Court Opinion

ID: 4540258
Source: CourtListenerOpinion
Date Created: 2020-06-10 01:01:35.09472+00
Date Added: 2024-06-11T08:49:27.052918
License: Public Domain

FILED
                                                                              JUN 5 2020
                           NOT FOR PUBLICATION
                                                                         SUSAN M. SPRAUL, CLERK
                                                                           U.S. BKCY. APP. PANEL
                                                                           OF THE NINTH CIRCUIT

             UNITED STATES BANKRUPTCY APPELLATE PANEL
                       OF THE NINTH CIRCUIT

In re:                                               BAP No. NV-19-1157-GLB

CHRISTOPHER SCOTT EMOND and                          Bk. No. 3:18-bk-51350-BTB
JESSICA LYNN KLEINEDLER,

                    Debtors.

CHRISTOPHER SCOTT EMOND;
JESSICA LYNN KLEINEDLER,

                    Appellants,

v.                                                   MEMORANDUM*

RYAN MCCARTHY INVESTMENTS,
LLC,

                    Appellee.

                     Argued and Submitted on May 21, 2020

                                 Filed – June 5, 2020

         *
        This disposition is not appropriate for publication. Although it may be cited for
whatever persuasive value it may have, see Fed. R. App. P. 32.1, it has no precedential
value. See 9th Cir. BAP Rule 8024-1.
               Appeal from the United States Bankruptcy Court
                         for the District of Nevada

          Honorable Bruce T. Beesley, Bankruptcy Judge, Presiding

Appearances:        Holly E. Estes of Estes Law, P.C. argued for Appellants;
                    Andrea M. Gandara of Holley Driggs Walch Fine Wray
                    Puzey & Thompson argued for Appellee

Before: GAN, LAFFERTY, and BRAND, Bankruptcy Judges.

                                INTRODUCTION

      Chapter 71 debtors Christopher Scott Emond and Jessica Lynn

Kleinedler (“Debtors”) appeal the bankruptcy court’s order granting

creditor Ryan McCarthy Investments, LLC’s (“McCarthy”) motion to

extend the deadline to file a nondischargeability complaint. Contrary to

Ninth Circuit precedent, the bankruptcy court extended the deadline

without a finding or showing of “cause” under Rule 4007(c). Without any

explanation why McCarthy could not file the complaint within the original

deadline, the facts in the record do not support a finding of cause.

Accordingly, we REVERSE.

      1
        Unless specified otherwise, all chapter and section references are to the
Bankruptcy Code, 11 U.S.C. §§ 101-1532, and all “Rule” references are to the Federal
Rules of Bankruptcy Procedure.

                                           2
                                   FACTS

A.      Prepetition Events

        Prior to filing the bankruptcy case, Mr. Emond was the manager and

44.2% owner of Lovely Rita’s Brewing Company, LLC (“Lovely Rita’s”). In

March of 2018, Lovely Rita’s borrowed $80,000 from McCarthy. In May

2018, Mr. Emond borrowed an additional $270,000 in an individual

capacity from McCarthy, and executed a promissory note stating that

Lovely Rita’s previous $80,000 obligation would be assumed by

Mr. Emond. The note provides for payment of $394,838.20 on April 30,

2021.

        On November 2, 2018, Lovely Rita’s filed a chapter 7 bankruptcy

case. The initial § 341 meeting of creditors was held on December 20, 2018,

and continued to February 5, 2019. McCarthy’s attorney attended both

§ 341 meetings and asked Mr. Emond, as representative of Lovely Rita’s,

questions about the circumstances surrounding the claim.

B.      The Bankruptcy Case

        On November 29, 2018, Debtors filed a chapter 7 bankruptcy case.

They scheduled assets of $44,237.69, all of which were claimed as exempt,

priority claims of $89,499.79, and nonpriority claims of $1,179,616.10.

Debtors scheduled an unsecured claim in favor of McCarthy in the amount

of $394,834.20. McCarthy received notice of the bankruptcy filing in

December 2018, which stated that the deadline to file a complaint to except

                                      3
a debt from discharge was March 11, 2019. The § 341 meeting in the

Debtors’ case was held on January 10, 2019 and was continued to February

21, 2019.

      On March 11, 2019, McCarthy filed a motion to extend the time to file

a nondischargeability complaint. McCarthy did not support the motion

with a declaration or other evidence. It stated that McCarthy was in the

process of evaluating testimony taken at the meetings of creditors as well

as its records to determine whether to file a nondischargeability complaint.

McCarthy also stated that its counsel was in the process of separating from

his current law firm and asserted that neither the Debtors nor other

creditors would be harmed by granting an extension.

