In re Mohammed

• Decision Date: 04 September 2015
• Docket Number: Case No.: 13–73191–ast
• Citation: 536 B.R. 351
• Parties: In re: Mir Mohammed, Debtor.
• Court: U.S. Bankruptcy Court — Eastern District of New York

536 B.R. 351

In re: Mir Mohammed, Debtor.

Case No.: 13–73191–ast

United States Bankruptcy Court, E.D. New York.

Signed September 04, 2015

Dilli R. Bhatta, Bhatta Law Firm, Jackson Heights, NY, for Debtor.

MEMORANDUM OPINION AND ORDER DENYING DEBTOR'S MOTION TO REOPEN

Alan S. Trust, United States Bankruptcy Judge

Pending before the Court is the motion filed by the former debtor, Mir Mohammed (“Debtor”), seeking to reopen her no asset chapter 7 case to schedule a previously undisclosed debt. The central issues here are: (i) whether an unscheduled debt is nonetheless automatically discharged in a no asset chapter 7 case; and, if so, (ii) whether a closed case should be reopened to schedule the unscheduled debt. The courts of appeals which have addressed the discharge of an unscheduled debt are split, and the Second Circuit has not yet ruled on it. For the reasons to follow, this Court concludes that the following test should be applied in these circumstances: a chapter 7 no asset case should not be reopened to allow an undisclosed debt to be scheduled unless: (i) the debtor or creditor can state a plausible basis for seeking a determination that the debt at issue does or does not fall within the category of non–dischargeable debts listed in Sections 523(a)(2), (4) or (6); or (ii) the creditor can state a plausible basis for the court to determine that assets may become available to distribute to creditors; or (iii) prejudice to either party which can be remedied by reopening the case has been demonstrated. Applying this test, the Motion will be denied.

Jurisdiction

This Court has jurisdiction over this core proceeding pursuant to 28 U.S.C. §§ 1334(b) and 157(b)(2)(A), and the Standing Orders of Reference in effect in the Eastern District of New York dated August 28, 1986, and as amended on December 5, 2012, but made effective nunc pro tunc as of June 23, 2011.

Findings of Fact and Conclusions of Law

The following constitutes the Court's findings of fact and conclusions of law to the extent Rule 7052 of the Federal Rules of Bankruptcy Procedure (the “Bankruptcy Rules”) so requires. See Fed. R. Bankr. P. 7052.¹

Background and Procedural History

On September 5, 2012, Jacob Milton commenced an action before the Queens County Supreme Court styled Jacob Milton v. Noor Mohammed, Mir Mohammed and Island Trading Enterprise, Inc., under index number 18478/2012, seeking damages based on alleged breaches of a loan agreement by Debtor and others (the “Contract Action”). No answer was filed, so Mr. Milton moved for a default judgment against all of the named defendants. On January 27, 2013, the state court entered an order granting the default judgment motion as to liability only. On February 14, 2013, after holding an inquest on the amount of Mr. Milton's damages, the state court entered a judgment in Mr. Milton's favor against Debtor and her co–defendants in the amount of $430,958.23 (the “Judgment”).

On June 14, 2013 (the “Petition Date”), Debtor filed a voluntary petition for relief under chapter 7 of the Bankruptcy Code, along with her bankruptcy schedules and statement of financial affairs (“SOFA”). Although Debtor listed thirty five unsecured creditors and three secured creditors holding approximately $598,509 in claims, she did not list the Judgment in her schedules, Mr. Milton in her creditor matrix, or the Contract Action in her SOFA. Debtor was represented by counsel when preparing and filing her bankruptcy petition and related papers.

Shortly after the Petition Date, the Clerk's Office generated and mailed notice of the commencement of Debtor's case to all creditors listed in her schedules. In that notice, the case was labeled a “no asset case”; thus, creditors were directed not to file proofs of claim until given notice to do otherwise; a date for the § 341 meeting of creditors was also provided. Mr. Milton did not receive this notice.

Allan B. Mendelsohn was duly appointed and qualified as the chapter 7 trustee of Debtor's bankruptcy estate (the “Trustee”).

On September 18, 2013, Debtor received a discharge. [dkt item 16]

On December 30, 2013, the Trustee issued his “Report of No Distribution”. The report indicated that after a diligent inquiry into Debtor's financial affairs, the Trustee was unable to discover any non–exempt estate property available for distribution to Debtor's creditors. Accordingly, the Clerk's Office was not required to give notice to creditors to file claims. That same day a final decree was entered [dkt item 18] and Debtor's case was closed.

Debtor neglected to disclose the existence of the Judgment or the Contract Action to the Court or to the Trustee at any point during her case. Thus, Mr. Milton did not receive notice of this case before it was closed; as such, he did not have the right to question Debtor at her § 341 meeting, to vote to elect a trustee, object to Debtor's claim of exemptions, challenge the dischargeability of his debt, or object to Debtor's right to receive a discharge.

