Farouki v. Emirates Bank Intern., Ltd.

• Decision Date: 14 January 1994
• Docket Number: No. 92-2339,92-2339
• Citation: 14 F.3d 244
• Parties: Nasser Ali FAROUKI, Plaintiff-Appellant, v. EMIRATES BANK INTERNATIONAL, LIMITED, Defendant-Appellee, and Ron Cerino; Enterprise Management, Incorporated, Defendants.
• Court: U.S. Court of Appeals — Fourth Circuit

Page 244

14 F.3d 244

Nasser Ali FAROUKI, Plaintiff-Appellant, v. EMIRATES BANK INTERNATIONAL, LIMITED, Defendant-Appellee and Ron Cerino; Enterprise Management, Incorporated, Defendants.

No. 92-2339.

United States Court of Appeals Fourth Circuit.

Argued Oct. 25, 1993.

Decided Jan. 14, 1994.

C. Lamar Garren, Piper & Marbury, Baltimore, MD, argued (David N. Braus, David N. Braus, Chartered, Great Falls, VA, on brief), for plaintiff-appellant.

Jeffrey Howard Dygert, Ross, Dixon & Masback, Washington, DC, argued (James E. Grossberg, on brief), for defendant-appellee.

Before MURNAGHAN and HAMILTON, Circuit Judges, and YOUNG, Senior United States District Judge for the District of Maryland, sitting by designation.

OPINION

MURNAGHAN, Circuit Judge:

The debtor in bankruptcy proceedings, Nasser Farouki, personally guaranteed a five million dollar loan made by Dubai Bank International Limited ("the Bank") to Dina Associated, S.A. ("Dina"). After Dina defaulted, the Bank pursued Farouki for payment based upon his personal guarantee. Farouki filed a petition in bankruptcy and sought a general discharge of his debts under Chapter 7 of the U.S. Bankruptcy Code. The Bank opposed the discharge. The bankruptcy court denied the discharge on six independent grounds, and the District Court for the Eastern District of Virginia affirmed.

From 1981 through 1986, Farouki served as the Director of Dina, an international trading and marketing firm primarily involved in the construction industry in the Middle East. He was an officer of Dina from 1985 to 1986. Dina was an affiliated entity of Dynasystems Corporation organized under the laws of Liberia and headquartered in Monaco. Nasser Farouki's brothers, Fawaz and Bassim, operated and managed Dynasystems. ¹

In March 1984, Nasser Farouki and his brothers obtained from the Bank a five million dollar loan for Dina. ² At that time, during a preliminary meeting with representatives of the Bank, Fawaz and Bassim represented that they and their brother, Nasser, owned all of the stock in Dina. Fawaz and Bassim Farouki signed a Guaranty Agreement personally guaranteeing the loan and representing that each was a principal shareholder of the capital stock in Dina. ³ Nasser Farouki executed a broad power of attorney allowing his brother, Bassim, to sign documents on his behalf in connection with the Dina loan. Bassim executed all of the initial loan agreements, including the Guaranty Agreement, on behalf of his brother.

Within months, Dina defaulted on the loan. The Bank asked Nasser Farouki to send it Dina's financial statements. The Bank received a letter from Bassim Farouki including Dina's financial statements as well as a financial statement dated September 30, 1984 purporting to be that of the principals of Dina, labeled, "Combined Personal Financial Statement--Fawaz, Bassim and Nasser Farouki." The statement represented the net worth of the brothers as $36,268,228. It stated that the three brothers owned 100% of Dina and of Dynasystems Corporation and possessed a controlling or substantial interest in seven other companies. The Schedule detailing their business investments indicated that the book value (substantially lower than the aggregate market value) of Dina in September of 1984 was $10,473,243.

In May 1985, the brothers restructured the loan by way of a "First Amendment" that modified the initial loan agreement. They also signed an affidavit of judgment by confession. A copy of the Guaranty Agreement executed by the brothers was attached to the affidavit of judgment by confession. Nasser Farouki personally reviewed and signed those documents. ⁴

Dina fell into default a second time, and, in June 1985, the Bank obtained a confessed judgment against Nasser Farouki, his brothers, and Dina in a New York State court in the amount of $3,900,517.70. Before the Bank could satisfy its judgment, Nasser Farouki filed a petition for bankruptcy on February 5, 1987. The Bank attempted to block discharge of Nasser Farouki's debts. On May 11, 1987, the deadline for filing complaints objecting to the discharge of Nasser Farouki's obligations, the Bank filed a motion for enlargement of time in which to file its complaint. The bankruptcy court agreed to hear argument on the enlargement motion on July 10, 1987 at 10 a.m. On July 10, however, counsel for the Bank did not arrive at the courthouse until 10:25 due to car trouble. By the time the lawyer arrived, the court had already denied the motion. Later that same day, one of the creditors, Ronald J. Cerino, filed a motion for reconsideration of the denial on behalf of all of the creditors. ⁵ The hearing on that motion was held on September 1, 1987. The bankruptcy court granted the motion for reconsideration allowing the Bank thirty days from that date to file a complaint objecting to Nasser Farouki's discharge. The Bank within 30 days filed such a complaint, and the bankruptcy court held a trial on the creditors' motion objecting to the debtor's discharge beginning on July 29, 1988.

