421 Chestnut Partners, LP v. Aloia (In re Aloia)421 Chestnut Partners, LP v. Aloia (In re Aloia)
MEMORANDUM OPINION
Two related matters are currently before me. First, the debtor/defendant has moved to dismiss as untimely filed the above-captioned adversary proceeding, which, inter alia, objects to the debtor’s chapter 7 discharge.
I.
The facts relevant to these disputes, including their procedural history, are as follows.
The debtor, Thomas Aloia, filed a voluntary petition in bankruptcy under chapter 7 on August 24, 2012. In accordance with Bankruptcy Rule 2003(a), the first meeting of creditors under section 341(a) was set for October 3, 2012. By virtue of Bankruptcy
On his Bankruptcy Schedule B (Personal Property) filed with his voluntary petition, Mr. Aloia disclosed, inter alia, his ownership of 100 percent of the stock of Aloia Construction, Inc. He further stated that this corporation was formed on January 7, 2002 and ceased operation on May 9, 2009. Mr. Aloia’s Bankruptcy Schedule B also reported that this corporation had the following five “current ... collection cases”:
Aloia vs. 421 Chestnut Partners, LP
Aloia vs. Byrne Limited Partnership
Aloia vs. 4742 Condo Associates, Fred Berg and Stephen Fox
Aloia vs. 800 Properties, Fred Berg and Stephen Fox
Aloia vs. Halberstadt Curley
At the meeting of creditors held on October 3, 2012, the chapter 7 trustee, Terry P. Dershaw, Esquire, examined the debtor. When he asked Mr. Aloia if there were any “errors or omissions” in his bankruptcy schedules, Mr. Aloia referred to his Schedule B and stated “[t]he first three [collection cases] are correct, number four and five are not actual matters or assets of the corporation at this time.” Ex. J-l, p. 5.
Counsel for the plaintiffs attended the October 3rd meeting and questioned Mr. Aloia. He asked the debtor: “How did you arrive at [the $0] value [of the corporation]?” The debtor responded: “I think it’s at zero dollars at this minute because the only assets it has are the collectability of the cases one, two, and three.” Id., p. 12.
Plaintiffs’ counsel also asked what changes, if any, regarding receivables four and five no longer made them corporate assets. Mr. Aloia replied
[in the 800 Properties case], it’s just an LLC that does not seem to be any col-lectability!,] and the Aloia Halberstadt Curley issue was related to a matter that they were handling, which they are still handling.... Halberstadt — well, not Halberstadt Curley, but Kevin Watson was an attorney at Halberstadt Curley and had moved to another firm. There was an issue that came up and he ended up leaving the firm and going to a new firm and carrying our cases over to the new firm.... The issue was misrepresentation. We felt there will [sic] was a breach in our agreement and Kevin left and took all of our cases with him.
Id., pp. 12-13. Mr. Aloia added that he valued the receivable claims according to whether he believed he could “collect the money owed to us.” Ex. J-l, p. 14.
At the October 3rd meeting, plaintiffs’ counsel also elicited that Mr. Aloia’s wife was paying “most” of the court costs and arbitration fees associated with these corporate collection cases; that the debtor’s spouse had filed UCC liens for the money advanced to the corporation, ex. J-l, p. 14; that the amounts claimed by the corporation in the first three collection cases listed on Schedule B were: 421 Chestnut-$363,000, Bern-$1.2 million, and 4742 Condo-$800,000; and, that the liabilities of Al-oia Construction were approximately $1.5 million, which Mr. Aloia stated he had guaranteed. Ex. J-l, pp. 14-16.
The chapter 7 trustee thereafter continued the October 3rd creditors meeting to November 13, 2012, requesting additional information from the debtor as follows:
Debtor to provide 2009-2011 tax returns (personal and for each business listed in SOFA # 18), bank statements for the period 7/1/11 — date of filing for all financial accounts in which the debtor had any interest or was the signatory of any personal or business account, documentation substantiating each collection case listed in Schedule B. Debtor to provide evidence of sale or transfer of any interest in Abcon Construction Inc. Case to be continued for further examination of debtor. Information Due on: 10/24/2012.
See docket entry 10/09/2012.
