Nardei v. Maughan , 297 B.R. 337 ( 2003 )

RECOMMENDED FOR FULL-TEXT PUBLICATION
Pursuant to Sixth Circuit Rule 206 2 In re Maughan No. 01-4151
ELECTRONIC CITATION: 2003 FED App. 0286P (6th Cir.)File Name: 03a0286p.06 _________________
COUNSEL
UNITED STATES COURT OF APPEALS
ON BRIEF: Mark D. Shepard, BABST, CALLAND,
FOR THE SIXTH CIRCUIT CLEMENTS & ZOMNIR, Pittsburgh, Pennsylvania, for
_________________ Appellant. Andrew W. Suhar, Youngstown, Ohio, for
Appellee.
In re: EDWIN M. MAUGHAN , X
- _________________
SR.,
Debtor. - OPINION
- No. 01-4151
_________________
-
>
, ALICE M. BATCHELDER, Circuit Judge. Plaintiff-
JOHN P. NARDEI, - appellant John Nardei appeals an order from the Bankruptcy
Plaintiff-Appellant, - Appellate Panel (“BAP”) of the Sixth Circuit reversing and
- remanding a judgment of the United States Bankruptcy Court
v. - for the Northern District of Ohio. Nardei, a partially secured
- creditor of defendant-appellee Edwin Maughan, argues that
- the BAP erred in reversing the bankruptcy court’s order
EDWIN M. MAUGHAN , SR.,
- granting Nardei an extension to file a complaint objecting to
Defendant-Appellee. - discharge. Although Nardei acknowledges that he failed to
N file timely either his complaint or his request for an extension
Appeal from the Bankruptcy Appellate of time for filing that complaint, he argues that the
Panel of the Sixth Circuit. bankruptcy court correctly held that Bankruptcy Rules
No. 98-41905—William T. Bodoh, Bankruptcy Judge. 4004(a) and 4007(c)—the rules governing the filing of
complaints objecting to discharge under 11 U.S.C. §§ 523 and
Submitted: March 28, 2003 727—are not jurisdictional in nature, but instead establish
only filing deadlines that are subject to equitable tolling. The
Decided and Filed: August 14, 2003 BAP’s opinion finding that those rules are jurisdictional and
reversing the bankruptcy court, Nardei argues, must be
Before: MERRITT and BATCHELDER, Circuit Judges; reversed. Because we find that the precedent of this circuit
DUPLANTIER, District Judge.* compels us to conclude that these rules are not jurisdictional,
we will reverse the order of the BAP and affirm the decision
of the bankruptcy court.
*
The Hon orable A drian G. Duplantier, United States D istrict Judge
for the Eastern District of Louisiana, sitting by designation.
1
No. 01-4151 In re Maughan 3 4 In re Maughan No. 01-4151
I. BACKGROUND Rules 4004(a)1 and 4007(c).2 In August of 1998, Nardei filed
a motion under Bankruptcy Rule 20043 to examine Maughan
The relationship between these parties began when John
Nardei, a resident of Youngstown, Ohio, purchased U.S. Gold
Eagle coins from Edwin Maughan, who operated a coin and 1
Rule 40 04(a) p rovides:
jewelry business in Pittsburgh, Pennsylvania. Over time,
Maughan convinced Nardei that he could increase the return In a chapter 7 liquidation case a complaint objecting to the
on Nardei’s investment by trading the coins according to the de btor's discharge under § 727(a) of the Code shall be filed no
later than 60 days after the first date set for the meeting of
fluctuations in the price of gold. Based on this advice, Nardei creditors under § 341(a). In a chapter 11 reorganization case, the
gave his existing investment of gold coins and additional complaint shall be filed no later than the first date set for the
payments for the purchase of more coins to Maughan; in hearing on confirmation. At least 25 days' notice of the time so
return, Maughan gave Nardei receipts detailing the number of fixed shall be given to the United States trustee and all creditors
gold coins purchased in each transaction. Maughan asked as provided in Rule 2002 (f) and (k), and to the trustee and the
Nardei to get more individuals involved in the investment trustee's attorney.
plan, which Nardei did. Eventually, Maughan began issuing 2
Rule 40 07(c) p rovides:
promissory notes to Nardei and the other investors covering
the total amount invested over the years. 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
After Maughan issued several more notes, it became clear for the meeting of creditors under § 341(a). The court shall give
to Nardei that his investment was not being used to purchase all creditors no less than 30 days' notice of the time so fixed in
gold coins, but was being used to purchase jewelry to be the manner provided in Rule 2002. O n motion of a pa rty in
interest, after hearing on notice, the court may for cause extend
resold in Maughan’s retail location. Nardei sued Maughan in the time fixed under this subdivision. The motion shall be filed
the Common Pleas Court of Allegheny County and obtained before the time has expired.
a judgment on the notes in the amount of $1,051,503.72, plus
interest and costs. The parties then entered into a settlement 3
Rule 200 4 provides, in relevant part:
whereby Maughan agreed to pay Nardei $1,200,000.00,
without interest, over a specified number of years. Maughan (a) Examination on motion
failed to comply with the terms of the agreement and
On motion of any party in interest, the court may order the
eventually filed a voluntary petition for bankruptcy under exam ination o f any entity.
