In re: AARON D. LOOS and ALICE M. LOOS, Debtor.
AARON D. LOOS, ALICE M. LOOS, Appellants,
v.
STANLEY AYERS; BRIAN BANIQUED, Appellees
BAP Nos. EC-06-1443-MoPaMk, EC-06-1444-MoPaMk
United States Bankruptcy Appellate Panel of the Ninth Circuit
April 25, 2008
NOT FOR PUBLICATION
Argued and Submitted at Sacramento, California: February 22, 2008
Appeal from the United States Bankruptcy Court for the Eastern District of California. Bk. No. 03-24832-C7, Adv. Nos. 03-2402, 03-2403. Hon. David E. Russell, Bankruptcy Judge, Presiding.
Before: MONTALI, PAPPAS and MARKELL, Bankruptcy Judges.
MEMORANDUM
This disposition is not appropriate for publication. Although it may be cited for whatever persuasive value it may have (see Fed. R. App. P. 32.1), it has no precedential value. See 9th Cir. BAP Rule 8013-1.
This case presents us with a new wrinkle on the adage, " Be careful what you ask for." Its bizarre history compels that we focus solely on procedural irregularities and leave the merits of the dispute for the bankruptcy court to resolve again should appellees choose to continue the fight.
Appellant, a Chapter 7 debtor, appeals from two judgments purportedly revoking his discharge pursuant to § § 727(a)(3) and (a)(5). We say " purportedly" because the bankruptcy court relied on provisions of the Bankruptcy Code that support denial of a discharge; nothing was pled or proven to support revocation of an extant, final order granting a discharge. Based upon the procedural errors reflected in the record before us, we REVERSE and REMAND.
Unless otherwise indicated, all chapter, section and rule references are to the Bankruptcy Code, 11 U.S.C. § § 101-1330, and to the Federal Rules of Bankruptcy Procedure, Rules 1001-9037, as enacted and promulgated prior to the effective date of The Bankruptcy Abuse Prevention and Consumer Protection Act of 2005, Pub. L. 109-8, 119 Stat. 23.
Although Mr. and Mrs. Loos named themselves as Appellants in both appeals, Mr. Loos is the only actual appellant in both cases as no claims of Appellees were sustained by the court against Mrs. Loos. All references to her as a party in either appeal are in error.
FACTS
Prior to the bankruptcy filing of Aaron Loos and Alice Loos (" Mr. Loos" or " Mrs. Loos, " collectively the " Looses"), Creditor-Appellee Brian Baniqued (" Baniqued") obtained an arbitration award in the amount of $20, 530.32; Creditor-Appellee Stanley Ayers (" Ayers") filed a complaint in state court, but the bankruptcy was filed before the complaint could be served.
The Looses filed a voluntary joint Chapter 7 bankruptcy petition on April 29, 2003. The last day to oppose discharge and to file a complaint to determine nondischargeability was July 28, 2003. On July 25, 2003, Baniqued and Ayers (collectively " Appellees") commenced independent adversary proceedings, both objecting to the Looses' discharges under § 727(c)(1) (" Complaints"). Appellees made no allegations that their respective debts were nondischargeable under § 523. Specifically, both Ayers and Baniqued, pursuant to § § 727(a)(3) and 727(a)(5), claimed that Mr. Loos concealed, falsified or failed to preserve records and invoices related to his management and maintenance of their individual rental properties, and that he failed to explain satisfactorily the whereabouts of certain rent monies received by him.