Also on October 3rd, the debtor filed an amended Schedule B, deleting the 800 Properties and Halberstadt Curley collection cases from the identified assets of Aloia Construction, and adding a statement that the corporate liabilities exceeded the value of the outstanding corporate “actions.”
On October 21, 2013, plaintiffs’ counsel, acting on behalf of plaintiff Diamond Tool & Fasteners, Inc. and two other entities, filed an involuntary chapter 7 bankruptcy
On November 2, 2012, Mr. Aloia filed a second amendment to his Bankruptcy Schedule B. This amendment disclosed the identical information regarding Aloia Construction, Inc. as had been identified in the original Schedule B, including the five “collection cases.” Deleted, however, was the statement that corporate liabilities exceeded the value of corporate actions. Moreover, instead of valuing his corporate interest at $0, the debtor listed its value as “unknown.” On November 2nd, the debt- or also filed an amended Bankruptcy Schedule C (Property Claimed as Exempt) listing his interest in Aloia Construction, Inc. as exempt, pursuant to
The continued meeting of creditors resumed on November 13, 2012. The trustee noted in his report of this meeting that he had not received all documents requested at the earlier October 3rd meeting:
Trustee investigation continuing. Debt- or to provide balance of documents previously requested and outstanding. Case to be continued for status, however, all parties are cautioned to check with trustee prior to scheduled continued meeting to determine if meeting will proceed. Information Due on: 11/20/2012.
See docket entry 11/13/2012. The trustee continued the meeting of creditors to November 28, 2012.
At the November 13th meeting, plaintiffs’ counsel again examined Mr. Aloia. One of the topics he raised concerned the debtor’s two amendments to Bankruptcy Schedule B. Ex. J-2, p. 16. The following exchange took place:
Q. So are those cases moving forward, all five of them?
A. The 800 properties is now, is moving forward, and the (indistinguishable) I have not talked to counsel for my issue.
Q. What is the issue in that case?
A. I don’t even know if it’s a legal issue so I really can’t expand upon it until I speak to counsel.
Q. What’s the basis of the claim?
A. The basis of the claim is on procedural.
Q. I’m not sure I understand what that is.
A. It’s a procedure that was missed on — without counsel advising me I’m not sure if I have a legal basis to pursue an action.
Q. So it’s a potential malpractice claim?
A. It’s potentially, but I don’t really want to speak out of turn without speaking to counsel first.
Q. What was the underlying case where this procedural issue arose?
A. It was on a, one of the construction matters with Century Construction.
Q. Century Construction. And is that in litigation or was it in litigation?
A. It was.
Q. And what happened?
A. It was dismissed.
Q. And it’s your contention or your belief that there’s a potential claim against them for it having been dismissed?
A. I don’t know at this point.
Q. Okay. What was the second case which was taken off and then re-added?
A. The 800 properties which I spoke about earlier.
Q. And what is that case about?
A. Nonpayment.
Q. Nonpayment of company — of an obligation to the company, is that what you’re suggesting?
A. Yes.
Ex. J-2, pp. 17-18.
Mr. Aloia also then testified that he did not know the total liabilities of Aloia Construction. He added: “I’m sure there’s some sort of general account” reflecting corporate income and expenses. Ex. J-2, pp. 37-38.
Apparently finally satisfied with Mr. Al-oia’s document production, but still needing time to review the documents produced, the trustee did not hold a meeting of creditors on November 28, 2012; rather, he and Mr. Aloia entered into a stipulation, granted by this court on November 28, 2012, extending to February 4, 2013 the deadline under
On December 3, 2013, the two plaintiffs herein, Diamond Tool and Fasteners, Inc., and 421 Chestnut Associates, L.P., filed a joint motion under Bankruptcy
Movants hold certain unsecured claims against Debtor and/or Aloia Construction Company, Inc., and are investigating the facts and circumstances of the Debtor’s self-dealing and commingling of corporate and individual funds. Debt- or’s actions might very well lead to an action seeking that Debtor be found individually liable to movant [sic] and such liability be held non-dischargeable under11 U.S.C. § 523 . Likewise, certain information has come to light in the two initial sessions of the Meeting of Creditors which might support an action that the Debtor is not entitled to a discharge.
