Opinion
No. 94 Civ. 7110 (SS)
June 28, 1995
Opinion
European American Bank ("EAB" or "appellant") appeals from an Order dated July 21, 1994 (the "July Order") by the Honorable Francis G. Conrad of the United States Bankruptcy Court for the Southern District of New York. Pursuant to Fed.R.Civ.P. 60(b) and Fed.R.Bankr.P. 9024, the July Order vacated an earlier Order of the bankruptcy court dated March 11, 1994 (the "March Order"), which had extended EAB's time to file a complaint against Dolores Benedict ("Benedict" or "appellee") declaring Benedict's guarantee obligation to EAB nondischargeable under § 523 of the Bankruptcy Code ( 11 U.S.C. § 523). In addition, the July Order barred EAB from prosecuting a complaint objecting to Benedict's discharge or to the dischargeability of the obligation, and discharged appellee's obligation to EAB. For the reasons discussed below, I affirm the July Order of the bankruptcy court.
Unless otherwise specified, all statutory references are references to the Bankruptcy Code, Title 11 of the United States Code. All references to "Rules" are references to the Federal Rules of Bankruptcy Procedure.
BACKGROUND
At issue in this appeal is whether EAB is barred from challenging the dischargeability of a loan it made to appellee's company, Cogliano Benedict Photographics Inc., which loan Benedict personally guaranteed. Benedict filed a Chapter 11 bankruptcy petition on April 13, 1993; the deadline to file complaints objecting to the discharge of debts under § 523(c) was set for August 23, 1993. Debts set forth in § 523(a), including debts for fraud, are excepted from discharge in bankruptcy. Section 523(c), however, specifies that some of these nondischargeable debts, including debts for fraud, will be discharged unless the creditor timely requests the bankruptcy court to determine the dischargeability of the debt. In order to conduct discovery to test whether Benedict had procured the loan fraudulently, EAB timely moved to extend its time to file a complaint under § 523(c). The bankruptcy court granted a 30-day extension.
On or about September 1, 1993, appellee converted her Chapter 11 case to one under Chapter 7. The conversion notice to creditors indicated that the new deadline under Bankruptcy Rule 4007(c) for the filing of complaints to contest the dischargeability of debts was January 10, 1994.
Rule 4007(c) mandates:
A complaint to determine the dischargeability of any debt pursuant to § 523(c) of the Code shall be filed not later than 60 days following the first date set for the meeting of creditors. . . . On motion of any party in interest, after hearing on notice, the court may for cause extend the time fixed under this subdivision. The motion shall be made before the time has expired.
EAB maintains that despite its repeated attempts from September through November 1993 to obtain documents and examine appellee, Benedict refused to comply with EAB's discovery demands. EAB moved on November 18, 1993 to compel discovery and to require Benedict's attendance at a Rule 2004 examination, or alternatively, to dismiss the bankruptcy case (the "November Motion"). The motion's return date was set for December 20, 1993, three weeks before the January 10, 1994 Rule 4007(c) deadline. At the request of Benedict's counsel, however, the return date of the motion was adjourned until February 7, 1994. EAB did not move for an extension of time to file its complaint objecting to the dischargeability of the debt owed to it.
On January 11, 1994, the day after the 4007(c) deadline passed, appellant and appellee met. Benedict agreed to reaffirm EAB's debt under § 524(c) (the "Reaffirmation"), and stipulated to extend EAB's time to object to the discharge of its debt should she later rescind the Reaffirmation (the "Stipulation"). Upon being advised of the Reaffirmation, the bankruptcy court scheduled a hearing for February 7, 1994, later adjourned to March 3, 1994. After meeting privately with appellee, Judge Conrad indicated, without specifying his reasons on the record, that he would not approve the Reaffirmation or Stipulation. He also asked whether a meeting of creditors had been held and whether the 60 days had expired with respect to objections to discharge. EAB's counsel replied, "It will expire, I believe, next week sometime." (Tr. March 3, 1994 at 3). Judge Conrad directed EAB's counsel to submit an order extending EAB's time to file a complaint under § 523 through June 20, 1994, and signed the Order on March 11, 1994.
Appellee thereafter obtained new counsel, who objected to the March Order, contending that it was untimely as it was entered after January 10, 1994. New counsel moved to have the March Order vacated as it was signed under a mistake of fact. In addition, appellee rescinded the Reaffirmation and Stipulation. At a hearing held on June 28, 1994, Judge Conrad agreed that he had signed the March Order extending EAB's time to file a complaint under the mistaken impression that the deadline for filing had not already passed. On July 21, 1994, Judge Conrad vacated the March Order pursuant to Fed.R.Civ.P. 60(b) and ordered EAB not to file and prosecute a complaint objecting to appellee's discharge or the dischargeability of the obligation. In so doing, the bankruptcy court rejected EAB's argument that its motion to compel discovery should have been deemed a motion to extend time under 4007(c). This appeal followed.
