Opinion ID: 163850
Heading Depth: 2
Heading Rank: 1

Heading: Vacating the Discharge Order

Text: 8 The Federal Rules of Bankruptcy Procedure allow for relief from final orders on the same terms as the Federal Rules of Civil Procedure. Rule 60 F.R.Civ.P. applies in cases under the [Bankruptcy] Code. Fed. R. Bankr.P. 9024 (also listing exceptions not pertinent to this case). Rule 60 provides relief from final orders under various circumstances. See Fed. R.Civ.P. 60(b) (On motion and upon such terms as are just, the court may relieve a party ... from a final judgment, order, or proceeding [due to] mistake, inadvertence, surprise, . . . excusable neglect[, or] newly discovered evidence.) 9 The Bankruptcy Code also, however, specifies that discharges may only be revoked when there has been unknown fraud, and only upon notice and hearing: 10 On request of a party in interest before one year after a discharge under this section is granted, and after notice and a hearing, the court may revoke such discharge only if — (1) such discharge was obtained by the debtor through fraud; and (2) the requesting party did not know of such fraud until after such discharge was granted. 11 11 U.S.C. § 1328(e) (emphasis added). The hearing must be an adversary proceeding. Fed. R. Bankr.P. 7001(4) ([A] proceeding to object to or revoke a discharge [is an adversary proceeding].) 12 The BAP nevertheless held that Rule 9024 allowed the Bankruptcy Court to vacate the Discharge Order without proof of fraud. Midkiff, 271 B.R. at 386. In reaching that conclusion, the BAP relied substantially on In re Cisneros, 994 F.2d 1462 (9th Cir.1993). 13 Writing for the Ninth Circuit, Judge O'Scannlain concluded in Cisneros: A Chapter 13 debtor's right to have his discharge revoked only for fraud (and not on general equitable grounds or for some reason that would justify revocation of a Chapter 7 discharge) is in no way infringed when a court vacates an order of discharge entered by mistake. Id. at 1466. Cisneros involved a debtor who, unlike the Midkiffs, had not yet made all scheduled payments under the plan. Even so, there is no reason to believe that Congress intended § 1328(e) to prevent the bankruptcy court from correcting its own mistakes. Id. The Cisneros court went on to explain that the word only in § 1328(e) could be explained by Congress's intent to exclude certain Chapter 7 proceedings from being imported into the Chapter 13 context. Id. 14 Following Cisneros, the BAP held that in spite of § 1328(e)'s restrictions on revoking discharges, the Bankruptcy Court retained authority to vacate the Midkiffs' discharge to allow the Trustee to collect and disburse the tax refund. The BAP reasoned that the Trustee's lack of knowledge of the incoming tax refund was the kind of mistake contemplated by Rule 60(b) and that the Bankruptcy Court did not err in vacating the Debtors' discharge pursuant to Fed. R. Bankr.P. 9024. Midkiff, 271 B.R. at 386. 15 In challenging that conclusion in this appeal, the Midkiffs again argue that the § 1328(e) restrictions limit the Trustee's authority to vacate a discharge under Rule 9024. They also contend that, even if Rule 9024 does authorize the vacating of discharges on grounds other than those specified in § 1328(e), the Trustee's lack of knowledge of the Midkiffs' tax refund is not the kind of mistake contemplated by Rule 9024. Neither argument is persuasive. 16
17 We are mindful that [t]he bankruptcy court is, after all, a court of equity, and it strikes us as anomalous in this context to say that the Debtors have a right to retain that which they had no right to receive in the first place. Cisneros, 994 F.2d at 1466. 18 Moreover, as the Trustee argues on appeal, the statute specifies that the court may revoke such discharge only under certain conditions, 11 U.S.C. § 1328(e) (emphasis added), whereas the court here did not revoke the discharge at all. Rather, it ordered that the Court's Discharge Of Debt After Completion of Chapter 13 Plan, dated April 24, 2001 is vacated to the extent, and for the sole purpose, of allowing the Trustee to collect and disburse the tax refund in accordance with the Debtors' Chapter 13 plan. Aplts' App. at 6-7 (Order Granting Trustee's Request to Vacate Order Discharging Debtor for Limited Purpose of Collecting and Disbursing Federal Income Tax Refund, filed May 10, 2001) (emphasis added). 