See docket entry # 87 (Motion to Extend Deadlines, ¶ 14).
For reasons given in an accompanying statement, this court granted the plaintiffs’ joint motion over the debtor’s opposition by order dated January 14, 2013. See docket entries ## 120-21.
On January 29, 2013, the chapter 7 trustee filed a report concluding the meeting of creditors. Thereafter, neither he nor the United States trustee filed an objection to discharge or a motion to dismiss this case by the February 4th deadline; however, on February 11, 2013, the chapter 7 trustee filed a notice that this chapter 7 case would be treated as one with nonexempt assets to distribute, and requested that the clerk give notice to creditors of a claims bar date. See Bankruptcy Rule
On February 4, 2013, the plaintiffs filed a Second Motion to Extend the deadlines under
Again, the debtor opposed this second motion. He alleged that plaintiffs’ counsel bore responsibility for the 2004 examination not having taken place, that he had provided to the trustee and plaintiffs all documents that had been requested regarding Abcon Construction, that the trustee was satisfied that the debtor was entitled to a bankruptcy discharge, and that the plaintiffs were improperly seeking to delay the debtor’s fresh start. See docket entry # 130.
On February 14, 2013, Mr. Aloia filed a second amended Schedule C, changing the amount of his claimed exemption of corporate stock to $11,791.27 and valuing his interest in that asset at $30,000. See docket entry # 134. The five corporate collection actions listed on this bankruptcy schedule remained unchanged.
March 6, 2013 was the date set for the hearing to determine the plaintiffs’ second motion for an extension under
Also on March 6, 2013, the plaintiffs filed the above-captioned three-count complaint objecting to the discharge of the debtor, pursuant to section 727(a)(2)(A), (a)(4) (Count III) as well as objecting to the dischargeability of an alleged obligation owed to Diamond Tool, pursuant to
Plaintiff believes and therefore [avers] that Defendant failed to list all of his assets on his schedules.Plaintiff believes and therefore [avers] that Defendant lied under oath when filing his schedules, testifying at the Section 341 Meeting of creditors and in subsequent filings.
March 5th Complaint, ¶¶ 23, 25.
In response, on March 21 the debtor filed his instant motion to dismiss, contending that the plaintiffs’ complaint sought relief beyond the deadlines set by
As the plaintiffs’ third motion for an extension under
An evidentiary hearing was held to consider the plaintiffs’ motion under
In March 2013, the plaintiffs learned that Aloia Construction had filed a prepetition civil action in New York state court, asserting that an attorney engaged by the corporation was negligent in failing to file timely a mechanics lien in favor of the corporation. This state court action, still pending, has been stayed because the insurer of the defendant/attorney filed a civil action in federal district court seeking a declaratory judgment disclaiming coverage. This second action is captioned Admiral Insurance Co. v. Adges, et al., 1811-cv-08289 (S.D.N.Y.). Exs. J-3, J-4.
The debtor did not include this malpractice litigation or the declaratory judgment action among the pending corporation lawsuits in his bankruptcy schedules.
The plaintiffs now contend that the declaratory judgment action has been settled, with the insurer agreeing to pay Aloia Construction $225,000. The debtor disagrees. The evidence presented on this point consisted of two exhibits.
First, by letter dated April 9, 2013, counsel for Aloia Construction opined to the district court his view of the status of the insurer’s declaratory judgment action. Counsel wrote that his corporate client had settled the declaratory judgment action
Second, by letter also dated April 9, 2013, counsel for Admiral Insurance wrote to the district court as to her view of the current status. Ex. J-4. Insurance counsel acknowledged that an agreement in principle had been reached with Aloia Construction, but thereafter the insurer learned certain facts that rendered any actual settlement conditioned upon a number of components beyond district court approval. Id.
As outlined by counsel, the insurer would not agree to the settlement unless the district court would first grant a motion that insurance counsel believed would permit the insurer to settle the litigation without the insured’s consent. In addition, the insurer maintained that it had recently learned that a creditor of the corporation (not either of these plaintiffs, but through the same attorney that represents the two plaintiffs in this adversary proceeding) had, on March 18, 2013, served a writ of execution attempting to garnish funds owed to the corporation by the insurer. Furthermore, on March 25, 2013, the insurer had become aware that various parties had filed UCC Financing Statements purporting to reflect security interests in any funds owed by the insurer to Aloia Construction. The insurer had also recently discovered that Mr. Aloia had a pending chapter 7 bankruptcy case. Id.
