Media House Prods., Inc. v. Amari (In re Amari)

• Decision Date: 27 November 2012
• Docket Number: Adversary No. 12 A 00979.,Bankruptcy No. 11 B 23399.
• Parties: In re Carl P. AMARI, Debtor. Media House Productions, Inc., Plaintiff, v. Carl P. Amari, Defendant.
• Court: U.S. Bankruptcy Court — Northern District of Illinois

483 B.R. 836

In re Carl P. AMARI, Debtor.

Media House Productions, Inc., Plaintiff,

v.Carl P. Amari, Defendant.

Bankruptcy No. 11 B 23399.

Adversary No. 12 A 00979.

United States Bankruptcy Court,

N.D. Illinois,

Eastern Division.

Nov. 27, 2012.

Lucas Fuksa, Nathaniel Cutler, Fuksa Khorshid LLC, Chicago, IL, for Plaintiff.

Beverly A. Berneman, Robert R. Benjamin, Golan & Christie, LLP, Chicago, IL, for Defendant.

MEMORANDUM OPINION ON DEFENDANT'S MOTION TO DISMISS AMENDED ADVERSARY COMPLAINT

JACK B. SCHMETTERER, Bankruptcy Judge.

This Adversary Proceeding relates to the bankruptcy petition filed by debtor Carl P. Amari (“Defendant”) under Chapter 7 of the Bankruptcy Code. Debtor received his discharge on March 2, 2012. Plaintiff Media House Productions (“Plaintiff”) filed its original complaint (Dkt. 1) on June 13, 2012 and filed an amended complaint with leave of court on September 20, 2012 (Dkt. 15). Count I of the Amended Complaint requests that debts allegedly due Plaintiff from Defendant be held non-dischargeable under 11 U.S.C. § 523(a)(2)(A). Count II seeks to have the debt allegedly due Plaintiff held nondischargeable under 11 U.S.C. § 523(a)(4). Count III seeks the same relief under 11 U.S.C. § 523(a)(6). In Count IV, Plaintiff requests that discharge be revoked under 11 U.S.C. § 727(d).

Defendant filed its Motion to Dismiss on July 24, 2012. It argues that (1) jurisdiction is lacking because the proceeding was filed after the time given to object to discharge or dischargeability and (2) the Amended Complaint fails to state a claim for relief. The Motion also seeks to have stricken from the Amended Complaint Plaintiff's request to impose a constructive trust on certain profits of an LLC managed by Defendant.

Jurisdiction

Jurisdiction lies under 28 U.S.C. §§ 157 and 1334. This matter has been referred here by Internal Operating Procedure 15(a) of the United States District Court for the Northern District of Illinois. Venue is proper under 28 U.S.C. § 1409. This matter is a core proceeding under 28 U.S.C. § 157(b)(2)(I).

Background

Plaintiff, Media House Productions, Inc. (“Plaintiff”) is an Illinois corporation in the business of digital/audio media production and editing. Defendant was the manager and a member of Falcon Picture Group, LLC (“Falcon Picture”), an Illinois limited liability company. Falcon Picture is a producer, developer, and distributor of audio, video, and DVD consumer products for sale through retail, mail order, and direct marketing channels of distribution. At some time in October 2009, Falcon Picture began production of an audio book based on certain books of the Catholic New Testament, later called the “Truth & Life Dramatized Audio Bible” (“Audio Bible”). At that time, Defendant allegedly contacted Plaintiff to request its services to help produce the Audio Bible. Plaintiff and Defendant entered into an Agreement whereby Plaintiff agreed to provide cash and services in exchange for a percent of revenue received from sales of the Audio Bible. Defendant filed his voluntary bankruptcy petition under Chapter 7 of the Bankruptcy Code on June 1, 2011.

DISCUSSION

I. Request for Dismissal Based Upon Lack of Jurisdiction

Defendant argues pursuant to Fed. R. Bankr.P. 4007 that the last day to object to the dischargeability of a debt under § 523(a) of the Bankruptcy Code or to discharge under § 727 of the Code was September 12, 2011. Plaintiff filed its Adversary Complaint nine months later on June 13, 2012. The time to file an objection to dischargeability of debt under § 523(a)(2)(A) and (a)(6) is ordinarily no later than 60 days after the first date set for the meeting of creditors under 11 U.S.C. § 341(a). Fed. R. Bankr.P. 4007(c). Debtor's first meeting of creditors took place on July 13, 2011. (11 B 23399, Dkt. No. 8) The last day to object under Rule 4007 would have been mid-September. A Seventh Circuit Opinion has ruled that the 60–day time limit under Fed. R. Bankr.P. 4007 for filing objections to dischargeability of certain debts is not jurisdictional and is subject to equitable defenses. In re Kontrick, 295 F.3d 724, 733 (7th Cir.2002). Plaintiff's defense asserted to Defendant's Rule 4007 challenge relies on failure to schedule Plaintiff as a creditor in his bankruptcy case with result that it received no notice of and didn't learn of the bankruptcy case until the end of December 2011, more than three months after the usual deadline.

