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May 11, 2008

Bankruptcy Jurisprudence from the Supreme Court - Bailey v. Glover

S_miller Bailey v. Glover, 88 U.S. 342 (1874)

Issue:  When the trustee is required to bring an action to avoid a fraudulent conveyance within two years of the bankruptcy filing, does the active concealment of the transfer by the debtor and the transferees toll the running of the two year statute of limitations to bring the action?       

Holding:  Yes, the two years runs from the time the conduct is discovered by the trustee assuming that the trustee used due diligence.      
Justice Samuel F. Miller

The debtor transferred all of his assets to family members for little or no consideration and subsequently filed bankruptcy.  His schedules listed only one creditor.  The trustee did not discover the transfer and thus did not file the complaint until some three years after his appointment.  The code at the time required the trustee to bring such an action “within two years from the time of the cause of action accrued for or against such [trustee].”  The transferees demurred and the demurrer was sustained. 

The Supreme Court reversed.  The opinion states that statutes of limitation should be strictly construed.  “It is obviously one of the purposes of the Bankrupt law, that there should be a speedy disposition of the bankrupt's assets.  This is only second in importance to securing equality of distribution.”  But this rule should not apply when fraudulent conduct has prevented the trustee from learning about the potential action. 

“[The requirement of a speedy bankruptcy case] is a wise policy, and if those who administer the law could be induced to act upon its spirit, would do much to make the statute more acceptable than it is.  But instead of this the inferior courts are filled with suits by or against [trustees], each of whom as soon as appointed retains an attorney, if property enough comes to his hands to pay one, and then instead of speedy sales, reasonable compromises, and efforts to adjust differences, the estate is wasted in profitless litigation, and the fees of the officers who execute the law.”

“In suits in equity where relief is sought on the ground of fraud, the authorities are without conflict in support of the doctrine that where the ignorance of the fraud has been produced by affirmative acts of the guilty party in concealing the facts from the other, the statute will not bar relief provided suit is brought within proper time after the discovery of the fraud.”

“[W]e hold that when there has been no negligence or laches on the part of a plaintiff in coming to the knowledge of the fraud which is the foundation of the suit, and when the fraud has been concealed, or is of such character as to conceal itself, the statute does not begin to run until the fraud is discovered by, or becomes known to, the party suing, or those in privity with him.”

The court struggled a little with the issue of whether or not this equitable rule should apply in actions at law.  But it said “the case before us is a suit in equity.”  Furthermore, the statute said that no “action in law or in equity” may be brought after two years and therefore the “statute must be held to apply equally by its own force to courts of equity and to courts of law.”

Note:  Justice Samuel Miller, a doctor before he studied law, was appointed to the Supreme Court by Abraham Lincoln in 1862. 

May 11, 2008 in Supreme Court | Permalink


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