Opinion ID: 197510
Heading Depth: 2
Heading Rank: 2

Heading: Administrative Deadline Extensions Under Bankruptcy Code Section 105(a)9

Text: 16 The Trustee next contends that section 105(a) empowers the bankruptcy court to harmonize the Medicare statute, and its implementing regulations, with the Bankruptcy Code. 10 He points out that whereas Code provisions are designed generally to facilitate chapter 7 estate-property recoveries for the benefit of unsecured creditors, see, e.g., Bankruptcy Code § 363(f) (allowing chapter 7 trustee to sell property free and clear of liens), the one-year HHS deadline for hospitals to conduct capital-asset sales through a chapter 7 trustee, see 42 C.F.R. § 413.134(f)(3), arbitrarily undermines efforts to preserve and maximize creditor recoveries by working a hypertechnical forfeiture of the depreciation-adjustment credit to which the debtor Hospital was otherwise entitled. 17 The Trustee thus characterizes the thrust of the challenged filing deadline as an unfair administrative effort to reduce HHS's monetary exposure to a minimum. As the Trustee sees it, even assuming that any such administrative aim comported with congressional intent, see, e.g., Northwest Hosp., Inc. v. Hospital Serv. Corp., 687 F.2d 985, 995 (7th Cir.1982) (invalidating HHS regulation imposing blanket disallowance rule which did not serve purposes of Medicare statute), whatever legitimate purpose is served by the HHS deadline is as well served by the equitable remedy fashioned by the bankruptcy court under section 105(a): allowing the Trustee to file the § 413.134(f)(3) claim but employing the appraised value of the Hospital's capital assets at the one-year anniversary of its closure, rather than the sale price obtained after the one-year period expired. Thus, according to the Trustee, the bankruptcy court's harmonization of legitimate Code objectives and Medicare program concerns avoided any inequitable result while precluding a windfall to HHS. 18 Section 105(a) empowers the bankruptcy court to exercise its equitable powers--where necessary or appropriate--to facilitate the implementation of other Bankruptcy Code provisions. See supra note 10. Although expansively phrased, section 105(a) affords bankruptcy courts considerably less discretion than first meets the eye, and in no sense constitutes  'a roving commission to do equity.'  Chiasson v. J. Louis Matherne & Assocs. (In re Oxford Mgt., Inc.), 4 F.3d 1329, 1334 (5th Cir.1993) (citation omitted). See In re Lapiana, 909 F.2d 221, 224 (7th Cir.1990); Bundy v. Donovan (In re Donovan ), 183 B.R. 700, 702 (Bankr.W.D.Pa.1995) (same). Instead, the equitable discretion conferred upon the bankruptcy court by section 105(a) is limited and cannot be used in a manner inconsistent with the commands of the Bankruptcy Code. In re Plaza de Diego Shopping Ctr., Inc., 911 F.2d 820, 824 (1st Cir.1990). These limitations have been variously described. 19 First, Bankruptcy Code § 105(a) may not be invoked to alter substantive debtor rights defined under the applicable nonbankruptcy law. See, e.g., Bird v. Carl's Grocery Co. (In re NWFX, Inc.), 864 F.2d 593, 596 (8th Cir.1989) (An 'equitable setoff' such as that fashioned by the bankruptcy court in the present case is not a proper use of the bankruptcy court's equitable powers because it creates new substantive rights for the parties ....); see also In re Continental Airlines Corp., 907 F.2d 1500, 1509 (5th Cir.1990) (holding that § 105(a) does not permit substantive modifications of labor agreement). 20 Following along these lines, the Secretary asserts that the Hospital's substantive right to claim a capital-asset depreciation-adjustment credit was automatically extinguished because no capital-asset sale occurred within the one-year period prescribed in § 413.134(f)(3), and that an extinguished right cannot be resurrected under section 105(a). See In re Chicago, Milwaukee, St. Paul & Pac. R.R., 791 F.2d 524, 528 (7th Cir.1986) (The fact that a [bankruptcy] proceeding is equitable does not give the judge a free-floating discretion to redistribute rights in accordance with his [or her] personal views of justice and fairness, however enlightened those views may be.). The maxim relied upon by the Secretary reveals less than the complete picture, however, unless its application is attuned to the particular context. 