Cite as: Keith M. Lundin, Lundin On Chapter 13, § 161.2, at ¶ ____, LundinOnChapter13.com (last visited __________).
11 U.S.C. § 1328(e) carefully circumscribes revocation of discharge in a Chapter 13 case:
On request of a party in interest before one year after a discharge under this section is granted, and after notice and a hearing, the court may revoke such discharge only if—
(1) such discharge was obtained by the debtor through fraud; and
(2) the requesting party did not know of such fraud until after such discharge was granted.
An action to revoke a Chapter 13 discharge is an adversary proceeding under Part VII of the Bankruptcy Rules, commenced by filing a complaint.1 It has been held that revocation of discharge is a discrete statutory remedy for defrauded creditors—that the plaintiff failed to object to confirmation is not fatal to a later complaint to revoke discharge.2
The similar language for revocation of an order of confirmation in § 1330(a) has been interpreted to require proof of actual fraud of the common-law variety.3 Chapter 7 cases discussing the similar language in § 727(d)(1) also adopt the rigorous common-law standard.4 The fraud must be directly attributable to the debtor. For example, when the debtor completed payments under the plan without distributions to creditors because no creditor filed a timely proof of claim, revocation of discharge under § 1328(e) was inappropriate—the debtor was guilty of no misconduct.5
There are very few reported decisions addressing revocation of discharge under § 1328(e). The remedy is rarely seen. Perhaps the only disagreement in the sparse case law concerns whether Bankruptcy Rule 9024 is available to provide relief from an order of discharge under circumstances other than the fraud required by § 1328(e).
Bankruptcy Rule 9024 incorporates Rule 60 of the Federal Rules of Civil Procedure. Rule 60(a) permits relief from a judgment or order based on “clerical mistakes . . . and errors . . . arising from oversight or omission.” Rule 60(b) permits relief from a final judgment or order for mistake, inadvertence, surprise, excusable neglect, newly discovered evidence, fraud, misrepresentation, misconduct of an adverse party and “any other reason justifying relief from the operation of the judgment.” Motions for relief from an order under Rule 60(b) must be filed within a reasonable time and not more than one year after the order involved for many of the reasons listed immediately above.
Bankruptcy Rule 9024 is prefaced that Rule 60 of the Federal Rules of Civil Procedure applies in bankruptcy cases “except that . . . a complaint to revoke a discharge in a chapter 7 liquidation case may be filed only within the time allowed by section 727(e) of the Code.”6 It is curious that the rules drafters explicitly conditioned the application of Rule 60 for revocation of discharge in Chapter 7 cases, but made no mention of revocation of discharge in Chapter 13 cases under § 1328(e). This incongruence suggests that the rules makers contemplated that Rule 60 is applicable to discharge orders in Chapter 13 cases. That Bankruptcy Rule 9024 also takes exception to Rule 60 that a complaint to revoke an order confirming a plan “may be filed only within the time allowed by . . . § 1330”7 is further support for the argument that Rule 60 is not disabled with respect to discharge orders in Chapter 13 cases.
But the grounds for relief and the time periods in Rule 60 are different than in § 1328(e). Rule 60 is both broader and longer: most of the grounds for relief from a judgment in Rule 60(b) are available for up to one year after entry of the order; the grounds under Rule 60 include many circumstances other than fraud described in § 1328(e).
It can be argued that the limited statutory ground for revocation of an order of discharge in § 1328(e) precludes use of a rule of procedure to enlarge that relief. The reported decisions are split.
In Cisneros v. United States (In re Cisneros),8 the U.S. Court of Appeals for the Ninth Circuit held that § 1328(e) does not preclude use of Bankruptcy Rule 9024 to set aside an order of discharge in a Chapter 13 case for “mistake.” The confirmed plan in Cisneros called for payment in full of the IRS. The IRS timely filed a proof of claim, but “for reasons that remain obscure” the Chapter 13 trustee did not receive that proof of claim from the clerk of the bankruptcy court. As a result, the debtor’s plan was paid in full in 16 months and a full-payment discharge was entered under § 1328(a). Eight months later, the IRS moved to reopen and to vacate the order of discharge. The Ninth Circuit held that the entry of discharge before the debtors completed payment of the IRS was a mistake that could be remedied under Bankruptcy Rule 9024:
Section 1328(e) therefore does not conflict with Rule 9024. . . . A Chapter 13 debtor’s right to have his discharge revoked only for fraud . . . is in no way infringed when a court vacates an order of discharge entered by mistake. . . . The order of discharge was entered by the bankruptcy court under a misapprehension as to the facts of the case. Had the court been apprised of the actual facts, it would never have entered the order. . . . [T]his is precisely the sort of “mistake” or “inadvertence” that Rule 60(b) was intended to reach. Since “no intervening rights have become vested in reliance on the order,” . . . there is no obstacle to the bankruptcy court’s invocation of the rule to correct itself.9
Several courts have worked hard to distinguish Cisneros and to limit the use of Rule 60 as a route around § 1328(e). In Nissan Motor Acceptance Corp. v. Daniels (In re Daniels),10 the confirmed plan provided for payment to secured claim holders of the lesser of “the amount of their claim or . . . the value of their collateral.”11 The plan listed Nissan Motor Acceptance with collateral valued at $11,000. By mistake, Nissan filed a proof of claim listing the amount owed as “$0.00.” The confirmed plan was paid in full, and a discharge order was entered.
