In the Matter of Robert Miles Knox, Appellant, v. Kal W. Lines, Trustee, Appellee, 463 F.2d 561 (9th Cir. 1969)

In May, 1969, Knox filed a voluntary petition in Bankruptcy. The District Court adjudged Knox bankrupt and appointed Lines as trustee. As the trustee, Lines was required, by Bankruptcy Gen. Order 17,¹  to prepare a complete inventory of Knox's property and to report to the court which assets were exempt and thus set off to the bankrupt. In making this report, on June 23, 1969, Lines disallowed Knox's claim for a homestead exemption on certain property.

Under General Order 17, Knox had "ten days after the filing of the report, unless further time [was] granted by the court", to object to Lines' report. The ten-day period expired on July 3d, but no objection was filed until the next court day, July 7th. At that time, Knox challenged the denial of the claimed homestead exemption.

On September 8, 1969, a hearing before the bankruptcy referee was held to consider Knox's objection. During the hearing, Lines moved to dismiss the objection. He argued that his report became final on July 3d and that the objection, since it was not timely filed, should not be considered. The referee granted the motion to dismiss, the District Court affirmed the dismissal, and this appeal followed.

Knox contends that the referee and the District Court should have considered his objection to the denial of the homestead exemption claim. He argues that they not only have jurisdiction to consider objections filed after the ten-day period, but also that, in the exercise of their discretion, they must look to Rule 60(b) Fed.R.Civ.Proc. when deciding whether to accept an untimely objection. We agree and therefore reverse.

A bankruptcy court is a court of equity. See, e.g., Pepper v. Litton, 308 U.S. 295, 60 S. Ct. 238, 84 L. Ed. 281, (1939); 1 Collier on Bankruptcy Sec. 2.09. Its equitable powers are, however, limited. They may be exercised only within the limits established by the Bankruptcy Act and the General Orders promulgated by the Supreme Court. See Collier, supra. Therefore, before we can consider whether it would have been equitable to consider Knox's objection, we must determine if General Order 17 foreclosed any power to review it.

Because the language of General Order 17 is ambiguous, there is no absolutely clear answer. A court clearly has discretion to grant "further time" for the filing of an objection, but it is not certain that it may do so if one who objects does so only after the expiration of a prescribed period. If it may, then the referee and the District Court erred, for Knox was then entitled to a decision by them as to whether equity would be served by the receiving and consideration of his objection.

When the referee considered this question, he concluded that Knox was not entitled to any relief because both he and the District Court judge²  were "without jurisdiction" to consider objections filed after the ten-day period specified in the General Order. The District Court expressly disagreed with the decision in In re Tognetti, 57 F. Supp. 286 (N.D. Cal. 1944), and affirming the referee's Order, relied upon Matter of Malley, No. 105701 (N.D. Cal., Nov. 20, 1968).³  We do not find that either the bare conclusion of the referee⁴  or the authority cited by the District Court is persuasive.

Malley is distinguishable, for there, the court did not expressly consider the scope of its power to permit tardy filings under General Order 17. The issue in that case was whether the ten-day filing period runs from the date of a trustee's original report or the date of his amended report. The bankrupt there argued that under Rule 15(a) Fed.R. Civ.Proc.⁵  he could file within ten days of the amendment. After discounting the significance of the fact that the trustee filed an amended report, and thus deciding that the period commenced with the original filing, the court concluded that the bankrupt's contention was meritless. It said:

"Rule 15(a) F.R.Civ.P., is inconsistent with General Order 17. Under Rule 15(a) it is possible for the bankrupt to file an objection to the trustee's determination more than ten days after the filing of the report without leave of court, and solely because the trustee has chosen to . . . file an amended report . . . . Under General Order 17, the bankrupt cannot file objections to the trustee's determination more than ten days after the filing of the report of exempt property without leave of court."

We see nothing in that holding to suggest that a bankrupt can obtain the desired leave of the court only within the ten-day period. As far as we can perceive, the Malley decision merely affirms an obvious proposition, which Knox does not here challenge, that any late filing must be approved by the court.

The fact that the District Court's reliance on Malley was misplaced does not mean that Tognetti should have supplied the basis for a contrary decision. Tognetti has no more relevance to the present case than does Malley. That is because Tognetti concerned a bankrupt's petition for relief under 11 U.S.C. § 67(c),⁶  not General Order 17. The court therefore made no effort to define its power to grant relief under the General Order. It merely noted that General Order 17 permits "exceptions to the trustee's reports to be filed with the referee," that Mrs. Tognetti had not filed such an objection, and that her failure to do so was insufficient reason to imply a waiver of her rights under Sec. 67(c). Whatever the case may reveal as to relief available under Sec. 67(c),⁷  it affords no enlightenment concerning the effect of General Order 17.

In citing Malley and Tognetti, the District Court was not widely astray, for we have found no authority interpreting that portion of General Order 17 which is here at issue.⁸  The proper resolution of the present case depends upon the application of pertinent decisions and doctrine developed in other contexts. There is some such persuasive authority which was apparently not drawn to the attention of the District Court.

