Shondel, Matter of

• Decision Date: 18 December 1991
• Docket Number: No. 90-3786,90-3786
• Citation: 950 F.2d 1301
• Parties: 26 Collier Bankr.Cas.2d 193, 22 Bankr.Ct.Dec. 694, Bankr. L. Rep. P 74,373 In the Matter of Gladys E. SHONDEL, Debtor-Appellant.
• Court: U.S. Court of Appeals — Seventh Circuit

Page 1301

950 F.2d 1301

26 Collier Bankr.Cas.2d 193, 22 Bankr.Ct.Dec. 694,

Bankr. L. Rep. P 74,373

In the Matter of Gladys E. SHONDEL, Debtor-Appellant.

No. 90-3786.

United States Court of Appeals Seventh Circuit.

Argued Sept. 13, 1991.

Decided Dec. 18, 1991.

R. Glen Wright, Findlay, Ill., John C. Sciaccotta, Jill A. Dougherty (argued), James M. Rogan, Kelly, Olson, Pusch, Rogan & Siepker, Chicago, Ill., for appellee.

James E. Peckert (argued), Charles C. Hughes, Kehart, Shafter, Hughes & Webber, Alan D. Bourey, Decatur, Ill., for debtor-appellant.

Before CUDAHY and EASTERBROOK, Circuit Judges, and MOODY, District Judge. ^*

CUDAHY, Circuit Judge.

In this case we are asked to determine whether a bankruptcy case may be reopened and the permanent injunction under 11 U.S.C. § 524 modified to permit recovery from the debtor's insurer. The issue is complicated here by two problems. First, though the debtor failed to list her insurance policy on her bankruptcy schedules, the creditor was aware of the insurance throughout the bankruptcy proceedings. And second, the state court in which the creditor seeks recovery previously dismissed the creditor's suit with prejudice on the ground that the section 524 injunction precludes judgment against the debtor. The district court affirmed the bankruptcy court's decision to reopen the case and modify the injunction, and we affirm.

I.

The relevant facts are not disputed. On July 19, 1985, Gladys Elaine Shondel was involved in an automobile accident which resulted in the death of Jimmie D. Craft. Mary Ellen Craft (the widow) was appointed executor of Jimmie Craft's estate, and on August 15 she filed a wrongful death action against Shondel in the Circuit Court of Macon County, Illinois. On March 14, 1986, Shondel filed a voluntary petition for relief pursuant to Chapter 7 of the Bankruptcy Code, 11 U.S.C. §§ 701-766, listing Craft as a creditor. Shondel possessed automobile liability insurance, but did not list the policy as an asset of the estate. Throughout the bankruptcy proceedings, however, Craft, through her attorney, had knowledge of Shondel's insurance. Shondel received her discharge on July 9, 1986, and on August 12 she moved in state court to dismiss the wrongful death action. On January 7, 1987, the state court dismissed that action with prejudice on the basis of Shondel's discharge.

On May 13, 1988, Craft moved the bankruptcy court to reopen the bankruptcy case and lift the automatic stay to allow her to proceed against Shondel in state court to the extent of Shondel's insurance coverage. On December 15, the former Trustee also moved the bankruptcy court to reopen the case to allow him to administer an undisclosed asset (the insurance policy). On October 26, 1989, the bankruptcy court reopened the case and modified the permanent injunction to allow Craft to proceed in state court on her wrongful death claim. However, the court also enjoined Craft from collecting any judgment in the action from Shondel, Shondel's property or property of the estate. Shondel then appealed to the district court, which affirmed. The lower courts reasoned that a bankruptcy discharge does not prohibit a determination of the debtor's liability for the purpose of seeking recovery from the debtor's insurer. They concluded further that the bankruptcy court could, within its discretion, reopen the case and modify the permanent injunction issued pursuant to 11 U.S.C. § 524.

II.

A. Reopening of the Bankruptcy Case

Shondel's first argument on appeal is that the lower courts erred in deciding that the bankruptcy case could be reopened. Section 350(b) of the Bankruptcy Code provides: "A case may be reopened in the court in which such case was closed to administer assets, to accord relief to the debtor, or for other cause." 11 U.S.C. § 350(b). The courts below identified three factors as providing "other cause" sufficient to justify reopening the bankruptcy case: the neglect of Craft's counsel during the bankruptcy proceedings; the fact that Shondel's insurance was not listed as an asset; and the conduct of Shondel's counsel in convincing the state court to adopt an erroneous position with respect to the effect of a discharge. Shondel argues that none of these factors constitutes "other cause" under section 350(b).