      McCarthy erroneously filed the notice of hearing on the motion in the

Lovely Rita’s case. On March 18, 2019, the bankruptcy clerk’s office filed a

notice of docketing error. On April 23, 2019, McCarthy filed the notice in

the Debtors’ case, setting the hearing for June 12, 2019.

      Debtors filed an objection to the motion for extension and argued that

McCarthy’s motion failed to comply with Local Bankruptcy Rule 9014(c)(1)

and did not cite any cause to support an extension under Rule 4007(c).

Debtors also argued that the request should be barred by the doctrine of

laches because McCarthy delayed setting the motion for hearing and as of

the date of the objection, McCarthy had still not filed a complaint or sought

any discovery.

                                       4
C.    The Hearing and the Court’s Ruling

      On June 12, 2019, the court held a hearing on McCarthy’s motion. At

the hearing, McCarthy argued that the major reason for the extension

request was that the Debtors’ § 341 hearing was continued from January 10,

2019 to February 21, 2019, and only 20 days remained after the conclusion

of the meeting and the March 11, 2019 deadline. McCarthy also argued that

the balance of equities favored granting the motion and because the loan

was made to Mr. Emond for use in Lovely Rita’s, McCarthy had to

integrate information from § 341 meetings in both cases.

      Debtors argued that McCarthy’s counsel was permitted to ask

questions at the § 341 meetings in the Lovely Rita’s case as well as the

individuals’ case and McCarthy had plenty of time to review the facts and

circumstances of the loans. Debtors argued that McCarthy did not provide

any reason to warrant an extension of time.

      The bankruptcy court granted the motion to extend but did not make

any factual findings. The court required McCarthy to file its complaint

withing ten days, set a deadline for Debtors to respond, and set a trial date

on the to-be-filed complaint for July 23, 2019.

      The court entered an order granting the extension motion on June 18,

2019. Debtors timely appealed and we granted Debtor’s motion for leave to

appeal an interlocutory order.

                                       5
                               JURISDICTION

      The bankruptcy court had jurisdiction under 28 U.S.C. §§ 1334 and

157(b)(2)(I). We have jurisdiction under 28 U.S.C. § 158.

                                     ISSUE

      Did the bankruptcy court abuse its discretion in granting the motion

to extend the deadline to file a nondischargeability complaint?

                          STANDARD OF REVIEW

      We review a bankruptcy court’s decision to extend time for filing a

nondischargeability complaint for abuse of discretion. Willms v. Sanderson

(In re Sanderson), 723 F.3d 1094, 1103 (9th Cir. 2013); Cont’l Cas. Co. v. Albert

(In re Albert), 113 B.R. 617, 619 (9th Cir. BAP 1990).

      We apply a two-step test to determine whether the bankruptcy court

abused its discretion. Sullivan v. Harnisch (In re Sullivan), 522 B.R. 604, 611

(9th Cir. BAP 2014). First, we consider de novo whether the bankruptcy

court applied the correct legal standard to the requested relief. Id. Then we

review the bankruptcy court’s factual findings for clear error. Id. Factual

findings 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. 2010).

                                 DISCUSSION

      Debtors argue that the bankruptcy court erred in granting the motion

because although McCarthy filed a motion within the sixty-day deadline, it

                                        6
failed to establish any basis for “cause” under Rule 4007(c).

      Rule 4007(c) requires that “a complaint to determine the

dischargeability of a debt under § 523(c) shall be filed no later than 60 days

after the first date set for the meeting of creditors under § 341(a).” Pursuant

to Rule 9006(b)(3), the bankruptcy court can extend the deadline only to the

extent and under the conditions stated in Rule 4007(c), which permits an

extension for cause, on a motion from a party in interest filed within the

sixty-day deadline.

      Under Ninth Circuit law, Rule 4007(c) is strictly construed. Allred v.

Kennerley (In re Kennerley), 995 F.2d 145, 147 (9th Cir. 1993). A creditor

seeking an extension of the deadline “must file a motion before the

deadline passes and show cause why the extension is necessary.” In re

Sanderson, 723 F.3d at 1100.

       A bankruptcy court abuses its discretion by granting a motion to

extend the deadline “without either a showing or a finding of cause.” Id. at

1103. “Cause” is not defined in the Rules or the Bankruptcy Code, but it

“must be compelling and a creditor must show why it was not able to

comply with the deadline as originally set.” Id. at 1104 (citing 9 COLLIER ON

BANKRUPTCY ¶ 4007.04 [3] (Alan N. Resnick & Henry J. Sommer, eds. 16th

ed. rev. 2020)).