21 Congress quite obviously intended to invest debtor estates and their representatives with certain rights, some of which may augment prepetition rights possessed by the debtor under nonbankruptcy law. See Johnson v. First Nat'l Bank of Montevideo, 719 F.2d 270, 273 (8th Cir.1983) (noting: [W]here Congress has enacted bankruptcy legislation which conflicts with state law, state law must yield.). But since section 105 itself is not a source of new substantive rights, the bankruptcy court may invoke section 105(a) only if the equitable remedy utilized is demonstrably necessary to preserve a right elsewhere provided in the Code. See Norwest Bank Worthington v. Ahlers, 485 U.S. 197, 206, 108 S.Ct. 963, 968, 99 L.Ed.2d 169 (1988) ([W]hatever equitable powers remain in the bankruptcy courts must and can be exercised within the confines of the Bankruptcy Code; [u]nder this section, a court may exercise its equitable power only as a means to fulfill some specific Code provision.); Official Unsecured Creditors' Comm. v. Stern (In re SPM Mfg. Corp.), 984 F.2d 1305, 1311 (1st Cir.1993) ([S]ection 105(a) [does not] authorize courts to create substantive rights that are otherwise unavailable under the Code, or to expand the contractual obligations of parties.); In re Dillon, 194 B.R. 533, 536 (Bankr.S.D.Fla.1996). 22 In this vein, the Trustee argues, the Hospital was entitled to the deadline extensions granted by the bankruptcy court since this is the sort of technical accommodation that tends to maximize the overall value of the chapter 7 estate, hence fits within the penumbra--if not the express terms--of Bankruptcy Code § 363. 11 We need not address the two maxims mentioned above, however, as there is a sounder foundation for the district court's conclusion. See Baybank-Middlesex v. Ralar Distribs., Inc., 69 F.3d 1200, 1202 (1st Cir.1995) (court of appeals may affirm district court on any ground disclosed in the record); Max Sugarman Funeral Home, Inc. v. A.D.B. Investors, 926 F.2d 1248, 1253 n. 9 (1st Cir.1991) (same). 23 The bankruptcy court may not utilize section 105(a) if another, more particularized Code provision--here, section 108(b)--impedes the requested exercise of equitable power. See In re Fesco Plastics Corp., 996 F.2d 152, 154 (7th Cir.1993) (By the same token, when a specific Code section addresses an issue, a court may not employ its equitable powers to achieve a result not contemplated by the Code.); Landsing Diversified Props. v. First Nat'l Bank & Trust Co. (In re Western Real Estate Fund, Inc.), 922 F.2d 592, 601 (10th Cir.1990) ([A] bankruptcy court's supplementary equitable powers [under § 105(a) ] may not be exercised in a manner that is inconsistent with the other, more specific provisions of the Code.), modified on other grounds, 932 F.2d 898 (10th Cir.1991); Continental Airlines, 907 F.2d at 1509; Levit v. Ingersoll Rand Fin. Corp., 874 F.2d 1186, 1198 n. 10 (7th Cir.1989) (same); Carter v. Peoples Bank & Trust Co. (In re BNW, Inc.), 201 B.R. 838, 847 (Bankr.S.D.Ala.1996) (When the Bankruptcy Code establishes a right explicitly, a bankruptcy court cannot expand or contract that right implicitly through use of equitable powers.); 2 Lawrence P. King, Collier on Bankruptcy, p 105-5 (15 ed.1996) (§ 105 does not override explicit mandates of other sections of the Bankruptcy Code or mandates of other state and federal statutes.) (citations omitted); see also, e.g., Chiasson, 4 F.3d at 1334 (This [payment] order effectuated an impermissible substantive alteration of the Code's provisions.). Unfortunately, however, by focusing exclusively on the two principles first discussed above, the parties managed to parry the legitimate concerns harbored by the bankruptcy court regarding the dissonant theme reflected in section 108(b), to which we now turn. Bankruptcy Code § 108(b) states: 24 Except as provided in subsection (a) of this section, if applicable nonbankruptcy law, an order entered in a nonbankruptcy proceeding, or an agreement fixes a period within which the debtor or an individual protected under section 1201 or 1301 of this title may file any pleading, demand, notice, or proof of claim or loss, cure a default, or perform any other similar act, and such period has not expired before the date of the filing of the petition, the trustee may only file, cure, or perform, as the case may be, before the later of-- 25 (1) the end of such period, including any suspension of such period occurring on or after the commencement of the case; or 26 (2) 60 days after the order for relief. 27 11 U.S.C. § 108(b) (emphasis added). The bankruptcy court considered, sua sponte, whether section 108(b) precluded its reliance on section 105(a) as authority for extending the one-year regulatory deadline imposed by the HHS regulation. 