Neal v. Oak Brook Management Corp.

• Decision Date: 27 April 2007
• Docket Number: No. 2-06-0549.,2-06-0549.
• Citation: 867 N.E.2d 1229
• Parties: Lawrence P. NEAL and Dawn Luebers Neal, Plaintiffs-Appellants, v. OAK BROOK MANAGEMENT CORPORATION, Defendant (Robert F. Smith, Defendant-Appellee).
• Court: United States Appellate Court of Illinois

867 N.E.2d 1229

Lawrence P. NEAL and Dawn Luebers Neal, Plaintiffs-Appellants, v. OAK BROOK MANAGEMENT CORPORATION, Defendant (Robert F. Smith, Defendant-Appellee).

No. 2-06-0549.

Appellate Court of Illinois, Second District.

April 27, 2007.

Drake James Leoris, Jr., David Drenk, Leoris & Cohen, P.C., Highland Park, for Dawn Luebers Neal and Lawrence Neal.

Mitchell M. Iseberg, Law Office of Mitchell M. Iseberg & Associates, Chicago, for Oak Brook Management Corp., and Robert F. Smith.

Justice O'MALLEY delivered the opinion of the court:

Plaintiffs, Lawrence P. Neal and Dawn Luebers Neal, appeal from an order of the circuit court of Lake County, granting the motion of Robert F. Smith to be dismissed as a defendant because the relevant debt was discharged in bankruptcy. We hold that the trial court erred in ruling that the debt was discharged, and we therefore reverse and remand.

Plaintiffs sued Oak Brook Management Corp. (OBMC) and Smith for common-law fraud, consumer fraud, and breach of contract. They filed their complaint on November 8, 2002. On March 12, 2003, the trial court entered an order staying the case against Smith because he had filed for protection under chapter 11 (11 U.S.C. § 1101 et seq. (2000)) of the United States Bankruptcy Code (11 U.S.C. § 101 et seq. (2000)).¹ OBMC answered the complaint on March 27, 2003.

On February 17, 2004, Smith moved to be dismissed from the case under section 2-619(a)(6) of the Code of Civil Procedure (735 ILCS 5/2-619(a)(6) (West 2004)). That section allows the dismissal of an action when the claim involved is barred by a discharge in bankruptcy. He stated that he filed for bankruptcy protection on April 25, 2002, and had "amended the schedules attached to his bankruptcy petition to include Plaintiffs' pre-petition claim." The schedules attached as an exhibit show a filing date of December 12, 2002. He received a discharge. Another exhibit is a copy of a discharge order entered on August 11, 2003, under section 1141(d) of the Bankruptcy Code (11 U.S.C. § 1141(d) (2000))—a chapter 11 discharge. Smith asserted that "[s]ince Plaintiffs' claim against Smith was listed in Smith's schedules and since Plaintiffs did not object to the discharge of Smith, Plaintiffs' claims against Smith have been discharged and Plaintiffs are enjoined from continuing the instant action against Smith."

Plaintiffs responded, arguing that the debt was excepted from discharge under section 523(a)(3)(B) of the Bankruptcy Code (11 U.S.C. § 523(a)(3)(B) (2000)). They asserted that the court should take judicial notice that Smith's meeting of creditors took place on May 30, 2002. They noted that, under Rule 4007(c) of the Federal Rules of Bankruptcy Procedure (Fed. R. Bankr.P. 4007(c)), in bankruptcy proceedings the deadline for filing a complaint to determine the dischargeability of a debt is 60 days after the meeting of creditors. Thus, they argued, the last day for filing a complaint was July 30, 2002. Further, because Smith did not add their claims to the schedule until December 12, 2002, they did not have an opportunity to object to the dischargeability of the debt, and it became nondischargeable under section 523(a)(3)(B).

Smith replied that, when a creditor is added to a petition, the creditor then has a "reasonable time" to object to dischargeability and that, if he or she does not, the debt is discharged. He noted that "some courts" have held that 60 days is a reasonable time.

The court granted Smith's motion to dismiss on March 8, 2005, and plaintiffs timely appealed.

We hold that the trial court erred in granting Smith's motion. It misinterpreted the applicable bankruptcy law. The Bankruptcy Code and the Federal Rules of Bankruptcy Procedure provide that amendments to schedules do not alter the deadlines for filing bankruptcy court complaints to determine the dischargeability of fraud debt. The cases Smith has cited do not alter this rule. Consequently, plaintiffs' failure to file a complaint to determine dischargeability in bankruptcy court did not render the debt dischargeable.