                                       7
1.    The Bankruptcy Court Abused Its Discretion By Granting The
      Motion Without A Showing Or Finding of Cause

      The bankruptcy court did not make any factual findings to support

cause under Rule 4007(c). The order extending the deadline and the

transcript of the hearing are silent as to the court’s basis for extending the

deadline.

      McCarthy also failed to show cause in its motion. The four-paragraph

motion to extend the deadline stated that McCarthy obtained information

which caused it to believe it had a nondischargeability claim. The motion

also stated that the circumstances surrounding the bankruptcy filing were

complex, McCarthy was in the process of evaluating testimony and

documents to determine whether to file a nondischargeability action, and

counsel was in the process of separating from his law firm.

      However, just as the creditor in Sanderson, McCarthy provided no

explanation why it was unable to complete its investigation prior to the

deadline. See id. at 1104. (“Critically, they failed to explain why they did

not complete their investigation prior to the deadline.”). Allowing a

creditor to extend the deadline to determine “whether or not [it] even had a

viable argument for nondischargeability—without any explanation why

[it] could not have made this determination within the time set by Rule

4007—would render the standard toothless.” Id. (citing 9 COLLIER ON

BANKRUPTCY ¶ 4007.04).

                                       8
      Despite McCarthy’s failure to show cause and the court’s lack of

findings, we may affirm on any basis supported by the record. See Caviata

Attached Homes, LLC v. U.S. Bank Nat’l Assoc. (In re Caviata Attached Homes,

LLC), 481 B.R. 34, 44 (9th Cir. BAP 2012). But, we find nothing in the record

to establish cause under Rule 4007(c).

      McCarthy merely cited circumstances which may, or may not, have

adversely impacted its ability to timely file a nondischargeability

complaint. Creditors routinely file nondischargeability complaints for

claims involving complicated factual situations and lawyers routinely

satisfy filing deadlines while changing firms. McCarthy did not explain

why these circumstances impacted its ability to file a nondischargeability

complaint within the Rule 4007(c) deadline.

      At the hearing on the motion, McCarthy argued that “the biggest

cause for the extension of time request is that the original 341 hearing was

continued from January 10th, 2019 to February 21st.” Hr’g Tr. 2:15-18, June

12, 2019. But again, McCarthy did not explain why the continued hearing

adversely affected its ability to timely file a complaint.

      McCarthy argues that we can infer that Debtors did not provide

adequate information at the initial meeting of creditors from the fact that

the meeting of creditors was continued, and this inference can support

cause under Rule 4007(c). The transcripts of the § 341 meetings are not in

the record and surrounding circumstances do not support such an

                                         9
inference.

      There is no indication in the record that Debtors delayed or frustrated

McCarthy’s discovery attempts, or even that McCarthy conducted any

discovery prior to the deadline. McCarthy stated in its motion that it had

obtained information at the meetings of creditors which caused it to believe

it had a nondischargeability claim. Yet, the record contains no evidence

that it did anything to further establish the factual basis of its claim. We

find no support in the record to indicate that McCarthy was unable to

discover relevant facts and determine whether to file a nondischargeability

complaint prior to the deadline.

      McCarthy cites In re Rubin, No. 2:16-bk-12936-RK, 2016 WL 4442846

(Bankr. C.D. Cal. Aug. 22, 2016) for the proposition that “cause” can exist if

a creditor is waiting for the chapter 7 trustee to determine whether assets

will be administered. McCarthy did not assert this basis for cause in its

motion, and there is no reason to believe that McCarthy needed

confirmation that Debtors’ case was a no-asset case before deciding to file a

nondischargeability complaint. Debtors’ schedules indicated that in

addition to having no non-exempt assets, they had priority debts of

$89,499.79. The bankruptcy notice sent to McCarthy in December 2019

stated that no property appeared available to pay creditors and filing a

proof of claim was not necessary. Unlike the creditor in Rubin, McCarthy

was not waiting for the § 341 meeting to be conducted. It had already

                                       10
attended the meetings of creditors in both cases and asked questions

related to its claim.

      McCarthy did not show, and the bankruptcy court did not find, cause

to extend the Rule 4007(c) deadline. The record does not provide a basis to

affirm the order without some explanation as to why McCarthy was unable

to file the complaint within the sixty-day deadline. The bankruptcy court

abused its discretion by granting the motion without a finding or showing

of cause.

                              CONCLUSION

      For the reasons set forth above, we REVERSE the bankruptcy court's

order extending the deadline to file a nondichargeability complaint.

                                     11