Stone, Matter of
| Decision Date | 03 January 1994 |
| Docket Number | No. 93-2187,93-2187 |
| Citation | 10 F.3d 285 |
| Parties | , Bankr. L. Rep. P 75,651 In the Matter of Clayton Wray STONE, Jr. and Jeannine Stone, Debtors. Clayton Wray STONE, Jr. and Wife, Jeannine Stone, Appellants, v. Melvin CAPLAN, et al., Appellees. |
| Court | U.S. Court of Appeals — Fifth Circuit |
Percy L. Isgitt, Houston, TX, for appellants.
Ronald G. Byrnes, Allan R. Lazor, Houston, TX, for appellees.
Appeal from the United States District Court for the Southern District of Texas.
Before JOHNSON, WIENER, and DeMOSS, Circuit Judges.
This is a no-asset bankruptcy case. Clayton and Jeannine Stone filed a voluntary petition for relief in October of 1987; however, they inadvertently omitted several creditors from their section 521(1) 1 schedules. Although the Stones amended the schedules to include those creditors prior to the final discharge of the case, the bankruptcy court ruled that the debt was nondischargeable under section 523(a)(3) of the Bankruptcy Code. The Stones appealed; the district court affirmed; this Court reverses.
In October of 1980, Plaintiffs Solly Hemus, Ronald Fash and his wife, Leah, together with Defendants Clayton and Jeannine Stone, purchased a condominium from Plaintiffs Melvin and Carole Caplan. Almost five years after this transaction, Mr. Hemus and the Fashes sold their interests in the condominium to the Stones and Ernie Beltz, a business partner of Clayton Stone. 2 Soon after this sale, the Stones began to experience substantial financial difficulties. They filed a voluntary petition for bankruptcy on October 16, 1987. 3 However, failing to recognize their obligation to the Plaintiffs [hereinafter referred to as "Caplans"], the Stones neglected to list the Caplans as creditors, as required by section 521(1) of the Bankruptcy Code.
The Caplans first learned of the Stones' bankruptcy proceedings in March of 1989, approximately one year after the deadline for filing proofs of claims. 4 In April of 1991, the Caplans filed a complaint in the bankruptcy court, alleging that the Stones were indebted to them. The Caplans requested that the court deem the debt in question nondischargeable under section 523(a)(3)(A). The Stones responded by amending their schedules to include the Caplans as creditors. In the interim, the bankruptcy trustee filed a no-asset report, declaring that the estate contained no property for distribution. 5
During a trial on the merits before the bankruptcy court, the parties stipulated that the Caplans' sole dischargeability claim was based upon the failure-to-list provision enumerated in section 523(a)(3)(A). The Caplans also conceded that the debtors had not engaged in fraud or intentional design in their failure to list the debt. Nevertheless, believing that the Fifth Circuit had not addressed this issue, the bankruptcy court strictly construed section 523(a)(3)(A) and ruled that the debt owed to the Caplans was nondischargeable. The district court, reviewing the case on appeal, affirmed. The Stones appeal.
The standard of review in bankruptcy cases is no different from the standard of review in other civil cases. This Court will not set aside a bankruptcy court's findings of fact unless they are clearly erroneous. Bankr.R. 8013; In re Missionary Baptist Foundation, Inc. (Wilson v. Huffman), 712 F.2d 206, 209 (5th Cir.1983). However, the primary issue in this case--the proper construction and application of section 523(a)(3)(A)--is a question of law which we review de novo. In re Herby's Foods, Inc., 2 F.3d 128, 130 (5th Cir.1993).
Section 523(a)(3)(A) of the Bankruptcy Code penalizes a debtor for failing to list all of his creditors and debt on applicable schedules. The statute provides that a debt may not be discharged if it was "neither listed nor scheduled under section 521(1) of this title, with the name, if known to the debtor, of the creditor to whom such debt is owed, in time to permit ... timely filing of a proof of claim, unless such creditor had notice or actual knowledge of the case in time for such timely filing ..." 11 U.S.C. Sec. 523(a)(3)(A). Section 17(a)(3), the predecessor to section 523(a)(3)(A), similarly provided that unscheduled debts were not dischargeable. The provision read as follows:
A discharge in bankruptcy shall release a bankrupt from all of his provable debts, whether allowable in full or in part, except such as ... have not been duly scheduled in time for proof and allowance, with the name of the creditor, if known to the bankrupt, unless such creditor had notice or actual knowledge of the proceedings in bankruptcy.
Section 17(a)(3), Bankruptcy Act, codified at 11 U.S.C. Sec. 35(a)(3) () (as quoted in In re Adams, 734 F.2d 1094, 1098 (5th Cir.1984)).