19 The Order was not titled a revocation, and the Bankruptcy Court specifically indicated that the purpose of the order was limited and specific. If the Bankruptcy Court had wanted to revoke the discharge, it presumably knew how to use that word, which appears prominently in the Bankruptcy Code. Indeed, revocation involves far more than temporarily setting aside a discharge. [R]evocation of discharge... has the same effect as a denial of discharge. `The revocation of a discharge makes the discharge a nullity. . .' The result then in either revocation or denial of discharge is obviously that the bankrupt does not receive a discharge. In re Hairston, 3 B.R. 436, 438 (Bankr. N.M.1980) (quoting 1A Collier on Bankruptcy, § 15.14, at 1514 (14th ed.1978)). When a discharge is revoked, [t]he debtor is not released from personal liability for any pre-petition obligation, regardless of whether the obligation is described as non-dischargeable by statute or not. In addition, the permanent injunction embodied in the order of discharge never becomes applicable, or is revoked as part of the order of discharge. Rosemary Williams, Annotation, Creditor's Right to Have Bankruptcy Discharge of Individual Debtor Revoked, Vacated, and Set Aside, 138 A.L.R. Fed. 253, 288 (1997) (footnotes omitted). By contrast, a Rule 60(b) motion does not affect the finality of a judgment or suspend its operation. Fed.R.Civ.P. 60(b). Thus, when a court grants relief under Rule 60(b), the discharge is not revoked but is simply altered to provide limited relief as appropriate under the circumstances. 20 It is true that the words revoke and vacate have sometimes been used interchangeably. See, e.g., In re Fesq, 153 F.3d 113, 115 (3d Cir.1998) ([This] appeal poses the fundamental question whether a final order confirming a debtor's Chapter 13 plan can be vacated without a showing of fraud, an issue that the parties have contested in terms of what grounds are available under law for revocation of such confirmation orders.) Importantly, however, it was the parties themselves in Fesq who chose to contest the vacating of an order on the basis of the legal standards governing revocations. At best, therefore, that characterization constitutes the law of the case, not a legal holding that equates revocation with vacation. 21 The decision in Fesq, in fact, provides further support for the distinction between the revocation and the vacation of discharge orders. In that case, the Third Circuit considered a request by a creditor to revoke a confirmation order (governed by the provisions of 11 U.S.C. § 1330, which are analogous to § 1328's rules governing discharges). The creditor in Fesq wished to file objections to the confirmed plan, on the basis that a computer glitch at his lawyer's firm had prevented him from timely filing objections prior to the filing of the confirmation order. Id. at 114. The creditor argued that he was entitled to relief under Rule 9024. Arguing in favor of finality, id. at 119, the Fesq court chose not to allow relief from the confirmation order. 22 The Third Circuit's refusal to grant relief under Rule 60(b) is thus a reflection of its desire to prevent a creditor from forcing a confirmed plan to be re-written without bringing an adversarial action and without asserting fraud. We are faced with no such request for substantive changes in the Midkiffs' plan. The Trustee here acted as soon as she received the new evidence and requested only that the Bankruptcy Court recognize that the tax refund was covered by the plan. No changes were made to the plan, because none were requested. The Midkiffs were merely prevented from receiving an undeserved windfall. 2 23 Our decision in In re Gledhill, 76 F.3d 1070 (10th Cir.1996) provides further support in an analogous setting. There, we held that Fed. R. Bankr.P. 7001(7) (specifying that a proceeding to obtain an injunction or other equitable relief is an adversary proceeding) does not preclude the use of Rule 60(b) to obtain relief by motion. 24 Rule 7001 lists ten classes of actions which require the initiation of an adversary proceeding. The list does not include requests for relief under Rule 60(b).... Consequently, the plain language of Rule 9024 allows a party to request Rule 60(b) relief from a bankruptcy court order granting relief from stay by filing a motion. Id. at 1078. 3