Insurance counsel asserted in her April 9th letter to the court that her client would not agree to any settlement until either there was a judicial resolution determining the proper party to whom the settlement funds should be paid, or an order permitting the insurer to interplead the settlement funds. Id.
Finally, counsel for Admiral Insurance maintained that her client had incurred (unspecified) additional counsel fees based upon these recently discovered events and information and intended to offset those additional fees from the settlement amount previously discussed. Id.
No evidence was presented as to the current status of the federal declaratory judgment litigation; nor what action, if any, the district court took after receiving the two April 9th status letters.
Insofar as the claims of the two plaintiffs against the debtor are concerned, there is no dispute that Diamond Tool and Fasteners obtained a prepetition judgment against the debtor and Aloia Construction. See docket entry # 1 (Statement of Financial Affairs, # 4; Bankruptcy Schedule D). The lien against property of the debtor arising from the judgment held by Diamond Tool was avoided pursuant to
Uncontradicted testimony was presented that Aloia Construction was awarded $83,000 in arbitration against 421 Chestnut Partners, LP. No evidence was presented that this latter entity holds a claim against the debtor that has not been resolved by this arbitration award.
II.
In opposing the plaintiffs’ motion to further extend the deadline for objecting to his discharge, the debtor argues that neither Diamond Tool nor 421 Chestnut Partners has standing to seek such an extension. As to the latter plaintiff only, I agree.
Article III courts may only hear “cases” and “controversies.” Const., Art. Ill, § 2. The requirement the every party have standing to assert claims grows out of
an “injury in fact” that is “concrete,” “distinct and palpable,” and “actual or imminent.” Whitmore v. Arkansas,495 U.S. 149 , 155,110 S.Ct. 1717 ,109 L.Ed.2d 135 (1990). Additionally, the party must establish that the injury “fairly can be traced to the challenged action and is likely to be redressed by a favorable decision.” Id. (internal quotations omitted).
In re Global Industrial Technologies, Inc.,
“[T]he standing inquiry remains focused on whether the party invoking jurisdiction had the requisite stake in the outcome when the suit was filed.” Davis v. Federal Election Commission,
That restriction requires that the party invoking federal jurisdiction have standing — the “personal interest that must exist at the commencement of the litigation.” Friends of Earth, Inc. v. Laidlaw Environmental Services (TOC), Inc.,528 U.S. 167 , 189,120 S.Ct. 693 ,145 L.Ed.2d 610 (2000) (internal quotation marks omitted). But it is not enough that the requisite interest exist at the outset. “To qualify as a case fit for federal-court adjudication, ‘an actual controversy must be extant at all stages of review, not merely at the time the complaint is filed.’ ” Arizonans for Official English v. Arizona,520 U.S. 43 , 67 [117 S.Ct. 1055 ,137 L.Ed.2d 170 ] (1997).
