In re Charmoli
| Decision Date | 31 January 2023 |
| Docket Number | 22-24358-gmh |
| Parties | In re: Scott W. Charmoli and Lynne M. Charmoli, Debtors in possession. |
| Court | U.S. Bankruptcy Court — Eastern District of Wisconsin |
DECISION AND ORDER DENYING REQUEST TO EXTEND TIME TO FILE PROOF OF CLAIM
G Michael Halfenger Chief United States Bankruptcy Judge
Debtors Scott and Lynne Charmoli commenced this joint bankruptcy case under subchapter V of chapter 11 on October 3, 2022, and on the same day filed a motion under Federal Rule of Bankruptcy Procedure 3003(c)(3) requesting that the court set the deadline for filing proofs of claim. ECF Nos 1 & 9. The court considered the request at hearings held on October 11 and December 2, 2022, and then entered an order on January 9 2023, that sets March 13, 2023, as the deadline. ECF Nos. 25 83 & 119.
Creditors Major Dental Partners, LLC (Major LLC) and Dr. Pako Major its principal (collectively, the Major Creditors), ask for an indefinite extension of the March 13 claims-bar deadline. ECF No. 107. The Major Creditors make this request as part of a motions package in which they also ask the court to remand state court litigation the debtors removed to this court, modify the automatic stay to allow the state court litigation to continue, abstain from adjudicating the parties' state-law claims, and postpone adjudication of their claims that Charmoli owes them debts that are not dischargeable under 11 U.S.C. §523(a)(2) and (a)(6). Whatever merit the rest of these requests may have (the adjudication of which is left for another day), the Major Creditors' request to indefinitely extend the time in which they may file proofs of claim is a nonstarter. It seeks a ruling that the Second Circuit aptly called a "dangerous precedent" more than three decades ago, First Fid. Bank, N.A., New Jersey v. Hooker Invs., Inc. (In re Hooker Invs., Inc.), 937 F.2d 833, 839 (2d Cir. 1991) (quoting observations of the bankruptcy court in the same case), and no controlling authority since has disagreed.
Before his conviction for healthcare fraud in 2022, debtor Scott Charmoli practiced dentistry in Jackson, Wisconsin, and was the sole member of Jackson Family Dentistry, LLC (the Debtor LLC). In January 2019, the Debtor LLC sold most of its assets to Major LLC, for $2.3 million. Major LLC agreed to pay $1.25 million in cash on the closing date and the remainder under the terms of a 10-year promissory note. Adv. Proc. No. 22-02136, ECF No. 1-1, at 155-98. Dr. Major guaranteed repayment of the note. Id. at 199-202. Jackson Family Dental, another entity controlled by Dr. Major, agreed to employ Charmoli for a period immediately following the sale. Id. at 211-25.
In October 2019 the Debtor LLC and Charmoli sued the Major Creditors in a Wisconsin state court. Their amended complaint, which also named Jackson Family Dental as a defendant, principally alleges that the Major Creditors owe the Debtor LLC about $1 million in damages for failing to make payments due under the promissory note and that Jackson Family Dental owes Charmoli unpaid wages. Id. at 144-225. In March 2020, the Major Creditors filed counterclaims against Charmoli and the Debtor LLC for breach of the asset purchase agreement; breach of a duty of good faith and fair dealing allegedly implied in the asset purchase agreement; intentional misrepresentations in connection with the promissory note, guaranty, and employment agreement; fraud in the inducement of the promissory note, guaranty agreement and employment agreement; and theft by fraud. Id. at 104-15. The gist of the counterclaims is that before the parties signed the asset purchase and related agreements, Charmoli had engaged in a repeated practice of damaging patients' healthy teeth to defraud insurance carriers-the conduct on which Charmoli's criminal charges were based- that he did not disclose to the Major Creditors. The Major Creditors alleged that they are entitled to recission of the promissory note, the guaranty agreement, and the employment agreement, as well as an award of damages, including attorney's fees, in an unspecified amount, exemplary damages equal to three times the amount of actual damages, and punitive damages. Id. at 114-15.
After petitioning for bankruptcy protection, Charmoli removed the claims in the litigation with the Major Creditors and Jackson Family Dental to this court pursuant to title 28's bankruptcy removal provision, 28 U.S.C. §1452(a). On January 3, 2023, the Major Creditors responded with the motions package mentioned earlier seeking, among other things, an order remanding the parties' litigation to state court and granting the Major Creditors an enlargement of the March 13, 2023 claims-bar deadline so that their proofs of claim will be timely as long as they file them no later than "14 days after any judgment" by the state court awarding them damages "becomes final." ECF No. 107, at 15.
