HANK WILLMS; DOLLY WILLMS, Plaintiffs-Appellees, v. ROWE SANDERSON III, Defendant-Appellant.
No. 12-35135
UNITED STATES COURT OF APPEALS FOR THE NINTH CIRCUIT
July 25, 2013
D.C. No. 3:11-cv-00818-HZ
OPINION
Appeal from the United States District Court for the District of Oregon
Marco A. Hernandez, District Judge, Presiding
Argued and Submitted November 5, 2012—Portland, Oregon
Filed July 25, 2013
Before: Arthur L. Alarcon, M. Margaret McKeown, and Jacqueline H. Nguyen, Circuit Judges.
Opinion by Judge Nguyen
Bankruptcy
The panel vacated the district court’s judgment affirming the bankruptcy court’s order granting plaintiffs an extension of time to file a nondischargeability complaint against a debtor.
The panel held that the bankruptcy court erred by sua sponte extending the time after the deаdline had already passed and by doing so without either a showing or a finding of cause. The panel remanded with instructions to dismiss.
COUNSEL
Lawrence W. Erwin, Bend, Oregon, for Defendant-Appellant.
D. Zachary Hostetter, Hostetter Knapp, LLP, Enterprise, Oregon, for Plaintiffs-Appellees.
OPINION
NGUYEN, Circuit Judge:
Appellant Rowe Sanderson III appeals from the district court’s judgment affirming the bankruptcy court’s order
I.
A.
The material facts underlying the parties’ dispute are straightforward. Rowe Sanderson’s company (“SCI”) was experiencing a cash flow problem. It hаd a promissory note for $1.5 million from La Pine Village, LLC (“LPV”) that was secured by a deed of trust to real property in Oregon. Sanderson expected to receive full repayment on the LPV note in two months but in the meantime needed operating capital for SCI.
Hank and Dolly Willms agreed to provide bridge financing. They loaned $500,000 to SCI, in exchange for which SCI executed a note agreeing to repay that amount plus interest within six days after the LPV payment was due. SCI grаnted the Willmses an interest in the LPV note as security and, sometime later, delivered it to them. LPV did not repay its debt to SCI on time. Consequently, SCI could not repay the Willmses by the agreed date.1
* This summary constitutes no part of the opinion of the court. It has been prepared by court staff for the convenience of the reader.
The Willmses did not agree that Sanderson’s payment should be applied to the debt on the SCI note and refused to return the LPV note, which they held as collateral. Sanderson, meanwhile, desiring to close the LPV transaction, attempted to induce the title company to release the funds from escrow and reconvey the deed of trust to LPV. To that end, he signed a letter of indemnity in which he claimed that SCI had lost, misplaced, or destroyed the LPV note, despite knowing that the note remained in the Willmses’ possession.
B.
Sanderson filed a voluntary Chapter 7 petition seeking personal bankruptcy protection in October 2009. The meeting of creditors was first set in December. On February 16, 2010—the last possible day—the Willmses moved to extend the deadline for filing either a complaint objecting to the petition’s dischаrge or a motion to dismiss.
The bankruptcy court held a hearing on the Willmses’ motion ten days later. At the hearing, the bankruptcy court denied all of the relief requested in the Willmses’ motion. After hearing the Willmses’ allegations, the bankruptcy court opined that the Willmses may have “a fairly straightforward [
The Willmses objected to the dischargeability of the debt owed under the SCI note from Sanderson’s bankruptcy estate. Overlooking the legal distinction between Sanderson and SCI, the Willmses claimed that Sanderson was personally liable on the SCI note. Although they acknowledged receiving SCI’s $507,117.33 payment, they contended that it applied to Sanderson’s other debts to them. They sought to have the debt on the SCI note declared nondischargeable under
At the conclusion of a one-day bench trial, the bankruptcy court found in favor of the Willmses. In an oral ruling, the bankruptcy court declared SCI’s debt to be nondischargeable on the basis that Sanderson failed to prove that he had repaid
The Willmses appealed the bankruptcy court’s judgment to the district court, arguing that the bankruptcy court had abused its discretion by allowing Sanderson to present new evidence after trial. Sanderson cross-appealed on the ground that the Willmses should not have been allowed to file their adversary proceeding at all. Sanderson asserted that the Willmses failed to request a time extension to file a nondischargeability complaint and the bankruptcy court decided to do so only after the deadline had passed. In addition, Sanderson argued that the Willmses had failed to show cause for needing more time.