Davis v. Federal Election Commission,
The doctrine of mootness “has been described as ‘the doctrine of standing set in a time frame: The requisite personal interest that must exist at the commencement of litigation (standing) must continue throughout its existence (mootness).’ ” Arizonans for Official English v. Arizona,
According to the evidence presented, at the time of the hearing on the plaintiffs’ current motion under
There was no evidence presented regarding the date the arbitration award against 421 Chestnut Partners was entered. If I assume that the debtor is liable for all debts of Aloia Construction (as he suggested at the meeting of creditors), and if the arbitration award in favor of Aloia Construction was entered prior to the debtor’s bankruptcy filing, this plaintiff was never a creditor in this case and has no standing to contest the debtor’s discharge. If the award occurred after this bankruptcy case commenced, then 421 Chestnut Partners would have been a creditor holding a disputed claim, see
Conversely, it is undisputed the Diamond Tool is a creditor of the debtor, as it holds a prepetition judgment. See generally
I shall assume that the debtor is correct in that the failure of this plaintiff to file a proof of claim, as directed by
Distinct, however, from the concept of allowance of a claim for distribution purposes, is the effect of a chapter 7 discharge on Diamond Tool’s prepetition claim. If Mr. Aloia were granted a chapter 7 discharge, then Diamond Tool would be enjoined under
Accordingly, the entry of a discharge in favor of the debtor would adversely affect the rights of Diamond Tool as a creditor of the debtor, and so it has standing to seek an extension of time to object to the debtor’s discharge. See, e.g., In re Sullivan,
Section 727(c) provides the basis for standing to object to discharge. Generally, the trustee, a creditor, or the United States Trustee may object to the debtor’s discharge or the dischargeability of certain debts. See 11 U.S.C. § 727(c)(1) ; see alsoFed. R. Bankr.P. 4007(a) . Thus, whether Lussier has standing here turns on whether Lussier is a “creditor.” A creditor is any “entity that has a claim against the debtor that arose at the time of or before the order for relief concerning the debtor.”11 U.S.C. § 101(10) . A claim is a “right to payment, whether or not such a right is reduced to judgment, liquidated, unliqui-dated, fixed, contingent, matured, unma-tured, disputed, undisputed, legal, equitable, secured, or unsecured.”11 U.S.C. § 101(5) .
Moreover, bankruptcy courts have recognized that claims need not be allowed in order to establish a party as a “creditor” under§ 727(c)(1) . In the Eighth Circuit, the B.A.P. has held that where the debtor listed the Internal Revenue Service (the “IRS”) as a creditor, the IRS held a claim qualifying it as a creditor with standing to object to discharge under§ 727 , even if the claim was ultimately disputed, reduced, or disallowed. Korte v. United States (In re Korte),262 B.R. 464 , 471 (8th Cir. BAP 2001). Similarly a Michigan bankruptcy court, for two main reasons, rejected the debtor’s argument that the chapter 7 trustee was not a creditor with standing to object to discharge.
First, nothing in§ 727(c) limits standing to object to the discharge to creditors whose claims are first allowed in the bankruptcy case.... If Congress intended to limit standing to only those creditors with allowed claims, it could easily have crafted the statutory language to reflect that intent. Thus, as demonstrated in the text, even a party with a disputed claim is a “creditor.” Second, when there are no assets available for distribution, as in most chapter 7 cases, even the filing of claims by creditors, let alone actually litigating such claims, is strongly discouraged. See [Bankruptcy Rules] 2002(e) and 3002(c)(5).
Solomon v. Barman (In re Barman),244 B.R. 896 , 899 n. 3 (Bankr.E.D.Mich.2000).
Therefore, based upon the applicable sections of the Bankruptcy Code, the undisputed facts, and the explicit language of In re Korte and In re Barman, the Panel recognizes Lussier as a creditor with standing to object to discharge under§ 727(c)(1) .
See also In re Hunn,
While BankruptcyRule 3002(a) clearly requires a proof of claim to be filed in order for the claim to be allowed for purposes of the claimant sharing in distribution in the estate, there is no suggestion in the statutes or the rules that a claim ceases to exist if not supported by a timely proof of claim. Title11, U.S.C. § 101(9)(A) defines a creditor simply as an entity that has a claim against the debtor that arose at the time of or before the Order for Relief concerning the debtor. There is no reference to schedules or proofs of claim. There does not seem to be any equitable reason to bar this plaintiff from pursuing an action under§ 727(a) on standing grounds.
Accordingly, as one of the plaintiffs has standing to seek an extension, I must consider whether it is entitled to relief under
III.
While
The 60-day deadlines in the Rules strike a balance between the competing interest of the debtors who want a fresh start, the creditors who would like to receive payment of their claims, and the U.S. Trustee who is charged with the duty to protect the bankruptcy system from abusive filings. The relatively brief deadlines for objections relating to chapter 7 relief are there to encourage expeditious administration of the case. The short deadlines “give debtors some degree of certainty in the process of obtaining a discharge.” In re Chamness,312 B.R. 421 , 423 (Bankr.D.Colo.2004). “A Chapter 7 bankruptcy discharge entitles a debtor to a ‘fresh start,’ therefore, the debtor has an interest in the prompt resolution of all discharge issues.” In re Davis,195 B.R. 422 , 424 (Bankr.W.D.Mo.1996) (citation omitted).
