In re Thompson

• Citation: 177 BR 443
• Decision Date: 30 January 1995
• Docket Number: Bankruptcy No. 891-84487-20.
• Parties: In re Henrietta THOMPSON, Debtor.
• Court: United States Bankruptcy Courts. Second Circuit. U.S. Bankruptcy Court — Eastern District of New York

177 B.R. 443 (1995)

In re Henrietta THOMPSON, Debtor.

Bankruptcy No. 891-84487-20.

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

January 30, 1995.

COPYRIGHT MATERIAL OMITTED

Gerald Mann, Sheldon Barasch, Robert Garner, DC 37 Municipal Employees Legal Services Plan, New York City, for debtor.

Marc Stuart Goldberg, Chapter 7 Trustee, New York City.

Stan Y. Yang, Office of U.S. Trustee, Garden City, NY.

MEMORANDUM DECISION

ROBERT JOHN HALL, Bankruptcy Judge.

Preliminary Statement

Before the Court¹ is a motion which brings forth a familiar issue: whether to allow a debtor to amend the bankruptcy schedules to add a debt not originally included in the petition, and to grant the debtor a discharge of the debt. One vexing aspect of this motion has created the problem in this and many of our other cases. That aspect concerns the scenario where the debtor makes application to amend the bankruptcy schedules, after the time allotted for the creditor to file an action to determine the dischargeability of the debt. A sub-issue that arises is whether the court should extend that creditor's time to file a dischargeability complaint, notwithstanding certain practical obstacles and a Federal Rule of Bankruptcy Procedure that only allows such extensions to be granted before the allotted time has expired.

After extensive analysis, the Court has determined that Bankruptcy Code section 523(a)(3) controls the vast majority of the scenarios which may be present when a debtor seeks to add a creditor not originally included in the bankruptcy petition. The outcome under section 523(a)(3) will vary depending upon three factors: (i) how long after the bankruptcy filing the debt is finally scheduled, (ii) whether the debtor commenced an asset or a no-asset case; and (iii) whether the debt is of, what we will term, the "fraud class." The problem to be addressed herein is the addition of a debt to the schedules of a no-asset case, after the time for filing dischargeability complaints has expired. We will cover the generally applicable law, then the problem, then its resolution.

DISCUSSION

Section 523(a) sets forth debts that are excepted from the discharge received by individual debtors. 11 U.S.C. § 523(a). The portion of this statute that governs nonscheduled debts provides:

(a) A discharge under section 727, 1141, 1228a, 1228(b), or 1328(b) of the Bankruptcy Code does not discharge an individual debtor from any debt —

(3) neither listed nor scheduled under section 521(1) of the Bankruptcy Code, 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 a 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; or

(B) if such debt is of a kind specified in paragraph (2), (4), or (6) of this subsection, timely filing of a proof of claim and timely request for a determination of dischargeability of such debt under one of such paragraphs, unless such creditor had notice or actual knowledge of the case in time for such timely filing and request;. . . .

11 U.S.C. § 523(a)(3).

As can be seen, section 523(a)(3) distinguishes between those debts which are, and those debts which are not, "of a kind specified in paragraph (2), (4), or (6)" of the subsection. Id. Parts (2), (4) and (6) of section 523(a) comprise a group of debts that may be referred to as being within the "fraud class." Id. § 523(a)(2), (4), (6). Fraud class debts consist of the debtor's obligations which derive from circumstances including false pretenses, actual fraud, embezzlement, larceny, or willful or malicious injury. Id.

A fraud class debt is not automatically excepted from discharge. 11 U.S.C. § 523(c). The creditor or party in interest must commence an adversary proceeding and obtain a judgment determining such debt non-dischargeable. Id. § 523(c)(1); Fed. R.Bankr.P. 4007. Unless the court determines fraud class debts non-dischargeable, the individual debtor "shall be discharged" from such debts. 11 U.S.C. § 523(c)(1). The creditor's ability to file a timely dischargeability complaint is plainly critical where a fraud class debt is concerned.

In cases under chapter 7,² dischargeability complaints may be filed not later than 60 days following the first date set for the meeting of creditors conducted pursuant to Code section 341(a). Fed.R.Bankr.P. 4007(c). This is not an abundant amount of time for creditors and parties desiring to file such complaints. If a debtor fails to schedule a fraud class debt in time to permit the filing of a timely dischargeability complaint, this improperly disables the creditor. Accordingly, section 523(a)(3)(B) bars the discharge of any fraud class debt not scheduled in time to permit the creditor to file a timely dischargeability complaint. 11 U.S.C. § 523(a)(3)(B).

