Eglin Federal Credit Union v. Horlacher (In Re Horlacher)Eglin Federal Credit Union v. Horlacher (In Re Horlacher)
ORDER GRANTING RECONSIDERATION OF THE NONDISCHARGE-ABILITY ORDER AND GRANTING DISCHARGE OF CLAIM NO. 17 PURSUANT TO § 726(a)(2)(C)
This matter came before the Court on Defendants’ Motion for Reconsideration. The Court has jurisdiction to hear this matter pursuant to 28 U.S.C. §§ 157 and 1334 and the Order of Reference of the District Court. This is a core proceeding pursuant to 28 U.S.C. § 157(b)(2)(I), and the Court has authority to enter a final order. For the reasons indicated below, the Court will reconsider its January 17,
Facts
The Debtors filed a voluntary chapter 7 bankruptcy petition on May 4, 2004. They did not list Eglin Federal Credit Union (“Credit Union”) as a creditor on their filed petition or schedules. The Debtors received a discharge on August 10, 2004. The bar date for creditors to file proofs of claim was September 14, 2004. The Credit Union did not receive the court issued notice regarding the proof of claim deadline because it was not listed on Debtors’ schedule as a creditor. The Credit Union states that it did not receive notice of Debtors’ bankruptcy case until June of 2005.
The Credit Union filed an adversary complaint on December 6, 2006 alleging its claim is nondischargeable pursuant to 11 U.S.C. § 523(a)(3)(A). The Debtors answered the complaint on January 8, 2007; they acknowledged that the Credit Union did not have formal notice of the bankruptcy proceedings but asserted that it did have notice or aсtual knowledge to be within the exception of § 523(a)(3)(A). 1 On February 28, 2007, the Debtors amended their schedules to list the Credit Union as a creditor, and on March 5, 2007, Debtors filed claim number 17 in the amount of $18,279.95 on behalf of Eglin Federal Credit Union pursuant to § 501(c).
The Credit Union denied the allegation of any actual knowledge of the bankruptcy proceeding and on August 23, 2007 moved for summary judgment in its adversary case. The motion for summary judgment was denied on November 13, 2007 but narrowed the triable issue to whether or not the Credit Union had actual knowledge.
A trial was held on December 14, 2007, to determine if the Credit Union had actual knowledge or notice of the Debtors’ bankruptcy. At trial, thе Debtors testified that the Credit Union was to be listed as a creditor on their petition and was inadvertently omitted. The Court determined from the evidence presented, the Debtors did not carry their burden of proving that the Credit Union had actual knowledge of the bankruptcy. Based on the evidence before it, the Court issued an order on January 17, 2008 declaring the debt owed to the Credit Union was nondischargeable.
On January 25, 2008, Debtors/Defendants filed a motion asking the Court to reconsider its ruling. The Debtors’ motion contained two main theories on why the Court should reconsider its ruling of non-dischargeability: (1) that the Credit Union had sufficient information to be charged with actual knowledge under the prudent person standard, and (2) that if the Credit Union had no knowledge of the bankruptcy proceeding, then § 726(a)(2)(C) authorized the creditor to file a “tardy” claim that is effectually “timely” under § 523(a)(3)(A), so the debt is dischargeable. The Credit Union responded on February 13, 2008 asserting two reasons that the Court should not entertain Debtors’ motion. The Credit Union contends (1) that the grounds for reconsideration under Rule 59(e) are not met, and (2) that § 726 can not be interpreted to disregard the plain meaning of § 523.
The Debtors’ case is still pending. It is unclear whether or not there will be any assets to distribute. There remain two outstanding tort suits for automobile acсidents that may bring money into the es
A hearing on Debtors’ Motion to Reconsider was held on February 15, 2008.
Law and Analysis
The Debtors bear the burden of proving that reconsideration of the nondis-chargeability order is appropriate.
Matter of Homestead Partners, Ltd.,
I. Standard for Reconsideration
A motion for reconsideration “is an extraordinary remedy” that is to be used by the courts “sparingly.”
