Contributed by Cristine Pirro
Imagine you are in the middle of representing a plaintiff in an adversary proceeding when you suddenly discover – after the statute of limitations has expired – that you failed to include a defendant. Are you Simply Out of Luck? Thankfully (for you), not necessarily, as Judge Mary Walrath of the United States Bankruptcy Court for the District of Delaware recently confirmed. She issued decisions in two different cases on the same day allowing plaintiffs in avoidance actions to amend their complaints after the expiration of the statute of limitations to add different defendants, albeit based on different grounds. In one case, she found that the amended complaint “related back” to the original complaint, while in the other case, although the relation back standard was not satisfied, she found cause to “equitably toll” the statute of limitations.
Both cases interpret Rule 7015 of the Federal Rules of Bankruptcy Procedure, which applies Rule 15 of the Federal Rules of Civil Procedure to adversary proceedings and sets the standards for when a complaint can be amended. A party is permitted to amend its pleading once as a matter of course within 21 days of service of the complaint or any responsive pleading. Fed. R. Civ. P. 15(a)(1). After a pleading has already been amended, or 21 days has passed from the filing of a responsive pleading, a party can only amend its pleading with the consent of the other party or with leave of the court. Fed. R. Civ. P. 15(a)(1). In the Third Circuit, although leave to amend is generally granted liberally, a court will not grant leave if the amendment would be “futile” because it fails to state a claim upon which relief can be granted. In general, if an amendment would be barred by the applicable statute of limitations, it is considered futile. Thus, after the statute of limitations has expired, an amendment will not be permitted unless it relates back to the date of the initial complaint or an exception to the statute of limitations, such as equitable tolling, applies.
An amendment relates back to the date of the original pleading when: (A) the law that provides the applicable statute of limitations allows relation back, (B) the amendment asserts a claim or defense that arose out of the conduct, transaction, or occurrence set out—or attempted to be set out—in the original pleading, or (C) the amendment changes name of the party against whom a claim is asserted, if the claim arises out of the same conduct as that set forth in the original pleading and if, within the period provided for serving the summons and complaint, the party to be brought in by amendment: (i) received such notice of the action that it will not be prejudiced in defending on the merits, and (ii) knew or should have known that the action would have been brought against it, but for a mistake concerning the proper party’s identity. Fed. R. Civ. P. 15(c)(1). The relation back doctrine is designed to balance a defendant’s interest in the protection afforded by the statute of limitations with a judicial interest in resolving disputes on their merits. It therefore focuses on whether the newly added defendant has been provided the notice intended by the statutes of limitations.
In In re Berkline/Benchcraft Holdings, LLC, the court found that the relation back standard was met.
During the ninety days before the petition date (i.e., the period during which preferential payments may be avoided in bankruptcy), the debtors made payments to or for the benefit of Evergreen Line. Just under two years after the petition date, the plaintiff commenced an adversary proceeding by filing a complaint against Evergreen Shipping Agency to avoid and recover the transfers as preferential pursuant to sections 547 and 550 of the Bankruptcy Code. The plaintiff served a copy of the original complaint and the summons on Evergreen Shipping, c/o the Corporation Service Company. Exactly two years and one day after the petition date, the plaintiff learned through a telephone conversation with Evergreen Shipping’s counsel that Evergreen Shipping was actually the agent for Evergreen Line, which was the party that had dealt with the debtors. A few days later, the plaintiff filed an amended complaint, modifying the defendant’s name from “Evergreen Shipping Agency” to “Evergreen Line.”
Evergreen Line moved to dismiss the amended complaint as time-barred by the statute of limitations and therefore futile. Because the amended complaint was filed more than two years after the petition date, the amended complaint would be considered futile by the court unless the amendment related back to the original complaint. In weighing whether Federal Rule of Civil Procedure 15(c)(1)(C) was met, the court considered whether: (i) the amendment asserted a claim arising out of the same transaction or occurrence described in the original complaint, (ii) the party to be brought in by the amendment (Evergreen Line) received such notice of the action within 120 days of the filing that it will not be prejudiced in defending on the merits, and (iii) within the same 120-day period, Evergreen Line knew or should have known that the action would have been brought against it, but for a mistake concerning the proper party’s identity.
