In re Innerline Engineering, Inc.
In re Innerline Engineering, Inc., 6:21-bk-11349-WJ (Bankr. C.D. Cal. Mar. 31, 2021) Bankruptcy Court DENIED motion of bankruptcy debtor Innerline Engineering, Inc., which moved Bankruptcy Court to extend the debtor’s time to file debtor’s bankruptcy schedules, in the emergency SubV (Chapter 11 bankruptcy, 11 USC 1181 to 11 USC 1195 is the “SubchapterV part of Chapter 11):
The United States Bankruptcy Court for the Central District of California (Judge Wayne Johnson) denied the motion of Chapter 11 debtor and debtor-in-possession Innerline Engineering, Inc., that moved to extend the time for Innerline Engineering to file its case initiation documents (schedules, etc), notwithstanding that the motion was filed timely and submitted on the court’s approved local bankruptcy form. In re Innerline Engineering, Inc., 6:21-bk-11349-WJ (Bankr. C.D. Cal. Mar. 31, 2021). The court issued a lengthy order regarding the debtor’s motion, enforcing the existing deadline to submit the remaining schedules, statements, and other required forms, and finding that the debtor failed to describe any emergency or urgent development that prompted the filing. The court, however, “encourag[ed] the Debtor to immediately re-file when ready to do so.” Entry of this order resulted in the dismissal of the case on the same date.
REASONING
The Bankruptcy Court issued an order analyzing what occurs at the moment a bankruptcy case is filed and how the duties of the debtor and creditors which stem therefrom are balanced under the Bankruptcy Code. The court ultimately denied the motion for 1) lack of good cause—the motion did not explain why the debtor voluntarily selected the petition date when it was either unable or unwilling to timely file all required schedules and documents; 2) lack of service of the motion on all creditors; and 3) other factors, including the debtor’s failure to file a prepetition payroll motion.
The court emphasized that, because the automatic stay provided in section 362 of the Bankruptcy Code affords a generous benefit to debtors in bankruptcy, there are responsibilities on the part of debtors that come with this “comprehensive, immediate, self-executing, and worldwide injunction” that “in most instances . . . immediately stops nearly all collection activities by creditors.” Or., pg. 2.
One such responsibility is the need to provide information:
When a borrower files a bankruptcy case and demands that a lender immediately stop a foreclosure sale or cease efforts to repossess collateral, diligent creditors will want to promptly verify that the borrower has (1) listed the collateral as an asset in that specific bankruptcy case and (2) listed the creditor on Schedule D in that case. When debtors fail to file their case initiation documents, however, verification is not possible.
Similarly, some debtors file bankruptcy cases to immediately stop wage garnishment or an eviction or a bank levy or other asset seizures. Creditors who are subject to the automatic stay under these circumstances will understandably want to know if the debtor listed the creditor on Schedules D, E or F … However, when debtors fail to file case initiation documents timely, this process is stymied.
Or., pg. 3.
Another responsibility is to provide this information timely. The court lists several important deadlines imposed on creditors, such as the 30-day deadline to object to exemptions after the meeting of creditors ends (FRBP 4003(b)(1)); the 60-day deadlines to object to the discharge of a debtor (FRBP 4004(a)) and the dischargeability of a debt (FRBP 4007(c)) ; and the 60-day deadline for a creditor to pursue a reaffirmation agreement (FRBP 4008(a)).
Creditors inevitably need to review a debtor’s schedules and statements to be able to evaluate their position on these matters (and others), and “a few weeks is not much time for a creditor to receive notice of the filing of a bankruptcy case in the mail, hire an attorney, and investigate the case.” The court noted that, “[t]his short time period is significantly reduced when debtors fail to file schedules and other case initiation documents with the petition and then, again, do not do so during the subsequent and fourteen-day period.” Or., pg. 4.
The court highlighted the refusal of higher courts to excuse untimeliness by creditors—even by just a few minutes—under virtually every conceivable set of facts and concluded that, “Courts need to avoid taking steps or other actions that would give debtors better treatment when missing deadlines than creditors or trustees.” Or., pg. 6.
With regard to lack of service of the motion on all creditors, that court identified the issue as two-fold: the debtor clearly did not serve the motion as required by the relevant local bankruptcy rule; however, the court’s analysis equally focused on the “almost always” ex parte nature of such motions brought by debtors.
The court concentrated on the typical procedure surrounding such motions to extend the deadline to file schedules and other case initiation documents, which typically results in creditors not having any “meaningful opportunity to respond” and concluded that the “process seems designed to prevent creditors from weighing in on the request.” Or., pg. 7. While the United States Bankruptcy Court for the Central District of California has a local rule which allows this type of motion to be determined without a hearing after notice is provided (LBR 9013-1(p)), in its order, the court did not reference this rule or if the motion would have been granted had notice been provided.
The court further found a lack of sufficient cause to grant the motion. The Court queried:
[T]he Motion references “several judgment creditor collection actions” and “cash flow interruptions” but it does not indicate whether these occurred gradually over time or suddenly.
. . .
The Motion also does not explain why the Debtor needs to be in bankruptcy at this time. The Motion does not identify any urgent problem. The Motion does not explain why the case should not be dismissed and then re-filed in another week or two or some later date whenever the Debtor has finished preparing the necessary documents. The Motion does not articulate any harm or problem that would arise if the Court simply enforced the fourteen-day deadline, dismissed the case and then the Debtor refiled another case whenever the Debtor finished preparing all necessary documents. Therefore, good cause for an extension has not been demonstrated.
Or., pg. 8.
The court similarly questioned why the debtor never filed a motion to pay prepetition payroll postpetition.
The court concluded with acknowledging that
[C]omments in the Motion tend to suggest that counsel has tried to press the Debtor to proceed with greater speed. Counsel who is diligently trying to prosecute a chapter 11 case cannot be faulted if the Debtor does not fully grasp the need for quick work and providing information quickly.
Or. pg., 10.
Nonetheless, the court found that “[d]enial of the Motion will assist counsel in helping the Debtor focus in the next case.”
AUTHOR’S COMMENTARY
The court here emphasizes the importance for debtors to file complete schedules with their petition or within fourteen days thereafter “to avoid prejudice to other parties,” but does not mention how FRBP 1007(c) must be weighed in this analysis. The Bankruptcy Rules specifically allow for an extension of time, and it therefore seems reasonable for debtors to expect that continuances will be granted if cause exists.
The Small Business Reorganization Act of 2019 (the “SBRA”) enacted subchapter V of chapter 11 to streamline the process by which small business debtors reorganize and rehabilitate their financial affairs.” H.R. REP. NO. 116-171, at 1 (2019). A sponsor of the SBRA legislation stated that the new law will allow small business debtors “to file bankruptcy in a timely, cost-effective manner, and hopefully allows them to remain in business,” which “not only benefits the owners, but employees, suppliers, customers, and others who rely on that business.” H.R. REP. NO. 116-171, at 4. It seems here that a short extension of the deadline to file the remaining schedules and statements would have allowed the debtor’s management to conclude their efforts to complete these documents—only additional 7 days were requested—and then refocus on the debtor’s business operations with an aim to reorganize. Likely dismissal and refiling resulted in additional costs for the debtor, such as paying another Chapter 11 filing fee of $1,738, and certainly took time away from the debtor’s business operations.