Chapter 7.
(b) Scope of examination
In the proceedings that followed, the bankruptcy court set
October 19, 1998, as the deadline to file a Complaint The examination of an entity under this rule or of the debtor
Objecting to the Discharge of the Debtor or to Determine under §§ 343 o f the Co de m ay relate only to the acts, co nduc t,
or property or to the liabilities and financial condition of the
Dischargeability of Certain Debts, pursuant to Bankruptcy debtor, or to any matter which may affect the administration of
the debtor's estate, or to the debtor's right to a discharge. In a
family farmer's debt adjustment case under chapter 12, an
individual's debt adjustment case under chapter 13, or a
reorganization case under chapter 11 of the Code, other than for
the reorganization of a railroad, the examination may also relate
No. 01-4151 In re Maughan 5 6 In re Maughan No. 01-4151
under oath and determine the appropriateness of filing to produce specified documents for the Rule 2004
objections to the discharge of the settlement debt. The examination. Within the time allowed by the extension,
bankruptcy court granted the motion and ordered Maughan to Nardei filed complaint under 11 U.S.C. § 523(c), alleging that
appear for an examination on August 21, 1998, and to provide Maughan had obtained the money from Nardei by false
specific documents sought by Nardei. Although Maughan pretenses or false representations. The bankruptcy court held
appeared for the Rule 2004 examination, he failed to comply a hearing in this adversary proceeding on August 22, 2000,
fully with the order to produce the documents. He did, and issued an opinion on January 9, 2001, finding that
however, promise to provide the missing documents Maughan’s debt to Nardei was obtained through false
promptly. pretenses, a false representation or actual fraud, and was
therefore excepted from discharge under 11 U.S.C.
When the October 19, 1998, deadline for filing a complaint § 523(a)(2)(A).
arrived, Maughan had still not produced all the documents
requested for the Rule 2004 examination. Three days later, Maughan appealed the bankruptcy court’s decision to the
on October 22, 1998, citing Maughan’s failure to produce the Bankruptcy Appellate Panel of the Sixth Circuit, arguing that
documents and, in the alternative, excusable neglect, Nardei the bankruptcy court erred by granting Nardei’s request for an
filed a Motion for Extension of Time to Object to Discharge. extension to file his complaint. The BAP agreed, and,
After initially granting Nardei’s motion, the bankruptcy court holding that the time limits set forth in Bankruptcy Rule
allowed Maughan to file a Motion in Opposition to Nardei’s 4007(c)4 are jurisdictional in nature and not akin to statutes of
extension request. The bankruptcy court considered the limitation, reversed the bankruptcy court’s decision. Nardei’s
parties’ motions and ordered that the time to file a complaint timely appeal to this court followed.
be extended to a date twenty days following the actual day
Maughan complied with the court’s prior order directing him II. DISCUSSION
We independently review the decision of the bankruptcy
court that comes to us by way of appeal from a Bankruptcy
to the operation of any business and the desirability of its Appellate Panel. See In re Isaacman, 26 F.3d 629, 631 (6th
continuance, the source of any money or prope rty acquired or to Cir. 1994); In re Cassell, No. 00-4523, 2001 U.S. LEXIS
be acquired by the debtor for purposes of consummating a plan 13969, **3-**4 (6th Cir. June 15, 2001) (unpublished). The
and the consideration given or offered therefor, and any other
matter relevant to the case or to the formulation of a plan.
