McDonald v. Home State Bank & Trust Co. (In Re McDonald)McDonald v. Home State Bank & Trust Co. (In Re McDonald)
MEMORANDUM AND ORDER
7. Introduction
This ease comes before the court on appeal from an order of the United States Bankruptcy Court dated April 2, 1993. In that order, the bankruptcy court denied debtor’s request to reopen his bankruptcy case in order to allow him to file a motion for an order avoiding Home State Bank’s lien pursuant to 11 U.S.C. § 522(f). Debtor asserts this ruling was in error and that he should have been allowed to reopen his bankruptcy case for the purpose of filing a motion to avoid Home State’s lien.
Having thoroughly reviewed the briefs of the parties and the record frоm the bankruptcy court, this court has determined that the facts and legal arguments are adequately presented in the briefs and record and that the decisional process would not be significantly aided by oral argument. Accordingly, oral argument will not be allowed pursuant to Bankruptcy Rule 8012.
II. Standard of Review
In reviewing the findings of the bankruptcy court, this court may set aside findings of fact only if they are clearly erroneous.
In re Branding Iron Motel, Inc.,
III. Factual Background
The facts in this matter are not in dispute. Debtor, an attorney, filed his Chapter 7 bankruptcy petition and schedules on May 28, 1992. On his schedules, debtor listed certain office equipment as exempt property pursuant to the tools of the trade exemption of K.S.A. § 60-2304(e) and listed Home State Bank (“Home State”) as a secured creditor. Home State holds a nonpossessory, nonpur-chase money security interest in the office furnishings and equipment listed as exempt property on debtor’s schedules. Debtor was granted a discharge pursuant to an order of the bankruptcy court dated December 18, 1993. On January 6,1993, a final decree was entered by the bankruptcy court discharging the Chapter 7 trustee of the debtor’s estate and closing the debtor’s no-asset case.
Due to an oversight on the part of debtor’s counsel, debtor failed to file a motion pursuant to 11 U.S.C. § 522(f) to avoid the nonpos-sessory, nonpurchase money lien of Home State in the office furnishings and equipment prior to five business days before the date initially set for the debtor’s discharge, as required by Local Rule 4003.1 of the United States Bankruptcy Court for the District of
On February 11, 1993, debtor filed his motion to reopen his bankruptcy case pursuant to 11 U.S.C. § 350(b) and Fed.R.Bankr. Proe. 5010. Debtor’s motion requested an order of the Bankruptcy Court reopening his case in order to allow him to file a motion pursuant to 11 U.S.C. § 522(f) to avoid Home State’s nonpossessory, nonpurchase money lien in his offiсe furniture and equipment. Home State filed an objection asserting that the doctrine of laches should bar debtor’s motion. On March 17, 1993 debtor’s motion and Home State’s objection thereto were heard by the Bankruptcy Court. Upon hearing statements of counsel, the bankruptcy court denied the debtor’s motion and made oral findings and conclusions on the record. In essence, the bankruptcy court found that debtor’s failure to comply with Local Bankruptcy Rule 4003.1 made any Section 522(f) motion untimely and precluded debtor from reopening his easе for the purpose of filing such a motion.
IV. Discussion
The question on appeal is whether the Bankruptcy Court’s denial of debtor’s motion to reopen based solely on the grounds that the debtor failed to comply with Local Rule 4003.1 was an abuse of discretion. The answer to this question is found by considering whether that rule is consistent with provisions of the bankruptcy code and the Federal Rules of Bankruptcy Procedure. If not, then even though the Bankruptcy Court’s decision was a correct application of the local rule the debtor is entitled to relief here because of that rule’s invalidity. 1
Bankruptcy Code Section 350(b) provides that “[a] case may be reopened in the court in which such ease was closed to administer assets, to accord relief to the debtor, or for other cause.” Although the legislative history does not address directly the issue of whether a debtor may reopen a case to avoid liens, it clearly contemplates that a trustee will be permitted to reopen a case in order to utilize his avoiding powers. “Subsection (b) permits reopening of the case to administer assets, to accord relief to the debtor, or for other cause. Though the court may permit reopening of a case so that the trustee may exercise an avoiding power, laches may constitute a bar to an action that has been delаyed too long.” H.R.Rep. No. 595, 95 Cong., 1st Sess. 338 (1977); S.Rep. No. 989, 95 Cong., 2d Sess. 49 (1978); U.S.Code Cong. & Admin.News 1978, pp. 5787, 5835, 6294. This court agrees with those courts that have held that allowing a debtor to reopen a case to utilize his avoiding powers is consistent with both the legislative history and the express language of Section 350(b).
