In re Stubbs ( 2017 )

RECOMMENDED FOR FULL-TEXT PUBLICATION
File Name: 17b0003p.06
BANKRUPTCY APPELLATE PANEL
OF THE SIXTH CIRCUIT
In re: LANEKA MARIE STUBBS, ┐
Debtor. │
___________________________________________ │
│ Nos. 16-8025/8027
SHELDON STEIN, Trustee, >
Plaintiff-Appellant, │
│
│
v. │
│
LANEKA MARIE STUBBS, │
│
Defendant-Appellee.
│
┘
Appeal from the United States Bankrupcty Court
for the Northern District of Ohio at Cleveland.
No. 14-17806; Adv. No. 15-01190—Jessica E. Price Smith, Judge.
Decided and Filed: March 9, 2017
Before: HUMPHREY, OPPERMAN, and PRESTON, Bankruptcy Appellate Panel Judges.
_________________
COUNSEL
ON BRIEF: Sheldon Stein, S. STEIN COMPANY LLC, Cleveland, Ohio, for Appellant.
_________________
OPINION
_________________
GUY R. HUMPHREY, Bankruptcy Appellate Panel Judge. These related appeals
concern a Chapter 7 trustee’s efforts to obtain income tax returns from a debtor and the remedies
which the trustee pursued upon the debtor’s failure to turn over the tax returns. The trustee
appeals orders denying the trustee’s default judgment motion in an adversary proceeding seeking
to revoke the debtor’s discharge for failure to turn over the tax returns; dismissing the adversary
Nos. 16-8025/8027 In re Stubbs Page 2
proceeding and vacating an order which required the debtor to appear for a Bankruptcy Rule
2004 examination. Because the trustee’s actions were proper, we vacate the bankruptcy court’s
orders and remand for proceedings consistent with this opinion.
STATEMENT OF ISSUES
The appellant, the Chapter 7 trustee, Sheldon Stein (the “Trustee”), raises the following
issues:
1. Did the lower court err in sua sponte vacating, seven months after the fact, its
order under Bankruptcy Rule 2004(a) requiring the debtor to appear for
examination and to bring financial records to the exam?
2. Did the lower court err in applying a wrong legal standard in sua sponte
overruling the Trustee’s motion for default judgment in the following
adversary proceeding not defended by the debtor?
3. Did the lower court err in sua sponte dismissing the adversary case filed by
the Trustee against the debtor and not defend [sic] by the debtor?
4. Do the sua sponte orders entered in the Chapter 7 case and the following
adversary proceedings violate public policy?
Appellant Br. at 2, BAP Case 16-8025 ECF No. 7.
JURISDICTION
The Bankruptcy Appellate Panel of the Sixth Circuit has jurisdiction to decide this
appeal. The United States District Court for the Northern District of Ohio has authorized appeals
to the Panel, and neither party has timely elected to have these appeals heard by the district court.
28 U.S.C. §§ 158(b)(6), (c)(1). A bankruptcy court’s final order may be appealed as of right
pursuant to 28 U.S.C. § 158(a)(1). For purposes of appeal, an order is final if it “ends the
litigation on the merits and leaves nothing for the court to do but execute the judgment.”
Midland Asphalt Corp. v. United States, 489 U.S. 794, 798, 109 S. Ct. 1494, 1497 (1989)
(citation and quotation marks omitted). An order denying default judgment and dismissing an
adversary proceeding is a final order. Columbiana Cty. School Employees Credit Union, Inc. v.
Nos. 16-8025/8027 In re Stubbs Page 3
Cook (In re Cook), 342 B.R. 384, 2006 WL 908600 (B.A.P. 6th Cir. Apr. 3, 2016) (table
decision) (citing Davis v. Courington (In re Davis), 177 B.R. 907, 910 (B.AP. 9th Cir. 1995)).1
STANDARD OF REVIEW
A bankruptcy court’s decision to deny a motion for default judgment is reviewed for an
abuse of discretion. Cook, 2006 WL 908600, at *1. Decisions concerning a 2004 examination
are also reviewed for an abuse of discretion. Buckner v. Oklahoma Tax Comm’n (In re Buckner),
271 B.R. 213, 2001 WL 992063, at *1 (B.A.P. 10th Cir. Aug. 30, 2001) (table decision). “An
abuse of discretion is defined as a definite and firm conviction that the [court below] committed
a clear error in judgment.” Mayor and City Council of Baltimore, Md. v. W. Va. (In re Eagle
Picher Indus., Inc.), 285 F.3d 522, 529 (6th Cir. 2002) (internal quotation marks and citation
omitted, alteration in original). An error of law is necessarily an abuse of discretion. An order to
dismiss a complaint is reviewed de novo. See Newberry v. Silverman, 789 F.3d 636, 640 (6th
Cir. 2015) (dismissal of a complaint for failure to state a claim requires de novo review). “De
novo means that the appellate court determines the law independently of the trial court's
determination.” Treinish v. Norwest Bank Minn., N.A. (In re Periandri), 266 B.R. 651, 653
(B.A.P. 6th Cir. 2001) (citations and quotation marks omitted).
