In Re Todd M. Jenkins

• Decision Date: 06 July 2010
• Docket Number: Adversary No. 09-01802-SBB.,Bankruptcy No. 09-11114-SBB.
• Parties: In re Todd M. JENKINS, Last four digits of SS# : XXX-XX-XXXX, Debtor.Ward Hardwood Floor Service, Inc., d/b/a Ward Hardwood Flooring, and Dust Containment Systems, LLC, d/b/a/ Tarp-Rite Dust Containment Systems, Plaintiffs,v.Todd M. Jenkins, Defendant.
• Court: United States Bankruptcy Courts. Tenth Circuit. U.S. Bankruptcy Court — District of Colorado

434 B.R. 604

In re Todd M. JENKINS, Last four digits of SS# : XXX-XX-XXXX, Debtor.

Ward Hardwood Floor Service, Inc., d/b/a Ward Hardwood Flooring, and Dust Containment Systems, LLC, d/b/a/ Tarp-Rite Dust Containment Systems, Plaintiffs,

v.Todd M. Jenkins, Defendant.

Bankruptcy No. 09-11114-SBB.

Adversary No. 09-01802-SBB.

United States Bankruptcy Court,

D. Colorado.

July 6, 2010.

COPYRIGHT MATERIAL OMITTED

Annette M. Powell, Powell Law Office, P.C., Lakewood, CO, for Plaintiffs.

F. Kelly Smith, Law Office of F. Kelly Smith, Denver, CO, for Defendant-Debtor.

MEMORANDUM OPINION AND ORDER

SIDNEY B. BROOKS, Bankruptcy Judge.

THIS MATTER came before the Court on June 8, 2010,¹ for a hearing on the Motion to Dismiss Complaint as Untimely filed by Todd M. Jenkins (“Debtor”) on February 18, 2010,² and Plaintiffs' Response in Opposition thereto, which was filed on February 27, 2010.³ The Court, having reviewed the pleadings, heard the arguments of counsel, and reviewed the within case file, makes the following findings of fact, conclusions of law, and enters the following Order.

I. Question Presented

The question presented by the parties to the dispute is whether a debtor who has failed to timely list and provide notice to a creditor of his bankruptcy case-but does remedy the problem, in part, by amending his schedules and giving later notice to the creditor-can invoke laches in defense of creditor's nondischargeability litigation under 11 U.S.C. § 523(a)(3). Or, put another way, can a creditor not timely notified of a debtor's bankruptcy filing have a right, indefinitely, to file dischargeability litigation?

II. Procedural Background

On January 27, 2009, Debtor filed for relief under Chapter 7 of the Bankruptcy Code.⁴ On January 30, 2009, the Clerk of the Bankruptcy Court mailed its Notice of Chapter 7 Bankruptcy Case, Meeting of Creditors, & Deadlines (“Notice”) to Plaintiff Ward Hardwood Floor Service, Inc., d/b/a Ward Hardwood Flooring (“Ward Hardwood”).⁵

It is uncontested that Debtor listed Ward Hardwood's address as 30746 Bryant Drive, Unit 316, Evergreen, CO 80439. It is also uncontested that Ward Hardwood had a mailing address of P.O. Box 2015, Evergreen, CO 80437 at the time of the bankruptcy filing, and that the physical address of Ward Hardwood was 29340 Industrial Way # D410, Evergreen, CO 80439.

On March 9, 2009, the section 341 meeting of creditors was held. The deadline for filing objections to discharge was May 1, 2009.⁶

On May 28, 2009, Debtor amended his schedules to include Plaintiff Dust Containment Systems, LLC d/b/a Tarp-Rite Dust Containment Systems (“Tarp-Rite”).⁷ The parties agree that this was the first time Tarp-Rite was identified as a creditor by the Debtor. In addition, on May 28, 2009, Debtor corrected Ward Hardwood's address to read P.O. Box 2015, Evergreen, CO 80437. It is important to note that there is a commonality of ownership in Ward Hardwood and Tarp-Rite and they are acting in concert with respect to this adversary proceeding (Ward Hardwood and Tarp-Rite shall be also referred to together herein as “Plaintiffs”). At this point, both Tarp-Rite and Ward Hardwood were, for the first time, properly served-and given notice of the bankruptcy case.

According to Plaintiffs, in April 2009, they

“paid a significant sum of money to a collection agency.... These sums were non-refundable and spent in futility because Debtor amended his schedules, as set forth above, shortly after the collection agency was hired and demand [sic] suit.” ⁸

Plaintiffs' counsel acknowledged at the hearing that Plaintiffs received notice of Debtor's bankruptcy on June 2 or 3, 2009. After that, “Ward and Tarp-Rite were directed by the collection agency to contact the agency's attorney, located in New York.” ⁹ Plaintiffs state that shortly thereafter, they did contact the New York counsel, by written correspondence. ¹⁰

In the meantime, on August 20, 2009, the Court entered Debtor's discharge. Eventually, Plaintiffs “were pointed in the right direction, to their current counsel.” ¹¹ Counsel met with them in November 2009, and filed this adversary proceeding against Debtor on December 28, 2009.