The court found that the first requirement was met because the original complaint and the amended complaint sought avoidance of the same transfers. The court also found that the second requirement was met because counsel for Evergreen Line requested an extension of the deadline to answer the amended complaint within the 120 days, and the amended complaint was filed less than a month after the original complaint, resulting in no unreasonable prejudice. Finally, the court found Evergreen Line should have known it would be sued because of the plain language of the complaint, the similarity in the corporate names, and the fact that Evergreen Shipping was an agent for Evergreen Line. Thus, the court allowed application of the relation-back doctrine and denied the defendants’ motion to dismiss.
The court weighed a similar issue in Opus East, L.L.C. Although the court held that the amended complaint in that case did not satisfy the relation back standard, it allowed the trustee to assert new claims against new defendants under the doctrine of equitable tolling, because the debtor hid the cause of action.
On July 1, 2009, Opus East, L.L.C. filed for relief under chapter 7. The chapter 7 trustee filed a complaint against several defendants for damages based on breaches of fiduciary duties, avoidance and recovery of preferential and fraudulent transfers, unjust enrichment, and tortious interference with contracts. The trustee then filed a second amended complaint on March 5, 2013 (over two years after the petition date), seeking to avoid and recover preferential and fraudulent transfers from new defendants, citing to a series of newly discovered transactions.
As in Berkline, the court had to consider whether the amendment was futile because it was filed after the statute of limitations expired or whether it related back to the original complaint. Here, however, the court found that the new claims did not relate back. This was because (i) the allegations relied upon a new set of facts and transactions that had no factual nexus to the original complaint and (ii) the trustee did not provide sufficient notice to the new defendants that additional allegations may be pursued as required by Federal Rule of Civil Procedure 15(c)(1)(B), given that the facts in the amended complaint were new and supported different claims than those brought in the initial complaint.
End of story, right? Not so fast. The trustee alternatively argued that the statute of limitations was equitably tolled because Opus East, L.L.C. negligently concealed the transfers on its Statement of Financial Affairs. Equitable tolling stops the statute of limitations from running until the plaintiff knows, or should reasonably be expected to know, the concealed facts supporting the cause of action. The Third Circuit has identified three situations where equitable tolling may apply: where (i) the defendant has actively misled the plaintiff respecting the plaintiff’s cause of action, (ii) the plaintiff in some extraordinary way has been prevented from asserting his or her rights, or (iii) the plaintiff has timely asserted his or her rights mistakenly in the wrong forum.
The new defendants contended equitable tolling should not apply in this case because (i) they did not affirmatively conceal any information from the trustee regarding the transfers and (ii) the trustee should have thoroughly investigated the financial affairs of the debtor as required under section 704(a)(4) of the Bankruptcy Code. The court disagreed, citing to a series of non-Delaware cases supporting the notion that even if the defendant did nothing to conceal an asset or cause of action, if the debtor negligently did so, the statute of limitations can be equitably tolled. The court held the undisputed fact that Opus East, L.L.C. failed to list the transfers on its Statement of Financial Affairs to be sufficient evidence of the debtor’s concealment of the transfers. The trustee properly relied on Opus East L.L.C.’s sworn Statement of Financial Affairs, which did not include the transfers, to meet his statutory obligation. The trustee could not reasonably have been expected to learn about the transfers prior to the expiration of the statute of limitations without some indication that they existed. Thus, the court granted the trustee’s motion to amend the complaint.
Together, these cases serve as a reminder that even if the statute of limitations has passed, a complaint may be amended if the plaintiff can show the amendment relates back to the date of the original pleading. Even if the relation back doctrine cannot be satisfied, however, there is still hope for a plaintiff through equitable tolling. From a debtor’s perspective, Opus also emphasizes the importance of accurately filing one’s schedules and statements of financial affairs.
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