Ninth Circuit Softens Creditors’ Deadline to Request Revocation of a Fraudulent Creditor’s Bankruptcy Discharge

A bankruptcy discharge is a permanent order that prohibits and prevents creditors from collecting on specific debts; in other words, it releases a debtor from any obligations regarding those debts. It grants the debtor a "fresh start." But a dishonest debtor may see that discharge revoked. For example, under section 727, subdivision (d)(1) of the Bankruptcy Code (11 U.S.C. et seq.), a bankruptcy court may revoke a debtor's discharge if the discharge was obtained through the debtor's fraud.

But section 727 "is generally construed strictly against a creditor and liberally in favor of a debtor," and as a result revocation of the discharge has been deemed an "extreme" remedy. ( In re de Armond, 340 B.R. 51, 55 (C.D. Cal. 1999).) As a result, subdivision (e)(1) of section 727 limits the time in which a request for revocation under subdivision (d)(1) may be brought to within one year of the discharge being granted.

But a recent Ninth Circuit opinion has qualified that deadline. In Weil v. Elliott, Ninth Circuit Case No. 16-55359, the debtor knowingly and fraudulently failed to disclose his ownership interest in a home; when the bankruptcy trustee learned of the fraud, she filed a complaint to revoke the discharge fifteen months later (i.e., after the year deadline had passed). But the Ninth Circuit nonetheless affirmed the revocation of the discharge; in doing so, it held that the one-year filing deadline imposed by section 727(e)(1) is not a jurisdictional constraint, but rather is a statute of limitations which may be waived.

While not explicit in the opinion, the public policy rationale for the Ninth Circuit's decision is probably fairly straightforward; the Bankruptcy Code "favors the discharge of honest debtors." ( In re de Armond, 340 B.R. at 55.) The Code is not designed to permit dishonest debtors from benefitting from their own fraud. By deeming section 727(e) a statute of limitations rather than a jurisdictional constraint, the Ninth Circuit seeks to prevent just that.