Bankruptcy

The Importance of Keeping Timely Deadlines in Mind

Bankruptcy Update

By Myron A. Bloom
Special to the Legal

A person files for Chapter 7 protection. Under the Federal Rules of Bankruptcy P. 4004(a), a creditor who wishes to object to the debtor's discharge has a time limit within which to object to the discharge. Specifically, Rule 4004(a) states that a complaint objecting to the discharge "shall be filed no later than 60 days after the first date set for the meeting of creditors under section 341(a)." Fed.R.Bankr.P. 4004(b) states that the court "for cause" may extend that time if a motion is filed before the time period is expired.

What if a complaint is filed timely but amended to add detailed allegations after the time period expires? The U.S. Supreme Court addressed this issue recently in Kontrick v. Ryan. The result may surprise you.

On April 4, 1997, Kontrick filed a Chapter 7 bankruptcy case. A creditor, Ryan, sought to oppose the discharge. Ryan obtained, presumably under Rule 4004(b), three successive extensions of the time within which he was could file his complaint under Rule 4004(a); finally, on Jan. 13, 1998, he filed is complaint, alleging only that Kontrick "had transferred property, within one year of filing the bankruptcy petition, within intent to defraud creditors," and thus was not qualified to obtain a Section 727(a) discharge.

On May 6, Ryan filed an amended complaint with leave of court but did not in connection with that filing seek another extension of time to file the complaint pursuant to Rule 4004(b). In the amended complaint, Ryan detailed for the first time the reasons for the requested relief, namely, that Kontrick had transferred property fraudulently to his wife first by removing Kontrick's own name from the family's once-joint checking account and then by continuing regularly to deposit his salary checks into the account, from which his wife paid family expenses.

Ryan answered the amended complaint but did not raise the untimeliness of the "family account" claim. After what the court described as "acrimonious" discovery, Ryan moved for summary judgment. In his response to the motion, Ryan cross-moved to strike portions of Ryan's summary judgment since, in his view, the motion contained "new allegations." Kontrick noted that the family account allegations were absent from the original complaint but did not ask that the court strike these allegations. Rather, he addressed the family account allegations on the merits.

On Feb. 25, 2000, the bankruptcy court ruled on the cross-motions and granted in relevant part Ryan's motion. The bankruptcy court used the amended complaint as its "baseline" in ruling on the cross-motions. The bankruptcy court stated that the course of conduct evidence by Kontrick (the family account allegations) had been established, and concluded on that basis that a violation of Section 727(a)(2) occurred. Thus, the court concluded, a denial of discharge was warranted.

Kontrick moved for reconsideration. For the first time, Kontrick argued that the bankruptcy court lacked jurisdiction over the family account claim, stating that the claim was raised for the first time in the amended complaint and that complaint was filed — without obtaining an extension of time under Rule 4004(b) — after the deadline for objecting to discharge had expired. Citing both Rules 4004(a) and (b), and Fed.R.Bankr.P. 9006(b)(3), Kontrick maintained that those rules established "a mandatory, unalterable time limit of the kind" that Kontrick stated was jurisdictional. This was the first time Kontrick argued the jurisdictional issue regarding the family account claim.

The bankruptcy court denied the motion for reconsideration, holding that Rule 4004's time frames were not jurisdictional and that Kontrick waived the right to assert the defense of untimeliness by failing to raise it until after the court ruled on the merits of the objections. The district court affirmed, as did the 7th U.S. Circuit Court of Appeals, which held that the timeliness provision of the rule at issue was not jurisdictional, and that Kontrick had waived the defense since it was not pursued in a timely fashion. The Supreme Court granted certiorari because of a division of opinion on whether Rule 4004 is "jurisdictional."

The Supreme Court noted that "only Congress" may determine whether a federal court has subject matter jurisdiction." It cited to provisions of the bankruptcy code that had "built-in time constraints," e.g., 28 U.S. C. Section 157(c)(1). However, the court noted, the time constraints applicable to objections to discharge are contained in the Rules of Bankruptcy Procedure prescribed by the court "... for the practice and procedure in cases under title 11."

