Jones v. Warren Construction (In Re Jones)Jones v. Warren Construction (In Re Jones)
MEMORANDUM & ORDER
Thе issue began as whether the defendant violated the discharge injunction in 11 U.S.C. § 524 when it garnished the debt- or’s wages to collect a prepetition debt. Because the defendant was not a scheduled creditor and did not have notice or knowledge of bankruptcy, the issue became whether the defendant’s debt was discharged pursuant to 11 U.S.C. § 523(a)(3)(B). In a third twist, the defendant contends on summary judgment that its “colorable” claim of prepetition misconduct by the debtors satisfies the cross-reference to § 523(a)(2), (4) or (6) in
I.
The debtors filed Chapter 7 on August 5, 2002. The trustee filed a no asset report and the debtors were discharged on November 25, 2002. Although the debtors referenced Warren Construction, the defendant here, in their Statement of Affairs, they omitted Warren Construction from the schedules and list of creditors.
Warren Construction filed a state court complaint in February, 2002, alleging that the debtors failed to pay for construction work aftеr a fire at their home. Just before the state court trial, Warren Construction learned that the debtors received insurance proceeds for the construction, but those funds were not paid to the defendant. When the debtors did not appear at trial, Warren Construction tоok a default judgment for $12,539.66.
No payment was made on the judgment, and Warren Construction filed a garnishment against the debtor, William Jones, on March 28, 2003. On April 8, 2003, Warren Construction learned of the bankruptcy for the first time. On April 18, 2003, the debtors filed this adversary proceeding seeking damages for violation of the discharge injunction.
Warren Construction contends that the debtors committed fraud or conversion by intercepting insurance proceeds that were intended for the defendant. Warren Construction argues that it was without timely notice of the debtors’ bankruptcy for § 523(a)(3)(B) рurposes and that it has alleged at least a “colorable” claim under § 523(a)(2) or (6). Accordingly, it seeks summary judgment that its debt was not discharged and that it did not violate the discharge injunction.
The debtors respond with an affidavit that they did not negotiate any insurance check that was payable to Warren Construction. The affidavit states that Warren Construction was not paid because its work was sub-standard, and that others were paid to complete or correct the defendant’s work. The debtors allege that no fraud or conversion occurred. Thе debtors argue that summary judgment is not appropriate because there is a material dispute with respect to the defendant’s proof under § 523(a)(3)(B) that it is owed a debt of a kind specified in § 523(a)(2), (4) or (6).
II.
Section 523(a)(3)(B) excepts from discharge a debt that is:
(3) neither listed nor scheduled under section 521(a) of this title, with the name, if known to the dеbtor, of the creditor to whom such debt is owed, in time to permit—
(B) if such debt is of a kind specified in paragraphs (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 crеditor had notice or actual knowledge of the case in time for such timely filling and request.
11 U.S.C. § 523(a)(3)(B). This section does not create an automatic exception to discharge when a Chapter 7 debtor fails to schedule or list a creditor. Rather, the unscheduled creditor must be without timely notice оr knowledge of the bankruptcy case and the creditor must have a claim “of a kind specified” in § 523(a)(2), (4) or (6).
Well respected canons of statutory construction support this uncluttered reading of § 523(a)(3)(B). Congress used the phrase “of a kind” in at least 35 other places in the Bankruptcy Code.
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Viewed in the context of its broader statutory usage, “of a kind” captures the elements or characteristics specified in another section of the Bankruptcy Code and makes the incorporated provision a condition for satisfaction of the section making the reference. For example, 11 U.S.C. § 726(b) provides for payment on claims “of a kind specified” in paragraphs (1) through (8) of 11 U.S.C. § 507(a). In
Stuart v. Carter (In re Larsen),
There is no argument from prior bankruptcy law or legislative history suggesting the unreasonableness of this reading of § 523(a)(3)(B). The phrase “of a kind specified” in § 523(a)(3)(B) does not derive frоm the prior Bankruptcy Act. Section 17(a)(3) of the former law prevented discharge of all debts that were not “duly scheduled” and contained no additional requirement that the creditor hold an otherwise nondischargeable debt. To deter
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, at 77-9 (1978); H.R.Rep. No. 95-595, at 363 (1977), U.S.Code Cong. & Admin.News 1978, pp. 5787, 5862-65, 5963, 6318;
see also Haga,
Although the reported decisions are fractured, a substantial number of courts have concluded that the creditor must prove the merits of its cause of action under § 523(a)(2), (4) or (6) to establish the elements of nondischargeability under § 523(a)(3)(B). As explained in
Waugh v. Eldridge (In re Waugh),
This Court believes that the better view is to require the creditor to also demonstrate the merits of the paragraph (2), (4), (6) nondischargeability action. This view is in keeping with the express terms of the statute and the policies embodied in the Bankruptcy Code. In any dischargeability procеeding, there is a strong presumption in favor of discharge and a fresh start for the honest debtor.... [Exceptions to discharge or dischargeability will be strictly construed in favor of discharge.... [Section 523(a)(3)(B) does not create a separate exception for dischargе merely for failure to schedule a particular creditor. Rather, the purpose of section 523(a)(3)(B) is to allow determination of dischargeability which would otherwise be barred by the time limitations of section 523(c) and Rule 4007(c), Federal Rules of Bankruptcy Procedure.... [S]eсtion 523(a)(3)(B) works to preserve the right to litigate the dischargeability of a debt when the creditor did not receive notice, but, at the same time, precludes that creditor from receiving a ‘windfall’ of nondischargeability due to a clerical error.
