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Creditors Cannot Benefit from Trustee and Debtor's Stipulation to Extend Deadline for Filing a Nondischargeability Complaint

Creditors who wish to object to the dischargeability of a debt must follow strict deadlines - and as one recent case illustrates, creditors cannot rely on an extension of those deadlines that is agreed upon by the debtor and the trustee.

In Five Star Laser, Inc., the District Court for the Eastern District of Michigan upheld Judge Rhodes' decision granting a debtor's motion to dismiss a nondischargeability complaint as untimely and holding that a stipulation entered into by the debtor and the bankruptcy trustee to extend the deadline for filing a nondischargeability complaint applied to the trustee only.

The District Court rejected the plaintiffs' argument that the stipulated order extending the deadline to file a nondischargeability complaint was ambiguous.  The Court noted that any ambiguity that may exist in a bankruptcy court order does not automatically entitle the aggrieved party to relief and that a reasonable interpretation by the court of its own order should stand.  The District Court referred to Rule 4007(c) and noted that the plaintiffs failed to meet the notice and cause requirements for the allowance of a general extension.  The District Court noted that the language of the first five paragraphs of the order could be construed to apply to creditors; however, the surrounding circumstances did not indicate that the stipulated order was supposed to provide a general extension.  Contrarily, the last paragraph of the stipulated order explicitly and unambiguously provided that the deadline extensions applied to the trustee only.

The Court further noted that a creditor has a duty to protect its interest in the debt it is owed, and if any ambiguity exists in a court order, the creditor must seek clarification.  The Court noted that in some instances a court will allow complaints to determine dischargeability to be filed late, but only where the bankruptcy court has explicitly misled creditors by setting an incorrect date.  The Court rejected the plaintiffs' argument that a PACER recordation that the "Objection to Discharge" was due on July 14, 2010 misled the plaintiffs.  The Court reasoned that any information recorded on PACER does not give rise to the level of "explicit court error" and the plaintiffs' reliance on the recordation was unreasonable.  Moreover, the Court noted that an "Objection to Discharge" refers to a complaint objecting to the overall discharge of the debtor's debts, not the particular dischargeability of a debt, such as the complaint here.  Therefore, on its face, the recordation did not even apply to the type of complaint filed by the plaintiffs.  In addition, there was a docket entry on PACER that noted "Deadlines Updated FOR TRUSTEE ONLY."  The plaintiffs did not refute the existence of this docket entry in their appeal.

Finally, the District Court affirmed that the bankruptcy court did not error in holding that the equitable defenses of waiver, equitable tolling, and equitable estoppel did not apply.  The Court noted that when parties fail to act diligently, they cannot invoke equitable principles to excuse their lack of diligence.  The plaintiffs failed to read the entire stipulated order, failed to heed warning of the May 26 PACER entry, or to inquire into the stipulated order's applicability to them - particularly in light of Rule 4007(c)'s requirements of notice and cause to grant a general extension.

Simply, creditor attorneys must be aware that a stipulation between the trustee and the debtor to extend deadlines may not apply to creditors, and therefore, creditors should not rely on such stipulations.

Categories: Eastern District of Michigan

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