If an individual has received a chapter 7 discharge, must there be an objection to discharge if the same debtor files a new chapter 7 petition within eight years?
If a chapter 7 discharge was entered although the debtor had received a chapter 7 discharge within eight years, may the bankruptcy court vacate the second discharge sua sponte?
Bankruptcy Judge Christopher M. Klein of Sacramento, Calif., ruled in an opinion on Jan. 18 that no objection to discharge is required if the debtor has received a chapter 7 discharge within eight years. He also held that the court can vacate a discharge under Rule 60(a) even years later, if the second discharge was not permissible under Section 727(a)(8).
In addition, Judge Klein concluded that Bankruptcy Rule 4004 is invalid in some respects because it would make substantive changes in Section 727(a)(8), thus violating the Bankruptcy Rules Enabling Act, 28 U.S.C. § 2075. Section 727(a)(8) provides that the court may not enter a discharge if the debtor has received a discharge in chapters 11 or 7 within eight years.
The relevant facts were simple. The individual debtor received a chapter 7 discharge in April 2009. He filed a second chapter 7 petition and was granted a second discharge about 18 months later.
In 2015, the same debtor filed another petition and became embroiled with the Internal Revenue Service in a dispute over a tax lien that ostensibly became invalid as a consequence of the second chapter 7 discharge in 2010. Sua sponte, Judge Klein raised the question of whether he could or should vacate the 2010 discharge.
Judge Klein traced the history of often-amended Rule 4004. In subsection (a), the rule now provides that a motion or complaint objecting to discharge of someone who has received a chapter 7 discharge within eight years must be filed within 60 days of the first meeting of creditors. Rule 4004(a), Judge Klein said, led the clerk to believe that the debtor was entitled to a discharge 18 months after a prior discharge because no one objected.
The mistake in granting the second discharge was “beyond cavil,” Judge Klein said. “The problem is how to correct it,” he said.
Entering a chapter 7 discharge is a ministerial duty, the judge said. In the case at bar, entering a discharge “was a clerical mistake within the meaning of Rule 60(a)” because the “court never intended to issue . . . a chapter 7 discharge in violation of Section 727(a)(8).”
The notion that an objection to discharge under Section 727(a)(8) “is subject to the Rule 4004(a) deadline is in conflict with the Bankruptcy Code” and, Judge Klein said, therefore conflicts with the Bankruptcy Rules Enabling Act, which provides that the rules may not “abridge, enlarge or modify any substantive rights.”
When a discharge has been entered as a matter of clerical error, Judge Klein said that Rule 60(a), incorporated by Bankruptcy Rule 9024, provides the means for vacating the improperly issued discharge. He went on to say that the time limit in Section 727(e) for revoking a discharge for the “blameworthy reasons specified in Section 727(d) is not infringed when a court vacates a mistaken order of discharge.”
Alternatively, Judge Klein said he had power to vacate the discharge under Section 105(a) because he would be “giving effect to a precise provision of the Bankruptcy Code.”