See Rhein-bolt v. Credit Thrift of America, Inc.,
Section 522(f) of the Bankruptcy Code gives debtors the right to avoid the fixing of a lien on an interest of the debtor in property to the extent that such lien impairs an exemption to which the debtor is entitled if such lien is a nonpossessory, nonpurchase money security interest in any implements, professional books or tools of the trade of the debtor. Section 522 does not establish a limitations period for the filing of a complaint by a debtor to avoid a lien. However, Local Bankruptcy Rule 4003.1 of the United States Bankruptcy Court for the District of Kansas provides that:
A motion in a case under Chapter 7 to avoid nonpossessory, nonpurchase money interests or judicial liens on exempt property pursuant to Bankruptcy Code § 522(f) must be filed at least five business days before the date initially set for the debtor’s discharge. Motions filed thereafter will be deemed untimely.
In denying debtor’s motion to reopen his case, the bankruptcy court relied solely on
Due to the absence of a statute or uniform rule, courts have dealt with the issue of when a debtor must file a complaint under Section 522(f) in a variety of ways. Analyzing the various eases, the Seventh Circuit noted that “[t]he leading approach is permissive but incorporates an equitable defense akin to lach-es, so that a debtor may reopen the bankruptcy case at any time to avoid a hen absent a finding of prejudice to the creditor.”
In re Bianucci,
In
In re Hall,
The court in
In re Rheinbolt,
The court in
In re Skakalski,
In re Newton,
The bankruptcy court’s denial of debtor’s motion to reopen based solely on the grounds that debtor failed to comply with Local Rule 4003.1, although understandable based upon the languagе of the local rule, was an abuse of discretion because the rule is inconsistent with the code provisions which control. We agree with the decisions cited above that, when section 350(b) is read in conjunction with section 522(f), the code contemplates that debtors may be allowed to reopen their bankruptcy cases in order to file section 522(f) motions unless equitable considerations dictate otherwise. In analyzing whether to allow a debtor to reopen his or her bankruptcy ease to allow the filing of a section 522(f) motion, thе Bankruptcy Court should examine the reasons for the debtor’s delay, prejudice to creditors that may result from the granting of debtor’s request, and other equitable considerations that may be present. A local rule that fixes timeliness as a sole criterion for denial runs counter to that charge.
Obviously, Local Rule 4003.1 was enacted to speed the disposition of bankruptcy cases by requiring section 522(f) motions to be brought within a reasonable time in order that they be considered in connection with a discharge. Such a goal is laudable, and by itself cеrtainly in no way contravenes the purposes of the Bankruptcy Code. Compliance with the rule would eliminate the waste of time and inconvenience created for both creditors and the court when debtors fail to timely file section 522(f) motions and have to move thе court to reopen their bankruptcy cases, as has occurred here.
The problem with Local Rule 4003.1 is that the express language of the rule indicates that failure to comply with the rule acts as a complete bar against granting a late filed § 522(f) motion. The rule states that § 522(f) motions “must” be filed at least five business days before the date initially set for the debtor’s discharge and that “motions filed thereafter will be deemed untimely.” The clear implication of that language is that failure to timely file a § 522(f) motion automatically precludes a debtor from filing such a motion at a later time, in contravention to provisions of the Bankruptcy Code.
IT IS, THEREFORE, BY THE COURT ORDERED THAT the Bankruptcy Court’s order denying debtor’s motion to reopen his bankruptcy case is reversed and remanded to the Bankruptcy Court with instructions to reconsider the matter in light of the еquitable considerations set forth in this order.
IT IS SO ORDERED.
Notes
. The various district courts are authorized to establish local rules of practice and procedure in all cases and proceedings within the district court's bankruptcy jurisdiction. See Fed. R.Bankr.P. 9029; Fed.R.Civ.P. 83. However, such local rules cannot be inconsistent with the provisions of the Bankruptcy Code or the Federal Rules of Bankruptcy Procedure. Id.