his ability to bring avoidance actions. Id. at 36. Therefore, extending the statute of limitations was necessary so that the Trustee could continue his investigations and commence avoidance actions for the benefit of creditors and the bankruptcy estate.

Although the Court explained that the “for cause” analysis was the proper analysis at this time, “in an abundance of caution”, the Court conducted an analysis under the tougher standard of equitably tolling and found that the Trustee met his burden of exhibiting reasonable diligence and the presence of extraordinary circumstances.

Courts are split as to whether Federal Rules of Bankruptcy Procedure 9006(b) may be utilized to extend deadlines set forth in section 546(a).  There is no Second Circuit precedent on this matter, and the only Circuit Court precedent is found in the Eleventh Circuit in the case IBT Int’l, Inc. v. Northern (In re Int’s Admin. Servs.), 408 F.3d 689 (11th Cir. 2005), which Judge Baer relied upon.

We will continue to monitor any updates or changes in the law.  But for now, always be mindful of deadlines even though there may be an opportunity to extend.

Please note this is a general overview of developments in the law and does not constitute legal advice.  Nothing herein creates an attorney-client relationship between the sender and the recipient.  If you have any questions regarding the provisions discussed above, or any other aspect of bankruptcy law, please contact Michael H. Traison, Esq. (mtraison@cullenllp.com) at 312.860.4230 or Kelly McNamee, Esq. (kmcnamee@cullenllp.com) at 516.296.9166.