FACTS
On December 16, 2014 the debtor, Laneka Marie Stubbs (“Stubbs”), acting pro se, filed a
petition for relief under Chapter 7 of the Bankruptcy Code. The meeting of creditors was
scheduled for January 20, 2015. The Trustee was concerned about a potential tax refund being
an estate asset. Since Stubbs had not filed her 2014 tax returns (which were not due until April
2015), the Trustee completed the meeting of creditors in February 2015, and instructed Stubbs to
send him a copy of her 2014 tax returns when filed and to not spend any refund she received.
Stubbs received her discharge on April 29, 2015.
1
Although, standing alone, the order vacating the 2004 examination may not be final, any interlocutory
orders became final by the dismissal of the litigation by the bankruptcy court. Compare In re Royal Manor Mgmt.,
Inc., 525 B.R. 338, 346 (B.A.P. 6th Cir. 2015) (discovery order deemed final because underlying litigation
completed), with In re Gray, 447 B.R. 524, 532 (E.D. Mich. 2011) (order granting a 2004 examination is not final).
Nos. 16-8025/8027 In re Stubbs Page 4
When the Trustee did not receive the tax returns nor hear from Stubbs by September
2015, he moved to conduct a Rule 2004 examination of Stubbs. See Fed. R. Bankr. P. 2004. An
order was entered granting the motion on September 24, 2015 and scheduling the examination
for October 20, 2015 at 1:30 a.m. That order was amended by an order entered on October 21,
2015 to correct the date and time and to schedule the examination at Suite 500, 50 Public Square,
Cleveland, Ohio on November 4, 2015 at 10:30 a.m.2 Stubbs was required to bring a copy of her
2014 state and federal tax returns to the examination. Stubbs did not appear.
Later that same day, November 4, 2015, the Trustee filed an adversary proceeding to
revoke Stubbs’ discharge pursuant to § 727(d)(2) and (3). The Trustee alleged that “[Stubbs]
disobeyed an Order of the Court in that she did not appear for examination at the time and send
the tax returns to the Plaintiff . . . ,” also noting that Stubbs neither requested the examination
and document production be postponed nor rescheduled. Compl. at 2, Adv. No. 15-01190 ECF
No. 1.
Despite proper service of the complaint and summons, Stubbs failed to file a Rule 12
response and the Trustee moved the clerk of court for an entry of default pursuant to Federal
Rule of Civil Procedure 55(a), incorporated by Federal Rule of Bankruptcy Procedure 7055. The
Trustee limited his request for default to the § 727(d)(3) basis for revocation of the discharge,
failing to obey a lawful court order. The Clerk entered the default which the Trustee followed
with a motion for default judgment.
The court scheduled the motion for default judgment for a hearing on February 23, 2016.
Stubbs did not attend the hearing, but the court engaged the Trustee in a colloquy. First, the
court wanted to know “why was the 341 concluded before the tax return was given?” Tr. of Hr’g
Feb. 23, 2016 at 2, Adv. No. 15-01190 ECF No. 23. The Trustee responded that:
I adjourned it two or three times because the tax return technically was not due
until April 15. The Debtor was instructed – because she didn’t produce those tax
returns, she was instructed to prepare them. So I gave her sufficient time to
comply with that request, so that she didn’t feel that she was unduly pressured.
2
The amended order stated in the caption that it was to correct the date and time and it is evident the time
of the original order was incorrect. However, nothing in the record suggests any confusion was caused by these
changes.
Nos. 16-8025/8027 In re Stubbs Page 5
But I did give her one, two, three – four opportunities, including the two
adjournments, the 2004(a) and the filing of the Complaint here to just call me up
and say, here’s the tax return.
