In re Horlacher

• Decision Date: 07 March 2008
• Docket Number: Bankruptcy No. 04-31126.,Adversary No. 06-03033.
• Citation: 389 B.R. 257
• Parties: In re Michael D. HORLACHER and Irma D. Horlacher, Debtors. Eglin Federal Credit Union, Creditor/Plaintiff, v. Michael D. Horlacher and Irma D. Horlacher, Debtors/Defendants.
• Court: U.S. Bankruptcy Court — Northern District of Florida

389 B.R. 257

In re Michael D. HORLACHER and Irma D. Horlacher, Debtors Eglin Federal Credit Union, Creditor/Plaintiff, v. Michael D. Horlacher and Irma D. Horlacher, Debtors/Defendants.

Bankruptcy No. 04-31126.

Adversary No. 06-03033.

United States Bankruptcy Court, N.D. Florida, Pensacola Division.

March 7, 2008.

COPYRIGHT MATERIAL OMITTED

J. Paul Fitzgerald, Milton, FL, for Michael and Irma Horlacher.

Louis L. Long, Jr., Shalimar, FL, for Eglin Federal Credit Union.

ORDER GRANTING RECONSIDERATION OF THE NONDISCHARGEABILITY ORDER AND GRANTING DISCHARGE OF CLAIM NO. 17 PURSUANT TO § 726(a)(2)(C)

MARGARET A. MAHONEY, Bankruptcy Judge.

This matter came before the Court on Defendants' Motion for Reconsideration. The Court has jurisdiction to hear this matter pursuant to 28 U.S.C. §§ 157 and 1334 and the Order of Reference of the District Court. This is a core proceeding pursuant to 28 U.S.C. § 157(b)(2)(I), and the Court has authority to enter a final order. For the reasons indicated below, the Court will reconsider its January 17 2008 order in light of the interplay between § 523(a)(3)(A) and § 726(a)(2)(C) and discharges Debtors' claim number 17.

Facts

The Debtors filed a voluntary chapter 7 bankruptcy petition on May 4, 2004. They did not list Eglin Federal Credit Union ("Credit Union") as a creditor on their filed petition or schedules. The Debtors received a discharge on August 10, 2004. The bar date for creditors to file proofs of claim was September 14, 2004. The Credit Union did not receive the court issued notice regarding the proof of claim deadline because it was not listed on Debtors' schedule as a creditor. The Credit Union states that it did not receive notice of Debtors' bankruptcy case until June of 2005.

The Credit Union filed an adversary complaint on December 6, 2006 alleging its claim is nondischargeable pursuant to 11 U.S.C. § 523(a)(3)(A). The Debtors answered the complaint on January 8, 2007; they acknowledged that the Credit Union did not have formal notice of the bankruptcy proceedings but asserted that it did have notice or actual knowledge to be within the exception of § 523(a)(3)(A).¹ On February 28, 2007, the Debtors amended their schedules to list the Credit Union as a creditor, and on March 5, 2007, Debtors filed claim number 17 in the amount of $18,279.95 on behalf of Eglin Federal Credit Union pursuant to § 501(c).

The Credit Union denied the allegation of any actual knowledge of the bankruptcy proceeding and on August 23, 2007 moved for summary judgment in its adversary case. The motion for summary judgment was denied on November 13, 2007 but narrowed the triable issue to whether or not the Credit Union had actual knowledge.

A trial was held on December 14, 2007, to determine if the Credit Union had actual knowledge or notice of the Debtors' bankruptcy. At trial, the Debtors testified that the Credit Union was to be listed as a creditor on their petition and was inadvertently omitted. The Court determined from the evidence presented, the Debtors did not carry their burden of proving that the Credit Union had actual knowledge of the bankruptcy. Based on the evidence before it, the Court issued an order on January 17, 2008 declaring the debt owed to the Credit Union was nondischargeable.

On January 25, 2008, Debtors/Defendants filed a motion asking the Court to reconsider its ruling. The Debtors' motion contained two main theories on why the Court should reconsider its ruling of nondischargeability: (1) that the Credit Union had sufficient information to be charged with actual knowledge under the prudent person standard, and (2) that if the Credit Union had no knowledge of the bankruptcy proceeding, then § 726(a)(2)(C) authorized the creditor to file a "tardy" claim that is effectually "timely" under § 523(a)(3)(A), so the debt is dischargeable. The Credit Union responded on February 13, 2008 asserting two reasons that the Court should not entertain Debtors' motion. The Credit Union contends (1) that the grounds for reconsideration under Rule 59(e) are not met, and (2) that § 726 can not be interpreted to disregard the plain meaning of § 523.

The Debtors' case is still pending. It is unclear whether or not there will be any assets to distribute. There remain two outstanding tort suits for automobile accidents that may bring money into the estate. If the suits do not settle or prevail at trial, the Debtors' case will most likely be declared a no asset case. To date, there has been no distribution of any estate proceeds to any creditors.

