Bankruptcy rules make clear that if a creditor wants to object to the discharge (legal write-off) of a debt on the basis of the debtor’s fraud, that objection has to be filed within 60 days of the “meeting of creditors.” (That “meeting” is about a month after the bankruptcy is filed, so this 60-day deadline is usually about three months after filing.) If a creditor wants an extension of this deadline, it has to file a motion for the extension no later than that same deadline date. The court can extend the deadline “for cause,” that is, if there is a sensible reason for the extension.
The Ninth Circuit Court of Appeals—the federal appeals court for California and all of the western states—showed a few weeks ago how strictly these timing rules must be followed. In Willms v. Sanderson the creditor, a husband and wife represented by an attorney, filed a motion for extension of time, on the last day to do so. But that motion asked for the extension of a closely related but different deadline. The bankruptcy judge did not see this as a problem, and in fact at the hearing, which was held after the deadline had passed, the judge decided to act as if the creditor’s extension motion had asked for an extension of the appropriate deadline, and then granted the extension. On appeal to the federal district court, the judge there also ruled that the extension was valid.
But the Court of Appeals told both of these judges, no way. The Court said that the 60-day deadline is a very strict one. If a creditor does not ask for an extension of THAT deadline within the time allotted, the bankruptcy judge can’t fudge on this, letting a motion of an extension on something else count as a motion of extension of this 60-day deadline. So the creditor was not permitted its day on court to show that it was defrauded by the debtor on the $500,000 loan.
Balancing the “Competing Goals” of a “Fresh Start” against Debts “Obtained by Fraudulent Means”
The Court of Appeals started broadly by acknowledging a tension between the “overriding goal” of bankruptcy to give a “fresh start” to debtors and not allowing dishonest debtors to get that benefit. “The strict deadline for filing a . . . complaint [alleging fraud] is one of the ways these competing goals are balanced.”
That “strict deadline” is laid out in Bankruptcy Rule 4007(c), which says the following as pertinent here:
. . . a complaint to determine the dischargeability of a debt under §523(c) shall be filed no later than 60 days after the first date set for the meeting of creditors under §341(a). . . . . On motion of a party in interest, after hearing on notice, the court may for cause extend the time fixed under this subdivision. The motion shall be filed before the time has expired.
The Court focused on the requirements in the rule: 1) that the “motion shall be filed before the time has expired,” 2) that the court have “cause” for granting an extension, and 3) that the debtor be put “on notice” that the extension is the subject of the hearing.
“Motion Shall Be Filed Before the Time Has Expired”
The motion that the creditor filed requested an extension to a deadline that sounds awfully similar to the one that should have been requested. The motion asked for an extension of “the deadline . . . to file a complaint objecting to the debtor’s discharge pursuant to . . . §707(b)(3).” (Emphasis added.) Instead the deadline that was at issue was to file a complaint objecting to the dischargeability of the creditor’s debt under §523(a). What the difference? The bankruptcy judge and the district court judge both apparently thought they were close enough
But the Court of Appeals said:
Discharge and dischargeability “refer to distinct concepts and cannot be used interchangeably” because they “are based on separate policies and are governed by distinct procedural rules.” Denial of discharge under . . . §727 is a remedy that “punishes debtors for misconduct in the bankruptcy process.”
In contrast, the rationale for §523(c)—which allows a creditor to have a specific debt declared nondischargeable—”is that the debtor acted in an improper manner at the time [that] he or she incurred the specific debt.”
(Emphasis added by the Court, citations omitted.)
The Court cited a number of its prior opinions which emphatically held that the 60-day deadline is strictly construed, and can’t be extended by the bankruptcy judge if the motion is not made in time. “Strict construction is necessary due to ‘the need for certainty in determining which claims are and are not discharged.'” The Court emphasized that there was nothing in the creditor’s extension motion that referred to §523(c) about fraudulent debts or to Rule 4007(c) about the 60-day deadline to object to a debt’s dischargeability on that basis. So the creditor’s “complaint was untimely, and the bankruptcy court erred in granting the extension and allowing the [creditor] to proceed.”
“Cause” for Granting Extension
As the Court stated:
The bankruptcy court also abused its discretion by granting the time extension without either a showing or a finding of cause. . . .. Nor did the [creditor’s] motion provide a basis for such a finding.
While the “cause” standard may be a lenient one, accepting the [creditor’s] request for more time so that they could determine whether or not they even had a viable argument for nondischargeability—without any explanation why they could not have made this determination within the time set by Rule 4007—would render the standard toothless.
Debtor “on Notice” of Extension
The Court found compelling that the contents of the creditor’s extension motion “could not have put [the debtor] on notice that the [creditor] planned to file a complaint to have the . . . debt . . . declared nondischargeable.” And in fact the debtor opposed the extension motion about discharge successfully, with the bankruptcy judge denying the extension. But then at the same hearing the judge simultaneously raised and ruled favorably on the nondischargeability extension, without the creditor ever having raised it, and without the debtor having any notice that this was at issue. The Court of Appeals said this lack of notice to the debtor made the extension invalid and the creditor’s subsequent complaint untimely.
The 60-day deadline for a creditor to object to the dischargeability of a debt is very strict. A motion for an extension of that deadline must not only be made within those 60 days, it must specifically refer to that particular deadline, so that the debtor is put on notice of it. The motion must provide good “cause” for needing the extension, NOT just that the creditor needs more time to decide if it has valid grounds to object.
A motion for extension that fails to meet these conditions is inadequate, and so the extension would not be granted, time would have run out, and so the creditor would not be permitted to file a complaint. And if it does file one, the complaint would be dismissed with prejudice, meaning without the right to ever file one again. So says the Ninth Circuit Court of Appeals in Willms v. Sanderson.