Filice v. United States (In re Filice)

580 B.R. 259

IN RE: Gerald William FILICE, Debtor.

Gerald William Filice, Plaintiff,

v.United States, Defendant.

Case No. 10–47748

Case No. 15–29534

Adv. Pro. No. 17–02036

United States Bankruptcy Court, E.D. California.

Signed January 18, 2018

Gerald William Filice, Sacramento, California, pro se.

Boris Kukso, United States Department of Justice, Washington D.C., for Defendant United States.¹

Before: Christopher M. Klein, Bankruptcy Judge

This decision holds that the power under Federal Rule of Civil Procedure 60(a) to vacate discharges as clerical errors "whenever one is found"—here, six years later—is not constrained by the time limits specified in 11 U.S.C. § 727(e).

The debtor received two chapter 7 discharges within two years. This court entered the second discharge in mistaken disregard of the § 727(a) (8) ban on two chapter 7 discharges in cases filed within eight years. The error went undetected for six years until the debtor tried in a third case to enforce the second discharge while fighting a tax debt. The U.S. trustee incorrectly assumed that time limits for objecting to discharges under Federal Rule of Bankruptcy Procedure 4004(a) and for revoking discharges under 11 U.S.C. § 727 (e) precluded undoing the discharge. Not so.

Rule 4004 is invalid as a violation of the Bankruptcy Rules Enabling Act, 28 U.S.C. § 2075, to the extent it requires entry of a discharge contravening § 727(a) (8) if no objection is timely filed. The court has an independent duty to enforce § 727(a) (8).

The second chapter 7 case will be reopened and the mistaken discharge order vacated under Rule 60 (a). The power to vacate in this manner is confirmed by 11 U.S.C. § 105(a) as an order appropriate to carry out § 727(a) (8).

Facts

This is the fifth title 11 case that Gerald Filice, a self-represented and now-disbarred lawyer,² filed within seven years.³

The second, third, and fifth cases matter to the dispute now before the court. The first chapter 7 discharge was entered in No. 09–28543, filed April 30, 2009. In case No. 10–47748, filed October 19, 2010, a second chapter 7 discharge was entered. In the present fifth case, No. 15–29534, filed December 10, 2015, discharge is not being entered by virtue of § 727(a) (8).

Nobody questioned Filice's eligibility for second chapter 7 discharge in No. 10–47748. Nor did the U.S. trustee act when the issue was raised earlier in this case, incorrectly assuming that § 727(e) precluded correcting the mistake.

The United States Internal Revenue Service filed in this fifth case Proof of Claim 5–2 for $422,607.16 for tax years 1998 through 2006 and 2009 through 2015. The claim subdivides into: (1) secured claim for $48,180.23 assessed June 23, 2008, for tax year 2006 secured, per 26 U.S.C. § 6321, by all property of the debtor; (2) priority claim for $33,957.80 for tax years 2001 through 2015; and (3) general unsecured claim for $340,469.13 for tax years 1998 through 2005 and 2009 through 2010.

One asset of the present chapter 7 estate is a personal injury cause of action claimed as exempt under state law "up to any applicable statutory limit" that the trustee and Filice jointly agreed to settle for $49,000.00, with $10,000.00 allocated to the estate and $39,000.00 to Filice as exempt.

When the IRS objected to release of exempt funds to Filice based on its asserted secured status in those funds under 26 U.S.C. § 6321 for a the tax assessed June 23, 2008, Filice filed this adversary proceeding to challenge the IRS' secured status.

Filice reasons that the discharge in the second case, filed October 19, 2010, destroyed secured status for a tax assessed June 23, 2008, based on his dubious construction of 11 U.S.C. § 523(a) (1) (A), the 240–day provision in § 507(a) (8) (A), and the § 507(a) (8) hanging paragraph as enacted in 2005. His premise is that the tax was assessed more than 330 days (240 days, plus 90 days) before filing the second case.⁴

The United States having suggested that the second discharge was invalid in light of § 728 (a) (8), the court sua sponte raised during trial the question of whether the second discharge should be vacated as a clerical mistake per Rule 60(a). Afforded an opportunity to defend the validity of the second discharge, Filice said only that he had not "requested" the first discharge and conceded that the IRS is secured by his exempt proceeds if the first discharge entered in No. 09–28543—takes precedence.

Findings of fact and conclusions of law were rendered orally on the record at the conclusion of trial.

Procedure

This adversary proceeding names as defendants the United States on behalf of the IRS, the chapter 7 trustee, and the other parties settling the tort action. But the debtor seeks relief, and the trial proceeded, only as between the debtor and the IRS.

Jurisdiction

Federal subject-matter jurisdiction is founded on 28 U.S.C. § 1334. This is a core proceeding that a bankruptcy judge may hear and determine. 28 U.S.C. § 157(b) (I) & (K).

