Bankruptcy - W. Homer Drake, Jr. and James W. Dilz

• Publication year: 1995

Bankruptcyby W. Homer Drake, Jr.^* and James W. Dilz^**

I. Introduction

During 1994 the United States Court of Appeals for the Eleventh Circuit decided thirteen cases under the Bankruptcy Code ("Code")¹ in the areas of discharge and dischargeability, preferences, fraudulent transfers, exemptions, hen avoidance, executory contracts, administrative expenses, postconfirmation default, attorney fees, substantive consolidation, and bankruptcy fraud. This Article is a survey of the bankruptcy decisions by the Eleventh Circuit in 1994.

II. Discharge and Dischargeability

A. Deadline for Filing Complaint

In Durham Ritz, Inc. v. Williamson (In re Williamson),² the Eleventh Circuit affirmed the dismissal of a dischargeability complaint filed seventy-six days after the first date set for the meeting of creditors.³ The Eleventh Circuit followed the opinion of the district court, which was attached to the Eleventh Circuit's one-sentence decision as an appendix.⁴ This decision illustrates that bankruptcy attorneys must be aware of, and comply with, deadlines in the Code and Bankruptcy Rules irrespective of notices issued by the clerk.

The debtor, Joe Williamson, filed a Chapter 11 petition on November 14, 1991. The clerk issued a notice stating that the deadline for filing dischargeability complaints pursuant to section 523(c)⁵ of the Code was "to be set."⁶ On March 5, 1992, sixteen days after the deadline set forth in Bankruptcy Rule 4007,⁷ Durham Ritz, Inc. ("Durham") filed a complaint alleging that its debt was nondischargeable under section 523(a)(2)(A).⁸ Bankruptcy Rule 4007(c) provides that "[a] complaint to determine the dischargeability of any debt pursuant to Section 523(c) of the Code shall be filed not later than 60 days following the first date set for the meeting of creditors held pursuant to Section 341(a)."⁹ The bankruptcy court dismissed Durham's complaint as untimely.¹⁰ Durham appealed, arguing that the complaint was timely according to the clerk's notice, that the failure of the clerk to give thirty-day notice of the deadline as required by Bankruptcy Rule 4007 tolled the sixty-day period, that the defective notice violated Durham's Fifth Amendment right of due process, and that equity demanded that the complaint be decided on its merits.¹¹

Relying upon two circuit court decisions, Neeley v. Murchison¹² and Byrd v. Alton (In re Alton),¹³ the district court rejected all four arguments.¹⁴ The Fifth Circuit held in Neeley that a creditor was on notice of the deadline for filing objections to dischargeability, even though the clerk's notice left the space for the deadline blank and the clerk subsequently gave assurances that no deadline had been set.¹⁵ In Alton, the Eleventh Circuit followed the reasoning of Neeley stating that

[a] holding that the language of Rule 4007(c) about notice gives a creditor the right to such official notice before he is under a duty to make inquiries to protect his own rights would conflict with the language of 11 U.S.C. Section 523, which makes actual notice sufficient to impose a duty-to-inquire on the creditor.¹⁶

In accordance with these precedents, the district court held that Durham acted "unreasonably" by waiting for a further notice from the clerk instead of complying with Bankruptcy Rule 4007.¹⁷ Furthermore, because Durham had written notice of the bankruptcy filing, the sixty-day period of Bankruptcy Rule 4007 was not tolled, nor did the Fifth Amendment entitle Durham to additional notice of the deadline.¹⁸ Finally, the district court found that Durham's inaction caused the late filing, not the debtor or the clerk, so equity did not justify relief from the deadline.¹⁹

To avoid suffering a fate similar to Durham, if there is any ambiguity about a deadline that may affect a client's rights, counsel should assume that the courts will strictly enforce the time periods prescribed in the Code and Bankruptcy Rules.

B. Procedure for Extension of Time

In Coggin v. Coggin (In re Coggin),²⁰ the Eleventh Circuit clarified the procedure for obtaining an extension of time under Bankruptcy Rule 4004(b)²¹ to object to the debtor's discharge under section 727²² of the Code. The debtor, Thomas E. Coggin, filed a Chapter 7 petition on April 25, 1989.²³ The last day to file a complaint objecting to the debtor's discharge was August 4, 1989. On July 28, 1989, the Chapter 7 trustee filed a motion pursuant to Bankruptcy Rule 4004(b) to extend the deadline, and the debtor's ex-wife, Phyllis B. Coggin, filed an identical motion on August 3, 1989.²⁴ The bankruptcy court granted both motions without affording the debtor notice or an opportunity for a hearing.²⁵