Prior to 1960, that section of the Bankruptcy Act discussed in Tognetti, Sec. 67(c), was written in terms similar to those currently employed in General Order 17. Section 67(c) provided that relief from a referee's order could be sought "within ten days after the entry thereof or within such extended time as the court may * * * allow." General Order 17 provides for the right to seek relief from a trustee's report "within ten days after the filing [thereof] unless further time is granted by the court." We think that the linguistic similarities between these provisions reflect a congruence of purpose. When the Supreme Court amended General Order 17 in 1933⁹  and gave it its present form, the Court must have intended to afford bankruptcy courts power to permit tardy objections to trustees' reports commensurate with their power to recognize untimely motions to review referees' orders and most other untimely motions. See Rule 6(b) (2) Fed.R.Civ.Proc. Otherwise, there would be an anomalous disparity of power. For example, if General Order 17 were interpreted more strictly than Sec. 67(c), a district judge administering an estate himself without the aid of a referee would have less power to review a trustee's decisions than he would if he had appointed a referee and thus could, under Sec. 67(c), review the orders of the referee affirming or reversing those same decisions. Perceiving no valid purpose which would support such a distinction, we conclude that these two provisions should be given the same interpretation.¹⁰ 

The common meaning of General Order 17 and Sec. 67(c) was established when, in 1942, the Supreme Court decided Pfister v. Northern Illinois Finance Corp., 317 U.S. 144, 63 S. Ct. 133, 87 L. Ed. 146 (1942). The Court therein defined the power of bankruptcy courts, under Sec. 67(c) to review referees' orders made pursuant to 11 U.S.C. § 203. It held:

"Courts of bankruptcy are courts of equity without terms. . . . The entire process of rehabilitation, reorganization or liquidation is open to reexamination out of time by the District Court, in its discretion, and subject to intervening rights.

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" [Section 67(c)] was [not] intended to be a limitation on the sound discretion of the bankruptcy court to permit the filing of petitions for review after the expiration of the period. The power in the bankruptcy court to review orders of the referee is unqualifiedly given in [11 U.S.C. § 11]. The language [of Sec. 67(c)] is . . . a limitation on the 'person aggrieved' to file such a petition as a matter of right."

We hold that the views expressed in Pfister are fully applicable to General Order 17 and reveal its proper interpretation; consequently, parties have a right to file objections within the tenday filing period and, thereafter, a court may grant a later request for review if it concludes that equitable considerations so require.

We are not persuaded that this interpretation of General Order 17 will lead to chaos, as Lines suggests, even though the interpretation is applicable to creditors as well as to bankrupts. The possibility of review subsequent to the expiration of the filing period will not upset or inhibit the settlement of estates because this type of review will be available only when equity requires it. Thus availability of review to an untimely applicant may depend upon (1) the absence of prejudice to the nonmoving parties resulting from delayed review, and (2) acceptable justification for the applicant's failure to comply with the ten-day filing rule. The existence of sufficient justification for delayed filing could be determined by a variety of standards. We think, however, that in most cases, as the bankrupt here suggests, it should depend upon compliance with Rule 60(b) Fed.R.Civ. Proc. which provides:

"On motion and upon such terms as are just, the court may relieve a party . . . from a final judgment, order, or proceeding for the following reasons: (1) mistake, inadvertence, surprise, or excusable neglect; . . . or (6) any other reason justifying relief from the operation of the judgment. The motion shall be made within a reasonable time."

The Rules of Civil Procedure are applicable to bankruptcy proceedings if they are consistent with the Act and the General Orders. Bankruptcy Gen.Order 37. We see no inconsistency between our interpretation of General Order 17 and Rule 60(b); hence, Rule 60(b) is applicable to motions for extended time under General Order 17.

The question thus becomes whether Knox met the test we have attempted to formulate. As to the first issue, the existence of prejudice caused by the delay in seeking review, there is little room for debate, for the circumstances of this case compel the conclusion that equity required the referee and the District Court to consider Knox's objection. Knox's delay in filing was insignificant and inconsequential. It spanned a four-day period which included a holiday and a weekend. Moreover, there is no evidence in the record to indicate that any of Knox's creditors were in any way prejudiced by the delayed filing or, in fact, that between the third and the seventh of July anyone relied upon the fact that no objection had been filed within the ten-day period. Given the well established policy of the Bankruptcy Act to favor property exemptions, see, e.g., Matter of Dudley, 72 F. Supp. 943 (S.D. Cal. 1947), aff'd 166 F.2d 1023 (9th Cir. 1948), the significance of a minor delay in the proceedings, such as the one in this case, is minimal. It is far more equitable to impose a harmless period of uncertainty upon creditors than it is to deny a bankrupt's claim to a possibly valid homestead exemption because of such a slight procedural error as was here committed.

Unfortunately, the record does not reveal whether Knox had a valid excuse for not making a timely objection. If, upon remand, he is able to present a reasonably satisfactory excuse, under Rule 60(b), for his slight delay, the merits of his claim for a homestead exemption should be reviewed.¹¹ 

Reversed and remanded.