Is the Debtors Failure to List Claims Fatal
Bankruptcy Code §523(a)(3) address-es the consequences for failure to schedule a creditor’s claim. This article will discuss only §523(a)(3)(A), which provides as follows:
A discharge under §§727, 1141, 1228(a), 1228(b), or 1328(b) of this title does not discharge an individual debtor from any debt...neither listed nor scheduled under §521(1)..., with the name, if known to the debtor, of the creditor to whom such debt is owed, in time to permit...if such debt is not of a 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...11 U.S.C. §523(a)(3)(a).
With regard to §523(a)(3)(A), the one fact upon which all courts tend to agree is that regardless of whether a claim is unlisted, if the creditor has actual notice of the bankruptcy proceeding, the unlisted claim will be discharged. See In re Barnes, 969 F.2d 526, 527 (2nd Cir. 1992) (creditor admitted during cross-examination that he knew of bankruptcy filing very shortly after it was filed); Yukon v. Green (In re Green), 876 F.2d 854 (10th Cir. 1989), (although creditor received no formal notice, creditor learned of the bankruptcy before bar date for filing complaints to determine non-dischargeability). Other examples that have been held to constitute actual knowledge for purposes of 11 U.S.C. §523(a)(3)(A) include information obtained through a responsive pleading, knowledge obtained from reading the newspaper, and verbal communications regarding the bankruptcy proceedings. See In re Hunt, 146 B.R. 178 (N.D. Tex. 1992); Eagle Corp. v. Duhon, 216 So. 2nd 367 (La. Ct. App. 1968); Michigan Consol. Gas Co. v. Wilson, 4 Mich. App. 188, 144 N.W. 2d. 682 (1966). It has been held however, that constructive notice or imputed knowledge is not enough to constitute actual notice. See Small Bus. Ass’n v. Bridges, 894 F.2d 108 (5th 1990). The burden of showing actual notice rests with the debtor. See Matter of Faden, 96 F.3d 792 (5th Cir. 1996).
Despite the straightforward language of 11 U.S.C. §523(a)(3), the courts have differed in its interpretation. Specifically, the courts have disagreed on the issue of whether a debtor’s inadvertent mistake in failing to list a creditor’s claim has any relevance once the deadline for filing a proof of claim has expired. To understand the divergent views on this issue, a review of the history of 11 U.S.C. §523(a)(3)(A) is instructive.
History of §523(a)(3)(A)
Prior to the Bankruptcy Reform Act of 1978, the predecessor to §523(a)(3)(A) was §17(a)(3) of the Bankruptcy Act, which provided in relevant part as follows:
A discharge in bankruptcy shall release a bankrupt from all of his provable debts, whether allowable in full or in part, except such as...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.
Section 17(a)(3), Bankruptcy Act, codified at 11 U.S.C. §35(a)(3)(repealed by the Bankruptcy Reform Act of 1978). See, also, Stone v. Caplan (In re Stone) 10 F.3d 285, 288 (5th Cir. 1994).
During the period that §17(a)(3) was in effect, the U.S. Supreme Court interpreted it strictly in Birkett v. Columbia Bank, 195 U.S. 345, 25 S.Ct 38, 49 L.Ed. 231 (1904). In that case, bankruptcy debtors in a chapter 7 proceeding failed to list the claim of a creditor on their schedules in time for the creditor to file a proof of claim. The creditor did not learn of the bankruptcy proceedings until after the debtors had been discharged. The debtors argued that the failure to list the creditor on their schedules was due to an inadvertent mistake and that the creditor had obtained knowledge of the bankruptcy in time to prove its claim and to move to revoke the discharge of the debtors. The Supreme Court ruled that the debtor’s neglect or inadvertence was irrelevant based upon the language of §17(a)(3), stating that it was natural for the law to give a creditor remedies against the estate of a bankruptcy notwithstanding the neglect or default of the bankrupt. Id. 195 U.S. at 351, 25 S.Ct. at 44. The Supreme Court further held that the creditor did not have actual knowledge of the bankruptcy action, holding that actual knowledge is "a knowledge in time to avail a creditor of the benefits of the law,—in time to give him an equal opportunity with other creditors,—not a knowledge that may come so late as to deprive him of participation in the administration of the affairs of the estate, or to deprive him of dividends." Id. 195 U.S. at 350, 25 S.Ct. at 40.