Mathis v. United States of America (In re Mathis),
The Debtors move for reconsideration based on their assertion that the debt of the Credit Union should be discharged given the facts of the case under the “prudent person” standard and section 726(a)(2)(C). It is clear from the case law that Debtors cannot move for reconsideration based on this new argument that was available at the time of the trial, but was not advanced.
In re Kellogg, 197
F.3d 1116, 1120 (11th Cir.1999). The Debtors are not presenting newly discovered evidence to the Court in support of their motion.
Mays v. United States Postal Serv.,
The Court declines to reconsider based on Debtors first contention, that the Court erred in ruling that the Credit Union had actual knowledge based on the prudent person standard. This legal theory and standard was considered by the Court in its January 17, 2008 order. There has been no change in law or newly discovered evidence since that order was issued that would change the Court’s analysis. Furthermore, the Court finds no сlear error as to the law or facts on this issue or any manifest injustice.
As to Debtors second contention, that the nondischargeability order was en
II. Interplay of § 523(a)(3)(A) and § 726(a)(2)(C)
A.
The starting place for this review will be the Bankruptcy Code’s nondischargeability statute, § 523. The pertinent part of § 523 states:
(a) A discharge under § 727 ... does not discharge an individual debtor from any debt—
(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 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.
28 U.S.C. § 523(a)(3)(A). This statute and the law surrounding it was the focus of the Court, based on the presentation of the parties and their motions, when it made its January 17, 2008 ruling. The court did not previously consider section 726 which states:
(a) Except as provided in section 510 of this title, property of the estate shall be distributed—
(2) second, in payment of any allowed unsecured claim ... proof of which is-—
(A) timely filed under section 501(a) of this title;
(B) timely filed under section 501(b) or 501(c) of this title; or
(C) tardily filed under section 501(a) of this title, if—
(i) the creditor that holds such claim did not have notice or actuаl knowledge of the case in time for timely filing of a proof of such claim under section 501(a) of this title; and
(ii) proof of such claim is filed in time to permit payment of such claim
28 U.S.C. § 726(a)(2)(C). Section 523(a)(3)(A) does not allow the discharge of any debt where a “timely” claim was not made, if the creditor owed did not have notice or actual knowledge of the debtor’s bankruptcy. A “timely” claim is one that is filed within 90 days of the first meeting of the creditors. Fed. R. Bankr.P. 3002(c). Generally, a “tardily” filed claim is not allowed to participate in distribution of the estate proceeds. However, 28 U.S.C. § 502(b)(9) makes an exception “to the extent [a claim is] tardily filed as permitted under paragraph (1), (2), or (3) of section 726(a) of this title.... ” The purpose of distinguishing between a timely or tardily filed claim is to set a linear time
In chapter 11 and chapter 13 cases, this filing deadline is necessary to establish a time line in order to get a plan confirmed, get creditors paid, and get a case closed. However, the cut off date for a creditor to file a claim is not as imperative in a сhapter 7 case where there are no assets or before any distribution is made. 2 In a chapter 7 liquidation, the amount of assets, if any, is the same no matter how many creditors are involved; the assets are distributed pro rata among the unsecureds. Section 726(a)(2)(C) acknowledges this difference between a chapter 7 case and a chapter 11 or 13. It allows a chapter 7 creditor to participate in distribution if the creditor had no knowledge of the bar date and files a claim after the set 90 day deadline but before distribution of the estate. In a chapter 7 case, as long as there has been no distribution of assеts, there is no harm or prejudice to the creditor in allowing a claim that is filed after the typical bar date for filing.
B.
The interplay of § 523(a)(3)(A) and § 726(a)(2)(C) has caused confusion in the courts and a split in the case law. The inconsistent decisions can be traced back to § 523(a)(3)(A)’s predecessor, § 17a(3) of the Bankruptcy Act. Section 17a(3) stated that a debt could not be discharged if it was not scheduled in time for it to be proved and allowed in the bankruptcy proceedings, unless the creditor had knowledge of the bankruptcy filing. The Supreme Court reviewed the application of this statute in
Birkett v. Columbia Bank,
Under this law, two lines of cases emerged-a strict interpretation of § 17a(3) and a liberal one. In
Milando,
the court followed
Birkett
interpreting § 17a(3) strictly and holding that a debtor could not reopen his no asset case to amend his schedules to add an inadvertently omitted creditor.
