United States ex rel. Minge v. Hawker Beechcraft Corp. (In re Hawker Beechcraft Inc.)

Citations: 493 B.R. 696; 2013 WL 3831671; 2013 Bankr. LEXIS 2973; 58 Bankr. Ct. Dec. (CRR) 72Docket: Case No.: 12-11873 (SMB); Adv. Proc. No.: 12-01890

Court: United States Bankruptcy Court, S.D. New York; July 24, 2013; Us Bankruptcy; United States Bankruptcy Court

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Section 1141(d)(6)(A) of the Bankruptcy Code prohibits the discharge of certain debts owed to domestic governmental units or arising from actions under the False Claims Act (FCA). Plaintiffs, former employees of TECT Aerospace, initiated a qui tam action against Hawker Beechcraft Corporation, alleging misrepresentations to the government regarding military aircraft components, with damages claimed at nearly $2.3 billion and additional civil penalties. After Hawker filed for Chapter 11 bankruptcy, the Kansas action was stayed, and Epiq Bankruptcy Solutions was appointed as the claims agent. A notice was sent to creditors regarding the bankruptcy proceedings, indicating a future deadline for filing complaints related to debt dischargeability. The court ultimately ruled that the Plaintiffs' qui tam claim is dischargeable, leading to the dismissal of the complaint concerning that claim.

The bankruptcy clerk’s office must receive the complaint and filing fee by the specified deadline. The Plaintiffs initiated an adversary proceeding on September 27, 2012, seeking to determine the dischargeability of their claims against Hawker in the Kansas Action, alleging debts incurred through false pretenses, which fall under 11 U.S.C. § 523(a)(2)(A). They argued that these debts are owed to a domestic governmental unit because they are prosecuting the Kansas false claims action on behalf of the Government. Hawker filed a motion to dismiss, claiming the complaint was time-barred due to the Plaintiffs' failure to file within the 60-day deadline after the creditors' meeting as mandated by 11 U.S.C. § 341(a). Hawker also contended that the Plaintiffs lacked standing to pursue the non-dischargeability of their qui tam claim and argued that the complaint did not adequately plead the necessary level of scienter for fraud claims. Additionally, Hawker maintained that the debts did not qualify as "owed to a person" under § 1141(d)(6)(A). The Plaintiffs countered that the 60-day deadline was inapplicable or, if applicable, was never triggered due to the clerk's failure to provide proper notice per Rule 4007(c) of the Federal Rules of Bankruptcy Procedure. They claimed reasonable reliance on the notice indicating that the deadline would be communicated later and requested the Court to invoke its equitable powers to deem the complaint timely. The Court denied the motion to dismiss under Rule 12(b)(6) without prejudice and reserved judgment on the remainder of the motion. Prior to the 2005 amendments to the Bankruptcy Code, a corporate debtor’s confirmed plan discharged all pre-confirmation debts unless it involved the liquidation of the estate's assets and the debtor ceased business operations post-confirmation. Hawker confirmed a non-liquidating plan, and under previous law, the Plaintiffs’ claims would have been discharged. The 2005 amendments, enacted through the Bankruptcy Abuse Prevention and Consumer Protection Act, altered these provisions.

Section 1141(d)(6) outlines exceptions to the discharge of debts for corporations under Chapter 11. Specifically, it states that a corporation's confirmation of a plan does not discharge debts owed to domestic governmental units or debts resulting from actions filed under certain state statutes. The exceptions are divided into two clauses: Clause 1 pertains to debts specified in section 523(a)(2)(A) or (2)(B) owed to domestic governmental units, while Clause 2 addresses debts owed to individuals as a result of specific legal actions.

Debt exceptions to discharge can be categorized into two types: self-executing exceptions and those requiring a creditor to seek a determination of dischargeability in bankruptcy court by a set deadline. Most exceptions under section 523(a) are self-executing, allowing creditors or debtors to seek dischargeability determinations at any time. However, exceptions for debts based on fraud, like those under section 523(a)(2), are not self-executing and necessitate creditors to follow procedural requirements, including filing a complaint within 60 days of the creditors' meeting unless extended by the court.