4
(c) Comp elling attendance and production o f documents The only bankruptcy rule properly before the bankruptcy court and
before the BAP and this court on appeal is Rule 4007(c), because, as
The attendance of an entity for examination and for the Nardei’s brief says, “[a]t trial, for strategic reasons, counsel for Nardei
production of documents, whether the examination is to be choose [sic] to p ursue o nly Nardei’s claim that Debtor’s debt to him is
conducted within or without the district in which the case is excepted from d ischarge [Rule 4007(c)] because it was obtained by fraud
pending, may be compelled as provided in Rule 9016 for the and false pre tenses p ursuan t to 11 U .S.C. § 523(a)(2)(A).” Although each
attendance of a witness at a hearing or trial. As an officer of the party briefed and argued the impact of both rules in this case, the
court, an attorney may issue and sign a subpoena on behalf of bankruptcy court discussed only Rule 4007(c), and our holding is
the court for the district in which the exam ination is to be held therefore limited to Rule 4007(c). Ho wever, because the reasoning and
if the attorney is admitted to practice in that court or in the court rationa le of both rules are co nsistent, we look to case s app lying bo th rules
in which the case is pending. for guidance on the question before us.
No. 01-4151 In re Maughan 7 8 In re Maughan No. 01-4151
first question for this court to decide is whether the deadline The Supreme Court had an opportunity to address a similar
provided in Bankruptcy Rule 4007(c) is jurisdictional, such rule in Taylor v. Freeland & Kronz, 503 U.S. 638 (1992)
that the bankruptcy court has no authority to alter it, or is (examining Bankruptcy Rule 4003, which governs the
more comparable to statutes of limitation and subject to the debtor’s list of property claimed as exempt under 11 U.S.C.
court’s equitable authority. We review de novo this question § 522 on the schedule of assets required to be filed by Rule
of law. In re Downs, 103 F.3d 472, 476-77 (6th Cir. 1996). 1007). Under the rule at issue in Taylor, a trustee or creditor
“may file objections to the list of property claimed as exempt
The Federal Rules of Bankruptcy Procedure state that “a within 30 days after the conclusion of the meeting of creditors
complaint to determine the dischargeability of a debt pursuant held pursuant to Rule 2003(a) . . . unless, within such period,
to § 523(c) of the Code shall be filed not later than 60 days further time is granted by the court.” FED . R. BANKR . P.
following the first date set for the meeting of creditors held 4003(b).5 The trustee in Taylor neither timely moved for an
pursuant to § 341(a).” FED . R. BANK. P. 4007(c). extension of time to object nor timely objected to the debtor’s
Additionally, any motion to extend the time for filing such a including on the list of exemptions proceeds from a pending
complaint “shall be made before the time [to file the lawsuit, believing that the lawsuit had no value. Taylor, 503
complaint] has expired.” Id. Under Bankruptcy Rule 9006, U.S. at 641. After the debtor received a significant payment
courts may enlarge the time for taking action under Rule 4007 in settlement of the lawsuit, the trustee attempted to object to
“only to the extent and under the conditions stated” in Rule the inclusion of the proceeds on the list of exemptions. Id.
4007. FED . R. BANK. P. 9006(b)(3). These rules, however, The Supreme Court affirmed the appellate court’s holding
must be read together with the general powers given to the that the trustee had failed to raise a timely objection to the
courts in bankruptcy under 11 U.S.C. § 105, which provides: exemption, and that the debtor therefore could not be required
to turn over the proceeds. Id. at 642.
The court may issue any order, process, or judgment that
is necessary or appropriate to carry out the provisions of Looking at the specific allowance under Rule 4003(b) for
this title. No provision of this title providing for the trustees and creditors to file objections within thirty days of
raising of an issue by a party in interest shall be the initial creditors’ meeting, the Court found by “negative
construed to preclude the court from, sua sponte, taking implication” that the rule “indicates that creditors may not
any action or making any determination necessary or object after 30 days ‘unless, within such period, further time
appropriate to enforce or implement court orders or rules, is granted by the court.’” Id. at 643. The Court held that even
or to prevent an abuse of process. if the trustee was correct, and the debtor improperly included
the lawsuit proceeds on the exemption list, the trustee could
11 U.S.C. § 105(a). not contest the exemption. “Deadlines may lead to
unwelcome results, but they prompt parties to act and they
There is no question that Nardei failed to file his motion for produce finality.” Id. at 644. The Court explicitly declined
an extension prior to the expiration of Rule 4007(c)’s sixty- to address the question of whether the bankruptcy court could
day deadline. Nardei, however, argues that Maughan’s failure have extended the time for filing the objection by invoking its
to comply with a prior order from the court led to the late
filing, and Section 105(a) authorizes the court to use its
equitable power to toll the filing deadline and prevent an 5
abuse of process. Rule 4003(b) is included in the series of rules along with R ule
4007(c) who se extension is limited by Rule 9006 (b)(3).
No. 01-4151 In re Maughan 9 10 In re Maughan No. 01-4151
equitable power under Section 105(a), noting that the trustee similar case). But the Isaacman decision cracked open the
had raised this issue for the first time in his opening brief on door of equity through which the bankruptcy court might
the merits in the Supreme Court. accept an untimely complaint.