Plaintiff argues that, even though it failed to file its Complaint within the time frame set by Fed. R. Bankr.P. 4007(c), it may nevertheless object to dischargeability of debts allegedly owed it by virtue of 11 U.S.C. § 523(a)(3)(B):

(a) A discharge under section 727 ... of this title does not discharge an individual debtor from any debt—

(3) neither listed nor scheduled under section 521(a)(1) of this title, with the name, if known to the debtor, of the creditor to whom such debt is owed, in time to permit—

(B) if such debt is of a kind specified in paragraph (2), (4), or (6) of this subsection, timely filing of a proof of claim and timely request for a determination of dischargeability of such debt under one of such paragraphs, unless such creditor had notice or actual knowledge of the case in time for such timely filing and request....”

Thus, when a debtor does not schedule debts so as to give creditors notice of the bankruptcy and time to permit filing of a proof of claim or dischargeability complaint, those debts are not discharged unless the creditor had notice or actual knowledge of the debtor's bankruptcy case. A precondition for nondischargeability of debts of the kind specified in 523(a)(3) is that the debts also be nondischargeable under subsections (a)(2), (a)(4), or (a)(6).

The penalty to debtor for failure to schedule such debts is not nondischargeability but instead it is loss of the 60–day limitation period that applies under Fed. R. Bankr.P. 4007. Therefore, a complaint to bar dischargeability may be considered timely even if filed after the deadline set by Rule 4007(c) if the creditor did not have notice or actual knowledge of the bankruptcy case in time to file a timely request for determination of dischargeability. Bletnitsky v. Jairath (In re Jairath), 259 B.R. 308, 314 (Bankr.N.D.Ill.2001) (Schmetterer, J.) (citing, inter alia, In re Dewalt, 961 F.2d 848 (9th Cir.1992)).

Plaintiff alleges that Defendant induced it to invest money and services based on false representations, misappropriated funds that belonged to Plaintiff, and willfully and maliciously caused harm to Plaintiff by failing to make capital contributions to the “Audio Bible Project.” It therefore argues that the debt owed it by Defendant is of the kind specified in subsections (2) and (6) of Section 523(a), which are pleaded as grounds in Counts I and II.

Defendant argues Plaintiff has not provided in its Complaint a factual basis for proceeding under § 523(a)(3)(B). In their briefs on the Motion to Dismiss, Defendant and Plaintiff focus on when the alleged fraud was discovered by Plaintiff. That is not the only relevant inquiry. Rather, it must be determined first when the Plaintiff received notice of or learned of Defendant's bankruptcy case. In its original Complaint, Plaintiff does not state by what date it learned of the bankruptcy. However, in its Amended Complaint, Plaintiff states that it learned of Defendant's bankruptcy case sometime during the last week of December 2011, three months after the usual deadline and six months before the initial Adversary Complaint was filed.

As noted above, the 60–day time limit for filing objections under Fed. R. Bankr.P. 4007 is not jurisdictional but is subject to equitable defenses, such as laches. In re Kontrick, 295 F.3d 724, 733 (7th Cir.2002). Plaintiff explains, both in its original and Amended Complaint, how and when it learned of the alleged fraud, arguing that even if it had known of Defendant's bankruptcy filing it could not have filed a complaint until it was aware of the alleged fraud. (Compl. ¶ 26; Am. Compl. ¶ 4041) According to Plaintiff, it did not know it had a cause of action until its receipt of certain financial documents on April 2, 2012, two months before this Adversary was filed.

Rule 4007, which governs complaints under § 523(a)(3)(B) allows for filing of such complaints at any time. Diepholz v. Zahlmann (In re Diepholz), BAP No. AZ–11–1581–DJuHL, 2012 WL 4747238, *6, 2012 Bankr.LEXIS 4718, *17 (9th Cir. BAP Oct. 4, 2012). However, there is authority requiring determination of the reasonableness or appropriateness of a delay in filing of a complaint after receipt of actual notice of a debtor's bankruptcy filing. Id. at *10, 2012 Bankr.LEXIS 4718, at *30. In In re Dewalt, a Ninth Circuit Opinion stated that upon learning of a bankruptcy filing, an unscheduled creditor should have time to review the merits of filing a nondischargeability complaint so as to file such a complaint only if justified. 961 F.2d 848, 851 (9th Cir.1992) In considering how much time is necessary for such decision, Dewalt looked to Rule 4007(c), which directs courts to give scheduled creditors at least 30 days notice of the impending bar date. Id.Dewalt also noted that scheduled creditors will have notice of the bankruptcy filing long before the 30–day notice of the bar date has been received. Id. The Opinion cited Collier on Bankruptcy for the proposition that “in most cases, creditors actually receive at least 80 days notice of the deadline for filing dischargeability complaints.” Id. (quoting Collier on Bankruptcy ¶ 4007.05[2] (15th ed. 1991)). The Opinion concluded that the 30–day notice provision of Rule 4007(c) provides a guide to the minimum time within which it is reasonable to expect a creditor to file a complaint or risk default. Id. It also opined that, “[i]n no event, however, could the reasonable time period contemplated by section 523(a)(3)(B) be greater than the 80 days advance notice a properly...