Section 727(a) provides, in relevant part:
The adversary proceedings were consolidated for the purposes of trial, which was held on February 5, 2004. Appellees were represented by the same counsel, while the Looses appeared pro se. On January 30, 2004, just six days prior to trial, both Ayers and Baniqued filed a pleading entitled " Supplemental Filing" (" Supplements"). Appellees and the court agreed that the Supplements were seeking leave to amend the Complaints to add exceptions to discharge claims under § 523, based upon fraud and breach of fiduciary duty, and the court treated them as such. Additionally, at the start of trial, Appellees' counsel orally moved to amend the Complaints to add the § 523 claims. The Looses opposed the motion on the ground they did not receive adequate notice under Rule 15 of the Federal Rules of Civil Procedure (" FRCP") as incorporated by Rule 7015. The court agreed with the Looses and denied Appellees' request. Testimony was heard and evidence was presented as to the § 727 claims only.
Section 523(a) provides, in relevant part:
At the close of trial, Appellees once again moved to amend the Complaints to assert their exceptions to discharge under § 523. This time the court granted Appellees' motion even though evidence submitted went to support objections to discharge under § 727. In exchange for that ruling, the court asked Appellees to drop their § 727 claims, and Appellees agreed. The dialogue went as follows:
FARBER [Attorney for Appellees]: At this time I would like to make a motion to amend the pleadings to amend the complaint to add 523. I believe that the evidence has clearly shown in this that 523 is an applicable code and complaint to be added.
THE COURT: Are you going to waive the denial of discharge?
FARBER: Are you going to allow me to amend 523?
THE COURT: I may very well allow you to amend your pleadings to show 523 if you will remove your request for denial of discharge.
FARBER: I do so.
THE COURT: All right. Very well. We will remove the -- your request is granted.
BAP Memorandum, 5:12-22 (quoting Tr. Trial 175:22 - 176:11) (February 5, 2004)).
As for its sudden change of heart, the bankruptcy court explained that Mr. Loos would have lost against Appellees' § 727 claims, which is why it allowed the less-devastating, nondischargeability claims under § 523:
. . . And I have a very specific reason why I permitted the change at the last minute, when previously I had ruled that it would not be permitted, that is because I think you were going to lose the other one, and that is far more devastating to you than 523(a)(2), which I think has been proven here.
. . . What I think the evidence clearly shows is that there was an effort by you, Loos, to deceive these parties. I think that the financial statements that you gave them were wrong. I think you made up those statements deliberately for the purpose of taking their money and not giving them an honest accounting of what happened to the money.
Id. at 5:26 - 6:9 (quoting Tr. Trial 176:25 - 177:17).
At a post-trial hearing on April 8, 2004, the bankruptcy court expanded on its reasons for allowing the § 523 exceptions:
Now admittedly the trial started under 727 on the basis that you did not adequately account for all of your assets and that type of thing, but the -- but the problem is that as the trial was going on it became obvious, because of these false accountings, I couldn't let you off the hook on the [§ 523 exceptions] because you shouldn't be able to benefit from your own fraud. In other words, you did provide accountings, so, you know, that part of it was ok, but the accountings were false, and because they were, I was, -- the only alternative I guess I had was to deny your discharge, but because of the facts that were presented at the trial, and because of Mr. Farber's motion at the end of trial, I said will you dismiss the 727 and he said yes, which gave me basis for findings [sic] that the particular obligation that you owe Dr. Ayers and Mr. Baniqued, having been false or you committed fraud in the process, the obligations were nondischargeable. That's the basis of what I found.
Hr'g. Tr. 19:22 - 20:14 (Apr. 8, 2004).
Consequently, the bankruptcy court ruled in favor of Appellees and determined their debts nondischargeable as to Mr. Loos under § § 523(a)(2)(A) and (a)(4). Appellees sought no relief from Mrs. Loos. The court entered final judgments against Mr. Loos in the two adversary proceedings on May 5, 2004, in the amount of $22, 494.51 to Ayers and $20, 530.32 to Baniqued, respectively. Notably, the judgments made no mention of dismissing Appellees' § 727 claims, or that Mr. Loos prevailed on the § 727 claims against him.
