In re Costa, Bankruptcy No. 89-25188-C-7. Adv. No. 93-2616.
| Decision Date | 14 September 1994 |
| Docket Number | Bankruptcy No. 89-25188-C-7. Adv. No. 93-2616. |
| Court | United States Bankruptcy Courts. Ninth Circuit. U.S. Bankruptcy Court — Eastern District of California |
| Parties | In re Robert P. COSTA and Rebecca J. Costa, Debtors. Robert P. COSTA and Rebecca J. Costa, Plaintiffs, v. Peggyanne WELCH, individually and dba Credit Bureau of Amador and Calaveras Counties; Airola & Airola, Attorneys; Steven Airola, Esq.; and Wells Fargo Bank, N.A., Defendants. |
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H. Lee Horner, Jr., Horner & Horner, Sacramento, CA, for debtors/plaintiffs.
Mark E. Ellis, Murphy, Pearson, Bradley & Feeney, Sacramento, CA, for defendant Wells Fargo Bank, N.A.
Steven Airola, Airola & Airola, San Andreas, CA, for Airola & Airola and in pro. per.
What is a law-abiding bank to do? It obeyed state law and froze $541 when served with a facially valid writ of execution. Now the debtor demands that the bank pay $10,000 in punitive damages on the theory that honoring a writ of execution violated the bankruptcy discharge injunction with respect to a debt that the debtors had intentionally omitted from their bankruptcy schedules.
The procedure and remedies applicable in the unlisted creditor scenario need to be specified so that debtors, creditors, and those caught in the cross fire may understand their respective rights and obligations in the wake of recent decisions clarifying that the bankruptcy discharge does apply to some unlisted debts.
After surveying procedure and remedies, I conclude that a putative violation of the discharge injunction does not give rise to an implied private cause of action for damages and that damages are only available as a matter of the judicial discretion that applies in matters of civil contempt. Thus, the debtors' adversary proceeding seeking compensatory and punitive damages will be dismissed.
At the time this chapter 7 bankruptcy case was filed, Robert Costa was an individually named defendant in a lawsuit by a credit bureau seeking to recover on an account stated. He knew about the claim, discussed it with counsel, and, with advice of counsel, elected to omit both the debt and the creditor from the schedules and lists filed pursuant to Bankruptcy Code § 521(1), 11 U.S.C. § 521(1).
Three weeks after the bankruptcy filing, and before the discharge was entered, the credit bureau obtained a $1,408 judgment in state court without knowledge that a bankruptcy case was pending.
Long after the bankruptcy case was closed, the credit bureau obtained a writ of execution for $1,762, reflecting the judgment amount plus costs and post-judgment interest, which the sheriff served upon Wells Fargo Bank ("bank"). In compliance with California statute, the bank informed the sheriff that it had deposit accounts in the name of the judgment debtor and a third party, and that it would await receipt of notice to pay from the levying officer. The bank froze the account balances, which totaled $541, in compliance with state law2 and notified the account owners that it would hold the funds until all notice requirements concerning a third party had been met.
The debtor engaged new counsel who demanded that the bank and the credit bureau restore the funds immediately, insisting (incorrectly, as will be seen) that the Ninth Circuit's decision in Beezley v. California Land Title Co. (In re Beezley), 994 F.2d 1433 (9th Cir.1993), held that all debts of a debtor are discharged, whether or not scheduled. The response was (correctly) that until it could be determined that the case had been a no-asset case in which no deadline for filing claims was set, the debt was not necessarily discharged and that dischargeability potentially needed to be adjudicated.
The case was reopened on the debtors' motion, without opposition, in order to permit them to attempt to enforce the discharge injunction. The debtors made no attempt to amend the schedules to list the omitted creditor.
The debtors filed this adversary proceeding premised on violation of the discharge injunction and requested general, special, and punitive damages from the credit bureau, its attorney, and the bank. Answers were filed. No motions were made to test the sufficiency of the pleadings. The credit bureau settled. Trial ensued against the remaining defendants.
Evidence was adduced that this was a no-asset case. None of the parties introduced evidence to establish whether the clerk of the court had set a deadline to file claims. The official file of the bankruptcy case, which should contain the pertinent papers, had not been retrieved from archives.
