MEMORANDUM OPINION ON PLAINTIFF’S COMPLAINT TO DETERMINE DISCHARGEABILITY OF DEBT
A trial was held on May 20, 1991 on the Complaint filed by the Debtor, Thomas L. Haga, to Determine Dischargeability of Debt of National Union Fire Insurance Company of Pittsburgh, Pa.
This Court has jurisdiction of this case pursuant to 28 U.S.C. § 1334(b) and (d), 28 U.S.C. § 157(a) and (b)(1) and the standing Order of Reference existing in this District. This adversary proceeding is a core proceeding under 28 U.S.C. § 157(b)(2)(I). This Memorandum Opinion constitutes the Court’s Findings of Fact and Conclusions of Law pursuant to Bankruptcy Rule 7052.
SETTING THE STAGE
On December 29, 1988, Thomas L. Haga filed a voluntary petition under Chapter 7 of the Bankruptcy Code. The case was subsequently closed. Upon discovering that he failed to schedule Defendant’s claim in his petition, the Debtor requested the case be reopened to allow amendment of the schedules. The order reopening the case required the Debtor to institute an adversary proceeding to determine the dis-chargeability of Defendant’s claim within sixty (60) days and stated that the reopening of the case was not an adjudication of the effect of the previous Order of Discharge entered in the case on the newly added claim. The Debtor then filed the instant complaint to determine the dis-chargeability of the debt owed Defendant.
FINDINGS OF FACT
The parties stipulated to Findings 1 through 7 in their Joint Pretrial Order and the Court found Findings 8 through 11 at the conclusion of the trial.
1. In November, 1984, Plaintiff purchased an interest in TM Whitehall Equipment Trust 84-B, a grantor trust, with $5,092.00 cash and delivery of his promissory note dated November 30, 1984 payable to TM Credit Corporation (“TMCC”). Plaintiff also executed an Indemnification and Pledge Agreement pursuant to which Defendant issued a bond guaranteeing Plaintiff’s payment of the TMCC debt.
2. Plaintiff provided his written financial statement dated September 25, 1984 (“Financial Statement”) to the broker handling the transaction knowing that a financial statement was necessary for the credit arrangement to occur.
3. The Indemnity Agreement is an agreement between Plaintiff and Defendant and not between Plaintiff and TMCC. The Plaintiff's liability thereunder is contingent on his not paying the TMCC debt.
4. Plaintiff defaulted on the TMCC debt. After acceleration, Defendant paid the TMCC debt pursuant to the terms of the bond.
5. Defendant notified Plaintiff of its payment under the bond and demanded reimbursement of said funds. Ultimately, Defendant obtained a default judgment for all amounts owed.
6. Plaintiff filed this chapter 7 case on December 29, 1988. The case was noticed to creditors as a “no asset” case, and creditors were advised not to file proofs of claim unless later notified.
7. Plaintiff listed TMCC as a creditor; however, Plaintiff failed to list Defendant as a creditor.
9. Defendant was not scheduled in the original petition.
10. Defendant did not have notice or actual knowledge of Plaintiffs bankruptcy case in time to file a proof of claim, if one had been necessary, or to timely request a determination of the dischargeability of its debt under § 523(a)(2), (4), or (6).
11. The only proof of non-dischargeability offered by Defendant was to point out certain differences between the Financial Statement and the schedules of assets and liabilities filed in the case on January 27, 1989. This neither proves that the Financial Statement was false when provided TMCC nor that Defendant has a debt of the kind specified in § 523(a)(2). Defendant offered no other proof of the elements of nondischargeability under § 523(a)(2). „
ISSUE
When alleging that its claim is excepted from discharge under § 523(a)(3)(B), to what degree must a creditor prove its claim is a kind of debt specified in § 523(a)(2), (4), or (6)?
DISCUSSION AND CONCLUSIONS OF LAW
Given that the Fifth Circuit has not spoken directly on this issue, the Court must look elsewhere to determine a claimant’s burden of proof in § 523(a)(3)(B) actions. Other courts dealing with the issue have required differing degrees of proof depending on their interpretation of the interplay between 11 U.S.C. § 523(a)(3)(B) and 11 U.S.C. § 523(a)(2), (4), or (6).
Section 523(a)(3)(B) of the Bankruptcy Code provides that if a creditor is not properly scheduled and has no actual knowledge of the case in time to timely file a claim
and
to timely file a dischargeability complaint under § 523(a)(2), (4), or (6), then “if such debt is of a kind specified in paragraph (2), (4), or (6) of this paragraph,” it is not discharged. 11 U.S.C. § 523(a)(3)(B) (emphasis added). Although written as conjunctive, this phrase should be read in the disjunctive.
In re Padilla,
It is stipulated that the Defendant was not scheduled and that it had no actual knowledge of this case in time to timely file a dischargeability complaint. Therefore, the resolution of the issue lies in the interpretation of the phrase “debt is of a kind specified_” The interpretation of Congress’ intent has widely varied and is not without substantial question.
Courts have imposed results using the entire scope of positions available concerning the extent to which the underlying § 523(a)(2), (4), or (6) claim must be proven when bringing a complaint under § 523(a)(3)(B). Results range from requiring only proof that the creditor was not scheduled to requiring a full trial on the merits of the underlying dischargeability claim.
Cases holding that a debtor’s failure to timely schedule a creditor, which prevents the creditor from receiving notice or having
On the other end of the spectrum, courts have required that the creditor prove the
merits
of the claim under § 523(a)(2), (4), or (6) as well as lack of notice or actual knowledge.
