In re Delloso

72 F.4th 532

IN RE: Louis N. DELLOSO, Debtor Strategic Funding Source, Inc. d/b/a Kapitus, Appellant

No. 22-2532

United States Court of Appeals, Third Circuit

Argued on April 25, 2023

Filed: July 10, 2023

On Appeal from the United States Bankruptcy Court for the District of Delaware (D.C. No.: 16-10832), Bankruptcy Judge: Hon. Craig T. Goldblatt

Matthew Beebe, Meluney Alleman & Spence, 1143 Savannah Road, Suite 3-A, Lewes, DE 19958, James M. Sullivan [ARGUED], Windels Marx Lane & Mittendorf, 156 W. 56th St., New York, NY 10019, Counsel for Appellant

Kasey H. DeSantis [ARGUED], Neal J. Levitsky, Fox Rothschild, 919 N. Market Street, Suite 300, Wilmington, DE 19801, Counsel for Appellee

Before: KRAUSE, BIBAS and RENDELL, Circuit Judges.

OPINION OF THE COURT

RENDELL, Circuit Judge.

Appellant Strategic Funding Source, Inc. d/b/a Kapitus appeals the Bankruptcy Court's denial of Kapitus's motion to reopen the chapter 7 bankruptcy case of Louis N. Delloso more than five years after the Bankruptcy Court closed the case. Kapitus, one of Delloso's creditors, sought to reopen his bankruptcy case to challenge the dischargeability of Delloso's debt, as Kapitus believes that, before petitioning for bankruptcy, Delloso fraudulently transferred assets that should have been part of the bankruptcy estate to a company that he owns and operates today.

The Bankruptcy Court declined to reopen the proceedings for two reasons. First, it was clear that any complaint to assert that the debt was dischargeable or to revoke the dischargeability of the debt would be untimely under applicable bankruptcy rules, and the time could not be extended by equitable tolling. Second, assuming Kapitus's allegations were true, it could obtain appropriate and sufficient alternative relief by suing Delloso and his new company in state court, which Kapitus had already done in New York. We agree with the rigorous and well-reasoned opinion of the Bankruptcy Court, discern no error in its analysis, and find no abuse of discretion in its decision to deny the motion to reopen. We will affirm.

I.¹

In 2011, Kapitus agreed to purchase certain receivables from Greenville Concrete, a company owned, in part, by Delloso, for $909,775. Under this agreement, Greenville Concrete would deposit its receivables into a designated account for Kapitus's benefit. The parties continued under this agreement without incident until March 6, 2013, when Greenville Concrete failed to deposit certain receivables into the account. Kapitus responded by issuing a notice of default.

Unable to resolve the dispute without court intervention, Kapitus sued Greenville Concrete in New York state court for breach of contract. Later, the two entities reached a settlement whereby Greenville Concrete agreed to make weekly payments until reaching a set amount and, if Greenville Concrete were to default on this new agreement, Kapitus would be permitted to enter a judgment against Greenville Concrete and Delloso. Greenville Concrete defaulted and Kapitus obtained a state court judgment against Delloso and Greenville for $776,600.25.

On March 31, 2016, Delloso filed a chapter 7 voluntary bankruptcy petition in which he listed, among other debts, the $776,600.25 he owed to Kapitus. He also disclosed that his sole employer for the preceding three years was "Bari Concrete Construction." A85. As 11 U.S.C. § 341 required, the Bankruptcy Court scheduled the creditors' meeting for May 4, 2016, and notified the creditors that the "[l]ast day to oppose discharge or dischargeability" was July 5, 2016. A30.

On July 5, 2016, the bankruptcy trustee reported that the bankruptcy estate had no assets for distribution. Accordingly, the trustee "issued the standard notice" and explained that because this case was a "no-asset case," "creditors should not file proofs of claim unless and until it appeared that assets would be available for distribution." A3. As there were no assets for distribution, Kapitus did not file a proof of claim. And none of Delloso's creditors filed adversary complaints to oppose the discharge or the dischargeability of any debt. The next day, the Bankruptcy Court granted Delloso's discharge. On August 5, 2016, the Bankruptcy Court closed the case.

More than five years later, on November 15, 2021, Kapitus moved to reopen the case. Kapitus alleged that in late 2020, as it was "attempting to enforce the Judgment against Greenville, [it] learned that Bari," the company Delloso identified as his employer in his chapter 7 petition, "was a concrete construction business associated with [Delloso]." A125. Kapitus explained that it learned that "Bari used the same addresses previously associated with Greenville, was controlled by [Delloso] and appeared to operate as a mere continuation of Greenville." Id. Kapitus also explained that it had brought suit in New York state court against Bari Concrete seeking satisfaction of the $776,600.25 judgment against Greenville Concrete and relief under various state laws for, among other things, "fraudulent conveyance," "conversion," and "unjust enrichment." A126.