Milando v. Perrone,
On the other side of the spectrum was
Robinson v. Mann,
C.
The language of § 17a(3) was changed by Congress when the Bankruptcy Reform Act of 1978 was enacted. Section 17a(3), which stated that a debt could not be discharged if it was not scheduled in time for it to be proved and allowed in the bankruptcy proceedings, was changed to the current § 523(a)(3)(A) and now prohibits the discharge of a debt that is “neither listed nor scheduled ... in time to permit ... timely filing of a proof of claim, unless [the] creditor had notice or actual knowledge of the case in time for ... timely filing.” § 523(a)(3)(A). The exact distinction between the language of these two statutes is not easily diseernable by the language alone. However, the alteration must be of some significance or Congress would have saved itself the effort and continued to use the same wording of § 17a(3).
Samuel v. Baitcher (Matter of Baitcher),
The legislative history would be beneficial in determining Congress’ intent in enacting § 523(a)(3)(A). The legislative purpose could help the Court in analyzing the statute and coming to the correct interpretation of the statute. However, courts cannot look to legislative history of a statute unless the words of the statute are unclear.
Wachovia Bank, N.A. v. United States,
III. Legislative History of § 523(a)(3)(A)
According to the House and Senate reports, Congress’ purpose for revising § 17a(3) “was to validate the liberal,
Robinson-type
approach and to overrule
Birk-ett,
which strictly construed section 17a(3).”
Stone v. Caplan (Matter of Stone),
derived from section 17a(3), follows current law, but clarifies some uncertainties generated by the case law construing17a(3). The debt is exceptеd from discharge if it was not scheduled in time to permit timely action by the creditor to protect his rights, unless the creditor had notice or actual knowledge of the case.
S.Rep. No. 95-989, at 78-9 (1978),
reprinted in
1979 U.S.C.C.A.N. 5787, 5864; H.R.Rep. No. 95-595, at 364 (1977),
reprinted in
1979 U.S.C.C.A.N. 5963, 6320. The House Report is more specific in its intent in its statement that § 523(a)(3)(A) is “intended to overrule
Birkett v. Columbia Bank,
IV. Law After Enactment of § 523(a)(3)(A)
Following the enactment of § 523(a)(3)(A), the courts continued to be split and follow the reasoning of either the liberal Robinson decision or the strict Mi-lando decision (even though Milando had interpreted § 17a(3) as Birkett did, and Congress intended to overrule Birkett with its enactment of § 523(a)(3)(A)).
Courts interpreting § 523(a)(3)(A) strictly read the statute to be unambiguous and do not go beyond its plain meaning. Often for these courts, it is the setting of the bar date that triggers the application of § 523. For instance, in
Laczko,
the debtors filed a chapter 7 case and inadvertently omitted a creditor from their schedules. The creditor had no notice or knowledge of the bankruptcy case until after the expiration of the date to file proofs of claim. After the debtors received their discharge and the bar date for filing claims had passed, the debtors amended their schedules to include the creditor and sought to have the debt discharged. The debtors argued that although a bar date had been set, the case ended up being a no asset case; therefore, there was no harm or prejudice to the creditor by allowing a late amendment and subsequent discharge. The court, however, aligned itself with
Milando
and concluded that the debt was not dischargeable because “[t]he courts have no power to disregard [the] clear language” of § 523(a)(3)(A).
Laczko v. Gentran, Inc. (In re Laczko),
Under the same facts as Laczko, the Bosse court stated that it was
unpersuaded that it should go beyond the unambiguous language of section 523(a)(3)(A), and former section 17(a)(3) and adopt the approach of Robinson v. Mann. Section 523(a)(3)(A), as written, may indeed produce harsh consequences which courts have struggled to avoid. This may be especially true in light of the policy in favor of a fresh start for the debtor. However, bankruptcy courts, as courts of equity, must follow express statutory authority to the same extent as courts of law. To that end, this court is powerless to ignore the plain language of § 523(a)(3)(A) in order to reach a result more in line with equitable ideas.
