By Ryan C. Wood
A strange Ninth Circuit Bankruptcy Appellate Panel opinion was published on September 3, 2019, about the California statute of limitation laws and the effect of a bankruptcy discharge on the applicable statute of limitations. The claim in question in this bankruptcy case totaled a whopping $832.30. The Ninth Circuit Bankruptcy Appellate Panel upheld the lower bankruptcy court’s ruling that the order of discharge in the bankruptcy case acts to stop the running of or tolls the statute of limitation just like the automatic stay does when the bankruptcy case is initially filed. This makes sense and is consistent with stopping a creditor’s right to seek collection of a debt in general. If you legally cannot seek collection it is not fair to count that period of time as part of the statute of limitations. So what is the issue here?
At the same time Bankruptcy Code Section 108(c) provides that if applicable nonbankruptcy law imposes a statute of limitations on a claim that has not expired pre-petition, “then such period does not expire until the later of (1) the end of such period, including any suspension of such period occurring on or after the commencement of the case; or (2) 30 days after notice of the termination or expiration of the stay.” 11 U.S.C. § 108(c). There is nothing there about an order of discharge……….. But an order of discharge discharges the bankruptcy filer’s personal liability for the debt permanently. So the order of discharge is a permanent stay right?
Claims and Bankruptcy
When there are assets available to creditors in a bankruptcy case creditors are required to file a proof of claim to prove how much they are owed and how they calculate how much they are owed at the time the bankruptcy case is filed. Creditors must prove their claims with evidentiary support. If a claim is filed and the applicable state law statute of limitations has expired at the time the bankruptcy case is filed there are grounds to object to the allowance and payment of the claim. Who objects to the claim is a matter up for argument even though Midland Funding, LLC v. Johnson, 137 S. Ct. 1407, 1410–11 (2017) provides it is a chapter 13 trustees duty to objection to the claim. I digress. This case is a chapter 7 case and here the bankruptcy attorney for the debtor is making the objection to the filed claim.
Facts of This Appeal
In this particular case the facts are as follows. The debtor/bankruptcy filers filed for chapter 7 protection and then received their discharge. The chapter 7 case was then properly closed given there were no assets for the benefit of their creditors and normally that is that. In this case the debtors four and one half years later requested the reopening of their chapter 7 case because of a pre-filing potential personal injury or products liability cause of action. See the bankruptcy estate includes potential causes of action that arose prior the bankruptcy case being filed. At the time they filed the debtors were not aware of the potential claim or claim. This to me sounds like some sort of issue that arose four and a half years later due to some sort of surgery. The surgery took place prior to the chapter 7 case being file but at that time there was no known issue with the surgery. After the chapter 7 was closed and discharge , four and a half years go by, and then a problem arises resulting from the pre-petition surgery. I do not agree with how this goes down given the bankruptcy filers could not have known about the issue until four and a half years later, but the surgery, if that was the cause, was in fact prior to the bankruptcy case being filed.
So the bankruptcy filers in this case properly notified their bankruptcy attorney and then reopened their chapter 7 case and the chapter 7 trustee was reappointed to administer the bankruptcy estate that now had funds to disburse to creditors. A notice for creditors to file proof of claims is then mailed out with a deadline to file the proof of claim.
Creditor Quantum3 Group, LLC, as agent for Moma Funding, LLC, filed the proof of claim in question for this appeal totaling $832.30. The debtors allege in their objection to the claim that the California four year statute of limitations pursuant to CCP Section 337 had run given when they reopened the bankruptcy case even though they admit the statute of limitations had not expired at the time the original bankruptcy case was filed. The applicable statute of limitations for breach of contract in California is four years…… When a bankruptcy case is filed the automatic stay takes effect stopping any and all collection activity. Pursuant to CCP Section 356 the statute of limitations stopped and/or tolled upon the filing of a bankruptcy since the creditor is not able to pursue collection activity or enforce their claim against the debtor anymore. The debtors in this case argued that once the chapter 7 was discharged and closed there was no longer any automatic stay so the statute of limitations started to run again. So they objected to all but one of the claims filed in the reopened chapter 7 case as not legally enforceable because the statute of limitations had expired on the enforceability of the underlying debt. The lower bankruptcy court did not agree and overruled the objection to the claim.