Although no amended complaints were filed that replaced the § 727 claims objecting to discharge with the § 523 claims of nondischargeability, the court effectively permitted the pleadings to be amended to conform to the proof, as permitted by FRCP 15(b)(1), and Rule 7015. Pummill v. Greensfelder (In re Richards & Conover Steel, Co.), 267 B.R. 602, 610 (8th Cir. BAP 2001) (amendment of pleadings to conform to evidence presented at trial is to be liberally construed, and such amendments are to be freely granted); see Samayoa v. Jodoin (In re Jodoin), 196 B.R. 845, 851 (Bankr. E.D. Cal. 1996), aff'd, 209 B.R. 132, 136 (9th Cir. BAP 1997) (reciting same).
The Looses filed a timely Notice of Appeal on May 17, 2004. Because there were no other pending challenges to the Looses' discharges, on May 21, 2004, the Clerk of Court entered a discharge as to both and the case was closed. There was no appeal of that discharge order; thus, it is a final order.
Mr. Loos appealed the judgments of nondischargeability. Appellees did not cross-appeal the elimination of the § 727 claims (having been agreed to at trial) nor appeal the May 21, 2004 grant of discharge.
On August 24, 2005, the BAP vacated the two judgments of nondischargeability and, for reasons not evident to us in the record, remanded to the bankruptcy court with instructions to set aside the withdrawal of the § 727 Complaints and enter findings and judgments as appropriate under § § 727(a)(3) and (a)(5). BAP Memorandum, 14:11-14. The BAP reasoned that the Looses were substantially prejudiced when the § 727(a) objections to discharge morphed into claims under § 523(a) at the eleventh hour of trial. It reversed the judgments of nondischargeability and remanded the action to the bankruptcy court with instructions that it enter findings, conclusions and a decision on the Appellees' original § 727(a) claims. BAP Memorandum, 13:8-14:8.
The remand hearing was held on October 23, 2006, without any new evidence presented. On November 17, 2006, the court fulfilled the BAP's instruction and entered judgments in the two adversary proceedings denying Mr. Loos his discharge under § § 727(a)(3) and (a)(5). Later, both judgments were amended on December 5, 2006, to revoke his discharge under § § 727(a)(3) and (a)(5). Copies of the two judgments were docketed in Mr. Loos's main Chapter 7 case. This is a critical problem in the case. Appellees filed no motion to amend the judgments, but somehow the court became aware that judgments under § 727(a) were inappropriate since the Looses already received their discharges in May, 2004. Furthermore, other than their captions, the amended judgments are identical in substance to the original ones. The Looses timely appealed.
JURISDICTION
The bankruptcy court had jurisdiction under 28 U.S.C. § § 157(b)(2)(I), (J) and 1334. We have jurisdiction under 28 U.S.C. § 158.
ISSUE
Did the bankruptcy court err when it revoked Mr. Loos's discharge?
STANDARD OF REVIEW
A bankruptcy court's application of basic rules of procedure and construction of the Bankruptcy Code present questions of law the BAP reviews de novo. All Points Capital Corp. v. Meyer (In re Meyer), 373 B.R. 84, 87 (9th Cir. BAP 2007) (citing Ruvacalba v. Munoz (In re Munoz), 287 B.R. 546, 550 (9th Cir. BAP 2002)).
DISCUSSION
Although the BAP vacated and remanded these adversary proceedings to the bankruptcy court for findings under § § 727(a)(3) and (a)(5), subsections applicable only to objections to discharge, the bankruptcy court eventually entered two amended judgments revoking Mr. Loos's discharge. Without reaching the merits of Appellees' objections to discharge, we conclude that procedurally the bankruptcy court's subsequent revocation of Mr. Loos's discharge was improper and remand is necessary.
Pursuant to § 727(a) a Chapter 7 debtor obtains a general discharge of all debts arising prepetition, subject to the exceptions to discharge of § 523. A party may object to the debtor's general discharge pursuant to § 727(a), or object to the dischargeability of a specific debt pursuant to § 523(a).