Spilka v. Bosse (In re Bosse),
In
Reese,
the debtor in a closed chapter 7 case moved to reopen her case to amend her schedules to list an inadvertently omitted creditor three years after the time to
Other courts have continued to interpret § 523(a)(3)(A) liberally. For the courts that have followed the
Robinson
line of cases, they have typically hеld not only that a case may be reopened and amended to include an omitted creditor, but also that such claims are dischargeable.
Bosse,
In an open case, where the bar date had passed and no distributions had been made to creditors, the debtor who had inadvertently omitted a creditor (who had no knowledge of the bankruptcy) from his schedules filed a late claim on behalf of the creditor, and the court held that the debt would be discharged (except for the attorney’s fees and costs incurred by the creditor in pursuing its state court actions before it knew of the debtor’s bankruptcy).
Homestate Ins. Brokers of Alaska, Inc. v. Brosman (In re Brosman),
that exceptional circumstances exist[ed] in [the] case for the discharge of the [creditor’s] сlaim. The debt was not listed simply through mistake or inadvertence; there were no assets for distribution to creditors; there was no fraud or intentional laches. There was no prejudice to the creditor other than the incurring of costs and attorney’s fees in state court.
Id.
at 216. Under the same fact scenario,
Ruhr
held that as long as a creditor still had the right under § 726(a)(2)(C) to file a tardy claim and participate in distribution meant that the debt was not subject to § 523(a)(3)(A).
Southern Pacific Land Co. v. Kuhr (In re Kuhr),
[t]hat the creditor in this case has chosen not to file a claim does not affect the debtor’s right to a discharge of the debt, as the creditor’s failure to file a claim is no different than the failure of a creditor who received notice at the outset of the case to file a claim.
Id. at 424. The court held that since the creditor still had time to file a claim and participate in any distribution, that its debt was not excepted from discharge. Id.
In a Florida case, where a debtor began litigation in state сourt prior to filing bankruptcy, continued the suit through the bankruptcy case (unbeknownst to the creditor), and had a final judgment rendered against debtor after he received a discharge and his bankruptcy case was closed, the debtor was allowed to reopen his case, amend his schedules, and have the judgment debt discharged because it was an no asset where no bar date had ever been set (so it never expired triggering the application of § 523(a)(3)(A)). The court reasoned that “the Defendants still [had] the right to file a claim, although doing so would be futile, and nothing more than an exercise in futility.”
Kirkpatrick v. Kogan (In re Kirkpatrick),
The Fifth Circuit affirmed
Robinson
in
Stone v. Caplan (Matter of Stone),
Having an allowed claim is how a creditor gets to participate in the distribution of the estate. A proof of claim is deemed allowed once it is filed if there is no objection to it. § 502(a);
see also,
Fed. R. Bankr.P. 3002(a), 3004. Section 523(a)(3)(A) protects a creditor’s right to participate in distribution by focusing on the necessity of filing a “timely” claim.
Lott Furniture, Inc. v. Ricks (In re Ricks),
There is little available law on this issue in the Eleventh Circuit. However, at the time the Fifth Circuit decided Robinson, Florida was part of the Fifth Circuit. Post-Robinson, the Eleventh Circuit seems to have sided with the liberal view after the enactment of § 523(a)(3)(A). The Eleventh Circuit stated that the new rule of § 523(a)(3)(A)
does not in a no-asset case any more deny a discharge to one who has failed to schedule for reasons of honest mistake, not ‘fraud or intentional design.’ This would be an inequitable result, in the absence of prejudice. Hence, if Baitcher can show absence of fraud or intentional design, she should have her discharge....