The Supreme Court construed this failure-to-list provision quite strictly in Birkett v. Columbia Bank, 195 U.S. 345, 25 S.Ct. 38, 49 L.Ed. 231 (1904). There, the debtor, Mr. Birkett, filed a voluntary petition for bankruptcy and failed to include one of his creditors, Columbia Bank, on his schedules. Unlike this case, however, Columbia Bank first learned of the bankruptcy proceedings almost two months after the discharge of the case. Mr. Birkett contended that section 17(a) was inapplicable since his failure to list Columbia Bank was due to inadvertence and since Columbia Bank learned of the bankruptcy proceeding in time to protect its rights.
The Supreme Court rejected both arguments. As to the former contention, the Court ruled that a debtor's neglect or inadvertence is irrelevant and cannot preclude the discharge of unscheduled debt. Id. at 351, 25 S.Ct. at 44. As to the latter argument the Supreme Court determined that Columbia Bank did not have actual knowledge of the bankruptcy action. The Court ruled that actual knowledge "is a knowledge in time to avail a creditor of the benefits of the law,--in time to give him an equal opportunity with other creditors ..." Id. The debt in question was therefore deemed nondischargeable under section 17(a)(3) of the Bankruptcy Act.
Almost forty years later, the Second Circuit, following the Supreme Court's guidance in Birkett, held that section 17(a)(3) contained no exceptions. Milando v. Perrone, 157 F.2d 1002, 1004 (2d Cir.1946). In the Milando court's view, the failure-to-list provision forbade the discharge of unlisted debt even if the creditor learned of the bankruptcy proceeding in time to participate in the distribution of dividends. Id.
This Court construed the law quite differently in Robinson v. Mann, 339 F.2d 547 (5th Cir.1964). Focussing upon the equitable powers of the bankruptcy court, this Court rejected other decisions which had held that debtors were absolutely barred from amending their schedules after the proof-of-claim period. 6 Id. at 549. Unlike Birkett and Milando, the Robinson Court determined that out-of-time amendments would be allowed--but only if exceptional circumstances and equity so required. Id. at 550.
In 1977, Congress set out to reform the Bankruptcy Act. It found contradictory interpretations of the failure-to-list provision: Birkett focussed upon the plain language of the statute, and Robinson focussed upon the equitable principles of bankruptcy law. Faced with this conflict, Congress rewrote the provision. 7 This case calls on the Court to properly construe that provision.
Indisputably, the goal of statutory construction is to ascertain legislative intent through the plain language of a statute--without looking to legislative history or other extraneous sources. Caminetti v. United States, 242 U.S. 470, 490, 37 S.Ct. 192, 195, 61 L.Ed. 442 (1917). The Court may not look beyond the words of a statute if those words are rational and unambiguous. In re Hammers, 988 F.2d 32, 34 (5th Cir.1993).
Though the words in section 523(a)(3)(A) are rational, they are not unambiguous. The parties and the bankruptcy court proffered three distinct interpretations of the failure-to-list statute. 8 The Caplans, citing In re Reese, 133 B.R. 245 (Bankr.M.D.Fla.1991), contend that the provision refers to Bankruptcy Rule 4007(c). Rule 4007(c) requires creditors to file dischargeability complaints which are based upon section 523(c) no later than sixty days after the first date set for the creditors' meeting. BANKR.R. 4007(c). In the Caplans' view, therefore, to escape the consequences of section 523(a)(3)(A), debtors must schedule all debts prior to the expiration of those sixty days. 9
The bankruptcy court's conclusion and the Stones' interpretation, though inconsistent, are far more persuasive. The court determined that the word "timely," in the phrase "timely filing of a proof of claim" in section 523(a)(3)(A), refers to Bankruptcy Rule 3002(c). This rule requires creditors to file their proofs of claims within ninety days following the first date set for the creditors' meeting. BANKR.R. 3002(c). The Stones, on the other hand, argue that in a no-asset case, no definitive deadline exists since creditors are not required to file proofs of claims unless and until assets are discovered. 10 BANKR.R. 3002(c)(5).
With so many possible interpretations of the provision in question, one thing seems altogether clear: The words of the section 523(a)(3)(A) are anything but clear and unambiguous. Congress is presumed to have known of the conflicting interpretations in Birkett and Robinson, and it apparently revised the statute to affirm one and overrule the other. See Shapiro v. United States, 335 U.S. 1, 16, 68 S.Ct. 1375, 1383, 92 L.Ed. 1787 (1948) (); In re Hill (Zielinski v. Hill), 972 F.2d 116, 120 (5th Cir.1992) (same). However, discovering which...
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