The Bankruptcy Court for the Southern District of New York recently handed down a decision declining to grant a creditor’s motion to reopen a debtor’s chapter 7 case and vacate a discharge order. Although the legal predicates at issue in that case may not be relevant to all practitioners, the case itself serves as a valuable reminder about “best” practices and provides a number of teachable moments for attorneys of all ages and practice areas.
In In re Fe M. Lavandier, Envios de Valores La Nacional Corp. (“LAN”), a licensed money transmitter, moved to reopen the debtor’s chapter 7 case, vacate the discharge order and permit the late-filing of a complaint to determine the dischargeability of a debt owed by the debtor. LAN contended that the discharge order was entered as the result of a mutual mistake of the parties and that the case should have been reopened so that the Bankruptcy Court could consider its complaint. Unlike in a chapter 11 case, unless a party in interest files a complaint objecting to the discharge or a motion to extend the time to object, a chapter 7 debtor receives a discharge early in the case – generally, 60 to 90 days after the date first set for the meeting of creditors under section 341 of the Bankruptcy Code.
Prior the bankruptcy, LAN’s predecessor-in-interest obtained a default judgment against the debtor and its affiliate based on an action for conversion and enforcement of a guaranty. The debtor commenced its bankruptcy case after the default judgment was entered. Shortly after filing, a notice was sent out to all scheduled creditors, including LAN’s attorneys, scheduling the section 341 meeting of creditors. The notice also advised creditors that the deadline to file a complaint objecting to the debtor’s discharge under section 727(a) of the Bankruptcy Code or to determine that a debt owed to the creditors was not dischargeable under sections 523(a)(2), (4) or (6) was December 9, 2014.
LAN’s counsel sought to depose the debtor following the section 341 meeting. To resolve a schedule conflict, the parties agreed to a date that fell approximately three weeks beyond the scheduled non-dischargeability deadline. On recommendation from the debtor’s attorney, the parties agreed to file a stipulation extending the non-dischargeability deadline to January 23, 2015 to allow the deposition to proceed as scheduled. The stipulation, however, by its terms only extended the deadline for filing an objection to “the debtor’s discharge in bankruptcy” and did not mention, or extend by its terms, the deadline to file a proceeding to determine the dischargeability of the debtor’s debt to LAN under section 523(a) of the Bankruptcy Code. Moreover, apparently again relying on statements made by debtor’s counsel, LAN’s attorney filed the executed stipulation electronically on the bankruptcy court’s docket but did not submit the stipulation to chambers or otherwise seek to have the court “so order” the stipulation. Accordingly, there was no court order extending the time to object to the debtor’s discharge and, as a result, the bankruptcy court entered an order discharging the debtor on December 23, 2014.
Following the scheduled deposition, LAN’s attorney requested that the debtor consent to vacate the discharge order; however, the debtor refused. A week later, the bankruptcy court entered a final decree, discharging the chapter 7 trustee and closing the case. The “stipulated” deadline to object to the debtor’s discharge expired two days later. Approximately three months after that, LAN filed its motion to reopen the chapter 7 case, vacate the discharge order, and file a complaint to determine that the debtor’s debt was not dischargeable under section 523(a)(4) of the Bankruptcy Code.
Section 350 of the Bankruptcy Code allows the court to re-open a closed case for cause. Citing the parties’ mutual mistake about the need to obtain court approval for the stipulation and Federal Rule of Civil Procedure 60(b)(1), which allows the court, on motion and just terms, to relieve a party from a final judgement or order for mistake, inadvertence, surprise, or excusable neglect, LAN argued that the discharge of its claim should never have been granted due to the nature of the claim (defalcation of trust funds while in a fiduciary capacity or, in the alternative, embezzlement of trust funds) and the mutual mistake of the parties. The debtor objected to the motion claiming that LAN had failed to establish grounds for excusable neglect as well as any excuse for waiting more than three months to file the instant motion.
The bankruptcy court agreed with the debtor and overruled LAN’s motion. In so holding, the court first noted that, accepting LAN’s versions of the events, there were two mistakes in the case that precluded LAN from the relief it requested. The first concerned the failure to obtain court approval of the stipulation. Bankruptcy Rule 4004(b)(1) provides that the bankruptcy court may extend the deadline to object to the debtor’s discharge on motion by a party, after notice and hearing, and for cause shown. As a consequence, the bankruptcy court held that, based on its express terms, Rule 4004(b)(1) required a court order even where the parties stipulate to the extension. The court noted that litigants are “not free to enter into private agreements to change deadlines mandated by statute or rule” and absent an order extending the deadline, the bankruptcy court “must issue a discharge unless one of the exceptions set out in Federal Bankruptcy Rule 4004(c)(1) applied.” Accordingly, the Bankruptcy Court held that a mistake relating to the failure to obtain the court’s approval of the stipulation amounted to ignorance of the law, which did not justify relief under Rule 60(b)(1).
Even if the stipulation had been “so ordered,” LAN’s second mistake – also one of law but this time a “fatal one” according to the court – was that the stipulation by its terms had no effect on LAN’s claim that the debtor’s debt was non-dischargeable. According to the court, LAN believed that the entry of the discharge order barred its non-dischargeability claim under section 523(a)(4), confusing two separate principles of bankruptcy law: objecting to a debtor’s general discharge pursuant to section 727(a) and the exceptions from an individual debtors’ discharge of the types of debts listed in section 523(a) of the Bankruptcy Code.
The court pointed out that some of the exceptions listed in section 523(a) are self-executing, where the creditor is not required to take any action, while others, specifically those under section 523(a)(2), (4), and (6) (i.e., claims based on false pretenses, fraud or defalcation while acting in a fiduciary capacity, embezzlement, or willful and malicious injury to another entity or the property of another entity), must be filed within sixty days of the date first set for the meeting of creditors. The court noted that LAN’s counsel drafted a stipulation that extended LAN’s time to object to the discharge under Bankruptcy Rule 4004 (Grant or Denial of Discharge) but did not extend the deadline for filing a complaint to determine the dischargeability of the debtor’s debt under Bankruptcy Rule 4007 (Determination of Dischargeability of a Debt). The court concluded that “LAN never requested or obtained an extension of time under Federal Bankruptcy Rule 4007 to file a complaint to determine the dischargeability of Lavandier’s debt” and, as such, no purpose would be served by reopening the case to permit LAN to file a time-barred claim.
The Lavandier decision provides a number of valuable reminders and practical takeaways of which all attorneys should be reminded. First, one should be mindful of relying on the advice of opposing counsel when it directly impacts the rights of your clients. Do your own research and carefully read applicable legal authorities and statutes for yourself. Second, be precise in your drafting. Make sure agreements accurately reflect the intentions of the parties. Third, know and understand all the relevant authorities and rules. And fourth, when in doubt, get it “so ordered.”