In Re Madaj
Bankr. L. Rep. P 77,744
In re: Michael K. MADAJ; Debtor; In re: Theresa A. Madaj, Debtor,
Wilbert F. Zirnhelt, Creditor-Appellant; Margaret R.
Zirnhelt, Creditors-Appellant,
v.
Michael K. MADAJ, Debtor-Appellee; Theresa A. Madaj,
Debtors-Appellee.
No. 96-1888.
United States Court of Appeals,
Sixth Circuit.
Submitted June 5, 1997.
Decided July 16, 1998.
Peter J. Zirnhelt, Richard P. Carroll (briefed), Peter J. Zirnhelt, P.C., Traverse City, Michigan, for Creditors-Appellants.
George Stauch, Jr., Flint, Michigan, for Debtor-Appellee.
Before: MARTIN, RYAN, and BATCHELDER, Circuit Judges.
OPINION
BATCHELDER, Circuit Judge.
"How sharper than a serpent's tooth it is
To have a thankless child!"
WILLIAM SHAKESPEARE, KING LEAR, act I, sc. 4
Before us on appeal are a husband and wife ("the Creditors"), who have felt the bite of their thankless foster child. With his wife, this foster child ("the Debtors") borrowed a substantial sum of money from his foster parents, promising to repay the loan within a few months out of anticipated insurance proceeds from a fire loss. Instead of repaying the loan, however, the Debtors filed a petition in bankruptcy under Chapter 7 and failed to include the foster parents in the list of creditors filed with the petition. Their no-asset case was duly administered, the Debtors eventually obtained a discharge pursuant to
The Debtors moved to reopen their Chapter 7 proceeding in order to list the debt, claiming that their failure to include it initially had been due to forgetfulness and inadvertence. The Creditors objected to the motion to reopen, claiming that in light of their repeated requests for payment and the Debtors' protests of poverty, the Debtors' memory lapse was not credible, and that the Debtors had failed to list the debt because they intended to defraud the Creditors. The Creditors opposed the reopening of the Chapter 7 proceeding because they believed, and still believe, that an unlisted debt is not discharged, and that the Debtors ought not be permitted to now list this debt and obtain its discharge. The parties agree that if this debt had been timely scheduled, it would have been dischargeable under
" '[I]n appeals from the decision of a district court on appeal from the bankruptcy court, the court of appeals independently reviews the bankruptcy court's decision, applying the clearly erroneous standard to findings of fact and de novo review to conclusions of law.' " In re Chavis,
The confusion in the district and circuit courts concerning unlisted Chapter 7 debts in a no-asset case, including the dischargeability of such debts, the effect of an order of discharge on such debts, and the efficacy of reopening a bankruptcy case to include them, is widespread. This confusion is due, in part, to a line of cases that perpetuates the erroneous view that once his case is closed, the debtor must have his case reopened in order to discharge a pre-petition debt not listed in the bankruptcy petition; once the case is reopened, the debtor amends his schedules to list the debt, and the now-scheduled debt is covered by the discharge. But this is not the law.
In a Chapter 7 no-asset case such as this, "reopening the case merely to schedule [an omitted] debt is for all practical purposes a useless gesture." In re Hunter,
The law in this area is counter-intuitive, and requires a careful fitting together of the relevant sections of the Bankruptcy Code and Rules. Because of the confusion in this area, a review of the provisions governing dischargeability of debts and the effect of a discharge in a Chapter 7 proceeding is in order. At the risk of appearing simplistic, we can summarize the relevant provisions1 as follows:
A discharge under
However, even 523(a)(3)(A) does not except an unscheduled debt from discharge if the creditor had notice or actual knowledge of the bankruptcy case in time for timely filing of a proof of claim.
