UNITED STATES BANKRUPTCY COURT
EASTERN DISTRICT OF KENTUCKY
COVINGTON DIVISION
IN RE:
JAMES E. WELLS
PAULA
A. WELLS CASE NO. 95-20905
DEBTOR
MEMORANDUM OPINION AND ORDER
This matter is submitted to the court for decision
upon the motion of Paula A. Wells to reopen this case to add an omitted
creditor. For the reasons set forth
below, the court concludes that the Motion to Reopen should be overruled and
that the debt to creditor, Norma McDowell, has been discharged.
Prior to filing bankruptcy, the debtors in this
proceeding incurred an indebtedness to Fifth Third Bank which was secured by a
certificate of deposit of debtor James Wells mother, Norma McDowell, in the
amount of $28,000.00. When the debtors
failed to pay the indebtedness, McDowells certificate of deposit was
liquidated to apply against the indebtedness.
The debtors thereby become indebted to McDowell. Thereafter, on August 18, 1995, the debtors
filed this Chapter 7 proceeding. They
did not list McDowell as a creditor, and while the reason therefor is not
clear, there is some suggestion that the omission may have been deliberate. A trustee was appointed and filed a
Trustees Report of No Distribution indicating that the trustee had not
received any property or money. That
report was filed on September 20, 1995.
The debtors were subsequently granted a discharge of their debts and the
case was closed on March 1, 1996. Since
there were no assets administered by the trustee, there was no distribution to
creditors.
On December 20, 1999, debtor, Paula A. Wells, moved to
reopen the case to add McDowell as a creditor.
After an initial delay, that matter was heard on March 7, 2000 and the
parties were directed to submit briefs on the question and the matter now
stands ripe for a decision by the court.
The debtor movant points out that no ground for
nondischargeability pursuant to 11 U.S.C. §523(a)(2), (4), or (6) is asserted
by the creditor and that pursuant to In re Madaj, 149 F.3rd 467 (6th
Cir. 1998), the state of mind of the debtors in failing to list the objecting
creditor is irrelevant. Apparently,
James and Paula are now divorced and Paula has been awarded maintenance. Paula contends that McDowells motivation in
pursuing this matter stems from her alienation from McDowells son.
The objecting creditor, McDowell, asserts that the
actions of the debtors in deliberately failing to list her as a creditor were
fraudulent and the court should therefore overrule the Motion to Reopen and
should not allow amendment of the schedules to list McDowell as a
creditor. McDowell recites Rosinski
v. Boyd (In re Rosinski), 759 F.2d 539 (6th Cir. 1985) for
authority that reopening should not be allowed if the failure to include the
creditor in the original schedules can be shown to have prejudiced the creditor
or to have been part of a scheme to defraud and done intentionally. McDowell has not asserted any ground of
nondischargeability set forth in 11 U.S.C. §523(a)(2), (4) or (6) in this
proceeding.
McDowells reliance on In re Rosinski is
misplaced. In Madaj, the facts
very much resemble the facts in this case and clarify the appropriate
interpretation of Rosinski. In Madaj,
the debtors had moved to reopen their case to list the foster parents of
debtor, Michael Madaj. The parties
stipulated that had the debt been properly scheduled there would have been no
claims of nondischargeability pursuant to 11 U.S.C. §523(a). The creditors in that case, unaware of the
bankruptcy proceeding and its conclusion, filed suit and obtained judgment
against the debtors. The debtors then
moved to reopen the case to add the omitted foster parents as creditors. The bankruptcy court concluded that, because
the case was a no-asset case, the debt to the foster parents was discharged and
it was not necessary to reopen the case to schedule the debt to reach this
result. The court then denied the
Motion to Reopen the case. On appeal,
the court explained that, in no-asset cases, since no claims are required to be
filed, no creditor is foreclosed from filing a claim, and unless some showing
of nondischargeability pursuant to 11 U.S.C. §523(a)(2), (4) or (6) is made,
the creditor has not been prejudiced and the debt is discharged. Where no nondischargeability is asserted
under subsections (2), (4) or (6) of 11 U.S.C. §523(a), all debts are
discharged unless the debtor fails to schedule the debts in time for the
creditor to file a timely proof of claim.
Where no proof of claim is required, there is no prejudice to the
creditor in failing to list the debt in these circumstances.