In re Bomarito,
Bankruptcy
When seeking relief under
After the objection deadline has passed,
(d) On request of the trustee, a creditor, or the United States trustee, and after notice and a hearing, the court shall revoke a discharge granted under subsection (a) of this section if—
(1) such discharge was obtained through the fraud of the debtor, and the requesting party did not know of such fraud until after the granting of such discharge!.]
By its express terms, revocation of a discharge under
The burden to obtain information relating to fraud remains on the creditors, who must investigate the bankrupt’s affairs before discharge.... The bankruptcy judge noted that the majority of courts have concluded that a creditor cannot bring a successful§ 727(d)(1) revocation action if the creditor had any information or knew of any facts that would have put him on notice of possible fraud_The bankruptcy court rejected the Appellants’ argument (which they also make now on appeal) that§ 727(d)(1) requires a more complete knowledge of the fraud, and held that notice of the fraud is sufficient. Knowledge of facts that would ordinarily put a reasonable person on notice of the alleged fraud precludes revocation under§ 727(d)(1) .... Creditors who have only a suspicion that a debtor has committed fraud have remedies available to them: they may petition the bankruptcy court for an extension of time in which to file objections ... or they may ask for additional time in which to conduct discovery. ...
Smith v. Seferian,
Before the enactment of Bankruptcy
Other courts, relying upon
In 2011, Bankruptcy
(1) On motion of any party in interest, after notice and hearing, the court may for cause extend the time to object to discharge. Except as provided in subdivision (b)(2), the motion shall be filed before the time has expired.
(2) A motion to extend the time to object to discharge may be filed after the time for objection has expired and before discharge is granted if (A) the objection is based on facts that, if learned after the discharge, would provide a basis for revocation under§ 727(d) of the Code, and (B) the movant did not have knowledge of those facts in time to permit an objection. The motion shall be filed promptly after the movant discovers the facts on which the objection is based.
(emphasis added). The Advisory Committee Note (2011) to this amendment makes clear that the drafters intended to provide creditors with an opportunity to oppose the debtor’s discharge by extending the deadline for an objection, so long as knowledge of the debtor’s fraud first surfaced during the gap period.
A.
In support of its third motion to extend the deadline for objecting to the debtor’s discharge, Diamond Tool avers as follows:
Subsequent to the filing of the Adversary Action, Plaintiffs’ counsel learned of the existence of a malpractice case against a former attorney, Adges, which had been filed on behalf of Aloia Construction Company, Inc., (“ACC”) a business whose shares are wholly owned by Debtor.
At that time, Plaintiffs counsel learned that a settlement had been reached in a related Declaratory action in which ACC would receive Two Hundred Twenty Five Thousand Dollars ($225,000.00). This settlement has not yet been paid to ACC.
In three versions of Debtor’s Schedule B, Debtor sets forth claims which ACC is pursuing. None of these filings contained information about the Adges malpractice claim, noted that it had been settled for $225,000 in the same month that the Chapter 7 case was filed, or that the settlement had not been received by ACC....
The existence of and settlement of the malpractice case were not disclosed by Debtor at two Section 341 Meeting[s] of Creditors, or in response to the Chapter 7 Trustee’s direction that Debtor provide full information concerning ACC’s pending claims.
Debtor intentionally mislead and likely committed perjury concerning this claim at the November 13, 2012 Section 341 meeting. As is set forth in the attached transcript, he indicated that there was a potential claim for malpractice against an attorney in connection with a matter involving Century Construction which had been dismissed due to a procedural error on [sic] by an attorney. As can be seen from the attached Exhibit, there was an actual 2010 malpractice case against Adges which involved 800 Properties and the failure to file mechanic’s liens, not Century Construction....
Third Motion for Extension, ¶¶ 9-13.