A debtor's discharge granted under § 727(a) can be revoked under § 727(d) only upon request of the trustee, a creditor, or the U.S. Trustee, and after notice and a hearing if the grounds for revocation listed exist. See Walsh v. Bracken (In re Davitch), 336 B.R. 241, 253 (Bankr. W.D. Pa. 2006); and Markovich v. Samson (In re Markovich), 207 B.R. 909, 913 (9th Cir. BAP 1997). Revocation is limited to actions in which the debtor (1) obtained his discharge through fraud unknown to the party requesting the revocation until after discharge; (2) acquired or became entitled to property of the estate and then knowingly and fraudulently failed to report or deliver it to the bankruptcy trustee; or (3) refused to obey a court order or to testify. However, revocation is an extraordinary remedy, and is construed liberally in favor of the debtor and strictly against those objecting to discharge. Bowman v. Belt Valley Bank (In re Bowman), 173 B.R. 922, 924 (9th Cir. BAP 1994); see First Beverly Bank v. Adeeb (In re Adeeb), 787 F.2d 1339, 1342 (9th Cir. 1986). Furthermore, under § 727(e) and Rule 9024, a revocation action against a Chapter 7 debtor must be commenced within one year after the discharge is granted.
Section 727(d), as applicable in this case, provides:
Section 727(e) provides:
Appellees dropped their § 727 claims at the end of trial and agreed to judgments under § 523(a). They made no further efforts to set aside the later-granted discharge either before or after the appeal, or ever sought to revoke Mr. Loos's discharge under § 727(d).
Because of the procedural problems present in this record, Mr. Loos should not lose his discharge. It is unclear why the bankruptcy court revoked Mr. Loos's discharge, considering revocation was never requested nor were the elements of any subsection of § 727(d) pled or proven. Consequently, we believe it was improper for the bankruptcy court to revoke Mr. Loos's discharge entered pursuant to findings under § § 727(a)(3) and (a)(5).
I. The revocation order was improper because neither Ayers nor Baniqued ever filed the necessary complaint to revoke Mr. Loos's discharge under § 727(d).
An action for revocation of a discharge order is an adversary proceeding which must be commenced by filing a complaint. Rule 7001(4). Since neither Ayers nor Baniqued did so, we examine whether the court, sua sponte, can revoke Mr. Loos's discharge.
Section 727(d) expressly specifies that revocation can be sought only by a creditor, a trustee, or the U.S. Trustee. In re Davitch, 336 B.R. at 253 (" Relying on the plain, unambiguous language of § 727(d), courts have consistently held that revocations of a debtor's discharge may be requested only by a trustee, a creditor, or the U.S. Trustee.") (emphasis added) (citing In re Nader, 1998 WL 767459 (Bankr. E.D. Pa. 1998)); see also In re Markovich, 207 B.R. at 913, and see Charles J. Tabb, The Law of Bankruptcy § 10.32 (1997) (court cannot sua sponte revoke a discharge).
In Markovich, this Panel addressed the issue whether the court, sua sponte, under its inherent equitable powers, can revoke a discharge. In that case, the bankruptcy court entered a Chapter 7 debtor's discharge, but several months later determined a complainant's debt as nondischargeable under § 523(a)(2)(A). The debtor wanted to revoke his discharge order so he could convert his case to Chapter 13. Besides holding that a debtor does not have standing to seek a revocation, this Panel held that a court lacks inherent equitable power to revoke a discharge outside the framework of § 727(d). In re Markovich, 207 B.R. at 913. The equity powers of the bankruptcy court cannot be used to override specific statutory provisions in the Code. Id., (citing Norwest Bank Worthington v. Ahlers, 485 U.S. 197, 206, 108 S.Ct. 963, 968, 99 L.Ed.2d. 169 (1988)). Therefore, relying on the plain, unambiguous language of § 727(d), and the rule set out in Markovich, Davitch and Norwest, the court itself is not among those which may take such action, and the bankruptcy court erred when it revoked Mr. Loos's discharge sua sponte.
