Business Law

Emond v. Ryan McCarthy Investments, LLC (9th Cir. BAP)

The following is a case update written by Gary B. Rudolph, of Sullivan Hill Rez & Engel, APLC, analyzing a recent decision of interest:

SUMMARY

In Emond v. Ryan McCarthy Investments, LLC (“Emond”), __ B.R.__, 2020 Bankr. LEXIS 1543 (May 21, 2020), the U.S. Bankruptcy Appellate Panel of the Ninth Circuit, in a non-published opinion, ruled that the bankruptcy court abused its discretion by granting a creditor’s motion to extend the deadline to file a complaint objecting to the dischargeability of a debt under 11 U.S.C. section 523 without a finding or showing of cause as required by Fed. R. Bankr. P. 4007(c).  The BAP held that the trial court record did not provide a basis to affirm the extension without an explanation as to why the creditor was unable to timely file the complaint within the 60-day deadline.  Accordingly, the trial court’s decision was reversed on appeal.  To view the memorandum, click here.

FACTS

Christopher Emond was the manager, as well as a 44.2% owner, of Lovely Rita’s Brewing Company, LLC (“Lovely Rita’s”).  In two separate pre-petition transactions, Lovely Rita’s borrowed approximately $350,000 in total from creditor Ryan McCarthy Investments, LLC (“McCarthy”).  Lovely Rita’s filed chapter 7 bankruptcy on November 2, 2018, with meetings of creditors being conducted on December 20, 2018, and February 5, 2019.  McCarthy’s attorney attended both meetings and questioned Mr. Emond as a representative of Lovely Rita’s regarding the loans. 

On November 29, 2018, Mr. Emond and his spouse, Jessica Lynn Kleinelder, filed their own chapter 7 bankruptcy case.  McCarthy was scheduled as an unsecured creditor in the amount of $394,834.20.  Notice of the bankruptcy filing, received by McCarthy on December 20, 2018, stated that the last day to file a complaint to except a debt from discharge was March 11, 2019.  The meeting of creditors in this case was initially conducted on January 10, 2019, and thereafter continued to February 21, 2019. 

On March 11, 2019, McCarthy filed a motion to extend the time to file a non-dischargeability complaint.  The motion, however, was not supported by a declaration or any other evidence.  It simply stated that McCarthy was evaluating testimony taken at the creditor meetings as well as the debtors’ records to determine whether the filing of a non-dischargeability complaint was warranted.  Additionally, McCarthy stated that his counsel was in the process of moving from his current law firm and the debtors or other creditors would not be harmed from the granting of an extension.

McCarthy erroneously filed the Notice of Hearing on its motion in the Lovely Rita’s case and not in the debtors’ case.  Despite this mistake, the clerk’s office filed on March 18, 2019, a Notice of Docketing Error and on April 23, 2019, McCarthy filed the notice correctly in the debtors’ case setting the matter for hearing on June 12, 2019.

In opposing the motion for an extension, the debtors argued that McCarthy failed to comply with Local Bankruptcy Rule 9014(c)(1) and also failed to cite any cause to support the extension under Rule 4007(c) of the Federal Rules of Bankruptcy Procedure.  The debtors additionally argued that the request should be barred by the doctrine of laches because McCarthy had still not filed a complaint or sought any discovery regarding the non-dischargeability of the debt.

The bankruptcy court held a hearing on McCarthy’s motion on June 12, 2019. During the hearing, McCarthy argued that the primary reason for the extension was that the debtors’ meeting of creditors was continued from January 10, 2019, to February 21, 2019, leaving only 20 days after the conclusion to comply with the March 11, 2019, deadline.  McCarthy also argued that he had to integrate information from both the Lovely Rita’s meetings of creditors as well as the debtors’ meetings.  In response, the debtors asserted that McCarthy’s counsel asked questions at both creditor meetings in the Lovely Rita’s and the individual bankruptcy case and that McCarthy had ample time to review the facts and circumstances of the loan.

In granting McCarthy’s motion to extend time, the bankruptcy court did not make any factual findings.  The debtors timely filed a Motion for Leave to Appeal an Interlocutory Order which was granted by the BAP.  On appeal, the BAP ruled that the trial court abused its discretion by granting the motion to extend the deadline without McCarthy presenting a showing of good cause.  In fact, the bankruptcy court did not make any factual findings to support cause under Rule 4007(c) of the Federal Rules of Bankruptcy Procedure.

REASONING

In determining that the bankruptcy court abused its discretion, the BAP applied the two-step test set forth in Sullivan v. Harnisch (In re Sullivan) 522 B.R. 604, 611 (9th Cir BAP 2014).  First, a de novo review is applied to determine whether a bankruptcy court applied the correct legal standard to the requested relief.  Thereafter, the appellate court reviews the bankruptcy court’s factual findings for clear error, which are clearly erroneous if they are illogical, implausible, or without support in the record.  Retz v. Samson (In re Retz), 606 F.3d 1189, 1196 (9th Cir. BAP 2010).  In the case sub judice, the BAP agreed with the debtors’ argument that McCarthy, although he filed his motion to extend time within the 60-day deadline pursuant to Rule 4007(c), invoking the extension in Rule 9006(b)(3), he nonetheless failed to establish any “cause.”  Without a showing or finding of cause, the bankruptcy court abused its discretion in granting McCarthy’s motion.  While cause is not defined in the Code or Rules, it must be “compelling and a creditor must show why it is not able to comply with the deadline as originally set.”  In Re Sanderson, 723 F.3d 1094, 1104 (9th Cir. BAP 2013). 

“Allowing a creditor to extend the deadline to determine ‘whether or not [it] even had a viable argument for non-dischargeability – without any explanation why [it] could not have made this determination within the time set by Rule 4007 – would render the standard toothless.’”  Id.

Since no evidence upon which a finding of cause was presented by McCarthy or ascertained by the trial court, the BAP concluded that the bankruptcy court abused its discretion by granting the motion.  Therefore, it reversed the bankruptcy court’s order extending the deadline to file a non-dischargeability complaint.

AUTHOR’S COMMENT

Although not published, this case presents a persuasive and compelling analysis of what not to do as a moving party when seeking an extension of time requiring a showing of “cause.”  In this case, the record was completely devoid of any evidence to support McCarthy’s requested extension and the BAP’s reversal of the trial court’s order is not only correct but unassailable.  Evidence is the cornerstone of any motion that requires the demonstration of “cause.”  And, that cornerstone was missing from the case McCarthy was trying to build.

These materials were authored by Gary B. Rudolph of Sullivan Hill Rez & Engel, APLC.  Editorial contributions were made by Ed Hays of Marshack Hays LLP.

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