Thus, Diamond Tool asserts that the debtor failed to disclose that Aloia Construction had a pending malpractice claim that had settled for $225,000. Such failure, it argues, constitutes fraud, presumably under
The debtor counters in his post-hearing memorandum in relevant part:
Movants are relying solely upon the absence of a specific reference to the Adger [sic] malpractice action under the description of Aloia Construction Company, Inc’s assets on schedule B. Debt- or in turn argues:
1. It was discussed and answered to the extent of the inquiry at the 341 meetings. If specific questions were asked, Debtor would have answered those questions, and;
2. It was not settled and still remains unsettled and;
3. It is an asset of Aloia Construction Company, Inc and not the Debtor and is not required to be listed and;
4. The corporate debts still exceed the receivables including Adges and therefore the corporation has no value and;
5. The affect of Adges and its current status if anything may affect the trustee’s valuation of the stock for sale, but has no affect on non-dischargeability. Debtor answered all questions at the 341 meeting on October 3, 2012 and November 13, 2013[sie] honestly based upon his knowledge at that time. The malpractice action derives from the 800 properties receivable listed under Aloia Construction Company, Inc. on schedule B. Debtor listed his ownership interest of Aloia Construction Company, Inc on schedule B. While the receivables are listed under Aloia Construction Company, Inc. description, it was solely to help the trustee value the stock. They are not assets of Thomas Aloia, individually.
Debtor’s Posthearing Memorandum, at 6-7 (unpaginated).
Thus, the debtor challenges Diamond Tool’s contention that his failure to list in his bankruptcy schedules Aloia Construction’s pending malpractice action against its former counsel (referred to as Adges) constitute frauds under
Moreover, the debtor also maintains that he responded honestly to questions posed to him at the November 13th meeting of creditors, which responses revealed to the trustee and to counsel for Diamond Tool the existence of a corporate malpractice
B.
In resolving the parties’ dispute over the applicability of
In In re Berger,
Cause for an extension does not exist when a creditor, who has notice of the bankruptcy case and filing deadlines, fails to diligently pursue discovery prior to expiration of those deadlines.
Id., at *4 (citing In re Chatkhan, 455 B.R. 365 (Bankr.E.D.N.Y.2011), which decision had applied
I agree with both courts that implicit in
First, Bankruptcy
Second, also as discussed above, creditor diligence has long been a requirement for revocation relief under
Finally, the Third Circuit Court of Appeals has instructed that congressional policy in favor of affording debtors a “fresh start” through a bankruptcy discharge requires that courts act sparingly before denying a discharge:
Congress described§ 727 ’s discharge provision as “the heart of the fresh startprovisions of the bankruptcy law.” H.R.Rep. No. 595, 95th Cong., 1st Sess. 384 (1977). The section is to be construed liberally in favor of the debt- or.... Completely denying a debtor his discharge, as opposed to avoiding a transfer or declining to discharge an individual debt pursuant to § 523 , is an extreme step and should not be taken lightly.
Rosen v. Bezner,
C.
The evidence reflects that plaintiff Diamond Tool, through its counsel, attended both section 341 meetings and elicited testimony from the debtor about the assets of Aloia Corporation. At the second meeting on November 13th it learned of a malpractice claim held by Aloia Corporation, which claim the debtor, a non-attorney, characterized as “potential.” Moreover, it also learned that this malpractice claim involved a construction project. In addition, on November 13th, Diamond Tool became aware that the malpractice claim had not been listed on the debtor’s Bankruptcy Schedule B, since the debtor testified that the “potential” claim arose from litigation that had been dismissed.
At the time Diamond Tool learned of the debtor’s corporate malpractice claim, this plaintiff was among the petitioners who had filed an involuntary bankruptcy petition against the Aloia Corporation under
I will accept that whatever information Diamond Tool possessed regarding the financial circumstances of Aloia Construction when the involuntary petition was filed did not include any knowledge of a malpractice claim. Diamond Tool, however, clearly knew of this potential malpractice claim as of November 13, 2012; yet, it took no steps to investigate its status or its value. Its motion for an extension of time under
In addition, on March 5, 2013, after the February 4th deadline had passed and before Diamond Tool contends that it first learned of the corporate malpractice action, it filed a complaint alleging that the debtor committed a false oath within the meaning of
Finally, Diamond Tool learned of the pending corporate malpractice action and its possible resolution in March 2013 from an individual who is not an attorney and who is not a party to the litigation. This suggests that information about the malpractice claim was easily available to those who chose to investigate.
