In Re: Andras Frankl

Background

Andras Frankl filed a voluntary Chapter 7 bankruptcy petition on May 2, 2018. The notice sent to creditors stated that the deadline to file a complaint objecting to dischargeability of a debt was August 6, 2018. Bankruptcy Rule 4007(c) requires such a complaint to be filed within 60 days after the first date set for the creditors’ meeting.

The creditors’ meeting was originally scheduled for June 7, 2018, but was later adjourned to August 21, 2018 so Frankl, who was incarcerated on second-degree grand larceny charges, could participate by telephone. Combined Resources Interiors, Inc. filed its adversary complaint on August 30, 2018—24 days after the stated deadline. The complaint sought a ruling that a $79,216.18 debt allegedly owed for construction work was not dischargeable in Frankl’s bankruptcy.

Bankruptcy Court Proceedings

Combined Resources moved for summary judgment. Frankl then filed a cross-motion for summary judgment, arguing for the first time that the complaint was untimely under Rule 4007(c). Although Frankl had not raised the defense in his answer or in a pre-answer motion, the Bankruptcy Court treated his cross-motion as a request to amend the answer.

On July 11, 2019, the Bankruptcy Court granted Frankl’s cross-motion for summary judgment, denied Combined Resources’s motion for summary judgment, and dismissed the adversary proceeding. It ruled that allowing Frankl to amend would not cause undue prejudice because discovery had not occurred and dismissal would speed resolution. It also denied equitable tolling, which is a court-created extension of a filing deadline in unusual circumstances. The Bankruptcy Court found that Combined Resources had not pursued its rights diligently and that no extraordinary circumstances justified relief. It did not decide the merits of Combined Resources’s request for summary judgment because the complaint was time-barred.

District Court Appeal

Combined Resources appealed, arguing that the Bankruptcy Court erred by allowing Frankl to raise the untimeliness defense and by refusing to extend the Rule 4007(c) deadline. The district court reviewed both issues for abuse of discretion, meaning it asked whether the Bankruptcy Court relied on an erroneous legal rule or made a decision outside the range of permissible choices.

The district court held that the Bankruptcy Court acted within its discretion in treating Frankl’s summary-judgment motion as a motion to amend his answer. The court explained that, although affirmative defenses generally must be stated in an answer, courts may allow an amendment when justice requires and when the opposing party would not suffer undue prejudice. Combined Resources would not face the type of prejudice recognized under Second Circuit law because no discovery had taken place, the amendment would not significantly delay the case, and the dismissal did not prevent it from bringing a timely action elsewhere.

The district court also held that the Bankruptcy Court properly refused equitable tolling. Combined Resources said it mistakenly believed the 60-day period ran from the date the creditors’ meeting occurred rather than from the date it was first scheduled. The district court concluded that this mistake did not show diligent pursuit of the claim, particularly because the bankruptcy notice clearly identified August 6, 2018 as the filing deadline. The court also rejected the argument that Frankl’s incarceration-related postponement of the meeting was an extraordinary circumstance, finding that any misunderstanding was not caused by Frankl. Combined Resources had not filed a defective complaint during the limitations period and had not requested an extension before the deadline expired.

Disposition

The district court affirmed the Bankruptcy Court’s decision. It therefore left in place the order granting Frankl’s cross-motion for summary judgment, denying Combined Resources’s motion for summary judgment, and dismissing the adversary proceeding. The Clerk was directed to close the case. Judge Ronnie Abrams did not decide whether the debt was substantively dischargeable.