II. The revocation order was improper because there are no findings under § 727(d) making revocation proper.
Not only was a complaint to revoke Mr. Loos's discharge never filed under § 727(d), but no evidence was ever offered that he is culpable under any of the three enumerated reasons in § 727(d) that could result in revocation.
Section 727(d) allows for revocation of discharge when requested by an authorized party under only the three circumstances noted above - none of which occurred here. Furthermore, the court cannot circumvent the enumerated reasons under 727(d) and revoke a debtor's discharge pursuant to its equitable powers provided by § 105(a). See Disch v. Rasmussen, 417 F.3d 769, 778 (7th Cir. 2005) (" [S]uch a broad interpretation of § 105(a) would make the list of grounds for revoking a discharge found in § 727(d) meaningless; anything not in the list could come in through the back door of § 105(a).").
The allegations in Appellees' Complaints, citing § § 727(a)(3) and (a)(5), did not give rise to revocation under § § 727(d)(1), (2) or (3) because:1. If there was any fraud committed by Mr. Loos, Appellees never alleged fraud that they did not know of until after the grant of discharge. In fact, they relied solely on the prepetition events that supported their ill-fated § 523 claims. In any event, they did not seek revocation within the one-year time limit of § 727(e), thus eliminating § 727(d)(1); 2. Mr. Loos has not been charged with having acquired, nor becoming entitled to acquire, property of the estate, nor failing to disclose said property to the trustee, eliminating § 727(d)(2); and3. Appellees' Complaints did not state a claim under § 727(a)(6), eliminating revocation under § 727(d)(3).
The court entered Mr. Loos's discharge order on May 21, 2004. Pursuant to § 727(e) and Rule 9024, any action by Ayers or Baniqued to revoke Mr. Loos's discharge had to be filed before May 21, 2005. Nothing was filed. Appellees were long-ago time barred from such an action.
The record indicates Mr. Loos's discharge was revoked, but provides no findings or conclusions to support that judgment under § 727(d). Because there is no evidence supporting a revocation under § 727(d), and the fact that Mr. Loos's discharge order was entered over two-and-a-half years earlier and no one took any action to vacate that order, it was improper for the bankruptcy court to revoke his discharge pursuant to findings and conclusions under § § 727(a)(3) and (a)(5).
III. The revocation order was improper because Mr. Loos received no notice or hearing required by § 727(d).
Based upon the record before us, not only was a § 727(d) complaint never filed, but the bankruptcy court entered the revocation order without giving Mr. Loos any prior notice.
The plain language of § 727(d) requires the court to provide notice and a hearing as to a debtor's discharge revocation. Notice is the bedrock of any procedurally proper bankruptcy case. Westchester Surplus Lines Ins. Co. v. Surfside Resort & Suites, Inc. (In re Surfside Resort & Suites, Inc.), 344 B.R. 179, 187 (Bankr. M.D. Fla. 2006) (citing the general principle of notice in Mullane v. Cent. Hanover Bank & Trust Co., 339 U.S. 306, 314, 70 S.Ct. 652, 657, 94 L.Ed. 865 (1950) (The " right to be heard has little reality or worth unless one is informed that the matter is pending and can choose for himself whether to appear or default, acquiesce or contest.")). Furthermore, " whatever . . . powers remain in the bankruptcy courts must and can only be exercised within the confines of the Bankruptcy Code." Norwest Bank Worthington, 485 U.S. at 206.
Here, the court clearly exceeded its authority under the Bankruptcy Code by failing to provide notice or a hearing to Mr. Loos prior to the revocation order. Such action prevented Mr. Loos from appearing, defaulting, acquiescing or contesting the revocation, thereby violating his due process rights granted under the Code. This was improper.