Id. Later, the court asked: “[d]o you know what happens in a Chapter 13 case if a debtor doesn’t
provide a tax return?” Id. at 3. The Trustee responded that the case gets dismissed. The court
then stated:
Is there a distinguishable reason why in a Chapter 13 case that case should be
dismissed, the debtor have the opportunity to do this again and have a discharge if
they comply later, than in a Chapter 7 the debtor not have the case dismissed and
then have an opportunity later to comply? Because I’m trying to figure out what
the difference is other than the fact that the debtors in the Chapter 7 don’t have the
funds to do this.
Id. The Trustee responded as follows:
In this particular case, the Bankruptcy Code obligated her to give me in advance
of the 341 the last filed tax return.3 She filed this case in December. She did
comply with that Code section. And, however, I requested the new tax return
because the case was filed in December. And about 95 percent of the non-exempt
money would have been property of the estate. If she hadn’t given me the last
filed tax return, I would have asked for dismissal. But she complied with that.
She just wouldn’t do her – her next tax return.
Id. at 3–4 (footnote added).
At the conclusion of the hearing, the court offered the Trustee the opportunity to move to
vacate the discharge and dismiss the case, to which the Trustee responded:
Your Honor, how can I tell if there is – and make an assessment of the Debtor’s
conduct if she doesn’t cooperate? And allowing her to dismiss potentially allows
her to keep assets which belong to creditors. What I am really asking is, the
Debtor should at least cooperate and follow the same rules. All I’m asking for
was cooperation and I expected Your Honor maybe to . . . put on an order to show
cause and have her come in and tell us why she didn’t do that.
Id. at 6. The court made the following rulings at the hearing:
3
See 11 U.S.C. § 521(e)(2)(A) (requiring an individual Chapter 7 or 13 debtor to provide to the trustee,
“not later than 7 days before the date first set for the first meeting of creditors”, the federal tax return (or a transcript
of such return) for the most recent tax year that ended prior to the petition date. In this case, the required return was
for 2013. As 2014 ended during the pendency of the case, Stubbs was also required, upon request of the Trustee, to
provide her 2014 federal tax return “at the same time filed with the taxing authority.” 11 U.S.C. § 521(f)(1).
Nos. 16-8025/8027 In re Stubbs Page 6
1) that it was not appropriate to revoke Stubbs’ discharge and, therefore, that the
Trustee’s motion for default judgment would be denied and the adversary proceeding
dismissed; and
2) that it would grant the Trustee time to file a “show cause.”
Id. at 6–7. The court then continued the hearing until June 7, 2016 and deferred entering orders
on its rulings.
On April 8, 2016, the Trustee filed a supplemental memorandum in support of default
judgment.
On May 13, 2016, the bankruptcy court entered a sua sponte order requesting that Stubbs
show cause why she should not be found in contempt for failing to appear at the Rule 2004
examination in contravention of the court’s order, to which the Trustee responded on May 18.
The Trustee argued that the revocation of discharge adversary proceeding was the appropriate
remedy and “the current civil contempt proceedings, started sua sponte by the Court after
discharge, harm the bankruptcy estate.” Trustee’s Mem. at 3, Case No. 14-17806 ECF No. 44.
The Trustee noted the various options available to the court based upon a finding of civil
contempt, such as daily fines, imprisonment, attorney fees or damages, but candidly stated that
“[t]he Trustee does not believe the Court will impose these drastic sanctions, and, indeed, the
Trustee is not asking the Court to do so.” Id. at 4. The Trustee further stated that “dismissal
after discharge [was] a nullity” and “[t]he debtor will not comply with future court orders or
cooperate with the Trustee except under the threat of revocation of the discharge under § 727.”
Id. at 4–5 (emphasis in original). Stubbs did not file anything in response to the show cause
order.
On June 7, the court held the combined hearing on the continued motion for default
judgment and the court’s show cause order. Again, Stubbs failed to appear. The hearing was
very short. The entire transcript reads:
Court: All right. This is a Motion for Default Judgment and then the Order to
Appear and Show Cause. Mr. Stein, I’m entering an order on the Order to Appear
and Show Cause that will find that the request as filed for the 2004 examination
came out of what appears to be the Trustee’s decision to conclude the 341 exam
as opposed to extending it; that by concluding it, the process for entering a
discharge was triggered. And so there was an opportunity for this case to have
Nos. 16-8025/8027 In re Stubbs Page 7
been dismissed for failure to prosecute as opposed to have been entered in a
discharge and now the revocation of discharge granted.