Samuel v. Baitcher (In re Baitcher),
V. Conclusion
The cases of
Ruhr, Brosman, Laczko,
and
Ricks
were all open cases where a creditor was inadvertently omitted from the debtor’s schedules. All had claim filing bar dates expire before the creditor had knowledge of the debtor’s bankruptcy. All had debtors who sought to add the omitted claim and have it discharged, and none had distributed any dividends from
Furthermore,
Reese, supra,
and
Kirkpatrick, supra,
two Florida cases, are not overwhelmingly persuasive since they reach opposite conclusions.
Reese
was a closed no asset case where a bar date was never set. When the debtor moved to reopen, amend the schedules to list the creditor and have the claim discharged, the court would not discharge the debt. However, in similar facts, the court in
Kirkpatrick
discharged the debt.
Reese
focused on the fact that because the case was closed, the creditor was not allowed to participate in the bankruptcy proceeding. In
Kirkpatrick,
the court focused on the fact that the creditor could technically still file a claim. Neither of these two cases is directly on point. In this case, the Debtors’ bankruptcy case is still open and no distribution has been made to any creditors. The Credit Union still has the opportunity to file a claim and take part in any distribution that is made. This is factually different from
Reese
and
Kirkpatrick
where the case was already closed. If the Credit Union files a claim, it can participate in any distribution just as it would have if it had been listed first on Debtors’ schedules. If the case turns out to have no assets, then the Credit Union will once again be in the same position it would have been had it been listed by Debtors from the start.
See Stone,
Given that the Eleventh Circuit appears to support Robinson, this Court will apply the three factor test put forth in Robinson to the facts of this case: (1) the reasons for the omission, (2) the degree of disruption that would result if the amendment were allowed, аnd (3) the prejudice to creditors.
First, at trial the Court heard testimony from the Debtors as to why the Credit Union debt was not included. It was clear to the Court that the omission was by inadvertence, a mistake. The Debtors’ testimony was credible and candid. Furthermore, the Credit Union did not dispute this. The Credit Union has not made any argument that the Debtors acted with improper motive or intended to omit it from the Debtors’ schedules. The Credit Union only asserts that it was left off of the bankruptcy schedules, and Debtors admit this. Based upon the admissions of the parties and the testimony at trial, the Court finds that the Credit Union was inadvertently omitted from the Debtors’ schedules, and the Credit Union had no
Second, the Court finds that there would be no undue burden on the Court or the parties if the claim was allowed. The Debtors are allowed to amend their schedules at anytime before the close of the case under Rule 1009.
Third, there is no prejudice to the Credit Union or other creditors if the debt is discharged. Section 726(a)(2)(C) clearly authorizes the Credit Union to file a claim, even now, and fully participate in any distribution that may occur in this case. Since the Code allows this claim to still be filed by the Credit Union, it is still timely and is not excepted from dischаrge under § 523(a)(3)(A).
Based on the ambiguity of the term “timely” in § 523(a)(3)(A), the Court looks to the legislative history and other Code provisions to determine the meaning and intent of the nondischargeability statute. After reviewing the Congressional reports and finding that Congress intended to overrule the strict interpretation of § 17a(3) by its enactment of § 523(a)(3)(A), the Court concludes that the liberal interpretation is the correct interpretation. This is supported by the limited law of the Eleventh Circuit.
For these reasons, the Court GRANTS the Debtors’ Motion to Reconsider and GRANTS the dischargeability of the Credit Union claim (number 17).
Notes
. Debtors also filed a counterclaim, the success of which turned on the outcome of the main issue of notice in the adversary complaint. As such, no counterclaim arguments were heard at trial.
. In a chapter 7, no asset case, where no bar date has been set, section 523(a)(3)(A) is not even applicable.
See Stone v. Captan (Matter of Stone),
. While Robinson’s reasoning has been subsequently applied to the question of discharge-ability, this was not in the analysis of the Robinson decision. The sole issue in Robinson was the right of the debtor to amend his schedules (Rule 1009(a) did not yet exist).
. The Ninth Circuit has decided numerous cases on this § 523(a)(3)(A) issue and has interpreted the statute both strictly, as in
Lac-zko, supra,
and liberally, as in
Brosman, supra.
See
Purcell v. Kahn (In re Purcell),