The filing of a bankruptcy petition creates a bankruptcy estate containing the debtor's non-exempt property. See 11 U.S.C. §541. And, in the absence of creditor consent to different treatment, a chapter 11 plan must generally commit to paying holders of allowed claims either the amount they are due under nonbankruptcy law or the amount they would receive in a chapter 7 liquidation of the estate's property. 11 U.S.C. §1129(a)(7). The Charmolis have proposed a chapter 11 plan under which they will liquidate estate property to pay holders of allowed claims. ECF No 110, at 4.
Creditors with disputed, unliquidated, or contingent claims against a chapter 11 debtor must file timely proofs of claim to have their claims allowed. 11 U.S.C. §§501, 502(a), 502(b)(9) & 1111(a); see also Fed.R.Bankr.P. 3003(b)(1) & (c)(2). The debtors scheduled the Major Creditors' claims as being disputed, unliquidated, and contingent. ECF No. 1 at 93 & 99. As a result, by operation of Bankruptcy Rule 3003(c)(2), the Major Creditors will only "be treated as [ ] creditor[s] with respect to such claim[s] for the purposes of voting and distribution" if they file "proof[s] of claim . . . within the time prescribed by subdivision (c)(3) of" Rule 3003.
Bankruptcy Rule 3003(c)(3) governs the deadline for filing proofs of claim in chapter 11 cases: "The court shall fix and for cause shown may extend the time within which proofs of claim or interest may be filed." Setting the claims-bar deadline, the Seventh Circuit has observed, serves the important administrative purpose of requiring creditors who seek payment from the bankruptcy estate to identify themselves and to quantify their claims promptly: "[T]he purpose of the filing deadlines is 'to enable the debtor and his creditors to know, reasonably promptly, what parties are making claims and in what general amounts.'" In re Stavriotis, 977 F.2d 1202, 1205 (7th Cir. 1992) (emphasis omitted) (quoting United States v. Kolstad (In re Kolstad), 928 F.2d 171, 173 (5th Cir. 1991)). Holstein v. Brill, 987 F.2d 1268, 1270 (7th Cir. 1993).
Filing a proof of claim is relatively simple-it may be accomplished by submitting a three-page form. Fed.R.Bankr.P. 3001(a). But, as the Seventh Circuit has cautioned, "Creditors who do not do even that much, on time, forfeit their entitlement to distributions from the estate." Matter of Plunkett, 82 F.3d 738, 742 (7th Cir. 1996).
A party requesting an enlargement of time to file a proof of claim bears the burden of showing that there is cause for the enlargement. In re Enron Corp., 419 F.3d 115, 121 (2d Cir. 2005) (). Enlargement of the claims-filing deadline for individual creditors is governed by Rule 9006(b)(1). See Pioneer Inv. Servs. Co. v. Brunswick Assocs. Ltd. P'ship, 507 U.S. 380, 382-83 (1993); see also In re Morgan, No. 18-24459, 2019 WL 548532, at *4 (Bankr. E.D. Wis. Feb. 11, 2019). As Judge Ludwig explained in Morgan, "Under Rule 9006(b)(1), the court can generally extend a deadline 'for cause,' if the party seeking the extension asks before the applicable deadline expires." Morgan, 2019 WL 548532, at *4. Rule 3003(c)(3) provides that the court may "extend the time within which proofs of claim . . . may be filed" "for cause shown". And, in the context of a request for enlargement of the deadline by a single creditor, Pioneer applies Rule 9006(b)(1)'s enlargement of time principles to inform Rule 3003(c)(3)'s "for cause shown" provision. Pioneer, 507 U.S. at 382-83 & 390- 91.
The Major Creditors seek enlargement of the claims-filing deadline only for themselves. They do not contend that the March 13 deadline unfairly prejudices creditors generally.[1] Nor do they suggest that they are unable to file a proof of claim by that deadline, which remains almost six weeks away. They instead ask the court to allow them to file proofs of claim "14 days after [their] claims are liquidated in the State Court Litigation and any judgment . . . becomes final" (ECF No. 107, at 14-15) solely to preserve their (supposed) right to try their state-law claims to a jury. The Major Creditors' reply brief leaves no doubt about this:
Major Dental only seeks to preserve its jury trial rights. As stated in the Motion to Abstain, Major Dental will file a proof of claim after the State Court has liquidated Major Dental's claims. . . . Major Dental, therefore, will submit to the equitable jurisdiction of this Court, but not until after it has exercised its right to a jury trial.
ECF No. 129, at 17 (emphasis added).[2]
The Major Creditors' premise-that filing proofs...
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