The Ninth Circuit Bankruptcy Appellate Panel wrote a primer on the finer points of pleading a complaint to revoke discharge under Sections 727(d)(1) and (d)(2).
The debtor was a lawyer who filed a chapter 7 petition but did not schedule any fees owing to him by his clients nor any contingency matters. The debtor argued, unsuccessfully, that the fees were not his property but were property of his non-filed LLC. The defense failed because the debtor did not form the LLC until several months after filing.
As it turned out, there were four undisclosed fees that the trustee eventually recovered. In all four instances, the trustee learned about the fees after the deadline for objecting to discharge. In three of the four instances, the trustee learned about the fees before the formal discharge was entered. In the fourth case, knowledge came to the trustee after discharge.
The deadline for objecting to discharge passed without any objections having been filed. The debtor later was granted his formal discharge.
Less than one year after entry of the discharge, the trustee sued to revoke the lawyer’s discharge under Sections 727(d)(1) and (d)(2). The complaint was timely because the trustee commenced the adversary proceeding within a year of discharge, as required by Section 727(e).
The bankruptcy judge revoked the discharge under Sections 727(d)(1) and (d)(2) for obtaining a discharge by fraud and for knowingly and fraudulently failing to turn over estate property. Representing himself, the debtor appealed and won a reversal and remand in a non-precedential, per curiam opinion on April 13.
The BAP listed the basic pleading requirements under (d)(1) and (d)(2). Under both subsections, the BAP said the trustee was also required to plead and prove “that he was unaware of the alleged fraud at the time the discharge was entered.” [Emphasis in original.] The bankruptcy court erroneously used the objection deadline as the cutoff date, the BAP said.
Therefore, three of the four claims were fatally flawed because the trustee admitted that he became aware of the existence of the assets before the discharge was granted.
The BAP said the trustee was evidently unaware of Bankruptcy Rule 4004(b)(2), which was amended in 2011 and might have resurrected the trustee’s ability to revoke discharge had he employed the rule within the time allowed.
The BAP described the rule as now allowing a party to request an extension of time for objecting to discharge after the deadline has passed, but “before discharge is granted, if (A) the objection is based on facts that, if learned after discharge would provide a basis for revocation under Section 727(d), and (B) the movant did not have knowledge of those facts in time to permit objection.” [Emphasis added.]
The BAP reversed the denial of discharge on three of the claims because the trustee had learned about the assets before the discharge was entered but had not sought an extension of time to object. On the fourth claim, where the trustee had proven that he only learned about the asset after discharge, the BAP remanded for the bankruptcy court to consider allowing the trustee to amend the complaint to conform to the proof.
The Ninth Circuit Bankruptcy Appellate Panel wrote a primer on the finer points of pleading a complaint to revoke discharge under Sections 727(d)(1) and (d)(2).