Bowen v. Franks (In Re Bowen)

102 B.R. 752, 1989 Bankr. LEXIS 1352, 1989 WL 92743

• Court: United States Bankruptcy Appellate Panel for the Ninth Circuit
• Decided: August 10, 1989
• Docket: BAP No. CC-87-1717 JVMo, Bankruptcy No. SB 86-03811 DN
• Status: Published

Opinions

OPINION

JONES, Bankruptcy Judge:

The Debtors appeal from an order denying their motion to reopen their case pursuant to 11 U.S.C. § 350(b) to add an omitted creditor to the schedules. We REVERSE.

FACTS

On July 10, 1986, the Debtors, Jeffrey and Debra Bowen, filed a petition for relief under Chapter 7 of the Bankruptcy Code. Creditor Fred R. Franks (“Franks”) was omitted from the list of creditors. There were no assets in the Debtors’ estate for distribution. The Debtors received a discharge on November 19, 1986 and the case was closed on March 20, 1987.

On March 20, 1987, Franks filed a complaint in state court on the omitted debt, for, inter alia, breach of contract, fraud and misrepresentation. After receiving notice of the state court complaint, the Debtors filed a motion to reopen the case pursuant to 11 U.S.C. § 350(b), for the purpose of adding Franks to the schedules. At the hearing on the motion to reopen, the Debtors argued that the omission was inadvertent and that Franks would not be prejudiced by the reopening of the case. They further argued that Franks had actual notice of the bankruptcy. Franks argued that the omission was not inadvertent and that he had been unaware of the bankruptcy. The bankruptcy court denied the motion to reopen the case, making no express findings on the issues of notice, prejudice or the inadvertence of the omission. The Debtors timely appealed.

DISCUSSION

Reopening a ease under the Bankruptcy Code is governed by 11 U.S.C. § 350(b). That section 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). However, reopening a case in order to add an omitted creditor will not result in relief being afforded to a debtor because, unless the creditor had actual notice of the bankruptcy, pursuant to 11 U.S.C. § 523(a)(3) the omitted debt will not be discharged. Section 523(a)(3) provides:

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

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(3) Neither listed nor scheduled under section 521(1) of this title, 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).¹

In In re Laczko, 37 B.R. 676, 678-679 (9th Cir. BAP 1984) aff'd without op., 772 F.2d 912 (9th Cir.1985), the Bankruptcy Appellate Panel, analyzing section 523(a)(3), adopted what it referred to as the “strict” approach and held that in order for an omitted debt to be discharged, a creditor must have actual knowledge of the bankruptcy.² The only apparent exception to the actual notice requirement might be where the case is a no-asset one and, pursuant to Bankruptcy Rule 2002(e), the creditors have been notified that they need not file proofs of claims. The Panel in Laczko indicated that, under these circumstances, § 523(a)(3) would not have been “triggered” because no deadline for filing proofs of claims was ever established. 37 B.R. at 679.

Unlike dischargeability questions under §§ 523(a)(2), (4) and (6) over which the bankruptcy court is granted exclusive jurisdiction, dischargeability questions under § 523(a)(3) are the type over which the bankruptcy court has concurrent, but not exclusive, jurisdiction. In re Aldrich, 34 B.R. 776, 779-80 (9th Cir. BAP 1983); In re Iannacone, 21 B.R. 153, 155 (Bankr.D.Mass.1982). Should a creditor bring suit in a court other than a bankruptcy court on a debt which he contends is excepted from discharge under § 523(a)(3), the local court may determine the question of discharge-ability. 3 L. King, Collier on Bankruptcy, para. 523.13[9] (15th Ed.1986).

Thus, the bankruptcy court had several options when faced with the Debtors’ motion to reopen. It could have denied the motion to reopen, leaving the § 523(a)(3) issue to state court. Alternatively, the court could have granted the motion to reopen and heard the § 523(a)(3) issue in bankruptcy court. In addition, if, at the hearing on the motion to reopen, it was conclusively established that the creditor did not have actual knowledge of the bankruptcy, the bankruptcy court could have refused to reopen the case because, pursuant to § 523(a)(3) the debt would not be discharged.

Here, the basis for the court’s denial of the motion to reopen is not entirely clear. The relevant portion of the proceeding went as follows:

The Court: Well, I guess the question is going to be is: Did your client have actual knowledge?

Mr. Ebner: No, he didn’t, Your Honor.

The Court: I don’t-

Mr. Ebner: I think the declaration attached to the opposition indicates that.

The Court: I guess that’s something that could be tested in the state court as well as here.

Mr. Ebner: I see no reason to burden this court with those issues, Your Honor.

The Court: Well, I certainly don’t agree with the philosophy that says whenever omitted creditors are discovered, then you amend your schedule and reopen the case and go on for years and years and years as soon as each of them come about. The motion to reopen is denied.

Franks argues that the court found in his favor on the issue of actual knowledge and denied the motion to reopen on that basis. We disagree. There is no indication from the above quoted portion of the transcript that the court made any finding at all with regard to the issue of actual knowledge.

In our view, the court’s intention was to leave the § 523(a)(3) issue to state court. This is indicated by the statements that: “I guess the question is going to be is: Did your client have actual knowledge?” and “I guess that’s something that could be tested in the state court as well as here.” Normally, this is not reversible error because, as noted, a state court is empowered to hear such issues.³

At oral argument on this appeal, however, the Debtors stated that if the bankruptcy case was reopened, they would not assert Franks’ actual knowledge as a defense. The Debtors further stated that they would not object to the setting of a new deadline for the filing of a nondis-chargeability complaint by Franks and that they would defend against such a complaint solely on the merits.

Accordingly, the Debtors have, on the record, agreed to waive all rights they may have under § 523(a)(3). Thus, the only matter left for determination is whether the debt to Franks is dischargeable under § 523(a)(2), (4) or (6), which is within the exclusive jurisdiction of the bankruptcy court. Under these very narrow circumstances, we REVERSE the bankruptcy court’s denial of the motion to reopen, and instruct the court to set a new deadline within which Franks must file his 11 U.S.C. § 523(a)(2), (4) or (6) complaint.

1 . Here, subsection (B) applies because even if the case was reopened to permit the Debtors to include Franks in the schedules, Franks has indicated that he would bring a nondischarge-ability action under §§ 523(a)(2) and (a)(4) on the grounds of intentional misrepresentation and fraud.

2 . The Panel rejected the rule of Robinson v. Mann, 339 F.2d 547 (5th Cir.1964) in which the Fifth Circuit held that bankruptcy courts have the discretion to invoke their equity powers to allow the amendment of schedules after the expiration of the claims period where (1) the case is a no-asset one; (2) there is no fraud or intentional laches; and (3) the creditor was omitted through mistake or inadvertence.

3 . The Debtor argues that the bankruptcy judge abused his discretion in denying the motion to reopen because, pursuant to § 350(b), cases are liberally reopened where there is no evidence of fraud or intentional design, debtor misconduct, laches or prejudice to the creditor. This argument is untenable. It ignores the notice issue raised by § 523(a)(3) and the possibility that the bankruptcy court intended to leave the § 523(a)(3) issue to state court.