Therefore, even if the debtor’s failure to list the pending corporate malpractice action on his Bankruptcy Schedule B, and failure to disclose the potential settlement with the defendant’s insurer, constitute frauds within the meaning of
Diamond Tool was long aware that the debtor’s interest in Aloia Construction was an asset of his bankruptcy estate. Nonetheless, after learning of a malpractice claim in November 2012, and knowing that any such claim was not included in the debtor’s list of corporate assets provided to the trustee, Diamond Tool elected not to investigate this claim, learning its status only by the unsolicited communication from another creditor who had undertaken her own investigation without the benefit of counsel. Seemingly suspicious of Mr. Aloia from the start, Diamond Tool chose to focus its inquiries upon the five corporate civil actions mentioned in the debtor’s bankruptcy schedules and the debtor’s transfer of his interest in Abcon Construction, rather than upon any malpractice claim.
In addition, the debtor’s multiple schedule revisions and answers at the 341 meetings should have alerted a diligent, suspicious creditor, that it could not rely on the debtor’s voluntary disclosures or upon the trustee’s document demands to determine whether the debtor’s value of his interest in Aloia Construction was accurate.
Moreover, even without the knowledge it later obtained about the corporate malpractice action, and even without any 2004 examination of the debtor, Diamond Tool had reached the conclusion that the debtor committed a false oath within the meaning of
Accordingly, for these reasons I will deny Diamond Tool’s and 421 Chestnut Partners’ third motion for an extension of the deadline to object to discharge. In
Appropriate orders will be entered.
Notes
. As will be mentioned infra, Counts I and II, raising issues of nondischargeability, have already been dismissed. Count III, an objection to the debtor’s discharge, is the only remaining cause of action in this proceeding.
. I take judicial notice, under
. One of the debtor’s objections to the joint motion was that it had been filed one day late. As noted earlier, deadlines under
.It appears that the chapter 7 trustee will attempt to liquidate the debtor’s interest in Aloia Construction Inc. On March 5, 2013, he filed a motion to sell that interest under section 363(b) for $40,000. See docket entry #139. The debtor and counsel for Aloia Construction filed objections, see docket entries ## 145, 146, with the latter suggesting that the proposed price was not at fair value. The trustee withdrew his sale motion. See docket entry #148.
. The debtor appeared at plaintiffs’ counsel’s office for his 2004 examination on January 29th, but plaintiff's counsel believed the examination had been rescheduled for February 1st. See Second Motion to Extend, ¶ 13.
. Count I expressly refers to Diamond Tool only. Count II uses the singular term “plaintiff,” while Count III refers to the plural “plaintiffs” in its heading, but then makes averments on behalf of just one plaintiff.
. The plaintiffs did not specify the assets they believed the debtor failed to disclose on his schedules, or the false oaths he made, as averred in Count III of their complaint.
. Indeed, if the debtor’s standing argument were correct, then in a chapter 7 case classified as a no-asset case — meaning that there are no non-exempt assets available for distribution to creditors — a creditor could only object to discharge if it ignored the court notice sent under Bankruptcy Rule 2002(e) that the filing of a proof of claim is unnecessary.
. The Advisory Committee Note (2011) states: Subdivision (b) is amended to allow a party, under certain specified circumstances, to seek an extension of time to object to discharge after the time for filing has expired. This amendment addresses the situation in which there is a gap between the expiration of the time for objecting to discharge and the entry of the discharge order. If, during that period, a party discovers facts that
. Since it is the debtor’s interest in his corporation that is an asset of the bankruptcy estate, and as that interest was obtained long before the debtor’s bankruptcy case commenced,
.
(1) [the debtor] made a statement under oath; (2) the statement was false; (3) [the debtor] knew the statement was false; (4) [the debtor] made the statement with fraudulent intent; and (5) the statement related materially to the bankruptcy case. False oaths sufficient to justify the denial of discharge include (1) a false statement or omission in the debtor’s schedules or (2) a false statement by the debtor at the examination during the course of the proceedings.
Matter of Beaubouef,
Mr. Aloia appears to contend that he never made any statements that were either false or material to the administration of his chapter 7 bankruptcy case.
I need not address that contention to resolve this dispute.