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Does the filing of bankruptcy stop the running of state statute of limitations?
In re: Brenda Marie Jones, No. 10-60000 In a bankruptcy dispute involving the discharge of taxes owed by debtor in a new chapter 7 case to the California Franchise Board, judgment of the bankruptcy court is affirmed where debtor’s prior Chapter 13 bankruptcy case had no effect on the look back period such that the period was not suspended and the tax debt discharged.
Shamus Holdings LLC v. LBM Financial, LLC, No. 10-2216 United States First Circuit, 06/09/2011 …11 U.S.C. § 362(a), which “gives debtors breathing room by stopping collection efforts in their tracks and permitting their resumption only when the stay is lifted by the bankruptcy court or dissolved by operation of law.” 229 Main St. Ltd. P’ship v. Mass. Dep’t of Envtl. Prot. (In re 229 Main St. Ltd. P’ship), 262 F.3d 1, 3 (1st Cir. 2001). The automatic stay prevents “the commencement or continuation . . . of a judicial, administrative, or other action or proceeding against the debtor.” 11 U.S.C. § 362(a)(1).
Another statute within the Bankruptcy Code is implicated here. That statute, 11 U.S.C. § 108(c, is a tolling provision; it extends state statutes of limitations for creditors who are barred by the automatic stay from taking timely action against the debtor. See Young v. United States (In re Young), 233 F.3d 56, 59 n.3 (1st Cir. 2000). It provides in pertinent part:
- If applicable non-bankruptcy law . . . fixes a period for commencing or continuing a civil action in a court other than a bankruptcy court on a claim against the debtor, . . . and such period has not expired before the date of the filing of the petition, then such period does not expire until the later of —
- (1) the end of such period, including any suspension of such period occurring on or after the commencement of the case; or
- (2) 30 days after notice of the termination or expiration of the stay under section 362 . . . of this title . . . with respect to such claim. 11 U.S.C. § 108(c)
Here, the bankruptcy occurred before the expiration of the limitations period and, at that time, LBM had the right to pursue judicial foreclosure. Id. § 1. Its ability to exercise that right was frustrated by the automatic stay. That stay prevented LBM, then and thereafter, from exercising its right to foreclose by commencement of a court action within the limitations period fixed by the Obsolete Mortgages Statute. See Perry v. Blum, 629 F.3d 1, 6 (1st Cir. 2010) (explaining that the automatic stay must be lifted to allow foreclosure to proceed).
The bottom line is that this case falls squarely within the maw of 11 U.S.C. § 108(c). That tolling provision preserves LBM’s option to commence a judicial foreclosure action until after the lifting of the automatic stay. See Spirtos v. Moreno (In re Spirtos), 221 F.3d 1079, 1080-81 (9th Cir. 2000); Morton v. Nat’l Bank of N.Y.C. (In re Morton), 866 F.2d 561, 565-66 (2d Cir. 1989); LBM Fin., LLC v. 201 Forest St., LLC (In re 201 Forest St., LLC), 422 B.R. 888, 895 (B.A.P. 1st Cir. 2010).
Tolling and Taxes:
The 3-year period that ordinarily commences on the most recent date the tax return for the year in question is due, pursuant to 11 U.S.C. § 507(a)(8)(A)(i). The basic rule is, if the tax collection entity (state or federal) is prohibited from tax collection due to the existence of the automatic stay in a bankruptcy case that arose during, or overlapped, the running of the 3-year time, the time is tolled (or “suspended”) for the time in which the previous case’s automatic stay overlaps the 3-year period, plus an additional 90 days.
That rule is relatively simple to apply. You begin with the due date, plus extensions, extend it out 3 years, then add the time a prior bankruptcy case stay overlapped, then add on an additional 90 days. See also Taxes and Bankruptcy. Again, it is extremely important to talk to a competent tax attorney before advising your clients.