Several lower courts applying Taylor have determined that Other circuits have gone beyond the limited facts of
the deadlines within the Bankruptcy Rules create Isaacman and have found that, in general, the deadlines are
jurisdictional bars and not statutes of limitation. See, e.g., not jurisdictional in nature. For example, the Fourth Circuit,
First Deposit Nat'l Bank v. Glover (In re Glover), 212 B.R. in Farouki v. Emirates Bank Int’l, Ltd., 14 F.3d 244, 248 (4th
860, 862 (Bankr. S.D. Ohio 1997); Goodwin v. United States Cir. 1994), held that the Rule 4004(a) deadline is not
Fid. & Guar. Ins. Co. (In re Goodwin), 215 B.R. 710, 714 jurisdictional and that the rules “do not preclude the
(Bankr. W.D. Tenn. 1997). This circuit, however, has issued bankruptcy court from exercising its equitable powers in
only one opinion addressing the apparent conflict between the extraordinary cases.” The Seventh Circuit compared the
filing deadlines of the Bankruptcy Rules and the bankruptcy filing deadlines to statutes of limitations, first finding that the
court’s extensive equitable power. In In re Isaacman, 26 F.3d text of the rules and statutes failed to resolved the issue7 and
629 (6th Cir. 1994), we held—without mentioning Taylor in then examining the structure, legislative history and
our discussion of this issue6—that Rule 9006(b)(3) prohibits underlying policy of the rules and the related statutory
a court from sua sponte extending the time in which to file a scheme. In re Kontrick, 295 F.3d 724, 730-33 (7th Cir.
dischargeability complaint, but the rule “does not prevent a 2002). The Seventh Circuit concluded that the Supreme
bankruptcy court from exercising its equitable powers under Court’s decision in Taylor was not dispositive and held that
11 U.S.C. § 105(a) in accepting an untimely filed complaint.” the timeliness provisions are not jurisdictional. Id. at 733.
Id. at 632. At issue in Isaacman was an error created by the The Second Circuit has also concluded that the deadlines
bankruptcy court itself establishing two separate deadlines for imposed by these Bankruptcy Rules are not jurisdictional.
filing complaints; the creditor relied upon the second date and European Am. Bank v. Benedict (In re Benedict), 90 F.3d 50,
filed an untimely complaint after the first deadline expired. 54 (2d Cir. 1996). The court divided the cases on this issue
We limited our holding to a situation in which a bankruptcy into three groups: (1) cases finding that the time periods
court erroneously set a second bar date and a creditor imposed by the rules are jurisdictional (citing several district
reasonably relied upon that second date when filing an
untimely complaint. Id. (joining the Ninth Circuit, In re
Anwiler, 958 F.2d 925 (9th Cir. 1992), and the Tenth Circuit, 7
Specifically, the court said, “The rules we have just described do
In re Themy, 6 F.3d 688 (10th Cir. 1993), in this specific not, as a matter of textua l interpre tation, ad dress the issue. Although R ule
holding); see also In re Moss, 289 F.3d 540, 541-42 (8th Cir. 9006(b)(3) restricts the grounds upon which the bankruptcy court may
2002) (adopting the reasoning of Isaacman in a factually enlarge the time for actions required by Rules 4004(a) and 4007(c), these
restrictions still vest a great deal of d iscretion in the bankruptcy co urt.”
Kontrick, at 730. W e find that statement somewhat puzzling, inasmuch
as Rule 9006(c)(3) pro vides that the court may enlarge the time for taking
6
action under these rules “only to the extent and under the conditions stated
W e did, however, specifically distinguish Taylor in deciding in those rules.” (italics added.) Rules 4004 and 4007 both permit the
whether the bankruptcy court had erred in refusing to use its equitable court to extend the time on motion of a party in interest, but such motion
power to accept the late filing, noting that there the Supreme Court had “shall be made before such time has expired.” That language in the text
not addressed the issue of the bankruptcy court’s equitable p owers. of those rules sounds like a condition to us, and rather than vesting
Isaacman, 26 F.3d at 635. discretion in the court, it appears to us to limit that discretion.