I am also going to be entering an order that will revoke the authority of the
Clerk’s office to enter 2004 exams. So those will now all be required to be set for
hearing.
And I am vacating the order with respect to the 2004 examination, which will
then not create cause for the default judgment.
So with respect to the Order to Show Cause, I find that the Debtor is not in
contempt. The previous 2004 exam ordered is revoked and the Motion for
Default Judgment is denied. And there’s a written order that you’ll be welcome
to read.
[The Trustee]: I’m not questioning but I’m merely saying that I didn’t hear
everything that you said.
Court: That’s fine. I’ve written an order. It will be submitted. You can take a look
at it.
[The Trustee]: Thank you.
Tr. of Hr’g June 7, 2016, Adv. No. 15-01190 ECF No. 24.
On June 9, 2016, the court entered an order that 1) sua sponte vacated the order
scheduling the Rule 2004 examination; 2) denied the Trustee’s default motion and 3) sua sponte
dismissed the adversary proceeding.4 The order criticizes the Trustee for his approach to this
case:
When the Debtor initially failed to file her tax returns, the Trustee failed to seek
dismissal of the case, failed to seek a delay in the entry of the Debtor’s discharge,
and failed to seek to hold the Debtor in contempt for her failure to cooperate with
the Trustee as required by 11 U.S.C. § 521. Any of these actions would have
prevented the Debtor from receiving her discharge. Instead, the Trustee
concluded the § 341 meeting, did not inform the Court of the Debtor’s failure to
cooperate, and cleared the path for the discharge entry.
Order at 3, Case No. 15-01190 ECF No. 15. The court made clear its preference to have the case
dismissed and mentioned this is a regular result in Chapter 13 cases. Id. In addition, the court
found that the Trustee did not meet his burden for default pursuant to § 727(a)(6) and needed to
establish that Stubbs refused to comply with a court order through a showing of civil contempt.
4
The same order was filed in the estate case and the adversary proceeding. For simplicity, the citation is
only to the adversary proceeding docket.
Nos. 16-8025/8027 In re Stubbs Page 8
The Trustee timely appealed the orders entered in the estate case and adversary
proceeding.
DISCUSSION
The bankruptcy court’s rulings are based largely on the court’s conclusion that the
Trustee used an improper approach to dealing with a debtor who has failed to provide a copy of
tax returns. The court’s stated preference for this situation was that the trustee continue the
creditors’ meeting and keep the creditors’ meeting open until any outstanding tax return is
provided. If the return was not provided, the trustee could pursue an adversary proceeding
objecting to the debtor’s discharge or, alternatively, seek dismissal of the Chapter 7 case for
failure to produce the tax returns, as is done in Chapter 13 cases.5
Left to stand, the bankruptcy court’s rationale behind its orders may allow Chapter 7
debtors that fail to deliver to the trustee an estate asset to keep their discharge and perhaps
suggests that such debtors cannot be compelled to participate in discovery as to their § 521
obligations.6 Alternatively, it requires Chapter 7 trustees to extend the date to object to discharge
until an asset such as a future tax refund is turned over, despite § 727(d)(3)’s design to avoid this
type of situation, or it may suggest that dismissal prior to discharge is an acceptable remedy in an
asset Chapter 7 case.
Unlike Chapter 13, a Chapter 7 debtor does not have an absolute right to dismissal and a
bankruptcy court typically does not dismiss a case with an asset of consequential value that can
be liquidated for the benefit of unsecured creditors. Indeed, estate assets usually are
administered regardless of whether a debtor receives a discharge. By contrast, a debtor’s
participation in Chapter 13 is entirely voluntary and generally a Chapter 13 case (unless
previously converted) may be dismissed by a debtor at any time. 11 U.S.C. § 1307(b).
5
See 11 U.S.C. §§ 1308(a) (requiring the filing of pre-petition tax returns “for all taxable periods ending
during the 4-year period ending on the date of filing the petition.”) and 1325(a)(9) (requiring the debtor to file all
“Federal, State and local tax returns as required by section 1308.”).
6
Section 521 imposes a number of obligations on a debtor, including, as is relevant to this case, cooperating
with the trustee as is necessary for the trustee to carry out the trustee’s obligations under the Bankruptcy Code
(§ 521(a)(3)); surrendering property of the estate to the trustee (§ 521(a)(4)); and providing copies of certain tax
returns to the court or trustee (§ 521(e) and (f)).