These rules, stated the court, do not create or withdraw federal jurisdiction, since it is clear, as evidenced by Fed.R.Bankr.P. 9030, that the rules "... shall not be construed to extend or limit the jurisdiction of the courts." The rules, in other words, merely prescribe the method by which the jurisdiction granted the courts by Congress is to be exercised.

Kontrick, in oral argument, urged that he did not disagree with this general proposition, but that he had used the word "jurisdictional" as shorthand to indicate a nonextendable time limit. The court sympathized, but was not persuaded. It recognized that many courts have been "less than meticulous" in this regard and have occasionally used the word "jurisdictional" to describe time prescriptions in rules of court — "[j]urisdiction ... is a word of many, too many, meanings," citing Steel Co. v. Citizens for Better Environment, among other cases. In this connection, the Supreme Court stated, "[c]larity would be facilitated if courts and litigants used the label 'jurisdictional' not for claims-processing rules, but only for prescriptions delineating the classes of cases (subject-matter jurisdiction) and the persons (personal jurisdiction) falling within a court's adjudicatory authority."

Kontrick conceded that Rules 4004 and 9006(b)(3) are not properly labeled "jurisdictional," but that the rules have the same import; the parties, Kontrick argued, may raise the issue at any time, just as parties may raise the issue of subject matter jurisdiction at any time, even for the first time at the appellate level. The Supreme Court disagreed. It stated that Kontrick overlooked a crucial distinction between a rule governing subject matter jurisdiction and an inflexible claim-processing rule. The former cannot be expanded on account of the parties' litigation conduct; "the claim processing-rule, on the other hand, even if unalterable on a party's application, can nonetheless be forfeited if the party asserting the rule waits too long to raise the point."

Applying these principles to the facts before it, the Supreme Court noted that the rule serves three primary purposes: First, the rule informs the pleader of a deadline; second, it instructs the court on the limits of its discretion to grant motions to extend the deadline; and third, it affords a debtor an affirmative defense to a complaint filed outside the rule.

The court noted that it was the third of those principles that was at issue here. Obviously, Ryan did not file a complaint with the family account allegations included in a timely fashion. Second, he did adhere generally to the rule governing extensions to file a complaint. However, with respect to the third principle, Kontrick argued that since the original complaint did not contain the specific acts complained of, "nothing thereafter counts," and the issue of his lack of diligence in raising the affirmative defense was of no moment, so that there was no need to examine equitable exceptions. The court stated that this case involved no issue of equitable tolling or any other equity-based principles. Ryan never asserted in his amended complaint any equitable circumstances qualifying him for a time extension, so that the issue of whether Ryan could have invoked equitable grounds for not pleading the family account facts in a timely fashion was not in play. Rather, the court stated, the issue is whether Kontrick would have succeeded in striking the allegations relating to the family account had the issue been raised in a timely manner. The court examined the lower courts' consideration of this issue. The lower courts noted that time bars must generally be raised in an answer or other responsive pleading; an answer may be amended to include an inadvertently omitted affirmative defense, even after the time to amend "of course" has passed, if "justice so requires." Kontrick not did not raise the defense of untimeliness relating to the "claim processing rules" of Rule 4004 until after a ruling on the merits of the complaint. While issues relating to subject-matter jurisdiction may be raised "at any time," even if a defense based on Rule 4004 could be equated to a failure to state a claim upon which relief could be granted, the issue could be raised, at the latest, at a trial on the merits. Only lack of subject matter jurisdiction would be preserved post-trial. And since Kontrick's defense was not of that nature, the defense, relating to claim-processing, would not be allowed after the party has litigated the claim and lost on the merits.

Accordingly, Kontrick's later filed defense was found to be unavailing; the striking of the defense was upheld; and Kontrick's discharge was denied.

The lesson: Be aware of the difference between rules governing subject-matter jurisdiction and claim-processing. One set can be raised at any time, while the other can be waived. The better lesson is to never assume that a deadline is jurisdictional.

This article is reprinted with permission from the January 23, 2004 issue of The Legal Intelligencer.  Copyright 2004 ALM Properties, Inc.  Further duplication without permission is prohibited.  All rights reserved.