25 The Midkiffs further argue that even if Rule 9024 does authorize the vacating of discharge orders, the Trustee failed to establish that her lack of knowledge of the tax refund constituted the kind of mistake warranting relief under Rule 9024. They contend that the burden was on the Trustee to investigate any future tax refunds that might have been due the Midkiffs, making the mistake not one to be forgiven. 26 The Midkiffs cite no authority for this assertion. We again find ourselves in agreement with the Cisneros court: 27 We acknowledge that the problems that have arisen in this case are ultimately attributable to the failure of the Trustee to learn that the IRS had filed a proof of claim. For present purposes, however, this is immaterial. The order of discharge was entered by the bankruptcy court under a misapprehension as to the facts of the case. Had the court been apprised of the actual facts, it would never have entered the order. 28 994 F.2d at 1467. 29 Moreover, the Midkiffs were best situated to know about the impending tax refund, because they had filed their tax return and knew that a refund was forthcoming. The party best situated to provide relevant information usually bears the burden of doing so. For example, in federal tax disputes, even after the recent adoption of the burden-shifting rules, taxpayers are still required to maintain[ ] all records required under this title and [to cooperate] with reasonable requests ... for witnesses, information, documents, meetings, and interviews. 26 U.S.C. § 7491(a)(2)(B) (Taxpayer Bill of Rights 3, July 22, 1998). Expecting bankruptcy trustees to maintain information pipelines to the IRS regarding the possibility of impending tax refunds is wholly unreasonable. 30 We continue, of course, to expect that trustees will carefully administer the plans under their authority. See esp. 11 U.S.C. § 704(4) (The trustee shall ... investigate the financial affairs of the debtor); 11 U.S.C. § 1302(b)(4) (The trustee shall... assist the debtor in performance under the plan). Nevertheless, debtors retain their duty to inform their trustees of relevant developments in their financial situations, including tax refunds due for periods governed by their plans. See 11 U.S.C. § 521 (The debtor shall ... cooperate with the trustee as necessary to enable the trustee to perform the trustee's duties under this title, [and] surrender to the trustee... any recorded information, including books, documents, records, and papers, relating to property of the estate.) We emphasize that a debtor who voluntarily submits him or herself to the jurisdiction of the bankruptcy court to obtain the benefit of a discharge of debts, must fulfill certain duties to insure that estate assets are administered in accordance with applicable law. In re Beach, 281 B.R. 917, 921 (10th Cir. B.A.P. 2002). 31
32 As an important matter of public policy, the BAP in this case also pointed out that adopting the Midkiffs' proposed rule would allow debtors to manipulate their tax returns to hide income. That is, by withholding excessive amounts of money from their paychecks in the final year of a bankruptcy plan and then receiving the excess as a tax refund after the plan is discharged, unscrupulous debtors could effectively cheat their creditors. Midkiff, 271 B.R. at 388. 33 Indeed, the Trustee here asserts that the Midkiffs were engaged in just that kind of chicanery: They requested a payoff amount from the Trustee in early March 2001; the Trustee sent a plan payoff letter dated March 6, 2001; the Trustee received the check for full prepayment six days later; and two days after that, on March 14, the Midkiffs signed and mailed their 2000 tax return to the IRS. This, the Trustee argues, strongly suggests that the Midkiffs were trying to close the plan before the 2000 tax refund was received, thus allowing them to keep the money. 34 While the timing of the Midkiffs' actions does offer grounds for suspicion, we need not express an opinion on the Midkiffs' motives in this case. Whether the Midkiffs were carrying out a nefarious plan or were entirely oblivious to the import of their actions, the Bankruptcy Court's response was appropriate. The rule that we adopt, moreover, will prevent future ill-motivated debtors from engaging in such a scheme. Even if that is not what the Midkiffs intended to do here, therefore, our decision today sets the most appropriate rule going forward. Where equity, efficiency, and the law all point in the same direction, we are comfortable in following that path. 35