Fifth Circuit Allowed an Extension of the Discharge Deadline After the Deadline Had Passed

If the bankruptcy court makes a mistake in extending the deadline for objecting to discharge, the bankruptcy court has the “equitable power” to correct its own mistake by allowing an untimely complaint objecting to discharge, the Fifth Circuit held, even though the Bankruptcy Rules prohibit an extension after the deadline has passed.

The debtor filed a chapter 7 petition in the Eastern District of Texas, where the court sent a notice establishing July 29 as the deadline for discharge objections. Before the first meeting of creditors, the parties agreed to transfer the case to the Northern District of Texas. The first meeting of creditors did not occur.

Before the July 29 discharge deadline, the order was entered moving the case to the Northern District. The new bankruptcy court sent a new notice making September 22 the discharge objection deadline.

The debtor did not object to the new deadline.

Before the new September 22 deadline but after the original July 29 deadline, creditors and the chapter 7 trustee filed a motion seeking an extension of the deadline. The debtor objected, claiming that the motion was untimely because it was filed more than 60 days after the original date for the first meeting of creditors. The bankruptcy court allowed the extension and eventually denied the debtor’s discharge.

The debtor appealed but lost in district court. In an opinion for the Fifth Circuit on October 23, Circuit Judge Priscilla R. Owen affirmed, saying that the creditors “reasonably relied” on the notice, setting a new, later deadline.

If strictly read, the Bankruptcy Rules, however, were on the debtor’s side. Generally, Bankruptcy Rule 9006(b)(3) allows for extensions of deadlines, but it permits extensions of the deadlines in Rules 4004(a) and 4007(c) “only to the extent and under the conditions stated in those rules.”

Rule 4004(a) establishes the discharge objection as “60 days after the first date set for the meeting of creditors.” With exceptions not applicable under Rule 4004(b)(2), Rule 4004(b)(1) requires that the extension motion must “be filed before the time has expired.”

Judge Owen found an escape hatch under Section 105(a), the so-called All Writs Act. It allows the court to “issue any order, process or judgment that is necessary or appropriate to carry out the provisions of” the Bankruptcy Code. Naturally, Judge Owen said that an order under Section 105(a) “may not contravene specific statutory provisions.”

“Assuming, without deciding,” that the new discharge deadline violated Rule 4004, Judge Owen said that the “parties were justified in relying on the Bankruptcy Court’s actions.” No one brought the mistake to the court’s attention. Thus, she said, the court “was empowered [under Section 105(a)] to craft an appropriate solution to correct its own error, if any.”

Furthermore, Judge Owen said, the creditors “could rely on the bankruptcy judge’s interpretation and application of the Rules.”

Judge Owen added that the bankruptcy court corrected its own error “in the only way it could — by deeming the Objectors’ motion timely.” Quoting the Ninth Circuit, she said that the equitable power in Section 105(a) “‘would be meaningless if courts were unable to correct their own mistakes.’”

Judge Owen upheld the extension of the deadline, noting that three other circuits reached the same result. She went on to uphold the denial of discharge on the merits.