In Madaj, the court went on to explain,
beginning on page 471, its holding in Rosinski as regards the state of
mind of the debtor in failing to list a creditor as follows:
The Rosinski Courts emphasis on the subjective
mental state of the debtor in failing to list the debt has led some to cite
that case for the proposition that a debtors actions in failing to list the
debt can somehow transmute an otherwise ordinary debt into a fraudulent debt of
the type covered in §523(a)(2), (4) or (6).
Rosinski does not stand for such a proposition. A debt is either fraudulent or not depending
on the debtors actions and intent in incurring the debt in the first
instance. An otherwise innocently
incurred debt (say, a loan from ones foster parents) does not suddenly become
a fraudulently incurred debt when the debtor fails to list it. The case at hand serves as an excellent
example. The Creditors conceded in the
bankruptcy proceeding that the loan at issue here is not a fraudulently
incurred debt. [Footnote omitted] When
the Creditors lent the money to the Debtors, both parties expected it to be
repaid. Before they repaid the loan,
however, the Debtors filed for bankruptcy.
Even if, as we shall assume for the sake of argument, the Debtors
purposely failed to list the debt in an attempt to defraud the Creditors, this
action did not (and could not) work some perverse alchemy to change the
innocent loan into a fraudulent debt of the type that is covered by §523(a)(2),
(4) or (6) and therefore excepted from discharge pursuant to
§523(a)(3)(B). If the debt is to be
excepted from discharge, it can only be excepted according to
§523(a)(3)(A). If the bankruptcy estate
had any assets (i.e., if this were not a no-asset case) and if the
Debtors failure to list the debt had deprived the Creditors of their ability
to timely file a proof of claim, then §523(a)(3)(A) would, indeed, except the
debt from discharge. To the extent that
Rosinski has been interpreted to demand a different result, it has been
dangerously misinterpreted.
In the case before us, it is undisputed that the debt
at issue, had it been timely filed, would not have been included in any
category of debts that are excepted from discharge by §523. It is undisputed that the Debtors
bankruptcy was a no-asset Chapter 7 case.
In order to determine whether the bankruptcy court erred in denying the
Debtors motion to reopen their Chapter 7 case to amend the schedule of debts
and in holding that the debt at issue here was nevertheless discharged, we must
answer one question: when an otherwise dischargeable debt is omitted from the
schedule in a Chapter 7 no-asset case and the debtor receives a discharge, what
is the effect of reopening the case to permit the debtor to schedule the
omitted debt?
The answer is there is no effect. The reason that the reopening has no effect
is clear. A debtor cannot change the
nature of the debt by failing to list it in his petition and schedules. Section 523(a)(3)(A) excepts from discharge
only those debts as to which a timely proof of claim cannot be filed because
the debts were not listed and the creditor had neither notice nor actual
knowledge of the bankruptcy in time to file a timely a proof of claim. In a no-asset Chapter 7 case, there is no
date by which a proof of claim must be filed in order to be timely. Whenever the creditor receives notice or
acquires actual knowledge of the bankruptcy, he may file a proof of claim, that
claim will be timely, and the fact that the debts were not listed becomes
irrelevant. Section 523(a)(3)(A) simply
provides no basis for excepting an unlisted debt from discharge if the creditor
has actual knowledge such that he can file a proof of claim. And once the §727 order of discharge is
entered, all of the debtors prepetition debts are either discharged or they
are not discharged; nothing the debtor does after the entry of the order of
discharge can change the character of those debts.
In accordance with the above, since there has not been
a claim of nondischargeability pursuant to 11 U.S.C. §523(a)(2), (4) or (6),
the court concludes that the discharge entered in the within proceeding
discharged the debtors from their obligations to McDowell, and that it is not
necessary to reopen this case and schedule McDowells debt to accomplish that
result.
IT IS THEREFORE ORDERED AS FOLLOWS:
1)
That the Motion to
Reopen the within proceeding filed by debtor, Paula A. Wells, be, and the same
hereby is, OVERRULED.
2)
That the indebtedness of
the debtors herein to Norma McDowell was discharged in this proceeding by this
courts Order of February 8, 1996 as appears of record herein.
Dated this day of March,
2000.
BY
THE COURT
JUDGE
COPIES TO:
Mark W. Wegford, Esq.
W. Ron Adams, Esq.
James A. Nolan, Esq.