In re Sterns (Bankr. D. Mont.)

The following is a case update written by Corey R. Weber, a partner at Brutzkus Gubner Rozansky Seror Weber LLP, analyzing a recent decision of interest:

The U.S. Bankruptcy Court for the District of Montana held that local bankruptcy rules permitting the grant of extensions to file objections to claimed exemptions and to file complaints objecting to discharge and for nondischargeability of debt contradicted the requirement of “cause” in the Federal Rules of Bankruptcy Procedure, and, therefore the local rules were required to be eliminated. In re Sterns, 2021 WL 739529 (Bankr. D. Montana 2/25/21).

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FACTS

The chapter 7 debtors’ meeting of creditors took place on December 11, 2020. The notice of the meeting of creditors fixed January 10, 2021 as the deadline to file objections to the debtors’ exemptions and February 9, 2021 as the deadline to file objections to discharge or to nondischargeability of debts. On January 7, 2021 (just before the deadline to file objections), a creditor, Herb Kelsey (Kelsey), filed a motion to extend the deadlines to file the objections on the basis that Kelsey’s counsel was not retained until the end of 2020 and required further time to investigate, conduct a Rule 2004 examination and determine whether to file objections. The motion was granted the day after it was filed, without a hearing, and was consistent with local rules which provide that the court routinely grants motions requesting additional time to file objections to discharge, objections to exemptions and complaints for nondischargeability of debts without the need for notice or a hearing. The local rules further provide that after relief is granted (the extension), a party in interest may object and schedule a hearing to reconsider the order.

The debtors objected to the motion on the grounds that the motion did not establish “cause” pursuant to Federal Rules of Bankruptcy Procedure 4003, 4004 and 4007. Since the court had already granted the motion, the objection was treated as a motion for reconsideration.

The court sustained in part and overruled in part the debtors’ objection and provided Kelsey an additional thirty days to file any objections to exemptions or discharge. The court eliminated the local rules in question that were contrary to the requirement in the Federal Rules of Bankruptcy Procedure that required “cause” in order to obtain an extension.

REASONING

The court found that reference to Rules 4003(b), 4004(a) and 4007(c) in Rule 9006(b) “makes clear that their deadlines shall only be extended if something more is established—i.e. ‘cause.’” Citing to Rule 4003(b) and Taylor v. Freeland & Kronz, 503 U.S. 638, 644 (1992), the court noted that the deadline must be strictly enforced in the interests of finality. The court cited other case law that held that bankruptcy courts can only extend the deadlines under Rule 4004(b) and 4007(c) for good cause and with proof that the creditor acted diligently.

Looking to its decision in In re Marsh, 2012 WL 4482581, 3 (Bankr. D. Mont. 2012), the court determined that “to establish cause, ‘the moving party must (1) make an affirmative showing that he or she has, with reasonable diligence attempted to investigate the facts and circumstances, and (2) offer a reasonable explanation of why that investigation could not be completed within the allotted time.’” The court stated that this “bright line rule encourages prompt action and promotes finality in bankruptcy proceedings.”

Citing to Anwar v. Johnson, 720 F.3d 1183, 1189 (9th Cir. 2013) and Marsh, the court reflected that local rules cannot be applied in a manner that conflicts with the federal rules and found that the local rules providing that the court may grant the extensions in question without notice or a hearing conflict with the federal rules. In making that determination, the court noted that the local rules “do away with the ‘cause’ standard required by their federal counterparts,” eliminate “any impetus for the moving party to act promptly and investigate the facts and circumstances of each case with reasonable diligence” and shift the burden to the objecting party. The court further stated that the local bankruptcy rules “create a procedural ‘catch twenty-two’ that creates a trap for the unwary” in that if the party objecting to the extension prevails on a motion for reconsideration, the extension granted pursuant to through the local bankruptcy rule is rescinded and, after relying on an extension from the court to object, the creditor’s objection then becomes untimely. The court stated that it “can discern no explanation for the maintenance of this procedural trap which unnecessarily injects uncertainty and peril into a process that the Rules and case law already address.”

The court therefore held that “[i]n the future, requests for extensions under Rules 4003, 4004, and 4007 will be denied unless the moving party satisfies their burden and demonstrates ‘cause’ exists for the requested relief.” The court eliminated the local rules that conflicted with Rules 4003, 4004 and 4007. Given “the procedural dilemma” based on the local rules and court’s prior order granting an extension, the court provided an additional thirty days to complete an investigation and file objections to discharge.

AUTHOR’S COMMENT

Given that the Ninth Circuit previously held in Anwar v. Johnson that local rules “must be consistent with the Bankruptcy Code and the Federal Rules of Bankruptcy Procedure” and not “enlarge, abridge, or modify any substantive right,” the court correctly determined that the local rules conflicting with the Rules must be eliminated. The local rules were likely implemented for the procedural ease of practitioners. However, the court noted that the local rules not only are detrimental to debtors in permitting routine extensions to object to exemptions and discharge without demonstrating the “cause” required under the federal rules, but were also are detrimental to creditors by providing a “trap” where an extension may be granted and then rescinded. eliminating the ability to file a timely objection.

In a footnote to the decision, the court reflected that “[t]his change will require a ‘cultural’ shift by moving parties away from the practice of requesting an extension on the eve of the deadline, comfortable with the knowledge that, at a minimum, an additional 30 days will be afforded them before any objection is heard.” The practical effect of eliminating the local rules in question is only to require quicker action (diligence) by creditors, including retaining counsel earlier to investigate claims, and that a motion with evidence demonstrating cause be filed earlier.

These materials were written by Corey R. Weber, a partner at Brutzkus Gubner Rozansky Seror Weber LLP, a member of the ad hoc group and the Immediate Past Chair of the CLA Business Law Section, with editorial contributions by the Hon. Meredith Jury (United States Bankruptcy Judge, C.D. Cal, Ret.), also a member of the ad hoc group. Thomson Reuters holds the copyright to these materials and has permitted the Insolvency Law Committee to reprint them. This material may not be further transmitted without the consent of Thomson Reuters.