CONCLUSION
At the end of trial, the bankruptcy court found Appellees' particular debts were nondischargeable under § § 523(a)(2)(A) and (a)(4). The two similar rulings were final on their face and said nothing to prevent the Looses from receiving their discharges under § 727(a). " [I]t is permissible as a procedural matter for a court to grant a discharge when no complaint objecting to discharge has been filed at the expiration of the 60-day period, notwithstanding a pending claim seeking to exempt a particular debt from discharge." Disch, 417 F.3d at 775 (citing the Administrative Office of the United States Courts, Bankruptcy Clerk's Manual (1997)). In other words, " [i]t is entirely possible for a debtor with nondischargeable debts to receive a discharge." 6 Collier on Bankruptcy, § 727.01[1] at 727-728 (15th ed. rev. 2007).
To this day, the bankruptcy court has not vacated the discharge order. Thus we have a final discharge order entered in 2004, followed by a revocation of that discharge in 2006, despite the absence of any effort by Appellees to vacate it or to follow proper procedure to revoke it. Neither Appellees nor anyone else has suggested that the entry of discharge was a clerical error requiring correction. It is not our place to enter or direct the entry of such an order. However, FRCP 60(b), as incorporated by Rule 9024, provides that a court can vacate an order it entered as a result of mistake, inadvertence, excusable neglect, fraud, or to conform to newly discovered evidence, or for any other reason justifying relief from the operation of a judgment. In In re Cisneros, 994 F.2d 1462, 1467 (9th Cir. 1993), the Ninth Circuit held that if a discharge order was entered by the bankruptcy court under a misapprehension to the facts of the case, the court can vacate that discharge pursuant to Rule 60(b), applicable to bankruptcy cases under Rule 9024. Thus, if Mr. Loos's discharge was entered in error, then there are proper procedures available for the bankruptcy court to vacate it.
Based upon the foregoing reasons, we REVERSE and REMAND.
Our disposition does not prevent Appellees from requesting the court to vacate the discharge order on remand. Any such request, however, would of course have to be consistent with this disposition and applicable procedure, and be subject to whatever defenses Mr. Loos may assert.
The court shall grant the debtor a discharge, unless--. . . (3) the debtor has concealed, destroyed, mutilated, falsified, or failed to keep or preserve any recorded information, including books, documents, records, and papers, from which the debtor's financial condition or business transactions might be ascertained, unless such act or failure to act was justified under all of the circumstances of the case; . . . (5) the debtor has failed to explain satisfactorily, before determination of denial of discharge under this paragraph, any loss of assets or deficiency of assets to meet the debtor's liabilities[.]
A discharge under section 727 . . . of this title does not discharge an individual debtor from any debt--. . . (2) for money, property, services, or an extension, renewal, or refinancing of credit, to the extent obtained by (A) false pretenses, a false representation, or actual fraud, other than a statement respecting the debtor's or an insider's financial condition; . . . (4) for fraud or defalcation while acting in a fiduciary capacity, embezzlement, or larceny[.]
This is evident from the above-quoted colloquy between Appellees' counsel and the court at the end of trial, and consistent with the fact that final judgments of nondischargeability were entered against Mr. Loos on May 5, 2004.
On request of the trustee, a creditor, or the United States trustee, and after notice and a hearing, the court shall revoke a discharge granted under subsection (a) of this section if (1) such discharge was obtained through the fraud of the debtor, and the requesting party did not know of such fraud until after the granting of such discharge; (2) the debtor acquired property that is property of the estate, or became entitled to acquire property that would be property of the estate, and knowingly and fraudulently failed to report the acquisition of or entitlement to such property, or to deliver or surrender such property to the trustee; or (3) the debtor committed an act specified in subsection (a)(6) of this section.
The trustee, a creditor, or the United States trustee may request a revocation of a discharge--(1) under subsection (d)(1) of this section within one year after such discharge is granted; or(2) under subsection (d)(2) or (d)(3) of this section before the later of (A) one year after the granting of such discharge; and(B) the date the case is closed.