No. 01-4151 In re Maughan 11 12 In re Maughan No. 01-4151
and bankruptcy courts); (2) cases that fail to reach the 487 U.S. 312, 317, n. 3 (1988), the filing deadline cannot be
jurisdictional question, but permit late filings when the jurisdictional. Rather, the rule is a statute of limitation—or
bankruptcy court has erred (essentially the simply a deadline—that is generally subject to the defenses of
Isaacman situation); and (3) cases explicitly rejecting the waiver, estoppel, and equitable tolling. See United States v.
view that the time limits are jurisdictional and allowing the Locke, 471 U.S. 84, 94 n. 10 (1985).
exercise of the court’s equitable power to extend the time for
filing complaints. Id. After specifically adopting the Having determined the BAP erred in its legal conclusion,
reasoning from the third group of cases, the court provided an and that the bankruptcy court correctly concluded that the
additional reason for rejecting the characterization of these time limits in Rule 4007(c) are not jurisdictional, we must
time requirements as jurisdictional: next determine whether the bankruptcy court properly used its
equitable power by allowing Nardei to file his untimely
Our conclusion is also consistent with the line of cases objection. We review the bankruptcy court’s use of its
that has allowed an extension of the time period when the equitable power for an abuse of discretion. See Isaacman, 26
creditor was affirmatively misled by the bankruptcy court F.3d at 633. “We will find an abuse of discretion only upon
as to the filing deadline. See e.g., In re Themy, 6 F.3d at a definite and firm conviction that the district court
688. Since equitable considerations cannot excuse a committed a clear error of judgment.” In re Kissebirth, 273
jurisdictional defect, there is implicit in those cases the F.3d 714, 721 (6th Cir. 2001).
concept that [Rule 4004(a) and] 4007(c) merely
establish[es] a filing deadline. There are five factors that should be considered when
deciding to apply the doctrine of equitable tolling: “The
Id. factors are: (1) lack of actual notice of filing requirement;
(2) lack of constructive knowledge of filing requirement;
The merits or faults of the reasoning in Isaacman and of (3) diligence in pursuing one's rights; (4) absence of prejudice
other courts on this issue is of little moment here, since we to the defendant; and (5) a plaintiff's reasonableness in
are bound by our decision in Isaacman unless it is inapposite remaining ignorant of the notice requirement.” Andrews v.
to this case. The first question before us, then, boils down to Orr, 851 F.2d 146, 151 (6th Cir. 1988). Since Nardei did not
whether Isaacman’s narrow holding that the bankruptcy court claim lack of notice or knowledge of the filing deadline, “our
could use its equitable power to circumvent the time limits inquiry must focus on the diligence used by the plaintiff in
required by Rule 4007(c) where an error of the court itself had pursuing its rights and the resulting prejudice, if any, to the
caused the untimely filing, requires the legal conclusion that defendant.” First Bank System v. Begue (In re Begue), 176
Rule 4007(c)’s time limits are not jurisdictional. We B.R. 801, 804 (Bankr. N.D. Ohio 1995).
conclude that it does. By permitting equity to trump the filing
deadline set by Rule 4007(c) in one particular circumstance, In its opinion granting the extension, the bankruptcy court
Isaacman, despite its explicitly narrow holding, compels the found that Maughan’s failure to comply with the court’s order
conclusion that the deadline is not jurisdictional, for to hold to turn over documentation justified the extension.
to the contrary would be to hold that equitable considerations Specifically, the court recognized the “dilemma” faced by
can excuse jurisdictional defects. Since “a litigant’s failure to Nardei and his counsel; since Bankruptcy Rule 9011 creates
clear a jurisdictional hurdle can never be “harmless” or an affirmative obligation on the creditor to investigate fully
waived by a court,” Torres v. Oakland Scavenger Company, before initiating an adversary complaint, it would have been
No. 01-4151 In re Maughan 13
improper for Nardei to file his complaint before Maughan
turned over all the relevant documentation. The record
indicates that Nardei continually tried to get the
documentation from Maughan, only to be misled by
Maughan’s promise that the information was forthcoming.
We find no error in the district court’s conclusion that Nardei
was diligent in seeking to enforce his rights and that
Maughan’s delay in producing the documents contributed to
Nardei’s failure to timely file his complaint. And although
Nardei could have filed his motion for an extension within the
time decreed by the rule, he filed that motion only three days
out of rule, and we find no error in the bankruptcy court’s
implicit conclusion that this delay, too, was partly attributable
to Maughan’s conduct or in the court’s express conclusion
that Maughan suffered no prejudice from the extension. The
bankruptcy court did not abuse its discretion by using its
equitable power to ensure that the debtor was not permitted
“to frustrate the ability of a litigant to comply with applicable
law by failing or neglecting to adhere to lawful orders of the
Court.”
III. CONCLUSION
For the foregoing reasons, we REVERSE the order of the
Bankruptcy Appeal Panel and AFFIRM the decision of the
Bankruptcy Court. We REMAND the case for proceedings
consistent with this opinion.