Waugh,
The reported decisiоns reaching other conclusions — perhaps a majority of the courts that have addressed the question— are not persuasive. It has been said that there are three schools of thought with respect to the creditor’s burden of proof under § 523(a)(3)(B):
Cases holding that a debtor’s failure to timely schedule a creditor, which prevents the creditor from receiving notice or having actual knowledge of the case, automatically excepts from discharge the omitted creditor’s debt include Matter of Peloso,107 B.R. 31 , 33 (Bankr.S.D.N.Y.1989), In re Dabbs, 72 B.R. 73 , 74 (Bankr.N.D.Ala.1987).
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.
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.
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 nondischargeable under subsections (a)(2), (4), or (6) of § 523 and not to prove its claim on the merits.
Haga,
Cases allowing a “colorable” or “viable” § 523(a)(2), (4) or (6) claim to suffice for § 523(a)(3)(B) purposes support this judge-made rule with policy arguments such as promoting accuracy and thoroughness by debtors and bolstering the allocation of jurisdiction over dischargeability actions between the bankruptcy courts and the state courts.
See, e.g., Haga,
Because Warren Construction bears the burden of proof under § 523(a)(3)(B), this adversary proceeding is not appropriate for summary judgment.
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IT IS SO ORDERED.
Notes
. See e.g., 11 U.S.C. §§ 101(10)(B); 101(12); 101(16); 346(g)(2); 365(b)(4); 501(d); 503(b)(1)(B); 507(a)(8)(A)(ii); 522(c)(1); 522(c)(3); 523(a)(3)(B); 546(c)(2)(A); 553(b)(1); 702(a)(1); 702(c)(1); 705(a); 723(c); 724(a); 724(b); 726(a)(2); 726(a)(6); 761; 766; 943; 1110(a)(2)(B); 1123(a)(1); 1123(a)(1); 1124(2); 1125(a)(1); 1129(a)(9); 1129(9)(C); 1141(d)(1)(A); 1145; 1168; 1228(a)(2); and 1328(a)(2).
. For example, § 101(12)(A) defines a "debt for child support” as a "debt of a kind specified in section 523(a)(5)....” Again, the cross-reference requires that a debt for child support meets the exact requirements of § 523(a)(5).
See e.g., In re Hutchison,
. Bankruptcy Rule 7056 states that Federal Rule of Civil Procedure 56 applies in adversary proceedings. Rule 56 provides:
The summary judgment sought shall be renderеd forthwith if the pleadings, depositions, answers to interrogatories, and admissions on file, together with the affidavits, if any, show that there is no genuine issue as to any material fact and that the moving party is entitled to a judgment as a matter of law.
Fed.R.Civ.P. 56(c) (2002). Rule 56(c) sets forth a two-pronged test: (1) whеther there is a genuine issue of material fact for trial; and (2) whether the law entitles the moving party to a judgment in the absence of a genuine dispute of a material fact.
The moving party always bears the initial burden of informing the court of the basis for its motion, and identifying those pоrtions of the pleadings and/or discovery materials which demonstrate that there is no genuine disputed issue of material fact.
See, e.g., Celotex Corp. v. Catrett,
The Sixth Circuit has interpreted
Celotex
to mean that "the movant [can] challenge the opposing party to 'put up or shut up' on a critical issue.”
Street v. J.C. Bradford & Co.,