See In re Padilla,
Without commenting on the issue, other courts have simply tried the underlying claim in § 523(a)(3) actions.
See In re Pyles,
Courts travelling the middle road have required the creditor
prove
a lack of notice/actual knowledge of the case but only
show
that it holds a § 523(a)(2), (4), or (6) claim.
See Matter of Zablocki,
A review of the legislative history of § 523(a)(3)(B) gives no helpful insight as to Congress’ intentions, and, therefore, which line of cases should be followed. According to the Legislative Statements, § 523(a)(3) was enacted to overrule
Birkett v. Columbia Bank,
“Unscheduled debts are excepted from discharge under paragraph (3). The provision, derived from section 17(a)(3) [former section 35(a)(3) of this title], follows current law, but clarifies some uncertainties generated by the case law construing 17(a)(3) [former section 35(a)(3) of this title]. The debt is excepted 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, 95th Cong., 2d Sess. 77-79 (1978); H.R.Rep. No. 95-595, 95th Cong., 1st Sess. 363 (1977), U.S.Code Cong. & Admin.News 1978, p. 5787.
A review of the law which developed under § 17a(3), the predecessor section to § 523(a)(3), is not particularly helpful either, as it contained no requirement that the omitted creditor also have grounds to object to the non-dischargeability of its debt. The former section excepted debts from discharge which “have not been duly scheduled in time for proof and allowance, with the name of the creditor, if known to the bankrupt, unless such creditor had notice or actual knowledge of the proceedings in bankruptcy.”
See
11 U.S.C. § 35 (§ 17a(3));
In re Laczko,
Various policy considerations which are threaded throughout the code do help guide construction of § 523(a)(3). To promote accuracy and thoroughness in petitions, debtors bear the burden to correctly list creditors’ claims and amend their schedules when necessary.
See
§ 521, Bankruptcy Rules 1007, 1009, 1019;
see also, U.S., Small Business Administration v. Bridges,
“The ‘fundamental purpose’ of notice to creditors is to give them an equal opportunity to avail themselves of the protection of the bankruptcy laws.... The reason for allocating this responsibility [to properly schedule debts] and its attendant penalties to the debtor is that it works to assure that the court will identify all creditors and thereby convey to them proper notice of the matter.... [T]imely listing of creditors is all that is required of the debtor.”
The omission of a creditor, whether inadvertent or intentional, robs the creditor of the ability to participate in the various stages of the case. Failure to receive notice may harm creditors by denying their participation in the meeting of creditors and their ability to object to the debtor’s claims of exempt property. It may also prevent their timely filing of a complaint objecting to discharge, a proof of claim to share in any distribution, or a complaint to determine dischargeability of a debt.
In re Anderson,
Some courts view the deadline imposed by 4007(c) as jurisdictional.
See In re Kirsch,
Further, the allocation of jurisdiction between the bankruptcy court and other forums to adjudicate actions brought under § 523 is helpful to the analysis. Under 28 U.S.C. § 1334(b), the district court has original but not exclusive jurisdiction of all civil proceedings arising under title 11. Under 28 U.S.C. § 157(b)(1), the bankruptcy court may hear and determine all core proceedings arising under title 11. Dischargeability actions under § 523(a)(2), (4), or (6) are core proceedings under 28 U.S.C. § 157(b)(2)(I). Section 523(c) requires that the bankruptcy court determine actions brought under subsections (a)(2), (4), or (6),
In re David,
Therefore, this jurisdictional allocation gives the state court the same power it gives the bankruptcy court to determine if a creditor has a “debt of a kind specified in paragraph (2), (4), or (6).” However, it should not be read as giving the state court
This Court concludes that the phrase “of a kind” contained in § 523(a)(3)(B) should be interpreted as requiring a creditor only to show that it has a viable or colorable claim that its debt is non-dischargeable under subsections (a)(2), (4), or (6) of § 523 and not to prove its claim on the merits. Under the latter interpretation, § 523(a)(3)(B) would create an exception to or extension of the limitations period contained in Rule 4007(c) when there is no indication anywhere that Congress had that intent.
BURDENS OF PROOF
The debtor’s discharge is an affirmative defense which establishes a prima facie defense to any claim brought against him based on a debt existing at the time of the bankruptcy filing.
See
3
Collier on Bankruptcy
para. 523.13, at 523-98;
In re Anderson,
In this case, Plaintiff failed to schedule Defendant’s claim, and Defendant had no notice or actual knowledge of the case in time for Defendant to file a timely complaint to determine dischargeability. The burden of proof is therefore on the Defendant to prove that it has a color-able/viable claim of non-dischargeability under § 523(a)(2), (4), or (6). The proof the Defendant offered at the trial does not meet that burden. Defendant’s comparison of the differences of the Financial Statement dated four years prior to bankruptcy with the bankruptcy schedules, without more, proves nothing. Defendant did present minimal evidence of its reliance on Debtor’s financial statement but presented no evidence of Debtor’s fraudulent intent nor of the falsity of said Financial Statement at the time it was issued. Thus, Defendant failed to sustain its burden of proof.
CONCLUSION
The Plaintiff is entitled to judgment on its Complaint to Determine Dischargeability of Debt, and the indebtedness alleged owed by Defendant related to the TMCC transaction is determined discharged by the Order of Discharge filed in this case on the 23rd day of May, 1989. A separate order of even date herewith will be entered by the Court.
Notes
. The Court notes that its prior opinion entered in
In re Dye,