III. Plaintiffs' Allegations

In their Complaint, Plaintiffs allege that Debtor entered into an agreement with them to provide services and materials in connection with projects on three homes in the Golden, Colorado area. Plaintiffs allege that they did the work, and that Debtor received full payment from the owners of the properties. According to Plaintiffs, such funds were supposed to be held in trust for them pursuant to the Colorado trust fund statute, Colo.Rev.Stat. § 38-22-127, but Debtor failed to pay them when they demanded that he turn over the funds. Plaintiffs, therefore, seek a determination pursuant to 11 U.S.C. § 523(a)(4) that Debtor's debts to them are nondischargeable.

IV. Time Limits and Laches in Section 523(a)(3)(B) ProceedingsA. Section 523(a)(3)(B) and Rule 4007(b) Do Not Place a Time Limit on the Filing of Adversary Proceedings

“Section 523(a)(3)(B) creates a nondischargeability action for defrauded creditors who were neither listed nor scheduled and had no notice or actual knowledge of the case in time to permit the timely filing of a proof of claim or a timely request for a determination of dischargeability.” ¹² Actions brought by creditors under section 523(a)(3)(B) are governed by Rule 4007(b), which provides: “A complaint other than under section 523(c) may be filed at any time.” ¹³ Thus, there is no statutory time limit for filing actions under section 523(a)(3)(B).

B. The Threshold Issue-Timeliness and Laches

Debtor acknowledges that Plaintiffs-creditors of this Debtor-were not actually or constructively made aware of his commencement of a bankruptcy case until the time had passed for filing objections to discharge or dischargeability. He further acknowledges that creditors in such circumstances are not barred by the claims-bar date from bringing adversary proceedings. ¹⁴ Despite this, however, Debtor contends that the doctrine of laches should operate to prevent Plaintiffs from maintaining their action in this case. Specifically, Debtor asserts that he would be severely prejudiced if Plaintiffs were allowed to continue with their proceeding at this stage. ¹⁵ He also asserts that by waiting more than six months after they had notice of the bankruptcy to file their adversary proceeding, Plaintiffs did not exercise reasonable diligence.¹⁶ He urges dismissal of the action.

The Court must first determine whether laches is even available as an affirmative defense in section 523(a)(3)(B) cases. Then, if appropriate and applicable, the Court can evaluate whether Debtor has proved the elements of laches. This is an important threshold issue,¹⁷ since the reason for the lack of a time limit in section 523(a)(c) actions is to provide time to file a complaint to a creditor who, due to the fault or mistake of the debtor, was not included in the debtor's bankruptcy schedules. It appears that this is a matter of first impression in this Circuit.C. Laches as a Defense in Section 523(a)(3)(B) Actions

In Beaty v. Selinger (In re Beaty),¹⁸ the Ninth Circuit held that the “at any time” language in Rule 4007(b) should not be read to bar a debtor from asserting a laches defense where a creditor's delay in bringing a nondischargeability proceeding is prejudicial to the debtor.¹⁹ The Court stated four principal reasons in support of its conclusion. First, the Court found that an examination of other bankruptcy actions that are without time limitations “demonstrates that Congress nevertheless intended laches to act as a constraint in those actions.” ²⁰ Second, the Court noted that the “at any time” language is not found in the Code, but rather in Rule 4007(b). Though Rule 4007(b) allows a filing “at any time,” the Bankruptcy Rules cannot “abridge, enlarge, or modify any substantive right.” ²¹ Third, the Court noted that laches is primarily concerned about prejudice. “Thus, there is nothing inherently contradictory about saying that an action that may be brought ‘at any time’ is nonetheless subject to an equitable limitation based on prejudicial delay.” ²² Fourth, the Ninth Circuit reasoned,

it is not hard to imagine a case in which the absence of a laches defense would lead to injustice. It seems highly unlikely that Congress intended that a debtor who innocently neglected to schedule a creditor be vulnerable to an ostensible creditor who learned of the bankruptcy case soon after discharge but waited many years for a key witness to die before bringing his § 523(a)(3)(B) action.²³

The Ninth Circuit's reasoning is persuasive. Yet, there is another important reason why laches is an appropriate defense to a section 523(a)(3)(B) action.

1. Due Process Concerns

Section 523(a)(3)(B) addresses important due process concerns. Specifically, the purpose of allowing a section 523(a)(3)(B) creditor-plaintiff to bring its claim even after the deadline for challenging dischargeability under section 523(a)(2), (4), or (6) has expired, is to ensure that its due process rights are not undercut by a debtor's failure to include the creditor-plaintiff in the schedules filed with the bankruptcy petition.²⁴

“The fundamental requisite of due process of law is the opportunity to be heard.” ²⁵ The means to that end is “notice reasonably calculated, under all the circumstances, to apprise interested parties of the pendency of the action.” ²⁶ Due process is not offended by allowing laches as a defense to section 523(a)(3)(B) actions, because it operates to bar actions only in cases where a creditor who has notice of a bankruptcy unreasonably delays exercising the due process rights afforded it.

2. Equitable concerns

Laches is an equitable doctrine. Fundamental among equitable principles is the precept that one who seeks equity must do equity. ²⁷ As the Ninth Circuit noted, when a debtor invokes laches as a defense to a § 523(a)(3)(B) action, concerns...