The district court affirmed the bankruptcy court’s sua sponte time extension but reversed its decision to consider Sanderson’s post-trial evidence. Accordingly, the district court instructed the bankruptcy court to enter judgment reinstating its initial oral findings in favor of the Willmses. Sanderson now appeals both of the district court’s rulings.4
Because we are in as good a position as the district court to review the bankruptcy court’s findings, we review them independently, Hedlund v. Educ. Res. Inst. Inc., 718 F.3d 1159, No. 12-35258, slip op. at 12 (9th Cir. May 22, 2013) (quoting Ragsdale v. Haller, 780 F.2d 794, 795 (9th Cir. 1986)), and apply the same standard of review, Goodrich v. Briones (In re Schwarzkopf), 626 F.3d 1032, 1035 (9th Cir. 2010) (quoting Christensen v. Tucson Estates, Inc. (In re Tucson Estates, Inc.), 912 F.2d 1162, 1166 (9th Cir. 1990)). The bankruptcy court’s legal conclusions are reviewed de novo and its factual findings for clear error. Id. (quoting Tucson Estates, 912 F.2d at 1166).
III.
We cannot endorse the bankruptcy court’s approach for a number of reasons. First, the court recommended a specific legal course of action for the Willmses to pursue. “[O]ur adversary system is designed around the premise that the рarties know what is best for them, and are responsible for advancing the facts and arguments entitling them to relief.” Greenlaw v. United States, 554 U.S. 237, 244, 128 S. Ct. 2559, 171 L. Ed. 2d 399 (2008) (quoting Castro v. United States, 540 U.S. 375, 386, 124 S. Ct. 786, 157 L. Ed. 2d 778 (2003)) (internal quotation marks omitted).
The bankruptcy court also sidestepped Sanderson’s due process right to notice and meaningful opportunity to respond. See Griffin v. Wardrobe (In re Wardrobe), 559 F.3d 932, 936 (9th Cir. 2009) (“[W]hile a bankruptcy court has equitable judicial power, its power is confined by ordinary standards of notice and opportunity to be heard.”). Sanderson
Finally, there are limited circumstances in which a bankruptcy court can sua sponte extend the deadline to file a nondischargeability complaint after the deadline has passed, and this case was not among them. Moreover, even when presented with a timely motion, a bankruptcy court errs by granting it without cause. See
A.
1.
Congress enacted
Bankruptcy Rule 4007(c) governs the time for filing a complaint objecting to the discharge of a debt due to fraud under
“Ninth Circuit law . . . strictly construes Rule 4007(c)” and courts “cannot extend [its] time limit implicitly” where no such motion is made. Kennerley v. Allred (In re Kennerley), 995 F.2d 145, 147 (9th Cir. 1993); see also Anwar v. Johnson, 720 F.3d 1183, No. 11-16612, slip op. at 9 (9th Cir. July 2, 2013) (“[W]e have repeatedly held that the
2.
The Willmses’ two-page motion did not provide notice that they intended to have a specific debt declared nondischargeability. The Willmses brought their motion pursuant to Bankruptcy Rules 4004(b) and 1017(e)(1) on the ground that it was the last day to file such a motion and they “require[d] additional time to complete an investigation and evaluate whether or not a complaint objecting to discharge or a motion to dismiss is warranted.” It stated only that they sought “an order extending through and including March 11, 2010, the deadline . . . to file a complaint objecting to the debtor’s discharge pursuant to
Discharge and dischargeability “refer to distinct concepts and cannot be used interchangeably” because they “are based on separate pоlicies and are governed by distinct procedural rules.” Irving Fed. Sav. & Loan Ass’n v. Billings (In re Billings), 146 B.R. 431, 435 (Bankr. N.D. Ill. 1992). Denial of discharge under
In contrast, the rationale for § 523(c)—which allows a creditor to have a specific debt declared nondischargeable—“is that the debtor acted in an improper manner at the time [that] he or she incurred the specific debt.” Billings, 146 B.R. at 434; see also Muegler v. Bening, 413 F.3d 980, 983 (9th Cir. 2005) (“[T]he overriding purpose of § 523 is to protect victims of fraud.” (citing Cohen v. de la Cruz, 523 U.S. 213, 222–23 (1998))). A § 523 complaint “focus[es] on the debtor’s prior dealings with an objecting crеditor, rather than on actions which necessarily affect the rights of all creditors.” Billings, 146 B.R. at 434.
