Faden, Matter of, s. 95-20020

• Citation: 96 F.3d 792
• Decision Date: 09 October 1996
• Docket Number: 95-20622,Nos. 95-20020,s. 95-20020
• Parties: , 10 Tex.Bankr.Ct.Rep. 285 In the Matter of Alan J. FADEN; Harriet B. Faden, Debtors. Alan J. FADEN; Harriet B. Faden, Appellants, v. INSURANCE COMPANY OF NORTH AMERICA, Appellee.
• Court: United States Courts of Appeals. United States Court of Appeals (5th Circuit)

Page 792

96 F.3d 792

65 USLW 2303, 10 Tex.Bankr.Ct.Rep. 285

In the Matter of Alan J. FADEN; Harriet B. Faden, Debtors.

Alan J. FADEN; Harriet B. Faden, Appellants, v. INSURANCE COMPANY OF NORTH AMERICA, Appellee.

Nos. 95-20020, 95-20622.

United States Court of Appeals, Fifth Circuit.

Oct. 9, 1996.

Rehearing Denied Nov. 7, 1996.

Carolyn A. Taylor, Hughes, Watters & Askanase, Houston, TX, for appellants.

Thomas Joseph Lutkewitte, Favret, Demarest, Russo & Lutkewitte, New Orleans, LA, for appellee.

Appeals from the United States District Court for the Southern District of Texas.

Before POLITZ, Chief Judge, and GOODWIN ¹ and DUHE, Circuit Judges.

DUHE, Circuit Judge:

Alan J. and Harriet B. Faden appeal rulings by the bankruptcy court, affirmed by the district court, declaring non-dischargeable a debt owed to Insurance Company of North America ("INA") because of a failure of notice, 11 U.S.C. § 523(a)(3), and granting an award of attorney's fees and costs to INA. We affirm.

BACKGROUND

In 1984 Alan Faden invested in a Texas limited partnership known as Kentex Thoroughbred Ltd. No. 1. He financed most of this investment, executing an INA surety bond, an Investor Bond Indemnification and Pledge Agreement, and related investment documents. Following default in payment, INA secured a state judgment against Mr. Faden.

In August 1991 Alan and Harriet Faden filed a Chapter 7 petition in bankruptcy. Appellants' counsel asked them to provide INA's correct address, among others, for their petition. The appropriate mailing address appeared throughout Alan Faden's investment documents with INA as "c/o Waite Hill Services, Inc., 1000 Virginia Center Parkway, Richmond, Virginia 23295."

The debtors, however, failed to provide this information to counsel. Thus, the burden of obtaining the correct address fell on counsel's secretary, who resorted to the telephone book for INA's address. The address for INA listed in the Southwestern Bell Business White Pages for the Greater Houston Area during March 1991 through March 1992 was: "INA ... see CIGNA Companies-CIGNA Property & Casualty Companies.... CIGNA Companies ... 1360 Post Oak Boulevard." Counsel's secretary sent the notice to this address, but made an error in transcribing CIGNA's suite number.

INA never received notice. The Fadens received a bankruptcy discharge in December 1991. After learning of the Fadens' discharge, INA filed adversary proceedings alleging that because the Fadens failed to properly notify INA, the debts owed to INA were non-dischargeable pursuant to 11 U.S.C. § 523(a)(3).

The bankruptcy court agreed with INA and found that "Alan Faden was not forthcoming with his counsel as to his creditors' addresses," and that his "testimony was vague and not credible as to why he did not make a good faith effort to provide a correct address for this creditor." In addition, the court found that as a joint debtor Harriet Faden was also obligated to provide INA proper notice. The Fadens then moved for reconsideration, arguing for the first time that the court should allow an out-of-time amendment to include INA. The bankruptcy judge denied the motion.

The district court affirmed. The Fadens appealed to this Court. The bankruptcy court then entered an Amended Judgment awarding INA attorney's fees and costs incurred in connection with the adversary proceedings. The district court again affirmed and the Fadens timely appealed. We consolidated the two appeals for our disposition.

DISCUSSION

A. Standard of Review

The bankruptcy court's findings of fact "will not be set aside unless clearly erroneous." Matter of Delta Towers, Ltd., 924 F.2d 74, 76 (5th Cir.1991). However, "when a finding of fact is premised on an improper legal standard, that finding loses the insulation of the clearly erroneous rule." Matter of Fabricators, Inc., 926 F.2d 1458, 1464 (5th Cir.1991). "Conclusions of law, on the other hand, are subject to plenary review on appeal." Id.