On December 5, 2014, nearly one year after her case had been closed, Debtor filed a motion to reopen her bankruptcy case in order to add Mr. Milton's Judgment to her schedules and “allowing the discharge to be entered” (the “Motion”). [dkt item 19] In her Motion, Debtor argues that her failure to disclose the Judgment was inadvertent; although she knew of the Judgment, she avers that she did not list it in her schedules because she mistakenly believed that she “was not part of the alleged debt”. Debtor further contends that her belief was corroborated by the fact that the Judgment did not appear on her credit report at the time she filed her petition. Debtor also somewhat inconsistently states that “[t]he omission of the creditor from Schedule F was not intentional because the alleged debt was disputed.”

Debtor initially failed to serve the Motion on Mr. Milton.

On December 16 and 17, 2014, Debtor filed an amended Schedule F and Statement of Financial Affairs to which she added the Judgment and the Contract Action, respectively.²

On January 5, 2015, Mr. Milton filed a pro se objection to the Motion asking the Court to conduct a hearing on the Motion and for additional time to retain counsel to file a response (the “Opposition”). [dkt item 24]

The Court held a hearing on Debtor's Motion on February 24, 2015, at which Debtor, through counsel, and Mr. Milton, now through counsel, appeared. Mr. Milton contended that Debtor's omission of the Judgment from her schedules was not inadvertent because in the Contract Action she was served with a summons and complaint, various pleadings, and notices of hearings, including an inquest, before her bankruptcy filing. Therefore, he argues, Debtor was on notice of the Contract Action and the Judgment. Noting that the potential for an unsecured debt to be discharged through a bankruptcy case does not constitute legal prejudice, the Court inquired of Mr. Milton as to what prejudice he would suffer by having this bankruptcy case reopened. Mr. Milton only pointed to the time spent and fees he incurred in connection with prosecuting the Contract Action before Debtor's bankruptcy case had been filed. Debtor did not elaborate on her request for a discharge of the Judgment. At the conclusion of that hearing, the Court directed Debtor to file an affidavit regarding her failure to schedule the Judgment, and gave Mr. Milton an opportunity to file a response, after which the Court would take the matter under submission. The parties thereafter filed their affidavits.³

Discussion

1. The Standard for Reopening a Closed Bankruptcy Case

Bankruptcy Rule 5010 authorizes debtors or other parties in interest to move to reopen a closed bankruptcy case within a reasonable time. See Fed. R. Bankr. P. 5010, 9024⁴ . Section 350(b) of the Bankruptcy Code authorizes courts to reopen a case “to administer assets, to accord relief to the debtor, or for other cause.” 11 U.S.C. § 350(b). This Court has previously stated that “[t]he statute's permissive language provides the Court with broad discretion to determine whether a debtor filed a motion to reopen in good faith or has demonstrated good cause.” In re Farley, 451 B.R. 235, 237 (Bankr.E.D.N.Y.2011).

The decision to reopen a case “invoke[s] the exercise of a bankruptcy court's equitable powers, which is dependent upon the facts and circumstances of each case.” Katz v. I.A. Alliance Corp. (In re I. Appel Corp.), 104 Fed.Appx. 199, 200 (2d Cir.2004) (quoting State Bank of India v. Chalasani (In re Chalasani), 92 F.3d 1300, 1307 (2d Cir.1996) ). Although a motion to reopen is generally considered a “ministerial act,” in determining whether to grant the motion, it is appropriate for the Court to review the legal merits of the relief sought upon reopening. See In re Smith, 426 B.R. 435, 440 (E.D.N.Y.2010)aff'd Smith v. Silverman (In re Smith), 645 F.3d 186 (2d Cir.2011). This Court will limit the exercise of its discretion to reopen a closed case “in circumstances where relief may ultimately be afforded to a party, but not where reopening is futile or a waste of judicial resources.” Farley, 451 B.R. at 237.

The moving party carries the burden of proof in establishing cause to reopen. In re Arana, 456 B.R. 161, 172 (Bankr.E.D.N.Y.2011)appeal dismissed 2012 WL 3307357, 2012 U.S. Dist. LEXIS 113133 (E.D.N.Y. Aug. 12, 2012). While the Bankruptcy Code does not define what constitutes “cause” under § 350(b), courts have found that “cause to reopen a bankruptcy case includes the need to amend schedules to add assets or creditors”. Stein, 394 B.R. at 15.

In determining whether cause exists, courts must also consider “whether reopening a case would prejudice the adversary's position.” Id. at 16 (quoting In re Emmerling, 223 B.R. 860, 864 (2d Cir. BAP 1997) ); see Harbour Trust Co. v. Aaron (In re Plusfunds Group, Inc.), 589 Fed.Appx. 41, 42–43 (2d Cir.2015) (remanding case to the bankruptcy court to explain what prejudice, if any, would result to the adversary from reopening ...