In December 1991, the Bankruptcy Court for the Eastern District of Virginia denied Nasser Farouki's request for discharge of his debts. 133 B.R. 769. The District Court for the Eastern District of Virginia affirmed in September 1992, and Nasser Farouki has appealed the district court's decision.

The main issues in the proceeding on the Bank's objection to discharge centered around Nasser Farouki's failure to provide accurate information regarding the following: the Dina stock he represented himself as owning when the brothers obtained the loan; a $1350 loan or advance from his sister; a $73,000 transfer into and out of his account for his father; and his alleged undervaluation of his personal property. He also has argued for the first time on appeal that the Bank failed to file its objection to his discharge in a timely manner, thereby precluding the Bankruptcy Court's jurisdiction over that objection.

I. The Timeliness of the Bank's Objection to Nasser Farouki's Discharge

The Bank timely filed a motion for enlargement of time in which to file a complaint objecting to the debtor's discharge pursuant to Bankruptcy Rules 4004(a) and (b) and 9006(b)(3). Rule 4004(a) provides:

In a chapter 7 liquidation case a complaint objecting to the debtor's discharge under Sec. 727(a) of the Code shall be filed not later than 60 days following the first date set for the meeting of creditors held pursuant to Sec. 341(a).

Rule 9006(b)(3) provides in pertinent part:

The court may enlarge the time for taking action under Rules ... 4004(a) ... only to the extent and under the conditions stated in those rules.

Rule 4004(b) allows the bankruptcy court, on the motion of any party in interest, to extend the time for filing a complaint objecting to discharge for cause. Such a motion "shall be made before such time [60 days] has expired." The Bank filed its motion for enlargement on May 11, 1987, the last day of the applicable 60 day time period.

Nasser Farouki has argued that, under Rule 4004, the Bank's complaint objecting to his discharge was not timely filed. When counsel for the Bank failed to appear at 10:00 a.m., the time fixed for the hearing on the Bank's motion for enlargement of time, the judge denied that motion. The creditors filed a motion for reconsideration that same day. The court, finding the 25 minute delay excusable due to transportation difficulties, granted the motion for reconsideration on September 1, 1987. Nasser Farouki has argued that the judge's initial denial of the Bank's motion for enlargement closed the applicable time period and that any subsequent action by the Bank regarding the discharge was precluded by that closure and hence of no effect.

Farouki's argument has both a procedural and a substantive aspect. Putting the merits of his claim aside for the moment, it may well be that Farouki waived his claim asserting the untimeliness of the Bank's complaint because he made that claim for the first time on appeal. Under the rule established in In re Santos, 112 B.R. 1001, 1008 (Bankr. 9th Cir.1990), "the timeliness of a dischargeability complaint presents an affirmative defense that must be raised in an answer or responsive pleading.... If the defense is not raised in the answer or responsive pleading, it is generally waived." ⁶ Farouki did not raise the defense of untimeliness until he appealed to this court. Therefore, the trial court did not have the opportunity to consider the merits of such a defense. Because we find Farouki's argument unpersuasive on substantive grounds, however, we need not rule on the procedural aspect of his claim.

As to the merits of his argument, Farouki has suggested that the bankruptcy court did not have jurisdiction to grant the motion for reconsideration because such a ruling violated the strict time limitations imposed by Rule 4004(b). ⁷ Farouki has asserted that all courts, other than the Ninth Circuit, consider the time period of Rule 4004 to be a jurisdictional requirement. ⁸ Discussing Santos, supra, an opinion rejecting the jurisdictional argument, Farouki has asserted that the Ninth Circuit's decision represents a minority position supporting the conclusion that the time periods delineated in Rule 4004 are non-jurisdictional. Farouki has provided no basis for such an assertion. Santos was decided by the United States Bankruptcy Appellate Panel of the Ninth Circuit. The case analogizes Rules 4004(a) and 4007(c), holding that "the deadlines for filing dischargeability complaints and objections to discharge set forth in Rules 4007(c) and 4004(a) are not jurisdictional time limits." 112 B.R. at 1006. ⁹ In support of its holding, the court refers to the structure and policy of 4007(c), the relevant statutory scheme, and the purposes and policies underlying the bar date. The Santos court concludes that "the total preclusion of equitable relief would be inconsistent with those Panel cases which recognize, in...