Nos. 16-8025/8027 In re Stubbs Page 9
Therefore, the court’s apparent conclusion that there is not a “policy or bankruptcy code
justification for treating Chapter 7 and Chapter 13 debtors differently where both fail to provide
documents required by their respective trustees” overlooks these distinctions. Order at 3.7
I. Entry of the Order Denying Default Judgment Constituted an Abuse of
Discretion
While “[r]evocation of a debtor’s discharge is an extraordinary remedy” (Smith v. Jordan
(In re Jordan), 521 F.3d 430, 433 (4th Cir. 2008)), the bankruptcy court’s entry of the order
denying default judgment was an abuse of discretion.8 The court stated in its order that Stubbs’
conduct did not rise to the necessary level to revoke her discharge. However, the facts show that
Stubbs was served the 2004 examination order and did not appear or respond in any way. The
amended order was clear and definite. It required the production of the 2014 tax returns and
7
Section 521 generally supports dismissal of Chapter 7 cases for failure to provide to the trustee a copy of
the Federal income tax return for the tax year preceding the filing of the bankruptcy petition (see § 521(e)(2)(B));
however, Congress did not provide for dismissal of Chapter 7 cases for failure to provide copies of other tax returns
(compare § 521(f) with § 521(e)(2)(B)). In this case Stubbs provided the Trustee with the Federal income tax return
for the year preceding the filing of her petition, but not for 2014, the tax year during which she filed her petition.
Moreover, even under § 521(e)(2)(B), a debtor may not be able to seek dismissal when the estate has assets available
for creditors. Compare In re On, 2010 WL 5394804 (Bankr. N.D. Cal. Dec. 28, 2010) (dismissal not mandatory
upon a motion of the debtors to dismiss for their own failure to comply with § 521(e)(2)(B)), with In re Casey,
274 F. App’x. 205 (3d Cir. Apr. 18, 2008) (trustee’s motion to dismiss required to be granted when the debtor failed
to comply with § 521(e)(2)(B) and did not show that failure was beyond the debtor’s control). See also In re Grasso,
341 B.R. 821, 825 (D.N.H. 2006) (trustee had discretion on whether to seek dismissal for the debtor’s failure to
comply with § 521(e)).
8
Federal Rule of Civil Procedure 55 (applicable to adversary proceedings by Federal Rule of Bankruptcy
Procedure 7055) states in applicable part:
(b) Entering a Default Judgment.
(1) By the Clerk. If the plaintiff's claim is for a sum certain or a sum that can be made certain by
computation, the clerk--on the plaintiff's request, with an affidavit showing the amount due--must
enter judgment for that amount and costs against a defendant who has been defaulted for not
appearing and who is neither a minor nor an incompetent person.
(2) By the Court. In all other cases, the party must apply to the court for a default judgment. A default
judgment may be entered against a minor or incompetent person only if represented by a general
guardian, conservator, or other like fiduciary who has appeared. If the party against whom a
default judgment is sought has appeared personally or by a representative, that party or its
representative must be served with written notice of the application at least 7 days before the
hearing. The court may conduct hearings or make referrals--preserving any federal statutory right
to a jury trial--when, to enter or effectuate judgment, it needs to:
(A) conduct an accounting;
(B) determine the amount of damages;
(C) establish the truth of any allegation by evidence; or
(D) investigate any other matter.
Nos. 16-8025/8027 In re Stubbs Page 10
Stubbs’ appearance for examination at a specific place and time. The court’s decision that this
does not rise to the level to revoke Stubbs’ discharge pursuant to § 727(d)(3) is unsupported by
the case law and the facts.
Revocation under § 727(d)(3) incorporates the basis for denying a discharge under
§ 727(a)(6). Therefore, § 727(a)(6)(A), read together with § 727(d)(3), provides for the
revocation of a discharge if “the debtor has refused, in the case . . . to obey a lawful order of the
court . . . .” 11 U.S.C. § 727(a)(6)(A). Case law is divided as to whether “refused” as used in
§ 727(a)(6) requires willfulness or intent to not comply with a court order. The Fourth Circuit
requires a finding of willfulness or intent, which may be established with evidence “that the
debtor received the order in question and failed to comply with its terms.” Jordan, 521 F.3d at
433 (citation omitted). Upon such showing, the burden shifts to the debtor to explain his lack of
compliance. Id. (citations omitted). The Eleventh Circuit also appears to follow this standard.