The Plaintiffs assert that their claims fall under the non-dischargeable category specified in section 523(a)(2)(A) or (2)(B) and are therefore exempt from discharge under section 1141(d)(6)(A).

The Court is tasked with determining whether the Plaintiffs' non-dischargeability complaint, specifically under Clause 1 of 11 U.S.C. § 1141(d)(6)(A), is time-barred due to their failure to file within the 60-day deadline. Clause 1 excludes from a corporate Chapter 11 debtor's discharge any debt owed to a domestic governmental unit, particularly those obtained by false pretenses or representations as specified in 11 U.S.C. § 523(a)(2)(A). The Plaintiffs argue that their claims in the Kansas Action meet this criterion and that their complaint is not subject to the procedural requirements or limitations of 11 U.S.C. § 523(c)(1) and Bankruptcy Rule 4007(c). 

The Court agrees that Clause 1's language is clear but contends that the absence of a reference to § 523(c)(1) does not exempt it from application. The interpretation of statutes begins with their plain language, and courts must strive to give effect to every clause. Statutory construction requires consideration of the broader context, and ambiguity may necessitate reliance on canons of interpretation. Various provisions in the Bankruptcy Code outline exceptions to discharge, with 11 U.S.C. § 523(a) enumerating specific debts that are not discharged under various sections of the Bankruptcy Code.

The Bankruptcy Code includes provisions that outline debts exempt from discharge, primarily referencing section 523(a). Notably, 11 U.S.C. 1141(d)(2), 1228(a)(2), and 1328(a)(2) specify that certain debts remain non-dischargeable under these sections. However, these provisions do not invoke 523(c)(1), which requires creditors to initiate a proceeding to determine debt dischargeability. This means that creditors asserting non-dischargeability based on fraud must follow the procedures outlined in 523(c)(1), even if the exception does not explicitly mention it. For instance, in cases involving debts incurred through false pretenses or fraud, an independent adversary proceeding must be timely filed to assess dischargeability, as established by relevant case law. 

Section 1141(d)(6)(A) outlines that debts specified in 523(a)(2)(A) or (B) are excepted from discharge, which falls under the scope of 523(c)(1). Additionally, 523(c)(1) applies to all debtors, not solely individuals, as indicated by its language and the applicability of chapter 5 of the Bankruptcy Code to chapter 11 cases. Even corporate debtors under chapter 12, such as family farmers or fishermen, are subject to these discharge exceptions. The confirmation of a chapter 12 plan does not discharge debts outlined in section 523(a) for both individual and corporate debtors.

Section 523(c)(1) of the Bankruptcy Code applies to creditors in individual Chapter 12 cases and is equally relevant to corporate Chapter 12 cases, ensuring that corporate debtors do not receive a more limited discharge compared to individual debtors. Any ambiguity regarding the applicability of § 523(c)(1) to § 1141(d)(6)(A) is clarified by reading these provisions in conjunction with other discharge provisions, as supported by case law that mandates statutory provisions to be construed in pari materia. It is concluded that § 523(c)(1) applies to debts owed by corporate Chapter 11 debtors to domestic governmental units under § 1141(d)(6)(A).

Although § 523(c) dictates the requirement for filing an adversary proceeding, it does not specify the filing timeline; this is governed by Bankruptcy Rule 4007(c). This rule mandates that a complaint to determine the dischargeability of a debt under § 523(c) must be filed within 60 days after the first meeting of creditors, with the court required to notify creditors at least 30 days before this deadline. The plaintiffs argue that the limitations period was never activated because the clerk, or Epiq in this instance, failed to provide the required 30-day notice, a position supported by relevant case law indicating that failure to notify can impact the applicability of the limitations period.

Meyers, the court clerk, erroneously mailed a notice after the deadline for filing non-dischargeability complaints had passed, incorrectly establishing a new deadline. The bankruptcy court ruled that this notice was essential to trigger the 60-day deadline for filing complaints, meaning the deadline began only when the incorrect notice was sent. The court noted that creditors had relied in good faith on the initially indicated September date, and denying them their right to file would be more prejudicial than allowing debtors to obtain discharges. 