Fed.R.Civ.P. 60(b) provides:
On motion and upon such terms as are just, the court may relieve a party or party's legal representative from a final judgment, order, or proceeding for the following reasons: (1) mistake. . . .
DISCUSSION
This court has jurisdiction to hear this appeal from the bankruptcy court pursuant to 28 U.S.C. § 158(a). On an appeal from an order of the bankruptcy court, the bankruptcy court's legal conclusions are reviewed de novo and its findings of fact are accepted unless clearly erroneous. See, e.g., In re Manville Forest Products Corp., 896 F.2d 1384, 1388 (2d Cir. 1990).
Appellant argues that the bankruptcy court erred in two ways: first, by reading EAB's November Motion to compel discovery as not including a motion to extend the Rule 4007(c) deadline; and second, by refusing to recognize the Reaffirmation and Stipulation agreed to by the parties, and later rescinded by appellee.
1. EAB's November Motion
EAB argues that a request for an extension of time to file a § 523 complaint was implicit in its November Motion to compel discovery, because its need for additional time in which to secure documents and conduct a § 2004 examination should have been apparent to the bankruptcy court. Benedict responds that the bankruptcy court could not have construed the November Motion as a request for an extension to file a complaint, because a request for a 4007(c) extension must be explicit.
EAB relies on In re Sherf, 135 B.R. 810 (Bankr.S.D.Tex. 1991) and In re Lambert, 76 B.R. 131 (E.D.Wis. 1985), for its position that the bankruptcy court should have construed the November Motion as implicitly including a motion for an extension of time; Benedict relies on In re Kennerley, 995 F.2d 145 (9th Cir. 1993), to counter that position. These cases are not binding authority on this court, although they are apparently the only precedent that discusses whether motions that do not explicitly request extensions under Rule 4007(c) may be construed as including such requests.
In Sherf, 135 B.R. 810, creditors filed an "objection" to dischargeability, which was served on the debtors. Thereafter, the clerk's office informed the creditors that they needed to file a complaint objecting to discharge, not merely an "objection." The creditors then timely served a complaint objecting to debtor's discharge, but neglected to file the complaint properly because they did not obtain a separate case number or pay a filing fee. The creditors were not informed of their mistakes until after the Rule 4007(c) deadline. The bankruptcy court held that a pleading filed before the Rule 4007(c) bar date that puts the debtor on notice as did the creditor's "objection" could be treated as a motion to extend time for filing a complaint. 135 B.R. at 815.
Unlike the "objection" and the served but not filed complaint inSherf, however, the November Motion to compel discovery here did not mention the filing of a complaint under § 523, nor did it even mention objections to discharge or dischargeability. The November Motion did not give any notice to appellee or the court as did the objection and the actual complaint served but not filed in Sherf.
In the second case relied on by appellant, Lambert, 76 B.R. 131, creditors moved the bankruptcy court for relief from a stay to permit them to pursue misrepresentation claims in state court. Included with the motion for termination of the stay was a copy of a complaint the creditors intended to file in state court. The court construed the motion for relief from a stay as one for an extension of time for filing a complaint to determine dischargeability of a debt and allowed the state court action to proceed. In upholding the ruling by the bankruptcy court, the district court noted that the order was "consistent with the principles behind the bankruptcy law, which preclude a debtor from escaping liability for fraudulent actions." 76 B.R. at 132. The district court discussed no caselaw in its decision, and the decision was not appealed to the Seventh Circuit.
The Ninth Circuit, however, criticized Lambert in Kennerley, 995 F.2d 145. In Kennerley, the bankruptcy court had barred a fraud action from proceeding against the debtor because the creditor had failed to file a timely complaint of nondischargeability, and the district court had reversed the bankruptcy court's order. The Ninth Circuit reversed the district court, rejecting the creditor's argument that his motion to lift the automatic stay should be considered a motion to extend the deadline under Rule 4007(c). Quoting what it termed the "well-reasoned decision" of the bankruptcy court, the Ninth Circuit emphasized, "`[Creditor's] motion for relief from the automatic stay did not request an extension of the deadline; it did not mention the deadline'. . . . In fact, the motion does not even mention Rule 4007 or § 523(c)." Id. at 147. In addition, the Kennerley court noted that Lambert conflicts with Ninth Circuit caselaw, which strictly construes Rule 4007(c). Id.