The Cadle Co. v. Parks-Matos (In re Matos), 267 F. App’x. 884, 886 (11th Cir. 2008). Mistake
or inadvertence could negate a finding of intent or willfulness. See Davis v. Osborne (In re
Osborne), 476 B.R. 284, 296–97 (Bankr. D. Kan. 2012) (citation omitted) (contrasting the willful
standard with the civil contempt standard).9
Other courts, including many bankruptcy court decisions within the Sixth Circuit, follow
the civil contempt standard. See, e.g. Hunter v. Magack (In re Magack), 247 B.R. 406, 410
(Bankr. N.D. Ohio 1999). In the Sixth Circuit, civil contempt is established by showing that
“(1) the alleged contemnor had knowledge of the order which he is said to have violated; (2) did
in fact violate the order; and (3) the order violated must have been specific and definite.” Id.
(citing Glover v. Johnson, 138 F.3d 229, 244 (6th Cir. 1998)). If these elements have been
shown, the debtor can provide evidence of impossibility or inability to comply. Hazlett v.
Gorshe (In re Gorshe), 269 B.R. 744, 746 (Bankr. S.D. Ohio 2001).
9
Although the defense of inability to comply was characterized in Osborne as unique to the willful
standard, inability is also a defense to civil contempt. See U.S. v. Rylander, 460 U.S. 752, 757, 103 S. Ct. 1546,
1552 (1983) (present inability to pay is a defense to civil contempt). See also Elec. Workers Pension Trust Fund of
Local Union 58, IBEW v. Gary’s Elec. Serv. Co., 340 F.3d 373, 379 (6th Cir. 2003) (applying the Rylander
standard).
Nos. 16-8025/8027 In re Stubbs Page 11
Under either standard, the court’s decision to deny default judgment is reversible error.
The bankruptcy court’s decision, in applying the civil contempt standard, found that “the Trustee
has failed to prove that [Stubbs’] behavior rises to this level . . . .” Order at 4. But the court
never suggested Stubbs lacked knowledge of the 2004 examination order, or that she did not
violate it, or that the order was anything but clear and specific. None of those issues were
addressed at the default hearing. Nor, of course, did Stubbs present any evidence under the civil
contempt standard or the willfulness standard when, under both standards, the burden shifted to
Stubbs.
In denying the Trustee’s motion for default judgment, the court found that by failing to
act more timely on Stubbs’ failure to provide her tax returns, the Trustee prejudiced Stubbs. This
reasoning may be construed as an application of the doctrine of laches, even though the court’s
order does not use the term, and the debtor never presented it as an affirmative defense. “Laches
requires proof of (1) lack of diligence by the party against whom the defense is asserted, and
(2) prejudice to the party asserting the defense.” Costello v. United States, 365 U.S. 265, 282, 81
S. Ct. 534, 543 (1961).
Some courts have found that belated attempts to revoke a discharge under § 727(d) may
be barred by the doctrine of laches. See Schilling v. Reid, 372 B.R. 1, 3 (W.D. Ky. 2007).
However, in DuBois v. Faber (In re Faber), the court considered the use of laches as an
affirmative defense to a complaint to revoke a discharge under § 727(d)(3) and aptly explained
why such a defense is not available under these circumstances. 330 B.R. 235 (Bankr. N.D. Ind.
2005). In that case, the Trustee waited two and a half years to bring the action to revoke the
discharge for failure to comply with an order compelling turnover of federal and state tax returns.
In approving the motion for default judgment, the court considered the laches defense:
The Court is committed to the concept that the violation of a “lawful order
of the Court” ipso facto establishes grounds for revocation of a debtor’s discharge
[See, 11 U.S.C. § 727(d)(3)], or within the context of 11 U.S.C. § 727(a)(6)(A)
constitutes grounds for denial of a debtor’s discharge. Effective administration of
bankruptcy cases requires debtors to comply completely with lawful orders of the
Court entered in their cases. “Laches” is a potential equitable defense: however,
its assertion as a defense depends upon an active participant in the adversary
proceeding in which revocation of discharge is sought; See, Kontrick v. Ryan,
540 U.S. 443, 124 S. Ct. 906, 157 L. Ed. 2d 867 (2004). In this case, the
Nos. 16-8025/8027 In re Stubbs Page 12
debtor/defendant has failed to contest the complaint, and this immutably leads to
revocation of his discharge.
