Last week I was at a final hearing on fee applications on behalf of a Chapter 7 Trustee, in a case in which the debtor had failed to disclose a pre-petition personal injury case pending in another state. The defendants in that case ultimately founds out about the Bankruptcy case about a year after it was closed and the debtor received her discharge. They contacted the Trustee and the case was reopened more than a year after debtor’s discharge to administer the asset (the proceeds of the personal injury case settled by the Trustee). The Judge questioned why we had not pursued revocation of the debtor’s discharge based on the obvious failure to disclose the lawsuit, false schedules and other issues in the case. It was a good question and one that the Chapter 7 Trustee and United States Trustee had considered. Unfortunately, no matter how egregious or fraudulent the debtor’s conduct, the Bankruptcy Code has strict time limits for seeking revocation of a discharge. The case below is an example of the strict limitations periods.
In Underwood v. Brit & Sons Electrical Wholesale, Inc., Adv. P. No. 1305138, 2013 Bankr. LEXIS 3630 (Bankr. N.G.Ga. August 15, 2013) (click here for .pdf of opinion), the debtor filed a motion to reopen his no-asset Chapter 7 case to add a creditor. When the case was reopened, almost two years after it was initially closed, the debtor filed an adversary proceeding seeking a declaration that the debt to the defendant was discharged. The defendant/creditor filed a counterclaim to deny debtor’s discharge pursuant to 11 U.S.C. §727(d)(1) (discharge granted through fraud; creditor had no knowledge of fraud until after discharge). The debtor sought dismissal of the counterclaim as untimely under §727(e)(1) as it was brought after one year after the debtor was granted a discharge. In turn, the defendant argued that because it was not listed as a creditor in the schedules and had no notice of the bankruptcy case, the time in which to object to, or seek revocation of, the debtor’s discharge was equitably tolled.
The Court held that equitable tolling did not apply to toll the statute of limitations and the counterclaim was dismissed. Section 727(e) provides –
(e) The trustee, a creditor, or the United States trustee may request a revocation of a discharge—
(1) under subsection (d)(1) of this section within one year after such discharge is granted; or
(2) under subsection (d)(2) or (d)(3) of this section before the later of—
(A) one year after the granting of such discharge; and
(B) the date the case is closed.
Because the defendant creditor was proceeding under §727(d)(1) the one-year time limit of §727(e)(1) applied. Further, Judge Hagenau held that this one-year period was not subject to equitable tolling.
Britt’s argument is based on the Supreme Court’s holding in Holmberg v. Armbrecht, 327 U.S. 392, 66 S. Ct. 582, 90 L. Ed. 743 (1946) where the court adopted the following rule: “where a plaintiff has been injured by fraud and ‘remains in ignorance of it without any fault or want of diligence or care on his part, the bar of the statute does not begin to run until the fraud is discovered, though there be no special circumstances or efforts on the part of the party committing the fraud to conceal it from the knowledge of the other party.'” Id. at 396-97. The court stated that, “this equitable doctrine is read into every federal statute of limitations.” Id. at 397. This doctrine has been referred to as “equitable tolling”. Equitable tolling, though, only applies to statutes of limitations and not to statutes of repose. It does not apply to time limitations which actually restrict the jurisdiction of the court. For example, in Lampf, Bleva, Lipkind, Prupis & Petigrow v. Gilberton, 501 U.S. 350, 111 S. Ct. 2773, 115 L. Ed. 2d 321 (1991), the Supreme Court heard arguments as to the availability of equitable tolling for a limitations period in a securities law statute. In that case, the court identified the period to be a statute of repose, as opposed to a statute of limitations, and therefore not subject to equitable tolling. The court noted that Congress had specifically legislated this limitation period. Tolling would contradict the firm deadline Congress set even in the face of fraud. In yet another Supreme Court case, this time involving an objection to discharge, the Supreme Court distinguished between limitations enacted by Congress and limitations in rules that were court created. Court-created rules “do not create or withdraw federal jurisdiction” while Congress has authority to grant jurisdiction to federal courts or limit it with time limitations. Kontrick v. Ryan, 540 U.S. 443, 453, 124 S. Ct. 906, 157 L. Ed. 2d 867 (2004)… The majority of courts addressing the issue of whether the time period of 11 U.S.C. § 727(e)(1) is subject to equitable tolling have found that it is not…
The limitation which Britt challenges is in the text of the statute itself, not in a rule. Moreover, Britt’s request for revocation is under Section 727(d)(1) which on its face contemplates that the debtor has committed fraud and that the requesting party did not know of the fraud. Congress had the opportunity to provide for further relief for such parties but instead made a conscious choice to limit the revocation to one year, presumably in favor of finality and the fresh start principle.
For the above reasons, the Court dismissed the defendant creditor’s counterclaim.