12 It received no aid from the parties, however, as the Trustee and the Secretary agreed below that (i) section 108(b) was inapposite because the Trustee was not seeking an extension to file a proof of claim, and (ii) section 108(b) applies to filing deadlines only. The parties likewise noted that 42 C.F.R. § 413.134(f)(3) merely requires the Trustee to consummate a capital-asset sale by the first anniversary of the Hospital's closure, not that the Trustee need have filed the § 413.134(f)(3) depreciation-adjustment claim within the one-year period. The cramped construction accorded section 108(b) by the parties cannot stand. 28 Under its plain terms, as abundantly indicated, inter alia, by its inclusion of the generic phrase cure a default, section 108(b) is not restricted to trustee initiatives that may be characterized as filings. For one thing, a cure for a default need involve no filing at all, depending on the particular circumstances. Yet more importantly, section 108(b) also contains the catchall phrase: or perform any other similar act. See Autoskill, Inc. v. National Educ. Support Systems., 994 F.2d 1476, 1484 (10th Cir.1993) (Although § 108(b) does not specifically refer to notices of appeal, the statute includes a broad catchall extending the time in which a debtor or trustee may 'perform any other similar act' in addition to the steps listed.); In re G-N Partners, 48 B.R. 462, 467 (Bankr.D.Minn.1985) ([T]hat § 108(b) is 'broader' than the listed items 'is obvious from its reading.' ) (citation omitted). 29 Thus, the pertinent inquiry in construing section 108(b) in the present context is whether all the undertakings expressly enumerated in it share some common characteristic. We think the answer is evident, since each undertaking enumerated in section 108(b) contemplates the exercise of a right, or the performance of a duty, prescribed by nonbankruptcy law in the prepetition environment encountered by the debtor, failing which any related prepetition legal right would be forfeit. 30 Moreover, even assuming the term similar, as used in section 108(b), see supra pp. 28-29, were less than unambiguous, its legislative history is clear beyond cavil. Section 108(b) was designed to permit the trustee, when he steps into the shoes of the debtor, an extension of time for filing an action or doing some other act that is required to preserve the debtor's rights. H.R.Rep. No. 95-595, at 318 (1977), reprinted in 1978 U.S.C.C.A.N. 5963, 6275; see also S.Rep. No. 95-989, at 30 (1978), reprinted in 1978 U.S.C.C.A.N. 5787, 5816 (same). See 1 Lawrence P. King, Collier on Bankruptcy p 108.03, at 108-6 (15th ed.1991) (noting that Congress included § 108(b) so that the trustee could take the necessary steps to preserve for the estate rights which might otherwise be barred); accord First Nat'l Fidelity Corp. v. Perry, 945 F.2d 61, 65 (3d Cir.1991) (holding that extension of time for exercising state-law right to redeem foreclosed property from 3 to 5 years would contravene § 108(b)(2), which limits extensions to 60 days); Counties Contracting & Constr. Co. v. Constitution Life Ins. Co., 855 F.2d 1054, 1058 n. 4 (3d Cir.1988) (holding that § 108(b) pertains to payment of insurance policy premium during grace period, an act necessary to continue the policy in effect); Whispering Bay Campground, Inc. v. Fagan (In re Whispering Bay Campground, Inc.), 850 F.2d 443, 445-46 (8th Cir.1988) (same; redemption rights under Minnesota law). 31 The outer reaches of section 108(b), in relation to contractual time limitations other than filing deadlines, remain in sharp dispute. Compare, e.g., Good Hope Refineries, Inc. v. Benavides, 602 F.2d 998, 1002-03 (1st Cir.1979) (holding that neither Bankruptcy Act § 11(e) nor its successor, Bankruptcy Code § 108(b), afforded trustee 60-day extension to exercise option contract), with In re Santa Fe Dev. & Mortgage Corp., 16 B.R. 165, 167-68 (9th Cir. BAP 1981) (holding that § 108(b) extends option contract for 60 days). These disputes are no less likely where, as here, the deadline is fixed not by contract but by applicable ... law (viz., the Medicare statute), but involves something more than a paper filing. 32 In all likelihood the applicability of section 108(b) will be decided on a case-by-case basis until the provision is clarified by Congress or the Supreme Court. Regulatory deadlines are clearly embraced by section 108(b)'s reference to applicable nonbankruptcy law, and section 108(b) cannot be wholly limited to paper filings, since it refers to default cures. For the present we are satisfied that the one-year sale requirement is sufficiently linked to an ongoing HHS proceeding to invoke section 108(b) and that no pertinent consideration makes its application inappropriate. 