The Willmses’ motion failed to reference § 523 or otherwise put Sanderson on notice that they sought to have a specific debt declared nondischargeable for being fraudulently obtained. Nor did the Willmses clarify the nature of their request before the hearing, which came after the 60-day deadline. Compare In re Weinstein, 234 B.R. 862, 864–65 (Bankr. E.D.N.Y. 1999) (construing request under Rule 4004 to extend the time to file adversary complaint “objecting to the discharge of the debtor” as request under Rule 4007 to extend the time to file § 523 complaint
It was the bankruptcy judge who first suggested a § 523 complaint after denying the motion that the Willmses actually filed. The most that could be gleaned from the Willmses’ motion is that they sought to stop Sanderson’s bankruptcy petition from being discharged or have it dismissed as a bad faith effort to abuse the bankruptcy process. In fact, that was precisely how Sanderson interpreted it. In opposing the motion, Sanderson argued that § 707(b) did not apply because his debts were not primarily consumer debts. Sanderson did not mention § 523 or dischargeability, likely because there was no indication that it would be at issue.
3.
The Willmses argue in the alternative, and for the first time on appeal, that the bankruptcy court could have treated their motion under Rule 4004 as arising under Rule 4007(c) through the exercise of its equitable powers under
Mоre generally, § 105(a) is not a “roving commission to do equity.” Pac. Shores Dev., LLC v. At Home Corp. (In re
Wе have previously rejected the use of § 105(a) to extend the strict time limits enumerated in Bankruptcy Rule 9006(b)(3). See Zidell, Inc. v. Forsch (In re Coastal Alaska Lines, Inc.), 920 F.2d 1428, 1431–33 (9th Cir. 1990). In Coastal Alaska, a creditor filed a proof of claim after Bankruptcy Rule 3002(c)’s 90-day limit had expired. This time limit, like that in Rule 4007(c), is subject to Rule 9006(b)(3)’s prohibition on extensions except “to the extent and under the conditions stated in those rules.” We examined this language and concluded that it did not permit a court to extend the time limit under its § 105(a) powers.
On occasion, we have suggested that “‘unique’ or ‘extraordinary’ circumstances” might allow an untimely § 523(a)(2) complaint to stand. Kennerley, 995 F.2d at 147; see also Anwar, slip op. at 12 (“[A]bsent unique and exceptional circumstances . . . , we do not inquire into the reason a party failed to file on time in assessing whether she is entitled to an equitable exception from [Bankruptcy Rule] 4007(c)’s filing deadline . . . .”). But “the validity of the doctrine remains doubtful” and “would appear to be limited
The record here does not reflect any unique or extraordinary circumstances. No confusion existed over the correct deadline. The Willmses were represented by counsel in the bankruptcy court just as they were while negotiating the SCI note. There is no legal or equitable reason why they should have been allowed to file an untimely § 523 complaint.
B.
The bankruptcy court also abused its discretion by granting the time extension without either a showing or a finding of cause. At a minimum, “cause” means excusable neglect. See Pioneer Inv. Servs. Co. v. Brunswick Assocs. LP, 507 U.S. 380, 382, 113 S. Ct. 1489, 123 L. Ed. 2d 74 (1993).7 The bankruptcy court did not attempt to find cause for the time extension—either at the hearing or in its subsequent
The Willmses asserted only that thеy needed additional time “to complete an investigation and evaluate whether or not a complaint objecting to discharge or a motion to dismiss is warranted.” Critically, they failed to explain why they did not complete their investigation prior to the deadline. While the “cause” standard may be a lenient one, accepting the Willmses’ request for more time so that they could determine whether or not they even had a viable argument for nondisсhargeability—without any explanation why they could not have made this determination within the time set by Rule 4007—would render the standard toothless. See 9 Collier on Bankruptcy, supra, at ¶ 4007.04 (“[T]he cause for an extension [under Rule 4004] must be compelling and a creditor must show why it was not able to comply with the deadline as originally set.”). The bankruptcy court therefore erred in granting the time extension.8
IV.
Ultimately, the bankruptcy court dismissed the case—albeit after needless delаy and expense—because the Willmses failed to prove that Sanderson acted fraudulently in procuring the loan from them. Because we hold that the Willmses should not have been allowed to file their adversary complaint, we need not reach the bankruptcy court’s decision to consider the supposedly new evidence that Sanderson cited in his post-trial motion for reconsideration and that impelled
We vacate the district court’s judgment. On remand, the district court should vacate the bankruptcy court’s orders and remand this matter to the bankruptcy court with instructions to deny the Willmses’ request to file a nondischargeability complaint and dismiss the adversary proceeding with prejudice.
VACATED and REMANDED with instructions.