The case of Podzamsky echoed this conclusion, where an incorrect notice indicated no deadline for filing complaints regarding a specific debt type, leading to the court ruling that creditors could assume they would receive proper notice before their rights were forfeited. However, the reasoning in Schwartz. Meyers and Podzamsky was deemed unpersuasive by the court in Nat’l Union Fire Ins. Co. v. Rockmacher. In Rockmacher, the clerk's notice included a meeting time but not a specific deadline for filing dischargeability complaints. The bankruptcy judge ruled that due process was satisfied since the plaintiff had enough information to determine the filing deadline. 

The court emphasized that technical compliance with the notice requirements of Bankruptcy Rule 4007(c) was less relevant when creditors had actual knowledge and could protect their rights. Therefore, the absence of a specific bar date in the notice did not exempt the plaintiff from meeting the 60-day filing requirement following the creditors' meeting. This ruling was upheld by the District Court, which reaffirmed that constitutional due process was met as the creditor was informed and participated in the meeting with experienced legal counsel.

The District Court upheld the Bankruptcy Court's determination that clerical errors not causing prejudice should not undermine the efficiency goals of bankruptcy proceedings. It emphasized that participants should be able to ascertain which debts are subject to discharge exceptions within a 60-day period. The court rejected the reasoning of Schwartz Meyers, which posited that a clerk’s notice was essential to trigger this deadline, aligning instead with the majority view that the notice requirement does not exempt creditors from adhering to the deadline if they have actual knowledge of the bankruptcy proceedings. 

The court noted that the notice sent by Epiq to the Plaintiffs was accurate and sufficient for them to determine the deadline for filing an adversary proceeding, which was extended to August 27, 2012, due to the sixtieth day falling on a weekend. The Plaintiffs failed to file their complaint until September 27, 2012, and their claim that they awaited further notice from the court was contradicted by the fact that they eventually filed the complaint late without additional notice. Consequently, any claim filed on behalf of a domestic governmental unit to except a debt from discharge under Bankruptcy Code § 523(a)(2) was deemed time-barred under Bankruptcy Rule 4007(c).

The document concludes that governmental units must file complaints objecting to dischargeability within the time limits established by Bankruptcy Rule 4007(c) and Official Form 9F, as noted by a leading bankruptcy law commentator. The claims asserted under Clause 2 of § 1141(d)(6)(A) are not time-barred, as this clause excepts certain debts from discharge. The plaintiffs argue that Clause 1 does not modify Clause 2 since they are independent. Hawker agrees with this independence but inconsistently suggests that Clause 1's reference to § 523(a)(2) applies to Clause 2. Additionally, Hawker contends that the plaintiffs cannot assert substantive FCA causes of action against TECT and HBC under Clause 2 because such claims do not constitute debts "owed to a person" as defined in § 1141(d)(6)(A). The full text of § 1141(d)(6)(A) indicates that both clauses are subordinate to the main clause and are grammatically independent, separated by a coordinating conjunction.

Congress utilized the phrase “owed to” in a bifurcated manner within the statutory text, indicating two distinct clauses: one for debts owed to a domestic governmental unit and another for debts owed to a person. This interpretation aligns with judicial precedents, such as in *Chao v. Day*, which emphasize the importance of not conflating separate clauses when expressly framed in parallel. Legislative history further supports the independence of these clauses, particularly in the context of amendments to the Bankruptcy Code that exclude certain debts from discharge, distinguishing between debts owed to governmental units and those owed to individuals.

The False Claims Act (FCA) imposes civil liability on individuals who knowingly submit false claims for payment to the government. It specifies that such actions may be initiated by the government or by private individuals (relators) in qui tam actions, where relators act on behalf of the government. Upon filing, relators must notify the government, which has 60 days to decide whether to intervene. If the government intervenes, it takes charge of the prosecution while allowing the relator to remain a party and participate in certain proceedings, such as hearings on dismissals and settlements.