A hearing on Debtors' Motion to Reconsider was held on February 15, 2008.

Law and Analysis

The Debtors bear the burden of proving that reconsideration of the nondischargeability order is appropriate. Matter of Homestead Partners, Ltd., 201 B.R. 1014, 1018 n. 4 (Bankr.N.D.Ga.1996). A motion for reconsideration may be brought pursuant to Fed.R.Civ.P. 59(e) or 60(b). Federal Rules 59(e) and 60(b) are incorporated into the Bankruptcy Rules and, with exceptions that do not apply in this case, they are identical to Bankruptcy Rules 9023(e) and 9024(b). Therefore, nonbankruptcy cases that interpret the rules are applicable. Sussman v. Salem, Saxon & Nielsen, P.A., 153 F.R.D. 689 (M.D.Fla. 1994). "If the motion is served within ten days of the rendition of judgment, the motion falls under Rule 59(e); if it is served after that time, it falls under Rule 60(b)." Id. at 694. Debtors filed their motion for reconsideration within ten days of the January 17, 2008 judgment; therefore, the Court will consider the motion under Rule 59(e).

I. Standard for Reconsideration

A motion for reconsideration "is an extraordinary remedy" that is to be used by the courts "sparingly." Mathis v. United States of America (In re Mathis), 312 B.R. 912, 914 (Bankr.S.D.Fla.2004) (quoting Sussman, 153 F.R.D. at 694). A motion to alter or amend a judgment may be brought pursuant to the Federal Rule of Civil Procedure 59(e). Fed. R. Bankr.P. 9023. "Rule 59(e) does not set forth any grounds for relief and the district court has considerable discretion in reconsidering an issue;" Sussman, 153 F.R.D. at 694 (citing to American Home Assur. Co. v. Glenn Estess & Associates, Inc., 763 F.2d 1237, 1238-39 (11th Cir. 1985)). The grounds for granting reconsideration of an order are limited to (1) an intervening change in the law, (2) consideration of newly discovered evidence, and/or (3) correcting clear error or preventing manifest injustice, In re Mathis, supra.

The Debtors move for reconsideration based on their assertion that the debt of the Credit Union should be discharged given the facts of the case under the "prudent person" standard and section 726(a)(2)(C). It is clear from the case law that Debtors cannot move for reconsideration based on this new argument that was available at the time of the trial, but was not advanced. In re Kellogg, 197 F.3d 1116, 1120 (11th Cir.1999). The Debtors are not presenting newly discovered evidence to the Court in support of their motion. Mays v. United States Postal Serv., 122 F.3d 43, 46 (11th Cir.1998). Therefore, the only possibility of Debtors' succeeding on their motion for reconsideration is for the Court to find an error in law or manifest injustice in its January 17, 2008 nondischargeability order.

The Court declines to reconsider based on Debtors first contention, that the Court erred in ruling that the Credit Union had actual knowledge based on the prudent person standard. This legal theory and standard was considered by the Court in its January 17, 2008 order. There has been no change in law or newly discovered evidence since that order was issued that would change the Court's analysis. Furthermore, the Court finds no clear error as to the law or facts on this issue or any manifest injustice.

As to Debtors second contention, that the nondischargeability order was entered prematurely due to the opportunity the Credit Union has under 28 U.S.C. § 726 to still file a claim and take part in any distribution, the Court will grant reconsideration. This is a new argument presented by Debtors. In fact, it is an argument that could have and should have been brought by the Debtors at the time they responded to the Credit Union's motion for summary judgment or at trial. Section 726 is not new law, nor was new evidence discovered that now makes section 726 applicable to the case where it would not have been before. However, if Debtors are correct in their analysis of the interplay of section 523 and section 726, then the Court has made an error in law and there would be injustice if the nondischargeability order was not reconsidered. For this reason, the Court will reconsider its January 17, 2008 order in light of section 726.

II. Interplay of § 523(a)(3)(A) and § 726(a)(2)(C)

A.

The starting place for this review will be the Bankruptcy Code's nondischargeability statute, § 523. The pertinent part of § 523 states:

(a) A discharge under § 727 ... does not discharge an individual debtor from any debt—

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(3) 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—

(A) if such debt is not of kind specified in paragraph (2), (4), or (6) of this subsection, timely filing of a proof of claim, unless such creditor had notice or actual knowledge of the case in time for such timely filing.

28 U.S.C. § 523(a)(3)(A). This statute and the law surrounding it was the focus of the Court, based on the presentation of the parties and their motions, when it made its January 17, 2008 ruling. The court did not previously consider section 726 which states:

(a) Except as provided in section 510 of this title, property of the estate shall be distributed—

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(2) second, in payment of any allowed unsecured claim ... proof of which is—

(A) timely filed under section 501(a) of this title;

(B) timely filed under section 501(b) or 501(c)...