Initially, there is the matter of the effect of the discharge on the omitted debt.
The question here lies a step beyond the problem of whether a case should be reopened for the limited purpose of amending schedules to list an omitted creditor. The Ninth Circuit's Beezley decision is an installment in that discussion and provides essential background to the dispute now at hand.
The confusion over amending schedules stems from a widespread failure to realize that the Bankruptcy Code does not require that a debt necessarily be scheduled in order to be discharged. Although the listing of a debt has lost the talismanic status it may have had under the former Bankruptcy Act, old habits die hard. After 1979, courts continued to receive motions for leave to reopen cases for the purpose of adding creditors to schedules, and some courts, including bankruptcy courts, assumed that amending the schedules made a difference.
The erroneous interpretation achieved some dignity when two courts of appeals assumed, without deciding, that adding an omitted creditor to the schedules after reopening the case would operate to discharge the omitted debt and then held that the dischargeability of debts before them depended upon whether there was a satisfactory explanation for the omission. Rosinski v. Boyd (In re Rosinski), 759 F.2d 539, 542 (6th Cir.1985); Stark v. St. Mary's Hospital (In re Stark), 717 F.2d 322, 323-24 (7th Cir. 1983).
These decisions perpetuated the confusion and stimulated a line of corrective bankruptcy court opinions that parsed the Bankruptcy Code to explain why the discharge encompasses unscheduled debts. The essential point is that amending the schedules to add an omitted debt after the discharge is entered is legally irrelevant to whether the particular debt is discharged.
Generally, unlisted debts are discharged unless the creditor did not learn of the bankruptcy in time to file a timely proof of claim or, if the debts are nondischargeable under 11 U.S.C. §§ 523(a)(2), (4), or (6), a timely nondischargeability action under those subsections. 11 U.S.C. § 523(a)(3). In the special case of the so-called "no-asset, no-bar-date case" where there are no assets for the trustee to liquidate and where no deadline for filing proofs of claim is fixed, it is never untimely to file a proof of claim, with the result that all unscheduled debts (except section 523(a)(2), (4), and (6) debts) are discharged.
The views expressed in these corrective decisions have been so harmonious as to constitute more of a chorus than a debate. Ten leading cases are cited in the margin.3 District courts have applied the same analysis in bankruptcy appeals.4 Significantly, no recent decision holds that amending schedules belatedly is relevant to whether the debt is discharged.5
The first and only court of appeals decision squarely to face the question of whether a belated amendment of schedules is legally relevant to discharge in a no-asset, no-bar-date case is Beezley in which the Ninth Circuit held that it was not an abuse of discretion for a bankruptcy court to decline to reopen a closed case for the purpose of adding an omitted debt to the schedules. In a two-paragraph per curiam opinion that cites Bakehorn, Stecklow, Tucker, Peacock, Thibodeau, Hunter, and Mendiola with approval, the court reasoned that after a no-asset, no-bar-date case is closed, dischargeability is unaffected by scheduling: Beezley, 994 F.2d at 1434. A comprehensive concurring opinion explicated the ruling.6
In view of allegations of fraud in the transaction that gave rise to the underlying claim, the Beezley court declined to opine whether the particular debt in issue was discharged. As the bankruptcy court had not allowed the Beezley bankruptcy case to be reopened, the question of how the debtor and omitted creditor could vindicate their rights was left open. And that is the question that arises here.
The precise status of the discharge in this case is, surprisingly, still uncertain. The debtors, who in a proceeding to enforce the discharge injunction have the burden of demonstrating that the discharge applies to the debt in question, failed to adduce evidence establishing that the clerk of the court did not fix a bar date for filing claims.
Their evidence was limited to the docket entries preserved by the clerk of court, which reflect that it was a no-asset case but do not indicate whether the form of the notice that the clerk of the court sent to creditors was the one that fixes a bar date or the one that does not. In the absence of other reliable evidence of the content of the notice, it would be necessary to view the actual notice in the official case file that should have been retrieved from archives.
If this was a no-asset, no-bar-date case, then Beezley would apply, and the debt in question would be deemed to have been discharged at the time of the original discharge.7 The discharge applies to all debts, listed or unlisted, except as expressly made nondischargeable. The nondischargeability provision applicable to unlisted debts is...
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