33 In the present context, an indispensable undertaking to preserve the Hospital's prepetition right to claim a capital-asset depreciation adjustment from HHS was the sale of its capital assets, and the applicable HHS regulations unconditionally fixed the deadline for doing so at one year from the date the Hospital ceased its participation in the Medicare program. Accordingly, under the plain terms of section 108(b) the fact that the Trustee would have had to take a further step after the sale, in order to preserve the right of the chapter 7 estate to any such adjustment (i.e., file a formal § 413.134(f)(3) claim with HHS), was altogether immaterial in the present circumstances because both undertakings were necessary to protect the Hospital from an irremediable forfeiture of its rights under the applicable nonbankruptcy law. 34 Thus, although section 108(b) obviously allows the trustee in bankruptcy a sixty-day grace period unavailable to the prepetition debtor, it just as plainly bespeaks a legislative intent to cut off the extension period, either at 60 days from the filing of the chapter 7 petition or upon the expiration of any remaining prepetition period, whichever occurs later. See, e.g., Johnson, 719 F.2d at 277-78 (holding that bankruptcy court cannot use § 105(a) to extend period for redeeming property under state law, a matter within § 108(b)'s ambit). 13 35 The Trustee complains, nevertheless, that it is unrealistic to expect a newly appointed trustee to marshal estate assets within sixty days of the petition, let alone sell all the capital assets. Even though this may well be a compelling policy consideration, however, Congress nonetheless surely envisioned that it might be difficult to meet the sixty-day deadline imposed by section 108(b)(2) in some circumstances. Yet it chose to legislate no exception. 14 36 Furthermore, the Trustee has not alleged that HHS was responsible for any delay in selling the Hospital's capital assets. Compare Johnson, 719 F.2d 270, 274-75 (There is no claim that [appellant] or any other party was guilty of any wrongdoing which adversely affected the debtors' ability to redeem the property within the statutory period. '[E]quity is available to protect property rights of the innocent debtor from the wrongful acts of other persons; however, equity does not extend to situations in which the debtor is simply unable to make the required payment within the prescribed time.' ) (citation omitted), with Otoe County Nat'l Bank v. Easton (In re Easton ), 882 F.2d 312, 315-16 (8th Cir.1989) (departing from Johnson holding where bad faith has been demonstrated). 37 Although chapter 7 creditors may be deprived of potential recoveries unless the trustee is able to sell a capital asset in time to preserve the debtor estate's right to a postpetition capital-asset depreciation adjustment from HHS, we are not at liberty to redistribute rights in accordance with [our] personal views of justice and fairness. Chicago, Milwaukee, St. Paul & Pac. R.R., 791 F.2d at 528. See Heyman v. M.L. Marketing Co., 116 F.3d 91, 1997 WL 324382, at  5 (4th Cir. June 16, 1997) (No. 95-2929) (Bankruptcy filings often result in procedural confusion. Congress anticipated this confusion and made allowances for it. Among other provisions, 11 U.S.C. § 108(b) provides trustees with at least sixty days to take control of a case and to make appropriate filings.). Rather, once Congress has weighed the competing policy concerns affecting the scope of relief available under section 108(b), see supra note 14, we must abide its legislative decision unless it infringes a constitutional mandate. See Pressimone v. I.R.S. (In re Pressimone ), 39 B.R. 240, 246 (N.D.N.Y.1984) (Courts [invoking § 105(a) ] ... have expressed a laudable concern for the rehabilitation of debtors ... [but] in so doing ... have independently weighed the competing policy objectives at stake, thereby substituting their own judgment for that of Congress.). In the present circumstances, therefore, the appropriate recourse for trustees in bankruptcy institutionally overburdened by a § 413.134(f)(3) deadline, or for the creditor interests adversely affected thereby, is not through 11 U.S.C. § 105(a), but congressional amendment of section 108(b), or a rule-making modification to 42 C.F.R. § 413.134(f)(3), see id. § 1395x(v)(1)(O)(ii). III