Strange Appeal and Argument
Here is what I know. This is a strange appeal and issue to have appealed. There are not a lot of chapter 7 bankruptcy cases that are reopened so many years later for this issue to come up on a regular basis. That said, if the debtors argument is valid what would be the point of ever reopening a chapter 7 case if four years has elapsed to administer recently discovered assets? None of the claims at the time the original case was filed would ever be valid due to the statute of limitations expiring. Keep in mind I am discussing the California statute of limitations for breach of contract that is four years since that is what the claim in the appeal was for. Other claims and different states have different time periods for statute of limitations.
I will place this disclaimer on this article given I hate being Monday morning quarterbacked. Many people and the mass media love to just take a little part of the story to base some sort of opinion on a person or circumstance then crucify that person filling in the gaps with assumptions. Attorneys are particularly vulnerable to this given we cannot divulge or discuss all information to provide the entire picture to ensure not violating the attorney client privilege and duty of confidentiality. So if you are reading this, and you know who you are, you have never picked the ball up in a real game. You have never played a single down. You have never earned a penny representing another human being in any matter period under the law. You do not know. So as not to be a hypocrite I dug deeper and looked up the underlying case to try and decipher the mystery of objecting to a $832.30 claim.
Deeper Dig into This Case and Appeal
So it turns out the debtors filed objections to all claims filed in the reopened chapter 7 case except for one claim and with the objections to claims served discovery demands with the filing of the objections to claims. This is particularly nasty and answering discovery demand is time consuming and expensive. There will be more about the discovery demands later.
Creditors Discover Bank and Atlas Acquisitions just rolled over and withdrew their claims entirely. Capital One Bank opposed the objection to their claim totaling $223.02 arguing exactly what the bankruptcy court and Ninth Circuit Bankruptcy Appellate Panel held; the statute of limitations was stopped or tolled first by the filing of the bankruptcy case and then by the order of discharge. The last transaction on the Capital One Bank account occurred in September 2011 and the four year California statute of limitations began on September 13, 2011. Capital One Bank’s opposition to the objection to claim correctly points out that if in fact the statute of limitations does expire, as the debtors argue in this case, then bankruptcy filers could game the system and be rewarded for filing for bankruptcy protection, concealing assets until the statute of limitations expires, then reopen the bankruptcy case to list the assets arguing mistake, and there would be no valid claims to pay…… Ultimately Capital One Bank rolled over and withdrew their claim totaling $223.30……..
Now we come to Quantum3, LLC, as agent for Moma Funding, LLC. They were having none of this. Quantum3, LLC, was served on the same day the debtors filed the claim objection discovery that included 12 interrogatories, 13 document requests and 12 requests for admission. The filing of the objection to claim and simultaneously servicing discovery seems excessive and Quantum3, LLC requested sanctions. The bankruptcy court first overruled the debtors’ objection to claim and then awarded sanctions to Quantum3, LLC. Of course there is nothing in the appeal about this and this is important context. The debtors objected to all but one claim and served excessive discovery requests along with the objections to claim. This is clear vexatious litigation tactics that have nothing to do with the merits of an argument. It worked on most of the creditors. The bankruptcy court also noted that none of the served discovery requests would or could even resolve the issues raised in the objection to claim as there was no real dispute as to the various facts of the filed claim …. “It is also important to note that part of the basis for asking for sanctions regarding Discovery is that the Discovery requests were part and parcel of the highly frivolous and meritless Objection to Claim proceeding. As the Court will recall, the Debtor’s argument on the Objection to Claim was that the “Discharge Injunction” was not an Injunction that stayed the running of the Statute of Limitation; an argument so lacking in merit it is difficult to believe it could be made with a straight face. Forcing Creditor to hire counsel to respond to discovery regarding such a nonsense argument was part of the grounds for the Motion for OSC, and necessary for the sanctions request as to discovery.” Ouch. I would not be surprised if Quantum3, LLC, requested attorneys’ fees and costs regarding this appeal pursuant to Federal Rule of Appellate Procedure 38, which provides: If a court of appeals determines that an appeal is frivolous, it may, after a separately filed motion or notice from the court and reasonable opportunity to respond, award just damages and single or double costs to the appellee. 28 U.S. Code § 1912 is a little different, it provides for damages and costs on affirmance where a judgment is affirmed by the Supreme Court or a court of appeals, the court in its discretion may adjudge to the prevailing party just damages for his delay, and single or double costs. FRAP 38 can provide damages without the showing of delay, just frivolousness.