The Court finds—in its view constrained by the law with respect to an
opponent’s failure to appear and assert a potentially valid basis for denying the
plaintiff's requested relief—that the Trustee/plaintiff has established a prima facie
basis in this adversary proceeding for the revocation of the debtor’s/defendant’s
discharge, and that revocation of the debtor’s/defendant’s discharge should be
granted pursuant to 11 U.S.C. § 727(d)(3)/11 U.S.C. § 727(a)(6)(A).
It is with some reluctance that the Court grants the plaintiff’s motion for
default judgment.
Id. at 240. Like the debtor in Faber, Stubbs has failed to appear and thus cannot be afforded the
protections of an affirmative defense; however, unlike Faber, the underlying facts do not favor
the application of the doctrine of laches.
First, “[w]here Congress has provided a specific and relatively short statute of limitations,
it can be inferred that the federally created limitation is not to be cut short . . . .” Royal Air
Properties, Inc. v. Smith, 312 F.2d 210, 214 (9th Cir. 1962). Section 727(e)(2) provides a time
limitation of “the later of . . . (A) one year after the granting of such discharge; and (B) the date
the case is closed.” 11 U.S.C. § 727(e)(2). “Since Congress has provided that a request for
revocation of a discharge must be made within one year after the discharge, 11 U.S.C. § 727(e),
laches cannot be applied to shorten that period.” W. Suburban Bank of Darien v. Arianoutsos
(In re Arianoutsos), 116 B.R. 116, 119 (Bankr. N.D. Ill. 1990). However, other courts have
applied the doctrine of laches when more than a year passed since the discharge was ordered, but
the case has remained open. See Reid, 372 B.R. at 3. In this case, only six months passed from
the April 29, 2015 discharge to the November 4, 2015 complaint for revocation of discharge and
thus the Trustee brought his complaint well within the one-year time limit set by § 727(e)(2)(A).
Moreover, to support the application of the doctrine of laches, the court would have to
make findings that the Trustee acted with a “lack of diligence” by not seeking a delay or denial
of discharge. Costello, 365 U.S. at 282. A lack of diligence means something more than a party
not taking a particular action against a party. See United States v. Weintraub, 613 F.2d 612, 619
(6th Cir. 1979) (The doctrine of laches did not bar the IRS from collecting from a third party
after a delay of 13 years as the service sought to collect from the taxpayer upon whom the third-
Nos. 16-8025/8027 In re Stubbs Page 13
party’s liability was predicated.), cert. denied, 447 U.S. 905, 100 S. Ct. 2987 (1980).
The bankruptcy court’s findings do not support the conclusion that the Trustee was not diligent.
Far from a lack of diligence, it appears that the Trustee went to great lengths to secure the tax
returns in a timely fashion, with graduated steps intended to achieve the desired result – turnover
of the tax returns.
In addition, there was no evidence that Stubbs was prejudiced by the Trustee’s decision
to seek revocation of her discharge rather than a dismissal or a delay of the discharge. It was
Stubbs’ failure to turn over the tax returns that led to an action for revocation of the discharge,
not the Trustee’s decision to delay legal action. Indeed, had Stubbs provided her tax returns after
the April filing deadline, she would have benefited from the Trustee’s decision to not move for
dismissal or delay of the discharge. The very purpose of revocations under § 727(d) is to allow
debtors to receive their discharge early in the case, “while protecting the estate and creditors if
one of the enumerated grounds for revocation arises.” 476 B.R. at 292 (citing 6 Collier on
Bankruptcy, ¶ 727.17[6] (Alan N. Resnick & Henry J. Sommer, eds.-in-chief, 16th ed. rev. 2016)
(additional internal citation omitted)). See S. Rep. No. 1173, 91st Cong., 2d Sess. 12 (1970)
(“This change would render it unnecessary for the bankruptcy court to delay determining
whether the bankrupt is entitled to a discharge in order to make sure that the bankrupt complies
with orders and responds to questions after granting of the discharge. Revocation of discharge
rather than delay in granting would be a preferable procedure and is of sufficient strength to
prevent abusive tactics by a bankrupt.”).10
As a final point, within the strictures and limitations of the Bankruptcy Code, Federal
Rules of Bankruptcy Procedure and other authority, the administration of the bankruptcy system
generally falls to the United States Trustee Program (the “UST”). See generally 28 U.S.C.