One year and four months after discharge, Nissan realized its mistake and filed a motion to reopen the case under § 350(b) and for relief from the discharge order under Rule 60(b). Nissan conceded that the debtor’s discharge was not fraudulently obtained under § 1328(e); however, Nissan argued that Cisneros supported revocation of discharge on the ground of mistake. The bankruptcy court disagreed:
Cisneros [v. United States (In re Cisneros), 994 F.2d 1462 (9th Cir. 1993)] . . . should not be read to mean that FRCP 60(b) can be freely used to vacate discharges. The Cisneros decision simply reaffirms that a court has the “inherent power to correct its own clerical errors.” . . . In this case, however, the mistake that Nissan contends would permit revocation would be a mistake made by Nissan, not the court. There was no misapprehension about the facts. The trustee was aware of the $0.00 proof of claim. The only possible mistake was Nissan’s failure to list the proper amount in its proof of claim. . . . FRCP 60(b) does not provide authorization for revoking an order of discharge on grounds of mistake as asserted in this case.12
In In re Puckett,13 the debtor scheduled the IRS as a creditor with a claim of zero. The IRS had notice and did not object to confirmation of the plan that provided no payment to claim holders that failed to timely file proofs of claim. The IRS failed to timely file a proof of claim. The debtor completed payments under the plan, discharge was entered and the case closed. Seven months after discharge, the IRS moved to reopen and to vacate the discharge order, citing Cisneros. The bankruptcy court distinguished Cisneros: “Here, in contrast, there was no mistake in the entry of the discharge order. Under the plan, as confirmed, the debtor did make all of the required payments. The discharge order, therefore, can only be vacated if the order of confirmation is vacated.”14 The order of confirmation could not be vacated because the IRS alleged no fraud.
Along the same lines, the debtor in United States v. Trembath (In re Trembath)15 won the battle with Cisneros but lost the discharge war with the IRS. The debtors in Trembath were controlling persons in closely held corporations that failed to remit employment taxes. The debtors filed Chapter 13 cases listing the IRS as a creditor, but the schedules and statement failed to reveal the corporations and lack of notice disabled the IRS to connect the debtors to the unpaid corporate withholding taxes. The confirmed plans provided for full payment of priority claims. The IRS did not know to file proofs of claim. The plans were paid in full, and discharges were entered. More than a year later, the IRS sought relief from the discharge orders under Rule 60.
Distinguishing Cisneros, the bankruptcy court rejected the government’s argument for Rule 60 relief: “Since Rule 60(b) conflicts with an express provision of the Bankruptcy Code (§ 1328(e)), most courts have limited . . . its holding to a court’s ‘inherent power to correct its own clerical errors.’ . . . Rule 60(b) should not be generally applied to vacate discharge orders and . . . Cisneros should be limited to its facts.”16 The bankruptcy court refused to vacate the discharge orders, but the court held that the debtors had failed to “provide for” the claims of the IRS because notice of the withholding tax claims was inadequate. Accordingly, the withholding tax claims were not discharged by § 1328(a) at the completion of payments under the plans.17
Daniels, Puckett and Trembath seem to be on the right track. Bankruptcy Rule 9024 is a rule of procedure. It should not be interpreted in derogation of the strict statutory requirements for revocation of discharge in § 1328(e).
Lack of notice is a special problem in Chapter 13 cases that invites a carefully crafted solution. Perhaps there needs to be a remedy at discharge for mistakes and defects in notice that fall short of the fraud described in § 1328(e). But a remedy based on Bankruptcy Rule 9024 disrespects the special finality of the discharge order Congress embodied in § 1328(e). Not unlike the amorphous “due process” and procedural limitations on confirmation recognized in some reported decisions,18 any nonstatutory exception to discharge invites uncertainty and nonuniformity into a vital aspect of Chapter 13 practice.19 There is need for careful development of jurisprudence in this area.
1 Fed. R. Bankr. P. 7001(4). See In re Rodgers, 180 B.R. 504 (Bankr. E.D. Tenn. 1995) (“Motion to Vacate Order of Discharge” was denied without discussion of § 1328(e). Section 1327 and res judicata preclude relief requested. Creditor’s counsel received adequate notice, and failure to object to confirmation is fatal.).