The Chapter 7 trustee and Mrs. Coggin both filed complaints objecting to the debtor's discharge under section 727 of the Code.²⁶ The debtor moved to dismiss both complaints on the grounds that they were not filed by the deadline and that the bankruptcy court improperly granted the extensions.²⁷ The bankruptcy court acknowledged that it erred in extending the deadlines ex parte, so the bankruptcy court vacated its earlier orders and scheduled the extension motions for a hearing. Following the hearing, the bankruptcy court granted the extensions for a second time and denied the debtor's motion to dismiss.²⁸ The district court affirmed,²⁹ as did the Eleventh Circuit.³⁰

At issue before the Eleventh Circuit was whether the Chapter 7 trustee and Mrs. Coggin timely made their motions to extend the deadline for filing their respective objections to discharge.³¹ The Chapter 7 trustee failed to serve the motion on either the debtor or his attorney, and Mrs. Coggin served only the debtor's attorney. Pursuant to Bankruptcy Rule 9014³² and Bankruptcy Rule 7004(b)(9),³³ if a motion under Bankruptcy Rule 4004(b) is served by mail, the moving party must serve both the debtor and the debtor's attorney.³⁴ The debtor argued that a party moving for an extension of time under Bankruptcy Rule 4004(b) has not made the motion until that party completes service. Since there was no question that neither the Chapter 7 trustee nor Mrs. Coggin attempted to serve the debtor, the debtor reasoned that the bankruptcy court lost jurisdiction to grant the extensions after the original deadline passed.³⁵

The Eleventh Circuit, however, rejected the premise that a party makes a motion under Bankruptcy Rule 4004(b) when they complete service.³⁶ Instead, a party makes the motion when they file it.³⁷ "[I]f a motion is filed but not served prior to the bar date, the jurisdictional requirement of rule 4004(b) is met, and the bankruptcy court retains jurisdiction to extend the bar date if service is proper, or to employ its equitable powers if service is not perfected properly."³⁸ In light of the fact that the bankruptcy court approved both motions ex parte, the Eleventh Circuit concluded that the failure of the Chapter 7 trustee and Mrs. Coggin to effect service upon the debtor and the debtor's attorney was excusable.³⁹ Therefore, the extensions were valid.⁴⁰

The lesson of Coggin is very simple. When seeking to extend the time for filing an objection to discharge, the movant should ideally file and serve the motion upon both the debtor and debtor's counsel before the bar date.

C. Review of Bankruptcy Court's Factual Findings

The Eleventh Circuit's decision in Equitable Bank v. Miller (In re Miller)⁴¹ illustrates the deference given to the bankruptcy court's factual findings in an adversary proceeding involving objections to discharge and dischargeability. Equitable Bank filed a complaint against the debtors, Dr. Arthur Miller and Janet Miller, pursuant to sections 523(a)(2)(B)⁴² and 727(a)(2)(A).⁴³ Equitable Bank based its dischargeability objection under section 523(a)(2)(B) on alleged false financial statements the debtors submitted to the bank.⁴⁴ The bank based its objection to discharge under section 727(a)(2)(A) on the alleged fraudulent transfer Dr. Miller made to his medical partner, Dr. Sylvan Sarasohn, of nine parcels of real property in satisfaction of two notes totaling $1,105,000.⁴⁵ The bankruptcy court found no intent to deceive with respect to either the financial statements⁴⁶ or the transfer to Dr. Sarasohn.⁴⁷ The district court reversed and sustained both objections, but the Eleventh Circuit concluded that the reversal by the district court was erroneous.⁴⁸

"Because a determination concerning fraudulent intent depends largely upon an assessment of the credibility and demeanor of the debtor, deference to the bankruptcy court's factual findings is particular- ly appropriate."⁴⁹ The bankruptcy court may look at the "totality of the circumstances" to infer the debtor's fraudulent intent.⁵⁰ A circuit court conducts a de novo review of a district court's holding that the bankruptcy court's factual findings were clearly erroneous.⁵¹

During the bench trial before the bankruptcy court, Dr. Miller gave plausible explanations for both the financial statements and the transfer to Dr. Sarasohn.⁵² Therefore, the district court improperly reversed the bankruptcy court's finding that the debtors lacked the requisite fraudulent intent under sections 523(a)(2)(B) and 727(a)(2)(A).⁵³

III. Recovery of Assets of the Estate

A. Preferences: Adoption ofDeprizio

In Galloway v. First Alabama Bank (In re Wesley Industries, Inc.)^M the Eleventh Circuit adopted the reasoning of Levit v. Ingersoll Rand Financial Corp. (In re V. N. Deprizio Construction Co J,⁵⁵ holding that the one-year reachback period applies to the avoidance of preferences to creditors whose claims are guaranteed by insiders of the debtor.⁵⁶ Wesley and Deprizio are only applicable, however, in bankruptcy cases filed prior to October 22, 1994. Congress legislatively overturned Deprizio in section 202 of the Bankruptcy Reform Act of 1994,⁵⁷ which amended section 550⁵⁸ of the Code. These amendments are effective in bankruptcy cases filed on or after October 22, 1994.⁵⁹

In Wesley First Alabama Bank ("First Alabama")...