§ 586. See also In re DeShetler, 453 B.R. 295, 302–03 (Bankr. S.D. Ohio 2011) (citing H.R.
Rep. No. 595, 95th Cong., 1st Sess. 100, reprinted in 1978 U.S.C.C.A.N. 5963, 6061
(“The [United States Trustee’s Program] was created . . . as a pilot effort in select federal judicial
districts to remedy the perceived institutional bias arising out of bankruptcy judges’ handling of
10
Section 727(d) is based on Section 15 of the former Bankruptcy Act. 6 Collier on Bankruptcy, ¶
727.LH[5] (Alan N. Resnick & Henry J. Sommer, eds.-in-chief, 16th ed. rev. 2016).
Nos. 16-8025/8027 In re Stubbs Page 14
both the judicial and administrative aspects of the bankruptcy system.”). As part of these duties,
the UST is responsible for the administration of trustees, as appropriate. 28 U.S.C. § 586(a)(3).
Bankruptcy courts must, of course, adjudicate all necessary legal determinations within their
jurisdiction, but defer to the legally valid, discretionary administrative decisions of Chapter 7
trustees as authorized under 11 U.S.C. § 704. Having found the approach of the Trustee in this
case to be within the bounds of the Code, deference to the Trustee’s determinations as to how to
proceed in this matter is warranted.
For all these reasons, the order denying the Trustee default judgment is vacated.
II. Sua Sponte Dismissal of the Adversary Proceeding Constituted an Abuse
of Discretion
Since the sua sponte order dismissing the adversary proceeding was based upon the
decision to deny default judgment, the entry of that order is reversible error as well.
III. Entry of the Order Vacating the 2004 Examination Order Constituted an
Abuse of Discretion
The entering of the order vacating the 2004 examination order was an abuse of discretion,
regardless of whether Stubbs’ discharge was revoked. The court appeared to premise this order
on the Trustee’s decision to conclude the § 341 meeting without having received the 2014 tax
returns. But the Trustee did receive the 2013 tax return and the court’s approach would have
required the delay of Stubbs’ discharge for additional months until the 2014 tax returns were due.
At the time the creditors’ meeting was concluded in February 2015, Stubbs gave no indication
that she would not cooperate in providing her 2014 tax returns. As previously noted in the laches
argument, § 727(d)(3) alleviates this dilemma by expressly incorporating § 727(a)(6).
The Trustee need not delay the discharge, but is permitted instead to file an adversary proceeding
to revoke the discharge for the refusal to comply with a court order. Moreover, even if the
discharge order had been vacated, the Trustee still had no obligation to seek dismissal of the case
and indeed had a fiduciary obligation to determine if the income tax refund represented an asset
which should have been liquidated for the benefit of unsecured creditors.
Nos. 16-8025/8027 In re Stubbs Page 15
A 2004 examination is a reasonable and usual method to compel a Chapter 7 debtor to
provide information that a Chapter 7 trustee or creditor cannot obtain voluntarily. See In re
Fearn, 96 B.R. 135, 137–38 (Bankr. S.D. Ohio 1989) (denying a motion to quash a 2004
examination and noting that “the primary purpose of a Rule 2004 examination is to permit a
party in interest to quickly ascertain the extent and location of the estate’s assets . . . ”) and Bank
One, Columbus v. Hammond (In re Hammond), 140 B.R. 197, 201–02 (S.D. Ohio 1992)
(reversing for abuse of discretion the bankruptcy court’s quashing of the creditor’s 2004
examination). If the debtor objects to the taking of the Rule 2004 examination, then the party
seeking to conduct the examination has the burden of establishing “good cause.” Id. at 201
(citing Freeman v. Seligson, 405 F.2d 1326, 1336 (D.C. Cir. 1968)). Stubbs did not object to the
Trustee’s Rule 2004 examination. Further, even if she did, the Trustee had good cause for
conducting the examination, namely to discover the information relating to the 2014 tax returns.
For these reasons, the entering of the order vacating of the 2004 examination was an abuse of
discretion and the order is vacated.
CONCLUSION
For the reasons discussed, the bankruptcy court’s orders denying the Trustee’s motion for
default judgment, dismissing the adversary proceeding, and vacating the Rule 2004 examination
order are VACATED and the case and adversary proceeding are REMANDED for proceedings
consistent with this decision.