The Bankruptcy Code does not define "other cause." A decision to reopen a case for "other cause" lies within the discretion of the bankruptcy court and will be reversed only for an abuse of that discretion. See, e.g., Hawkins v. Landmark Finance Co., 727 F.2d 324, 326 (4th Cir.1984); In re Thomas, 204 F.2d 788, 791 (7th Cir.1953). In exercising its discretion to reopen a case, "the bankruptcy court should exercise its equitable powers with respect to substance and not technical considerations that will prevent substantial justice." In re Stark, 717 F.2d 322, 323 (7th Cir.1983) (per curiam). The trend in reopening cases under section 350(b) has thus been "to allow the bankruptcy judge broad discretion to weigh the equitable factors in each case." Michael P. Saber, Section 350(b): The Law of Reopening, 5 Bankr.Dev.J. 63, 82 (1987) (collecting cases).

We believe that the bankruptcy court had sufficient cause to reopen Shondel's case in order to modify the permanent injunction. Initially we note that equitable considerations weigh heavily in favor of Craft. Such considerations led this Court in Stark to favor a broad policy of reopening: there we held that a debtor may reopen a case to add an omitted creditor where there is no evidence of fraud or intentional design and where the creditor is not harmed. 717 F.2d at 324. We think that a case may be reopened under analogous circumstances where a creditor seeks recovery from a previously undisclosed asset of the debtor. Here there is no evidence of fraud or intentional design on the part of Craft. Moreover, since the modified injunction prohibits any recovery from Shondel personally, she is not harmed or seriously prejudiced by the reopening. As this Court has recently concluded, "[D]ebtors-defendants suffer little prejudice when they are sued by plaintiffs who seek nothing more than declarations of liability that can serve as a predicate for a recovery against insurers, sureties, or guarantors." In re Fernstrom Storage & Van Co., 938 F.2d 731, 736 (7th Cir.1991); accord In re Holtkamp, 669 F.2d 505, 508-09 (7th Cir.1982). Thus in Fernstrom Storage this Court found the requisite "cause" to grant relief from the automatic stay under section 362(a) where the creditor sought to sue the debtor solely to obtain recovery from the debtor's insurer. Although it involved a different provision of the Bankruptcy Code, the analogous posture of the case and the similar "cause" requirement make its reasoning persuasive here.

With these equitable principles in mind, we turn to the specific factors relied on by the courts below in finding cause to reopen the case. First, the lower courts pointed to the neglect of Craft's original counsel in failing to take the appropriate action in the bankruptcy court to protect his client's rights. ¹ Craft's counsel did fail to follow the usual procedure for recovering from an insurer in a case such as this one, which is to move the bankruptcy court to lift the automatic stay and allow the state court suit to proceed. See, e.g., Fernstrom Storage, 938 F.2d at 735; Holtkamp, 669 F.2d at 507. Here, the automatic stay of section 362 had been replaced by the permanent injunction under section 524 when Shondel received her discharge. In addition, Craft's attorney failed to persuade the state court that a discharge in bankruptcy does not discharge the obligations of a debtor's insurer under an insurance policy. Shondel argues that counsel's neglect cannot constitute "cause" under section 350(b). She cites Powell v. Starwalt, 866 F.2d 964 (7th Cir.1989), which held that an attorney's neglect cannot be "good cause" under Federal Rule of Civil Procedure 4(j) (requiring dismissal for failure to serve summons and complaint within 120 days). We do not think that a showing of "good cause" under Rule 4(j) should be equated with a bankruptcy court's discretion to reopen a case for "other cause" under section 350(b). ² In contrast to a court's ruling on a Federal Rule, a bankruptcy court exercises equitable powers and, as noted, should emphasize "substance and not technical considerations that will prevent substantial justice." Stark, 717 F.2d at 323. Therefore, while counsel neglect or mistake may not be "good cause" for purposes of Rule 4(j), it may be a factor in the finding of "other cause" in the context of a bankruptcy reopening. ³

The lower courts' second basis for reopening the case is Shondel's failure to list her liability insurance as an asset on her bankruptcy schedules. Shondel argues that this cannot be cause to reopen because Craft was aware of the insurance and therefore could not have been defrauded or harmed by its omission. The dominant view is that insurance policies that provide coverage for the debtor's liability are property of the debtor's estate. See In re Titan Energy, Inc., 837 F.2d 325, 329 (8th Cir.1988); Tringali v. Hathaway Mach. Co., 796 F.2d 553, 560 (1st Cir.1986); A.H. Robins Co. v. Piccinin, 788 F.2d 994, 1001 (4th Cir.), cert. denied, 479 U.S. 876, 107 S.Ct. 251, 93 L.Ed.2d 177 (1986); In re Minoco Group of Companies, Inc., 799 F.2d 517, 519 (9th Cir.1986). As such, they generally should be listed on the debtor's schedule of assets under 11 U.S.C. § 521(1). As the bankruptcy court noted, however, it is not current practice for debtors to list each insurance policy as an asset in every case. Bankr.Ct.Op. at 5 (Oct. 26, 1989). We nonetheless agree with the lower courts that, at least where a debtor schedules a liability claim and owns liability insurance to cover that claim, the liability insurance policy should be listed as an asset of the estate.

Shondel's failure to list her insurance...