2 See In re Wolff, 175 B.R. 27, 29 (Bankr. E.D. Ark. 1994) (It is appropriate to reopen Chapter 13 case after discharge to permit the United States to file a complaint to determine the dischargeability of its claim and to seek revocation of discharge on the ground of insufficient notice. It is not fatal to the government’s motion that the United States failed to object to confirmation. “Revocation of discharge is independent of any creditor’s objection to treatment in a plan, and based upon fraudulent conduct of the debtor rather than any plan provision.”).
3 See § 224.1 [ Revocation of Confirmation ] § 117.3 Revocation of Confirmation.
4 See, e.g., Dobnicker v. Albers (In re Albers), 80 B.R. 414, 417 (Bankr. N.D. Ohio 1987); Artinian v. Peli (In re Peli), 31 B.R. 952, 955 (Bankr. E.D.N.Y. 1983); Wendel v. Daugherty (In re Daugherty), 14 B.R. 1, 2 (Bankr. S.D. Fla. 1981).
5 In re Stern, 70 B.R. 472 (Bankr. E.D. Pa. 1987).
6 Fed. R. Bankr. P. 9024.
7 See §§ 223.1 [ Relief from Confirmation Order: Bankruptcy Rules 9023 and 9024 ] § 117.2 Relief from Confirmation Order: Bankruptcy Rules 9023 and 9024 and 224.1 [ Revocation of Confirmation ] § 117.3 Revocation of Confirmation.
8 994 F.2d 1462 (9th Cir. 1993).
9 994 F.2d at 1466–67. Accord Midkiff v. Dunivent (In re Midkiff), 271 B.R. 383, 386 (B.A.P. 10th Cir. 2002) (Applying Cisneros v. United States (In re Cisneros), 994 F.2d 1462 (9th Cir. 1993), Bankruptcy Rule 9024 is available to vacate Chapter 13 discharge when tax refund was received after trustee certified completion of payments and refund should have been distributed to creditors under the plan. “[T]he court was not aware of all the facts, i.e., that the Debtors were entitled to a tax refund for the 2000 tax year prior to the entry of the Debtors’ discharge. This is the kind of mistake contemplated by Rule 60(b).”), aff’d, 342 F.3d 1194, 1196–99 (10th Cir. 2003) (“Rule 9024 of the Federal Rules of Bankruptcy Procedure may be used to provide relief from a bankruptcy discharge order. . . . [R]evocation involves far more than temporarily setting aside a discharge. ‘[R]evocation of discharge . . . has the same effect as a denial of discharge.’ . . . [W]hen a court grants relief under Rule 60(b), the discharge is not ‘revoked’ but is simply altered to provide limited relief as appropriate under the circumstances.”); Walker v. IRS (In re Walker), No. CIV 02-2504-PHX-SMM, 2003 WL 22474836 (D. Ariz. Sept. 26, 2003) (unpublished) (Seven years after order discharging taxes in a Chapter 13 case, IRS is entitled to relief under Rule 60(b)(4) because the debtor failed to properly serve the IRS. Applying Bankruptcy Rule 7004(b)(5), the debtor served the IRS at the wrong local address, the debtor never served the Office of the United States Attorney for the district in which the Chapter 13 case was pending and the debtor never served the Attorney General of the United States in Washington, D.C.); In re Ruehle, 296 B.R. 146, 157–58 (Bankr. N.D. Ohio 2003) (Discharge is vacated 18 months after entry under Rule 60(b)(4) based on holding that student loan discharge provision in confirmed plan was void for lack of due process. “A court may grant relief from a judgment that is void pursuant to Fed.R.Civ.P. 60(b)(4). . . . Whether a judgment is void hinges on whether due process was violated . . . . The procedure to discharge a student loan is clearly set out in the Bankruptcy Code and Rules and Debtor’s failure to follow the process violated ECMC’s right to due process of law. . . . The notice ECMC received apprised it of plan confirmation not student loan dischargeability. Plan confirmation is of little consequence to student loan creditors. . . . The Ninth and Tenth Circuits failed to evaluate the due process concerns of a ‘discharge by declaration’ plan provision.”), aff’d, 307 B.R. 28 (B.A.P. 6th Cir. 2004) (Discharge by declaration denied student loan creditor due process and is appropriately corrected by relief from the discharge order under Bankruptcy Rule 9024.); In re Tyler, 285 B.R. 635, 637, 638–43 (Bankr. W.D. Tex. 2002) (Applying Fed. R. Civ. P. 60(b)(4), discharge order that failed to make exception for nondischargeable student loans is void. “This Discharge Order did not contain the language it should have excepting the Debtor’s student loans from discharge in accordance with then existing law as the Chapter 13 Trustee had neglected to change the form he was using. . . . Although Rule 60(b) motions must be made ‘within a reasonable time’ the Eleventh Circuit has held that there is no time limit for bringing a motion under Rule 60(b)(4) . . . to relieve a party from a final