I am persuaded by the reasoning in Kennerley. Like the motion inKennerley, EAB's November Motion did not request an extension of the dischargeability bar date, nor did it mention Rule 4007 or § 523(c). The bankruptcy court had no cause to scrutinize the November Motion to conclude that EAB might be asking for other forms of relief it had not requested, given the specificity of the notice of motion, which reads in part:
NOTICE OF MOTION FOR AN ORDER TO COMPEL DISCOVERY AND REQUIRE DEBTOR'S ATTENDANCE AT EXAMINATION AND/OR IN THE ALTERNATIVE TO DISMISS THE DEBTOR'S BANKRUPTCY CASE
PLEASE TAKE NOTICE that upon the annexed motion (the "Motion") and proposed order of European American Bank ("EAB") by its counsel, Helfand Helfand, will move this court . . . for an order pursuant to Rule 45 of the Federal Rules of Civil Procedures [sic] made applicable by Rules 2004, 2005 and 9016 of the Federal Rules of Bankruptcy Procedure, to compel the debtor to permit discovery and require the Debtor to appear and be examined and/or in the alternative to dismiss the Debtor's bankruptcy case pursuant to Bankruptcy Code § 707(a)(1) and Bankruptcy Rule 2003.
Given the particularity of this notice of motion, EAB's contention that the bankruptcy court should have assumed that the motion sought an extension of time to object to dischargeability is unreasonable. Moreover EAB, a bank represented by counsel, had brought a specific motion for a deadline extension in the superseded Chapter 11 case; Judge Conrad had no reason to believe that EAB would not do the same in the Chapter 7 action, if EAB was seeking that relief. Finally, the November Motion was filed approximately seven weeks in advance of the 4007(c) deadline; there was no reason for the bankruptcy court to think that counsel for EAB would not subsequently file a timely motion for an extension if it perceived a need to do so. See Kennerley, 995 F.2d 145, 147 (9th Cir. 1993) (creditor's motion for relief from automatic stay should not be considered a request for an extension of the deadline; "[a]t the time the motion was filed, the deadline was some six weeks in the future, and plenty of time remained for [creditor] to file a timely dischargeability complaint").
The Ninth Circuit's reasoning in Kennerley is also consistent with the conclusion of other circuits that have held Rule 4007(c) to be a strict statute of limitations. See, e.g., In re Themy, 6 F.3d 688, 689 (10th Cir. 1993) (Rules 4007(c) and 9006(b)(3) "prohibit a court from sua sponte extending the time in which to file dischargeability complaints"); In re Alton, 837 F.2d 457, 459 (11th Cir. 1988) ("There is `almost universal agreement that the provisions of F.R.B.P. 4007(c) are mandatory and do not allow the Court any discretion to grant a late filed motion to extend time to file a dischargeability complaint.' "); In re Pratt, 165 B.R. 759, 761 (Bankr.D.Conn. 1994).
I too find the "strict statute of limitations" view of Rule 4007(c) to be consistent with the language of the Rule and its legislative history. The current Bankruptcy Rules, promulgated in 1983 and amended thereafter, eliminated the discretion of the bankruptcy courts in setting dischargeability deadlines. For example, former Rule 409(a) provided that the bankruptcy court set the deadline for filing a complaint objecting to dischargeability "not less than 30 days nor more than 90 days after the first date set for the first meeting of creditors. . . ." Current Rule 4007 removes the discretion of the bankruptcy court by statutorily fixing a 60 day period to file dischargeability complaints. In addition, the bankruptcy court's discretion to extend deadlines also has been eliminated: Former Rule 409 provided that the bankruptcy court "may for cause shown, on its own initiative or on application of any party in interest, extend the time for filing a complaint objecting to discharge." Current Rules 4007 and 9006 eliminate the court's authority to extend deadlines sua sponte; Rule 4007(c) provides that, in order to extend the bar date, "[t]he motion shall be made before the time has expired," and Rule 9006(b)(3) provides that enlargement of time under 4007(c) may be obtained "only to the extent and under the conditions stated in those rules." See, e.g., In re Klein, 64 B.R. 372, 374-75 (Bankr.E.D.N.Y. 1986).
While the limitations on a court's ability to set and extend deadlines does not directly address appellant's argument that its November Motion should be construed as including a request for an extension, I agree with the reasoning in Kennerley that a broad reading of the November Motion that would construe a motion to compel discovery as a motion to extend the deadline for filing a dischargeability complaint would be inconsistent with the overall strict interpretation which should be accorded to Rule 4007(c).
