In re Peacock
| Citation | 139 BR 421 |
| Decision Date | 08 April 1992 |
| Docket Number | Adv. No. 91-2057.,Bankruptcy No. 89-12174 |
| Parties | In re Barbara Gale PEACOCK, Debtor. Barbara Gale PEACOCK, Plaintiff, v. STATE FARM MUTUAL AUTOMOBILE INSURANCE COMPANY, Defendant. |
| Court | United States Bankruptcy Courts. Tenth Circuit. U.S. Bankruptcy Court — Eastern District of Michigan |
Keith Kerwin, Flint, Mich., for plaintiff.
Steven O. Ashton, Plymouth, Mich., for defendant.
On October 12, 1989 Barbara Gale Peacock (hereafter "Debtor" or "Plaintiff") filed a voluntary petition for relief under chapter 7 of the Bankruptcy Code. She did not list any debt to State Farm Mutual Automobile Insurance Company (hereafter "State Farm" or "Defendant") in her schedules, nor was that creditor listed on the matrix. Accordingly, State Farm received no notice of the case. On September 6, 1991, the Plaintiff moved to reopen her case, which had been closed, per routine, in 1990. She alleged that State Farm had brought suit against her for an August 3, 1988 automobile accident involving a car which she owned but which was driven by another. As she had no insurance, the suit sought money from her directly. In her motion to reopen the case, the Debtor asserted that she had no knowledge of State Farm's claim and therefore that the omission of the claim from her schedules was "not due to any fault" of hers. She requested an order to reopen the case so that she could amend her schedules to belatedly list State Farm as a creditor. My order reopening the case, dated September 16, 1991, stated:
She asked that the case be reopened to add the omitted creditor. Presumably, the Debtor\'s objective in doing so is to discharge the underlying debt. Simply adding State Farm to her schedules, however, would not accomplish that objective. See In re David, 106 B.R. 126, 129 (Bankr.E.D.Mich.1989). Reopening this case for the purpose of adding the omitted creditor is pointless, then, unless the Debtor also seeks a determination from this Court that the debt in question has in fact been discharged. Id. at 129-30. An adversary proceeding must be initiated in order to obtain such a determination. F.R.Bankr.P. 7001(6).
I therefore conditioned the reopening upon the Debtor's filing of an adversary proceeding for the determination of the dischargeability of the State Farm debt.
After entry of this order, the Plaintiff filed a complaint seeking a determination that her debt to State Farm had been discharged by the order of discharge which entered on January 17, 1990. State Farm answered the complaint and opposed the relief. The Plaintiff's motion for summary judgment was heard on March 25, 1992. As there is no dispute of material fact, this opinion sets forth solely my conclusions of law, pursuant to F.R.Bank.P. 7052.
The Defendant conceded that had its debt been properly scheduled at the outset of the case, it would have had no cause of action against the Plaintiff for nondischargeability based on 11 U.S.C. § 523(a)(2), (4) or (6).1 Nevertheless the Defendant maintained that the Plaintiff knew or should have known about her potential liability to State Farm as early as December of 1988, which is when State Farm says it mailed her a letter asserting its claim. Because the Debtor recklessly omitted its claim from her schedules, the Defendant reasoned, she should be precluded from amending them now.
State Farm's argument confuses the issues of amending the schedules and the dischargeability of debt. My position on the (lack of) connection between these issues has been stated before. See In re David, supra. A simple example will highlight why the question of whether a particular debt appears on a schedule is often irrelevant to the determination of whether the debt is discharged.
Assume a debtor omits a debt for alimony, child support or last year's income taxes. No one would seriously argue that by merely reopening the case and amending the schedule to add the omitted creditor, the underlying debt is suddenly discharged. When the discharge entered, the debt either was or was not discharged. David, 106 B.R. at 131, n. 8; In re Mendiola, 99 B.R. 864, 868, 19 B.C.D. 440 (Bankr.N.D.Ill. 1989); In re Anderson, 72 B.R. 783, 16 C.B.C.2d 1539 (Bankr.D.Minn.1987); In re Anderson, 72 B.R. 495 (Bankr.D.Minn. 1987). The original listing of such debts would not discharge them, so how could the act of amending do so?
Moreover, no one would take the position that the omission bars the omitted creditor from filing a lawsuit to determine the dischargeability of its claim, or simply to enforce its claim. Nor should the debtor be precluded from defending that action with the affirmative defense of bankruptcy discharge. The debtor ought also be allowed to trigger the legal determination of whether the omitted claim was effectively discharged rather than waiting for the creditor to bring suit.