Kapitus urged the Bankruptcy Court to reopen Delloso's chapter 7 case to permit it to file an adversary complaint challenging the dischargeability of its debt under 11 U.S.C. § 523(a)(2), (4) and (6). Kapitus further urged that Delloso's transfer of assets from Greenville Concrete to Bari Concrete just before Delloso's filing of his chapter 7 petition was a fraudulent conveyance that rendered the $776,600.25 judgment a non-dischargeable debt.

In the alternative, it posited that even if the Bankruptcy Court were to conclude that its debt was dischargeable, the discharge of the debt should be revoked under 11 U.S.C. § 727(d)(1). Under § 727, a bankruptcy court "shall revoke a discharge . . . if . . . such discharge was obtained through fraud of the debtor, and the requesting party did not know of such fraud until after the granting of such discharge[,]" 11 U.S.C. § 727(d)(1), and provided that the request for revocation is made "within one year after such discharge is granted," 11 U.S.C. § 727(e)(1).

Finally, Kapitus urged the Bankruptcy Court to exercise its discretion under 11 U.S.C. § 350 to reopen the case for cause, reappoint a trustee, and administer a previously undisclosed asset—Delloso's purported ownership interest in Bari Concrete.

After oral argument, the Bankruptcy Court declined to exercise its discretion and reopen the long-closed case for two of the reasons that had been cited by the Bankruptcy Court for the District of Delaware in In re: New Century TRS Holdings, Inc., No. 07-10416 (BLS), 2021 WL 4767924, at *6-7 (Bankr. D. Del. Oct. 12, 2021).²

First, even if the Bankruptcy Court were to reopen the case, Kapitus could not obtain the relief it sought. Whether Kapitus filed a complaint to challenge the dischargeability of the $776,600.25 debt under § 523 or otherwise requested the revocation of Delloso's discharge under § 727(d)(1), its requests were "time-barred." A2. While Kapitus urged the court to apply equitable tolling to allow its claims for relief, the Bankruptcy Court concluded that applying that tolling to § 523 "would be inconsistent with the command of Rule 9006(b) stating that the time periods set out in Rule 4007(c) may be extended 'only to the extent and under the conditions stated in' the Rule." A14 (quoting Fed. R. Bankr. P. 9006(b)). Moreover, the claim under § 727(d) to revoke the discharge of the debt for fraud was foreclosed by Rule 9024. As the Court later noted, the upshot would be that "[p]ermitting equitable tolling would operate to extend the time limit under conditions not stated in the rule itself." A14. Such a result, the Court reasoned, would contradict the text of the timing rules that leave little room for flexibility and thus would not be permitted under the Supreme Court's decision in Nutraceutical Corp. v. Lambert, — U.S. —, 139 S. Ct. 710, 203 L.Ed.2d 43 (2019).

Second, the Court reasoned that there was "no need to reopen a long-closed bankruptcy case . . . because Kapitus may obtain relief in the New York Action." A23. The availability of an alternative forum in which to seek relief, thus, "counsel[ed] strongly against reopening [the] bankruptcy case." A23.

The Bankruptcy Court denied the motion to reopen. The parties then requested certification for immediate appeal to this Court because the appeal had the potential to "advance the progress of the case or proceeding" materially. A320. We granted the request.

II.

The Bankruptcy Court had jurisdiction under 28 U.S.C. §§ 157 and 1334. As we granted the parties' request for certification of immediate appeal, we have jurisdiction under 28 U.S.C. § 158(d)(2).

III.

A.

Kapitus styled its motion in the Bankruptcy Court as a "Creditor Motion for Order to (I) Reopen Debtor's Case Pursuant to Bankruptcy Code § 350(b) and Rule 5010 of the Federal Rules of Bankruptcy Procedure to Allow Creditor to File Complaint Seeking to Revoke the Debtor's Discharge as to Creditor's Claim Pursuant to Bankruptcy Code [§] 523(a) or Alternatively as to All Creditors Pursuant to Bankruptcy Code § 727(d)(1); (II) Alternatively, (A) Reopen Debtor's Case Pursuant to Bankruptcy Code § 350(b) to Administer a Previously Undisclosed Asset and (B) Direct the United States Trustee to Appoint a Bankruptcy Trustee; and (III) Grant Such Other Relief as the Court May Deem Just and Proper." A120.

As noted above, in determining whether to reopen the case, the Bankruptcy Court considered the factors outlined in New Century and relied on two of them when it decided to deny the motion. First, the Court looked to the sixth factor, which examines "whether it is clear at the outset that the debtor would not be entitled to any relief after the case were reopened." 2021 WL 4767924, at *7. It found that factor counseled against reopening. Kapitus does not challenge the propriety of considering this factor; instead, Kapitus urges that reopening is warranted to permit it...