Adelphia Recovery Trust v. Bank of America, N.A. et al., 2009 WL 1249360 (S.D.N.Y. May 6, 2009)

In Adelphia Recovery Trust v. Bank of America, N.A. et al., Adelphia Recovery Trust (ART) amended “Claim 31” of a massive complaint it filed against parties allegedly involved in a scheme to defraud Adelphia Communications, the debtor. ART amended Claim 31 to include newly discovered transfers of the debtor equaling approximately $95 million made to Adelphia’s lenders, including Salomon Smith Barney, Bank of America and Goldman Sachs (the Lenders). Under Bankruptcy Code section 548, the fraudulent transfer of a debtor’s assets may be avoided for the benefit of the debtor’s estate and its creditors.

The Lenders moved to dismiss the amended Claim 31 arguing, among other things, that it was time-barred under Bankruptcy Code section 546, which states that fraudulent transfer claims brought under Bankruptcy Code section 548 must be commenced within two years from the petition date. Conceding the amendment came more than two years after Adelphia filed for bankruptcy, ART argued that the amended claim was nevertheless permitted under Federal Rule of Civil Procedure 15(c). Federal Rule of Civil Procedure 15(c) permits a pleading to be amended to add additional claims after the statute of limitations elapses, if the additional claims relate back to those in the original pleading by arising out of the same conduct, transaction, or occurrence set forth in the original pleading. The Lenders argued that the transfers added to Claim 31 did not “relate back” to those in the original complaint, because “for fraudulent transfer and preference claims, each transfer is a separate and distinct event,” and therefore each fraudulent transfer claim must be brought within the statute of limitations set by Bankruptcy Code section 546. Meltzeler v. Bouchard Transport Co., Inc., 66 B.R. 977 (Bankr. S.D.N.Y. 1986).

The United States District Court for the Southern District of New York held that the claims added to ART’s complaint were timely (the District Court heard the case because the action related to a broader, multi-district litigation). In support of its holding, the Court cited Barr v. Charterhouse Group Int’l, Inc., 238 B.R. 558 (Bankr. S.D.N.Y. 1999). In Charterhouse, the court determined whether new claims related back by looking at whether the initial complaint “put the defendants … on notice of new or additional legal theories … [and] inform[ed] the defendants of the facts that support those new claims.” The District Court found that the new claims asserted by ART fit within the Charterhouse rule, because they arose from the same borrowingfacility as those in the original complaint and took place in the same time period as those included in the original complaint.

The District Court found the Metzeler case cited by the Lenders inapposite because the new claims in Metzeler arose from different transactions than those initially alleged. In contrast, the new transfers alleged in Claim 31 arose out of the same transaction as the transfers alleged in the original complaint because both transfers were repayment for monies borrowed under one credit facility.

Commentary: Plaintiffs often discover additional preferential or fraudulent transfers after filing their original complaint, as more facts come to their attention through discovery or further analysis of the debtor’s records. In order to be able to bring claims based on newly-discovered facts, it is essential for a complaint in an avoidance action to be factually broad so that any newly discovered transfers will relate back to the facts originally alleged.