Analysis

The chapter 7 discharge that the debtor received in his 2009 case made him categorically ineligible, by virtue of 11 U.S.C. § 727(a) (8), for the chapter 7 discharge that was entered in his 2010 case. The prohibition is absolute. The mistake is beyond cavil. The problem is how to correct it.

This court first addressed mistaken discharges issued to categorically ineligible debtors in 1993. Wetherbee v. Willow Lane, Inc. (In re Bestway Prods., Inc.), 151 B.R. 530, 534 (Bankr. E.D. Cal. 1993), aff'd, 165 B.R. 339 (9th Cir. BAP 1994) (chapter 7). The Ninth Circuit soon agreed. Cisneros v. United States (In re Cisneros), 994 F.2d 1462, 1465–67 (9th Cir. 1993) (chapter 13). That analysis retains vitality.

I

The chapter 7 discharge is a routine order clerical or ministerial in nature subject to Rule 60(a) correction. In re Johnson, 564 B.R. 653, 656–57 (E.D. Cal. 2017) ; Fed. R. Civ. P. 60(a), incorporated by Fed. R. Bankr. P. 9024.⁵

A

Under § 727(a), the court "shall" enter a discharge in a chapter 7 case unless one of twelve disqualifying conditions specified in § 727(a) applies. 11 U.S.C. §§ 727(a) (1)–(12).

The verb "shall" connotes a presumption favoring discharge and, except for categorical ineligibility, necessitates objection and proof by preponderance of evidence of the disqualification in an objection-to-discharge proceeding, with the objector bearing the risk of nonpersuasion. Fed. R. Bankr. P. 4005.

Three of the disqualifying conditions are categorical conditions of ineligibility.⁶ They are purely formal and based on objective facts.⁷

The facts dispositive of categorical ineligibility for chapter 7 discharge under §§ 727(a) (1), (a) (8) and (a) (10) are subject to judicial notice. They are facts that are not subject to reasonable dispute and can be accurately and readily determined from sources whose accuracy cannot reasonably be questioned. Fed. R. Evid. 201(b) (2).

Court records establish whether a debtor is an individual, or has received a chapter 7 discharge in a case filed within eight years before the date of filing the petition, or has a court-approved written waiver of discharge executed after the order for relief. 11 U.S.C. §§ 727(a) (1), (a) (8) & (a) (10).⁸

As the task entails a binary yes-no analysis of court records, the adversarial process serves merely to call to the court's attention a disqualifying condition. While the court is grateful for the assistance, it has an independent duty to assure itself that discharge orders do not offend §§ 727(a) (1), (a) (8) and (a) (10). In re Hiatt, 312 B.R. 150, 151 (Bankr. S.D. Ohio 2004) ; Cf., United Student Aid Funds v. Espinosa, 559 U.S. 260, 278, 130 S.Ct. 1367, 176 L.Ed.2d 158 (2010) (Independent duty re chapter 13 confirmation).

The adversarial process does not assist in determinations regarding the categorically forbidden discharges because the relevant facts are matters of record susceptible of judicial notice. Whether there has been a prior discharge, whether the debtor is an individual, and whether the debtor has filed a waiver of discharge, which waiver the court has approved, are all matters of public record. The language of the statute indicates that inaction by creditors or trustees does not qualify debtors for discharges that cannot, as a matter of law, be entered.

It is contrary to the Bankruptcy Code to grant a chapter 7 discharge to a categorically ineligible debtor—i.e., debtor not an individual, discharge within eight years, and written waiver of discharge. Those discharges are not supposed to be entered regardless of whether there is an actual objection to discharge.

In contrast, the grounds for denial of chapter 7 discharge under §§ 727(a) (2) through (a) (7) are all on account of blameworthy conduct, proof of which are quintessential subjects for the adversarial process. They turn on proof of contingent facts focused on the debtor's motives or conduct, that are not susceptible of judicial notice and as to which defenses are available. 11 U.S.C. §§ 727(a) (2) – (a) (7).⁹

a

Denial of discharge under §§ 727(a) (2) through (a) (7) requires adversary proceedings objecting to discharge for which creditors, the chapter 7 trustee, and the United States trustee, but not other parties in interest, have statutory standing. Fed. R. Bankr. P. 4004 (a) ; 11 U.S.C. § 727 (c).¹⁰

Those objections to discharge are subject to the nonjurisdictional limitations period prescribed by the inflexible claim processing rules of Rules 4004(a) and (b). Fed. R. Bankr. P. 4004(a)-(b) ; Kontrick v. Ryan, 540 U.S. 443, 455–56, 124 S.Ct. 906, 157 L.Ed.2d 867 (2004).

Consistent with the presumption in favor of discharge, the objector bears the burden of proof by preponderance of evidence and correlative risk of nonpersuasion. Fed. R. Bankr. P. 4005 ; Grogan v. Garner, 498 U.S. 279, 289, 111 S.Ct. 654, 112 L.Ed.2d 755 (1991) (preponderance).

The facts pertinent of those objections to discharge are not readily ascertainable from inspection of the record and, instead, require the court to...