Dischargeability in this context arises under § 523(a)(3) if at all. As § 523(a)(3)(B)2 applies only when the omitted claim is one which might have been excepted from discharge if the creditor had the opportunity to timely file a complaint under § 523(a)(2), (4) or (6), and as State Farm has conceded that it lacks such a cause of action, § 523(a)(3)(B) is inapplicable.
The next question is whether § 523(a)(3)(A) excepts State Farm's debt from discharge. Here the issue is whether the debt was "listed or scheduled . . . 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." Id.
Restated, § 523(a)(3)(A) excepts a creditor's debt from discharge unless either of the following conditions is established: (1) the debt is scheduled in time to permit the creditor to file a timely proof of claim; or (2) the creditor obtained notice or actual knowledge that the debtor filed for bankruptcy in time to permit the creditor to file a timely proof of claim.
This is a no-asset case, so a deadline for filing proofs of claim has not been set. And since State Farm, by now at least, has "actual knowledge" of the case, the second condition is clearly established: State Farm can now file a proof of claim which would be timely (no deadline having been established), if it so desires.3 As an alternative, State Farm can request that its name be added to the matrix, so that it will receive notice from the clerk in the off chance that the case is subsequently reopened for the purpose of distributing newly discovered assets.
The important point here is that State Farm is in a position to timely assert its right to a portion of any distributions that might be made in this case, and that is sufficient to take it outside the scope of § 523(a)(3)(A). After all, the second condition in that subsection does not require that the omitted creditor actually exercise its option to file a timely claim: the exception to discharge created by (a)(3)(A) is rendered inapplicable by the mere fact that the creditor has notice or actual knowledge in time to do so. This is logical because the primary point in scheduling a creditor is to assure that the creditor receives notice of the bankruptcy filing. See In re Walker, 125 B.R. 177, 180 (Bankr.E.D.Mich.1990). Indeed, for purposes of § 523(a)(3), the notice is the only relevant function of scheduling a creditor; if it were not, then I presume that notice or actual knowledge of the bankruptcy filing would not serve as an acceptable substitute for timely scheduling of the creditor. For these reasons, it is clear that the debt to State Farm is not excepted from discharge on account of § 523(a)(3)(A).
State Farm's argument assumes that § 523(a)(3)(A) renders an omitted debt nondischargeable unless the debtor amends her schedules to add the omitted creditor. But the procedure of amending a debtor's schedules is relevant only to the first of the two conditions enumerated above: it has no bearing on the question of whether the second condition is established. If a creditor, like State Farm, has actual knowledge of a bankruptcy case in time to permit the filing of a timely proof of claim, then § 523(a)(3)(A) is rendered inapplicable regardless of whether the debt in question has been, or could be, added to the debtor's schedules.
Therefore, in a no-asset case like this one, to trigger the "unless" escape clause of § 523(a)(3)(A), all a debtor who belatedly realizes she has omitted a claim need do is to ensure that the omitted creditor gets some form of notice or actual knowledge of the case, such as by mailing him a letter or telling him in person before a handful of credible witnesses. If the debtor prefers the more formalistic and expensive4 approach, she can move, as the Debtor did here, under 11 U.S.C. § 350(b) to reopen the closed case and to amend the schedules. Even if the omitted creditor tries to resist the reopening or the amendment, simply by responding to the motion the creditor has put himself in an awkward position to argue that he has no such knowledge of the case. Another alternative for the debtor is to do nothing. If the creditor eventually sues to collect the debt, the debtor imparts "actual knowledge" of the bankruptcy to the creditor merely by asserting the bankruptcy discharge as a defense.
In summary, the Bankruptcy Code discharges debts which are never listed on a schedule. If a creditor has knowledge of the debtor's bankruptcy case in time to file a proof of claim and to bring a § 523(2), (4) or (6) cause of action, the omission of the claim is not a bar to its discharge. § 523(a)(3); 3 Collier on Bankruptcy, ¶ 523.135a (15th ed. 1992) ("If the creditor had notice or actual notice sic, knowledge of the case in time to permit timely filing of the proof of claim, the debt will be discharged whether listed or scheduled or not."). "Under the Code, only the creditors' rights to participate in a dividend and to obtain a determination of dischargeability are of such...
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