order where a judgment is void. . . . The law in effect at the time this Debtor’s bankruptcy petition was filed did not provide for the discharge of Debtor’s student loans absent an adversary proceeding by the Debtor. This Debtor has never filed an adversary proceeding requesting discharge of his student loans. Thus ECMC had no notice prior to entry of this Discharge Order that this Debtor’s student loans would be discharged. This Court therefore concludes that the Discharge Order is void as to ECMC because ECMC did not have notice and a meaningful opportunity to be heard prior to the discharge of Debtor’s student loan.”); Pearson v. United States Dep’t of Educ. (In re Pearson), 279 B.R. 612, 617 (Bankr. M.D. Ga. 2002) (On remand, applying Fed. R. Civ. P. 60(b)(4), student loan creditor’s motion for relief from discharge order is granted because debtor did not file an adversary proceeding to determine whether repayment of her student loan was an undue hardship. Court used form order that purported to discharge student loans notwithstanding repeal of the “sunset” provision with respect to the dischargeability of student loans. “[T]he Court’s discharge order is void as to Defendant because Defendant did not have notice and a meaningful opportunity to be heard prior to the discharge of Plaintiff’s student loan.”); In re Avery, 272 B.R. 718, 731 (Bankr. E.D. Cal. 2002) (Applying Cisneros v. United States (In re Cisneros), 994 F.2d 1462 (9th Cir. 1993), discharge vacated under Rule 60(b)(1) when creditor filed timely proof of claim that failed to state an amount due and creditor received no payments under 100% plan because trustee “misinterpreted” the proof of claim as a demand for “0.00.” Failure to notice all creditors of the final report was fatal to entry of discharge. Because the trustee “misinterpreted AIF’s proof of claim” the trustee “erroneously concluded that the debtors had completed their plan.” The court “erroneously issued a discharge and closed the case even though AIF did not have an opportunity to complain that it had not been paid.”); In re Smith, 142 B.R. 862 (Bankr. E.D. Ark. 1992) (Complaint to revoke discharge is treated as a motion for relief from an order pursuant to Bankruptcy Rule 9024. IRS is granted relief from confirmation order and from discharge order when IRS filed a claim for $36,534.84, but the Chapter 13 trustee erroneously interpreted the confirmed plan to reduce that claim to $12,177.06. IRS became aware of the claim reduction only after discharge was entered.). See also In re Mosby, 244 B.R. 79, 90 (Bankr. E.D. Va. 2000) (At conversion to Chapter 13 after discharge in a Chapter 7 case, debtor has standing to seek relief from the discharge order, but relief will rarely be appropriate. “This court concurs with the reasoning in [Cisneros v. United States (In re Cisneros), 994 F.2d 1462 (9th Cir. 1993),] and [In re Jones, 111 B.R. 674 (Bankr. E.D. Tenn. 1990),] and concludes that relief in the form of an order vacating a chapter 7 discharge may potentially be granted on motion of a debtor under Rule 60(b). . . . Rule 60 functions as a safety valve to prevent miscarriages of justice and would seldom, if ever, be appropriate simply because a litigant changes his or her mind. . . . [I]t would be a rare instance where the debtor can show, after the discharge is granted, that it was entered as a result of mistake, inadvertence, surprise, or excusable neglect. . . . No evidence has been offered that the discharges in either case were entered as a result of inadvertence, mistake, surprise , or excusable neglect, either on the part of the court or on the part of the debtors. Rather, all that has happened is that the debtors have changed their minds and belatedly decided that they would be better off under chapter 13 than chapter 7.”).
10 163 B.R. 893 (Bankr. S.D. Ga. 1994).
11 163 B.R. at 895.
12 163 B.R. at 897.
13 193 B.R. 842 (Bankr. N.D. Ill. 1996).
14 193 B.R. at 847.
15 205 B.R. 909 (Bankr. N.D. Ill. 1987).
16 205 B.R. at 914.
17 The meaning of “provided for” in § 1328(a) is discussed in § 349.1 [ Claims Not Provided for by the Plan or Disallowed under § 502 ] § 158.5 Claims Not Provided for by the Plan or Disallowed under § 502. See also § 234.1 [ Failure to Provide For ] § 121.3 Failure to Provide For.
18 See § 233.1 [ Notice and Due Process Considerations, Including Claims Allowance and Valuation ] § 121.2 Notice and Due Process Considerations, Including Claims Allowance and Valuation.
19 See also § 349.1 [ Claims Not Provided for by the Plan or Disallowed under § 502 ] § 158.5 Claims Not Provided for by the Plan or Disallowed under § 502.