In a Chapter 7 no-asset case the court does not set a deadline for the filing of proofs of claim. Rather, the court may notify creditors that there are no assets, that it is not necessary to file claims, and that if sufficient assets become available for payment of a dividend, further notice will be given for filing of claims. See
The operation of
The statutory language relevant to debts not fraudulently incurred reads as follows:
A discharge under
In a Chapter 7 no-asset case, however, the creditors cannot recover from the estate because there is nothing to recover. For this reason, there is no deadline for filing a timely proof of claim in a no-asset case. Technically speaking, therefore, no matter when the creditor learns of the bankruptcy, he is able to file a timely claim. Because
The result may seem strange at first blush, but it makes sense when one considers both the type of debt involved and the nature of a no-asset case. Unlike the fraudulent debts covered by
Yet, there are no proceeds to be distributed to the creditors in a no-asset case, which renders the notice function served by the scheduling of debts far less important. For precisely this reason, there is no deadline for the filing of proofs of claim in a no-asset case. For the most part, creditors in a no-asset case do not stand to gain by having their debts scheduled, nor do they stand to lose by having their debts omitted from the schedules.3 Thus, it should come as no surprise that the exception contained in
Our decision in the case at hand should clear up any confusion resulting from the prior Sixth Circuit decision, In re Rosinski,
The question not addressed by the Rosinski Court, and the question that we answer here today, is whether there is any reason to reopen a Chapter 7 no-asset case in order to amend the schedule of debts; that is, whether amending the schedule of debts has any effect on the dischargeability of an unscheduled debt in a Chapter 7 no-asset case. As we stated above, amending the schedule of debts has no effect on the dischargeability of the debt and is, therefore, unnecessary. Nothing we said in Rosinski contradicts this holding.
For example, the Rosinski Court specifically noted:
Under the Code, only the creditors' rights to participate in a dividend and to obtain a determination of dischargeability are of such importance that their loss mandates exception of a late scheduled debt from discharge.
Rosinski,
Thus, the dischargeability of the debt (or, more accurately, whether the debt had been discharged) was not precisely the focus of the court's attention in Rosinski, although perhaps it should have been. The Rosinski Court held that a no-asset debtor's being permitted to reopen her case to amend the schedule of debts does not prejudice the omitted creditor, a holding which is unaffected by our decision in this present case. We wish to make it clear, however, that Rosinski is a holding with extremely narrow application, especially in light of our holding today that amending the schedule is unnecessary to answer the question of whether the debt has been discharged.
To say, as the Rosinski Court did, that the creditor may not prevent the debtor from reopening the case to amend the schedule is not to say that it is necessary for the debtor to reopen the case in order to obtain a discharge of the debt. It is important to realize that Rosinski focused exclusively on the propriety of reopening the debtor's bankruptcy case and not on whether the debt had in fact already been discharged. In doing so, the Rosinski Court attached great importance to the factual question of whether or not the debtor acted fraudulently in failing to list the debt. The opinion's language is confusing, especially where the court stated:
Under current law, [the Debtor] may be prevented from amending her schedule only if her failure to include the creditor on the original schedule can be shown to have prejudiced him in some way or to have been part of a scheme of fraud or intentional design.
Rosinski,
The Rosinski Court's 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 debtor's actions in failing to list the debt can somehow transmute an otherwise ordinary debt into a fraudulent debt of the type covered in
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
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.
If the Creditors before us had acquired knowledge of the bankruptcy prior to the entry of the discharge order, the debt would not have been excepted from discharge because the Creditors had actual knowledge in time to file a proof of claim. Their learning of the bankruptcy after the entry of the discharge order did not transmogrify the debt into one that is excepted from discharge under some provision of the Code other than
For these reasons, the order of the bankruptcy court denying the Debtors' motion to reopen and holding that the debt to the Creditors has been discharged is AFFIRMED.
Notes
Because
For example,
It is true that creditors may want to add their names to the matrix in the unlikely event that the case is eventually reopened in order to distribute previously undiscovered assets of the estate, but the vast majority of no-asset cases do not involve such plot twists
The Creditors attempt to raise on appeal an issue as to whether the debt was fraudulently incurred. The record reflects the explicit acknowledgment of their counsel that they did not take the position that the debt had been fraudulently incurred, and, in any event, we will not consider issues raised for the first time on appeal. For this reason, we decline to address the Creditors' claim that they have been denied the opportunity to obtain a determination of whether the debt was dischargeable