In October 2018, the Wisconsin Court of Appeals reversed a decision by Circuit Court Judge Clare Fiorenza that previously granted summary judgment on behalf of certain defendants. The plaintiff in the case is the Committee of Unsecured Creditors, which represents the interests of approximately 140 unsecured creditors in the Chapter 11 bankruptcy case of Great Lakes Quick Lube LP.
The Committee sought to avoid certain fraudulent transfers against the defendants, who sold certain Valvoline franchises in a leveraged buyout to the Great Lakes Quick Lube prior to its bankruptcy. The Committee argued that three seller hold-back notes of $1 million each were fraudulent under Wis. Stat. sec. 242.04(1)(a), and as such, sought recoupment of $3 million from the sellers. Those three notes were paid in full by the debtor a couple of years before the bankruptcy petition on April 2, 2012.
Wis. Stat. sec. 242.04(1)(a) sets a 1-year statute of limitations on a fraudulent transfer claim after a party “could reasonably have . . . discovered” it. The Committee argued that the time period should run from when the fraudulent nature of the transfer could reasonably have been discovered. The defendants argued that the time period runs from the date of the transfer itself—regardless of when any fraud could have been discovered.
The Court of Appeals held that based on the statutory text itself, the statute of limitations test ought to be based on discovery of the fraudulent nature of the transfer—not simply the occurrence of the transfer itself. Next, the court reasoned that to be entitled to summary judgement, the plaintiffs had to show that “all of the creditors in question could reasonable have discovered the fraudulent nature of the transfer.” The court applied the “triggering creditor” rule from bankruptcy law, which governs the analysis. The court found that at least one creditor, which did not have access to Great Lakes Quick Lubes’ financial statements, could not have known about the existence and nature of the three $1 million notes. Other creditors similarly lacked knowledge regarding the details of the Valvoline transaction with the defendants. Accordingly, the court held that the defendants had the burden to show that “not one [of the 140 creditors] had a timely state law claim at the time of the bankruptcy petition filing.” The decision was reversed, and remanded, allowing the Committee to continue its pursuit of the fraudulent transfer claims against the defendants.