Initially, we note that, although the issues in this appeal are almost entirely ones of bankruptcy law, this court and the trial court have subject matter jurisdiction. Principally at issue is whether the discharge exception of section 523(a)(3)(B) allows plaintiffs' suit to proceed in the face of Smith's discharge. Whether state courts have jurisdiction concurrent with that of the bankruptcy courts to decide whether debts are excepted from discharge under section 523(a)(3)(B) has been in contention in the bankruptcy courts. Compare In re Padilla, 84 B.R. 194, 196-97 (Bankr.D.Colo.1987) (holding that jurisdiction to decide whether a debt belongs to one of the classes that would bring it within the scope of section 523(a)(3)(B) lies exclusively in the bankruptcy courts), with In re Strano, 248 B.R. 493, 501-03 (Bankr. D.N.J.2000) (holding that, although the bankruptcy court is the preferred forum because of its greater expertise, state courts have concurrent jurisdiction). We find persuasive In re Strano's careful analysis of the relevant statutory provisions concluding that the provisions that give bankruptcy courts exclusive jurisdiction over closely related issues do not apply to section 523(a)(3)(B). Adopting that analysis, we find that this court and the trial court have subject matter jurisdiction.

Smith asserts that plaintiffs' claims were discharged because plaintiff's did not seek a determination of dischargeability in bankruptcy court. More specifically, he asserts that his amendment to his schedules forced plaintiffs to file a complaint in bankruptcy court to preserve their claims. That is not the law. As we discuss, debts due to fraud, akin to that alleged here,² usually fall within a group of restricted exceptions to discharge—exceptions that require the creditor to file a timely complaint in bankruptcy court to determine dischargeability or else have those debts automatically discharged. Ordinarily, for the required complaint to be timely, a creditor must file it within 60 days of the date originally set for the meeting of creditors. Plaintiffs never filed a complaint in bankruptcy court. However, bankruptcy law creates an exception to that requirement in cases where the creditor does not have notice of the bankruptcy in time to file a timely complaint, thus creating an exception to an exception to an exception. Smith does not deny that plaintiffs lacked notice of the bankruptcy in time to file a complaint within the 60-day period. Nevertheless, he asserts that bankruptcy law required plaintiffs to file a complaint within a reasonable time after he amended his schedules to list plaintiffs as creditors. In support of his position, Smith points to certain cases that hold that bankruptcy courts may set a time limit for the filing of the required complaints when they reopen a case to allow a debtor to amend his or her schedules to include omitted creditors. As we will explain, these cases are inapposite. Although the cases may be correct that courts can set such limits, the law is clear that new limits do not automatically arise when a debtor amends his or her schedules. Thus, plaintiffs' failure to file a complaint when Smith amended his schedules did not cause their claims to be discharged.

We start our consideration of the applicable bankruptcy law by considering the scope of the section 523(a)(3)(B) exception to discharge. Section 523(a) limits the dischargeability of an individual's debts under all chapters of the Bankruptcy Code. 11 U.S.C. § 523(a) (2000). When Smith filed for protection, section 523(a) contained 18 subsections describing the types of nondischargeable debt. Three of these subsections describe debt arising from certain kinds of intentional torts, including some frauds and misrepresentations; we will call this "fraud debt." Fraud debts are the restrictedly dischargeable debts—the debts for which a creditor must generally file a complaint to avoid their discharge.³

The sections describing fraud debts are 523(a)(2), (a)(4), and (a)(6). 11 U.S.C. § 523(a)(2), (a)(4), (a)(6) (2000). The restriction on their dischargeability arises from section 523(c)(1). The effect of that section is to require a creditor to file an adversary complaint in bankruptcy court to preserve their nondischargeability. See 11 U.S.C. § 523(c)(1) (2000). (We will thus refer to the complaints this section requires as "section 523(c)(1) complaints.") Section 523(c)(1) itself contains an exception: it provides for the discharge of fraud debt absent a proper complaint "[e]xcept as provided in subsection (a)(3)(B) of this section." 11 U.S.C. § 523(c)(1) (2000). As we explain, sections 523(a)(3)(B) and 523(c)(1), read together, limit the dischargeability of fraud debt, even when a creditor has not filed a section 523(c)(1) complaint, to cases where the creditor has received acceptable notice of the bankruptcy. Debts falling into the other categories excepted from discharge are not discharged despite a creditor's inaction in the bankruptcy proceedings, and a creditor can raise the nondischargeability of those debts for the first time in a state court action to collect them. See, e.g., In re Walker, 195 B.R. 187, 203-04 (Bankr. D.N.H.1996).

Section 523(a)(3) limits the dischargeability of all debts the debtor did not properly list on his or her bankruptcy schedules.⁴ It contains two very similar subsections. Section 523(a)(3)(A) applies to debt other than fraud debt. It bars discharge of a debt unless the debt was scheduled in time for the creditor to file a timely proof of claim, or unless the creditor had actual notice of the bankruptcy in time to file a timely proof of claim. The last day to file a timely proof of claim—the claims bar date—is thus the sole date critical to determining dischargeability under section 523(a)(3)(A). Section 523(a)(3)(B) applies to fraud debt. It bars discharge of...