B. Section 523(a)(3)

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:

A discharge ... does not discharge an individual debtor from any debt ... 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. § 523(a)(3)(A) (emphasis added). "The burden is on the debtors to complete their schedules accurately." Matter of Springer, 127 B.R. 702, 707 (Bankr.M.D.Fla.1991). In addition, the burden of proof rests with the debtor to show that a creditor had "notice or actual knowledge" under section 523(a)(3). U.S., Small Business Admin. v. Bridges, 894 F.2d 108, 111 (5th Cir.1990).

The bankruptcy court held that Appellants' notice fell short of the constitutional due process requirement to provide notice reasonably calculated under the circumstances. An adjudication that purports to determine the rights of adverse parties will not be accorded finality unless all affected individuals are given notice reasonably calculated to apprise them of the pendency of the proceeding and the scope of their rights, together with information sufficient to provide In this case, Mr. Faden had reliable information in his original investment documents with INA and in INA's correspondence with and suits against him, yet failed to provide any of this information to his attorney. Importantly, INA's Investor Bond Indemnification and Pledge Agreement clearly indicates an INA address where notice should be sent. Despite this readily available information, the Fadens made no attempt to provide any address to their counsel. The bankruptcy court was thus correct in holding that Appellants did not reasonably calculate their notice under the circumstances.

                them with an opportunity to prepare and present a response.   Mullane v. Central Hanover Bank & Trust Co., 339 U.S. 306, 314, 70 S.Ct. 652, 657, 94 L.Ed. 865 (1950).  In determining the constitutional adequacy of the notice,  Mullane made clear that "whether a particular method of notice is reasonable depends on the particular [factual] circumstances."   Tulsa Professional Collection Services, Inc. v. Pope, 485 U.S. 478, 484, 108 S.Ct. 1340, 1344, 99 L.Ed.2d 565 (1988)
                

Appellants argue that the mailing of notice to CIGNA (INA's parent) as listed in the current Houston telephone book was an act reasonably calculated to notify INA of the Fadens' bankruptcy proceeding. According to Appellants, a telephone directory is a proper source for determining a creditor's address. While reliance on a telephone directory may be reasonable in some circumstances, it did not suffice here because Appellants could have easily referenced their own files to find the requisite information. ² "Although a bankrupt is not required to exhaust every possible avenue of information in ascertaining a creditor's address, he must exercise reasonable diligence in accurately scheduling his debts." Matter of Robertson, 13 B.R. 726, 731 (Bankr.E.D.Va.1981).

C. Robinson Factors

When debtors fail to schedule creditors properly, a bankruptcy court may permit out-of-time amendments, "but only if exceptional circumstances and equity so require[ ]." Matter of Stone, 10 F.3d 285, 289 (5th Cir.1994). Appellants therefore argue that the bankruptcy court erred by not allowing an out-of-time amendment to include INA. The decision to reopen a bankruptcy case and allow amendment of schedules is committed to the sound discretion of the bankruptcy judge and will not be set aside absent abuse of discretion. In re Jones, 490 F.2d 452 (5th Cir.1974).

Our decision in Robinson v. Mann, 339 F.2d 547 (5th Cir.1964), is the touchstone for determining whether a debt is dischargeable under section 523(a)(3). Stone, 10 F.3d at 290. Robinson identified three relevant factors in evaluating whether a debtor's failure to list a creditor properly will prevent discharge of the unscheduled debt: (1) the reasons the debtor failed to list the creditor; (2) the amount of disruption that would likely occur; and (3) the prejudice suffered by the listed creditors and the unlisted creditor in question. Robinson, 339 F.2d at 550.

Under Robinson's first factor, "a court should not discharge a debt under section 523(a)(3) if the debtor's failure to schedule that debt was due to intentional design, fraud, or improper motive. If the failure is attributable solely to negligence or inadvertence, however, equity points toward discharge of the debt." Stone, 10 F.3d at 291 (citations omitted). "The burden is on the debtor ... to demonstrate absence of fraud or intentional design." Springer, 127 B.R. at 708.

In evaluating the debtors' motives, we owe deference to the critical role bankruptcy judges play in making credibility determinations. See Fed.R.Civ.P. 52(a); Bankr.R. 8013. In this case, the bankruptcy court unequivocally found that Mr. Faden's reasons for failing to provide adequate notice were incredulous.

The Court finds that Alan Faden's testimony was vague and not credible as to why he did not make a good faith effort to provide a correct address for this creditor.

Indeed, this Court finds that Debtors demonstrated very little effort to provide counsel with proper addresses as to any of their creditors. However, INA is the only creditor which has pursued the matter.

The court also found that "Alan Faden was not forthcoming with his counsel as to his creditors' addresses." Thus, instead of indicating mere inadvertence, the debtor's testimony suggested to the court that he intentionally or recklessly avoided supplying INA's proper address. Because no evidence suggests that this finding was clearly erroneous, the bankruptcy court did not abuse its discretion in declaring the debt non-dischargeable.

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