In re Falk
| Decision Date | 08 February 1989 |
| Docket Number | Bankruptcy No. 4-87-3115,Adv. No. 4-88-335. |
| Citation | 96 BR 901 |
| Parties | In re Walter FALK, Debtor. INDUSTRIAL FINANCIAL CORPORATION, Plaintiff, v. Walter FALK, Defendant. |
| Court | U.S. Bankruptcy Court — District of Minnesota |
Clinton Cutler, Minneapolis, Minn., for debtor.
Kathryn Page, Minneapolis, Minn., for plaintiff.
EN BANC MEMORANDUM OPINION AND ORDER
The above entitled matter came on for hearing before the undersigned on the 2nd day of November, 1988, on a motion by the defendant to dismiss under Fed.R.Civ.P. 12(b)(6), incorporated by Bankruptcy Rule 7012, and under 11 U.S.C. § 523(c). Kathryn Page appeared on behalf of plaintiff, Industrial Financial Corporation ("IFC"); Clinton Cutler appeared on behalf of defendant/debtor, Walter Falk ("Falk").1 The court has jurisdiction to hear and decide this matter pursuant to 28 U.S.C. §§ 157 and 1334, and Local Rule 103(b). This is a core proceeding under 28 U.S.C. § 157(b)(2)(I).
On September 14, 1987, Falk filed a petition for relief under Chapter 11 of Title 11 of the United States Code. On October 13, 1987, the clerk of this United States Bankruptcy Court for the District of Minnesota sent to the debtor's creditors a notice of debtor's bankruptcy case. The notice, in standard form prescribed by Local Rule 122(j) (Local Form 227), advised creditors that the meeting of creditors, pursuant to 11 U.S.C. § 341(a), was set for November 13, 1987. Paragraph 7 of the notice stated:
7. Discharge of debts. The first date set for hearing on the confirmation of a plan has been fixed as the last date to file a complaint objecting to the discharge of the debtor under Bankruptcy Rule 4004(a) and the last day to determine the dischargeability of a debt under Bankruptcy Rule 4007(c). If no complaint objecting to discharge is filed timely, confirmation of the plan will discharge debtor under 11 U.S.C. § 1141. If no complaint to determine dischargeability of a debt under clause (2), (4), or (6) of 11 U.S.C. § 523(a) is filed timely, the debt may be discharged. (Emphasis added).
That portion of paragraph 7 of the notice which set the last date for filing a complaint under 11 U.S.C. § 523(a)(2), (4), or (6) as the first date set for the hearing on confirmation of a plan of reorganization was based on Local Rule 123 which, in individual chapter 11 cases provides, in pertinent part, as follows:
This Local Rule was part of a comprehensive set of Local Rules adopted, pursuant to 28 U.S.C. §§ 2071 and 157, and then Bankruptcy Rule 9029, by Order of this Court dated October 4, 1985, effective October 31, 1985.
Debtor's plan of reorganization was filed on September 9, 1988, and the plan was set for confirmation hearing on November 3, 1988. In reliance on Local Rule 123 and the clerk's notice, on September 2, 1988, plaintiff commenced this action seeking a determination that debtor's indebtedness to it, in the sum of $254,393.88, is excepted from discharge under 11 U.S.C. § 523(a)(2) and (a)(6).
Before the court for decision is debtor's motion to dismiss the complaint as untimely under Bankruptcy Rule 4007(c). It is debtor's position that Local Rule 123 conflicts with Bankruptcy Rule 4007(c) and is, therefore, of no effect.
The court, sitting en banc,2 has determined that its adoption of Local Rule 123 was in conflict with Bankruptcy Rule 4007(c) which provides in pertinent part:
(c) Time for Filing Complaint Under Section 523(c) in Chapter 7 Liquidation and Chapter 11 Reorganization Cases; Notice of Time Fixed. A complaint to determine the dischargeability of any debt pursuant to § 523(c) of the Code shall be filed not later than 60 days following the first date set for the meeting of creditors held pursuant to § 341(a). The court shall give all creditors not less than 30 days notice of the time so fixed in the manner provided in Rule 2002. On motion of any party in interest, after hearing on notice, the court may for cause extend the time so fixed under this subdivision. The motion shall be made before the time has expired.
Resolution of this issue requires the court to examine the jurisdictional basis of the rulemaking authority vested in the Supreme Court and in the lower federal courts by statute.