Appellant does not argue that his failure to file for an extension of the Rule 4007(c) deadline was a result of "excusable neglect," presumably because most courts have interpreted Rule 9006(b)(3) as eliminating the possibility that a deadline may be extended under 4007(c) because of excusable neglect. See, e.g., In re Rockmacher, 125 B.R. 380, 383 (S.D.N.Y. 1991) (when dealing with extensions of time under Rule 4007(c), "the excusable neglect standard of rule 9006(b)(1) is explicitly excepted from consideration by rule 9006(b)(3)"); In re Savage, 167 B.R. 22, 27 (Bankr.S.D.N.Y. 1994) (Bankruptcy Rule 9006(b)(3) does not make allowance for excusable neglect"); In re Figueroa, 33 B.R. 298, 300 (Bankr.S.D.N.Y. 1983) ("It is clear that by prohibiting that which it formerly permitted, Congress intended to no longer subject the preeminent fresh start policy to the uncertainties of excusable neglect in failing to timely object to discharge of a claim"). Accord Pioneer Inv. Serv. Co. v. Brunswick Assoc. Ltd. Partnership, 113 S.Ct. 1489, 1495 (Supreme Court explained that existence of excusable neglect doctrine for filing late claims in Chapter 11 cases but not in Chapter 7 cases reflects the different policies of the two chapters: "Whereas the aim of a Chapter 7 liquidation is the prompt closure and distribution of the debtor's estate, Chapter 11 provides for reorganization with the aim of rehabilitating the debtor and avoiding forfeitures by creditors.").
Appellant further argues that the bankruptcy court should have extended the dischargeability complaint deadline under its general authority granted in § 105(a) of the Code, which allows the court to act to prevent an abuse of the bankruptcy process. Appellant relies on In re Greene, 103 B.R. 83 (S.D.N.Y. 1989), aff'd without opinion, 904 F.2d 34 (2d Cir. 1990), cert. denied, 498 U.S. 1067 (1991), in which the district court upheld the bankruptcy court's use of § 105(a) to extend the deadline for objections to dischargeability. The facts in Greene, however, are decidedly different from the situation here.
The Greene court extended the filing deadline for a creditor who was neither included on the creditor list nor had actual notice of the bankruptcy, unlike EAB, who was properly notified of appellee's filing of bankruptcy. Moreover, the Greene court was persuaded that the appellants before it were not honest debtors, but rather, had attempted to use the process "for purposes other than a good-faith effort to secure a fresh start." Id. at 88. Here, on the other hand, despite repeated cries by EAB of foul play on the part of appellee, Judge Conrad stated when granting appellee's motion to vacate the March Order, "The facts here cannot lead me to the conclusion that counsel for the bank has made here, that the Debtors have some sort of unclean hands." Tr. June 28, 1994 at 26. As the district court is bound to the bankruptcy court's findings of fact unless they are clearly erroneous, see, e.g., In re Manville Forest Products Corp., 896 F.2d 1384, 1388 (2d Cir. 1990), I accept Judge Conrad's finding of the lack of bad faith on the part of appellee.
EAB further argues that its earlier deadline extension in appellee's Chapter 11 case and its discovery requests put Benedict on notice that EAB intended to object to the dischargeability of the obligation owed it. It is important to bear in mind that notice is not the only purpose of the Bankruptcy Rules. Instead, the Rules are intended to serve other goals, among them, "the prompt closure and distribution of the debtor's estate," Pioneer, 113 S.Ct. at 1495, and the promotion of "the expeditious and efficient administration of bankruptcy cases by assuring participants in bankruptcy proceedings `that, within the set period of 60 days, they can know which debts are subject to an exception to discharge,'" Rockmacher, 125 B.R. at 384 (quoting In re Sam, 894 F.2d 778, 781 (5th Cir. 1990)). While the operation of the Rules may lead in some cases to harsh results, "[t]he bankruptcy system simply could not operate if every deadline, which by its nature can cut off someone's lawful rights, could be contested on equitable grounds." In re Collins, 173 B.R. 251, 254 (Bankr.D.N.H. 1994).
2. Rescission of Reaffirmation and Stipulation
EAB also argues that the Bankruptcy Court acted arbitrarily in overlooking the Reaffirmation and Stipulation entered into by the parties on January 11, 1994, the day after the deadline passed for EAB to file an objection to appellee's discharge or the dischargeability of debts owed it. In the Stipulation, appellee agreed to extend EAB's time to object to dischargeability should she rescind the Reaffirmation. Benedict later rescinded both the Reaffirmation and Stipulation.
EAB's argument is specious. It provides no legal authority for the novel proposition that litigants, through a stipulation, can bypass a court's exercise of its obligation to decide whether cause exists to extend a statutorily controlled deadline. See, e.g., In re Snyder, 102 B.R. 874, 875 (Bankr.S.D.Fla. 1989) ("[T]his court will not permit litigants to bind this court, by bargaining for delay beyond that specified by the Rules and the Code"). Judge Conrad did not abuse his discretion by refusing to recognize the Stipulation.
CONCLUSION
For the reasons stated above, I affirm the Order of the bankruptcy court dated July 21, 1994, case no. 93-B-41894 (FGC), and direct the Clerk of the Court to enter judgment accordingly.
SO ORDERED.