Section 523(a)(3) also makes reference to the addition of debts to the bankruptcy schedules in time to permit the "timely filing of a proof of claim." 11 U.S.C. § 523(a)(3)(A), (B). This is an important time period for creditors to whom the debtor owes either fraud or non-fraud class debts. A creditor's right to share in a distribution of estate assets is highly constricted (or eliminated) if the creditor fails to file a proof of its claim. Id. § 726(a)(2). In cases under chapter 7 of the Bankruptcy Code, the final date upon which proofs of claims may be filed is 90 days after the first date set for the section 341(a) meeting of creditors. Fed.R.Bankr.P. 3002(c). If the debtor does not schedule a debt in time to permit the creditor to file a timely proof of claim, the debtor has improperly obstructed the creditor's ability to share in a distribution of the estate's assets. See 11 U.S.C. § 726(a)(2); id. Accordingly, section 523(a)(3) bars the discharge of non-fraud class debts not scheduled by the debtor in time to permit the creditor to file a timely proof of claim. 11 U.S.C. § 523(a)(3)(A). Fraud class debts are treated slightly differently and are considered next.

Section 523(a)(3)'s bifurcation requires the debtor to schedule debts within certain time periods which depend upon whether the debt is of the fraud class. Id. If a debt is within the fraud class, the debtor's neglect in scheduling the debt can prejudice the creditor's ability to file either a dischargeability complaint or a proof of the claim. Id. § 523(a)(3)(B). Therefore, fraud class debts are required to be scheduled in time to permit both the timely filing of a proof of claim and the timely filing of a dischargeability complaint. Id.; Haga v. National Union Fire Ins. Co. (In re Haga), 131 B.R. 320, 323 (Bankr.W.D.Tex.1991) (citing In re Padilla, 84 B.R. 194, 196 (Bankr. D.Colo.1987)). A debtor's failure to schedule a debt in time to permit a creditor to perform either action is plainly egregious. Section 523(a)(3)(B) therefore prevents the discharge of such untimely scheduled debts. 11 U.S.C. § 523(a)(3)(B).

For non-fraud debts, there is no need to be concerned that a debtor will not schedule the debt in time to allow the creditor to file a timely dischargeability complaint. See 11 U.S.C. § 523(a)(3)(A); 523(c); Fed. R.Bankr.P. 4007(b). A complaint seeking a determination that a non-fraud class debt is non-dischargeable may be filed "at any time." Fed.R.Bankr.P. 4007(b). Section 523(a)(3)(A) accordingly does not bar the discharge of non-fraud class debts, even if they are scheduled after the time allotted for the filing of complaints to determine the dischargeability of fraud class debts. 11 U.S.C. § 523(a)(3)(A). Section 523(a)(3)(A) only requires that the debtor schedule non-fraud class debts in time to permit the timely filing of a proof of claim by the creditor. Id. § 523(a)(3)(A).

Fraud class debts compel the creditor to be concerned with both the filing of a proof of claim, and with the dischargeability of the debt. The debtor's neglect should not impede the creditor from pursuing either right.

So, to recap, where the debtor seeks to add non-fraud class debts, one test applies: whether the debt was scheduled in time to permit the timely filing of a proof of claim. 11 U.S.C. § 523(a)(3)(A). The debtor's addition of fraud class debts requires application of two tests: whether the debt was scheduled in time to permit both the timely filing of a proof of claim and the timely filing of a dischargeability complaint. Id. § 523(a)(3)(B). If an individual debtor does not timely schedule any debt, that debt will be excepted from his or her discharge. Id. § 523(a)(3).

We consider these precise time periods favorable. Indeed, because they are statutory, we must enforce them. The policy should be to allow liberal amendments of the schedules by a debtor. See Fed.R.Bankr.P. 1009(a); In re Candelaria, 121 B.R. 140, 144 n. 2 (E.D.N.Y.1990) ("Bankruptcy Code favors accuracy in debtors' schedules") (citing In re Godley, 62 B.R. 258, 261-62 n. 1 (Bankr.E.D.Va.1986); In re Jensen, 46 B.R. 578, 581 (Bankr.E.D.N.Y.1985)). If a debt is added within the respectively allotted time periods, it may be discharged in due course. But if a debt is not timely added, the statute must be adhered to and that debt must be excepted from the debtor's discharge. Any request by the debtor for a discharge of this untimely scheduled debt must also be denied.

The Chronic Dilemma

As briefly stated above, in addition to whether the debt is of the fraud class, the results of the application of section 523(a)(3) are also quite dependent upon whether the case is an asset or a "no-asset" case. The addition of originally unscheduled debts to the no-asset case can generate a difficult issue. It is a recurrent issue with which we and other courts and commentators have struggled. See generally Wayne Johnson, Discharging Unscheduled Debts: Creating Equal Justice for Creditors by Restoring Integrity to Section...