Pursuant to 28 U.S.C. § 2075, Congress has vested authority in the Supreme Court of the United States to prescribe rules governing procedure and practice in bankruptcy cases and proceedings. These rules, however, "shall not abridge, enlarge, or modify any substantive right." Id. Section 2071 provides that the Supreme Court and all courts established by Congress may prescribe rules for conduct of their business, which rules must "be consistent with Acts of Congress and rules of practice and procedure prescribed by the Supreme Court." 28 U.S.C. § 2071. Bankruptcy Rule 9029 delegates to the federal district courts (or at the time Local Rule 123 was adopted to the bankruptcy courts)3 the authority to make and amend rules governing practice and procedure in bankruptcy cases and proceedings, but only to the extent those rules are not inconsistent with the Bankruptcy Rules.
In accordance with the foregoing, Local Rule 123 may only be upheld if (a) it is consistent with the Bankruptcy Code in that it does not "abridge, enlarge, or modify any substantive right," as required by 28 U.S.C. § 2075 and (b) it is "a matter of procedure not inconsistent with" the Bankruptcy Rules as required by Bankruptcy Rule 9029. In re Walat, 89 B.R. 11, 12 (E.D.Va.1988). If Local Rule 123 fails either prong of this two pronged test it is invalid. See Frank v. Arnold (In re Morrissey), 717 F.2d 100, 104 (3rd Cir.1983); Sunset Enters., Inc. v. B & B Coal Co., Inc., 38 B.R. 712, 715 (W.D.Va.1984), aff'd, 798 F.2d 1409 (4th Cir.1986).
By extending the time to file a complaint to determine the dischargeability of a particular debt, Local Rule 123 does not "abridge, enlarge, or modify any substantive right" granted in the Code itself and, therefore, it meets the first part of the test for validity. Section 523 of Title 11 merely sets forth the instances in which a debt may be excepted from discharge; it does not provide any time period in which such action must be taken. Local Rule 123 is not a substantive rule merely because it may in some way affect a substantive right. See, e.g., In re Hill (Jones v. Hill), 811 F.2d 484, 487 (9th Cir.1987); Bonner v. Adams (In re Adams), 734 F.2d 1094, 1102 (5th Cir.1984); Walat, 89 B.R. at 12. It does not operate to affect in any way the manner in which the court would ultimately determine the issue of whether there is merit in the plaintiff's allegations. See Adams, 734 F.2d at 1102. Rather, it relates to the administration of legal proceedings and prescribes the manner in which the court shall function to carry out the implementation of substantive rights; as such it is purely procedural in nature. Id. See also Hanna v. Plumer, 380 U.S. 460, 464, 85 S.Ct. 1136, 1140, 14 L.Ed.2d 8 (1965); Associated Dry Goods Corp. v. Equal Employment Opportunity Comm'n, 720 F.2d 804, 808-809 (4th Cir. 1983); In re Decker, 595 F.2d 185, 189 n. 4 (3rd Cir.1979).
The second part of the test of validity, consistency with the Bankruptcy Rules, however, is a different matter. Bankruptcy Rule 4007(c) is explicit in its direction that, both in chapter 11 and in chapter 7 cases, actions to determine the dischargeability of particular debts must be commenced "not later than 60 days following the first date set for the meeting of creditors held pursuant to § 341(a)." The Rule then specifically provides a means by which a creditor may obtain an extension of time for filing such a complaint. A court may extend the time required based on the following prerequisites: (1) a motion, (2) made by a party in interest, (3) after hearing on notice, (4) made before the time has expired, and (5) cause.
Bankruptcy Rule 9006(b)(3) further limits the court's power to enlarge the sixty day time period set forth in Rule 4007(c). It provides:
(3) Enlargement limited. The court may enlarge the time for taking action under Rules 1006(b)(2), 3002(c), 4003(b), 4004(a), 4007(c), and 8002 only to the extent and under the conditions stated in those Rules.
Bankr.R. 9006(b)(3) (emphasis added).
Bankruptcy Rules 4007(c) and 9006(b)(3) differ significantly from their predecessors, which provided a time period of not less than 30 days nor more than 90 days after the meeting of creditors for bringing actions seeking exception from discharge, but allowed the court to extend the time based on a showing of excusable neglect. Bankruptcy Rules 409(a)(2) and 906(b) (repealed). Under those Rules, debtors were often faced with late filed complaints to determine the dischargeability of particular debts.
Bankruptcy Rule 4007(c) also differs significantly from Rule 4004(a) which governs complaints objecting to discharge under 11 U.S.C. § 727. Rule 4004(a) requires such complaints in chapter 7 cases to be filed within sixty days following the first date set for the meeting of creditors, but defers the deadline for filing such complaints in chapter 11 cases to a date not later than the first date set for the hearing on confirmation. It seems clear, therefore, that the drafters of these two Rules chose to deal with § 727 and § 523 actions in chapter 11 cases in a different manner, allowing the former to be filed within the time period now set by Local Rule 123, but requiring the latter to be filed at an earlier point in time.
Consistent is defined as "coexisting and showing no noteworthy opposing, conflicting, inharmonious, or contradictory...
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