If the Government opts not to intervene in a qui tam action within 60 days, the relator gains the exclusive right to prosecute the case but the Government may later intervene only by demonstrating "good cause." Relators are entitled to a share of the proceeds: if the Government does not intervene, they receive between 25% and 30% based on court determination; if the Government does intervene, the share is between 15% and 25%, depending on the relator's contribution. Payments to the relator are made solely from the action's proceeds, while reasonable attorneys’ fees and expenses are recoverable from the defendant. The False Claims Act (FCA) also protects relators from employer retaliation, granting them comprehensive relief, including reinstatement and compensation for damages and legal costs. The relator plays an active role in the lawsuit, possessing standing to pursue claims and participate in settlements, even when the Government intervenes. The violator remains liable to the Government, which is the real party in interest in these actions, with the relator acting as a mechanism for the Government’s recovery.

In Colucci v. Beth Israel Med. Ctr., the court clarified the standing of a relator in qui tam claims under the False Claims Act (FCA). While the relator has a private interest in the outcome due to potential monetary rewards, this interest is not fully realized until the litigation concludes successfully. The relator's standing to prosecute a qui tam claim does not alter the nature of the underlying debt, which remains owed to the government, not the relator.

Regarding bankruptcy implications, the court analyzed the applicability of 11 U.S.C. § 1141(6)(A) to FCA claims. Clause 1 excludes from discharge debts owed to a governmental unit, while Clause 2 excludes debts owed to a person. Given that the alleged false claims under the FCA are liabilities to the government, they fall under Clause 1, not Clause 2. This interpretation prevents absurd outcomes where the government's claim could be dischargeable while the relator's claim for the same injury would not be.

The court emphasized that if the relator is considered a partial assignee of the government's claim, they must follow the same procedural and substantive requirements as the government under Clause 1. However, Clause 2 is not rendered ineffective as the FCA allows for certain claims directly owed to the relator, including awards for attorney's fees and expenses in successful qui tam actions, which can be significant.

Plaintiffs filed proof of claim No. 782 to recover their qui tam claim, which remains unaffected by this opinion. Should the Debtors object and the Plaintiffs successfully prosecute their claim, they may be entitled to recover attorneys’ fees and legal expenses from Hawker, and such a claim may be deemed non-dischargeable. The court does not resolve this issue now but confirms that the Complaint alleging non-dischargeability of attorneys’ fees is not dismissed. Hawker argues that the non-dischargeability of attorneys’ fees hinges on the underlying qui tam claim's non-dischargeability under 11 U.S.C. § 523(a)(2)(A), a position the court disagrees with, asserting that attorneys' fees are debts “owed to a person” and governed by Clause 2, which is not subject to § 523(a)(2).

The court concludes that the qui tam claims against Hawker are dischargeable and were discharged under the Debtors’ confirmed plan. The extent of any personal claims the Plaintiffs may have against Hawker under Clause 2 remains unclear. The parties are instructed to settle an order reflecting these conclusions and schedule a conference for further proceedings. The court does not address the standing of the Plaintiffs under Clause 1, as that matter is moot due to time-bar issues. The court will consider the Plaintiffs' allegations under Clause 2 and the permissible scope of those claims.

The text outlines the applicability of certain sections of the Bankruptcy Code concerning non-dischargeability of debts, specifically addressing the interpretation of sections 523 and 1141. It highlights that section 523(a)(2) applies to corporate debtors via section 1141(d)(6)(A), while section 523(c)(1) applies to all debtors in chapter 11 cases. The author disputes Ralph Brubaker's view that the government is not subject to a 60-day deadline for asserting non-dischargeable claims, noting that such claims create priority for governmental creditors over non-governmental ones, potentially harming innocent creditors and introducing uncertainty in bankruptcy restructuring. The document further defines "claim" under 31 U.S.C. 3729(b)(2)(A)(i) and explains the qui tam provision, which allows individuals to pursue claims on behalf of the government while protecting them against retaliation. However, it notes that the plaintiffs in this case were not employees of Hawker and did not file a retaliation claim.