In the 1960s, the Fifth Circuit Court of Appeals, in Robinson v. Mann, 339 F.2d 547 550 (5th Cir. 1964), diverging from the Supreme Court’s decision in Birkett and other established case law, held that untimely amendments to schedules would be allowed in exceptional circumstances if equity so required. Specifically, the Robinson court outlined three factors courts must consider in determining whether a debtor’s failure to list a creditor would prevent discharge of the unscheduled debt: (1) the reason the debtor failed to list the creditor, (2) the amount of disruption that would likely occur from the allowance of the amendment, and (3) any prejudice that would be suffered by listed creditors and the unlisted creditor in question. Id. at 550.
In 1977, when Congress was preparing to reform the Bankruptcy Act, it noted the two lines of decision with regard to untimely amendments. Rather than following the Supreme Court’s strict interpretation in Birkett, Congress chose to follow the more liberal interpretation of Robinson. In fact, when §523(a)(3) was enacted, the House Judiciary Committee report stated as follows:
Section 523(a)(3) of the House Amendment is derived from the Senate Amendment. The provision is intended to overrule Birkett v. Columbia Bank, 195 U.S. 345, 25 S.Ct. 38, 49 L.Ed 231 (1904)
H.R. Rep. No. 595, 95th Cong., 2d Sess. (1977), 1978 U.S. S.C.A.N. 5963.
Untimely Amendments Under §523(a)(3)(A)
Following the enactment of the Bankruptcy Code, most jurisdictions have construed §523(a)(3)(A) liberally as did the Robinson court. In the case of In re Soult, 894 F.2d 815, 817-818 (6th Cir. 1990), the Sixth Circuit Court of Appeals held that a former chapter 7 debtor was entitled to reopen a case in order to add an omitted creditor where the debtor’s omission of the creditor was not willful, reckless, or part of a fraudulent scheme, but rather had occurred through the inadvertence of his attorney, even though the bar date had passed before the creditor had learned of the bankruptcy. Furthermore, the Sixth Circuit found that the creditor had not lost any meaningful right that he would have enjoyed if he had been properly listed. Id. See, also, In re Baitcher, 781 F.2d 1529 (11th Cir. 1986); In re Rosinski, 759 F.2d 539 (6th Cir. 1985); In re Stark, 717 F.2d 322 (7th Cir. 1983).
Only one jurisdiction has continued to construe §523(a)(3)(A) as strictly as the Supreme Court in Birkett had done prior to the enactment of the Bankruptcy Code. The Ninth Circuit Bankruptcy Appellate Panel (BAP) in In re Laczko, 37 B.R. 678 (9th Cir. BAP 1984), aff’d w/o opinion, 772 F.2d 912 (9th Cir. 1985), held that absent actual notice of the bankruptcy by the omitted creditor, §523(a)(3)(A) clearly excepts the omitted claim from discharge. The BAP explicitly rejected the "exceptional circumstances" rule set forth in Robinson. See, also, In re Corgiat, 123 B.R. 388, 391 (Bankr. E.D. Cal. 1991); In re Bosse, 122 B.R. 410 (Bankr. C.D. Cal. 1991).
It is clear from the explicit language of §523(a)(3)(A) that an unlisted debt will be discharged if the unlisted creditor has actual notice of the bankruptcy proceedings prior to the deadline for filing proofs of claim, even if the creditor received no formal notice. The burden of proof on actual notice, however, rests with the debtor, and actual notice may not be easy for the debtor to prove.
This does not mean that the debt will automatically be held to be non-dischargeable in every situation in which the unlisted creditor does not obtain actual notice prior to the proof of claim deadline. The failure of a debtor to list a creditor’s claim may not be fatal so long as the failure was inadvertent, little or no disruption would result from the amendment of the schedules after the proof of claim deadline has expired, and no creditor, including the unlisted creditor, would be prejudiced by the amendment. Most jurisdictions would allow an untimely amendment under these cir-cumstances. Once again, however, it is not always easy for a debtor to prove these things. In order to prevent a debt from being held non-dischargeable, debtors and their attorneys should meticulously check and recheck the schedules before filing to ascertain that all creditors’ claims are listed, and that all creditors’ addresses are correct. Being careful at this early stage of the proceedings can save the debtor much grief and expense in the long run.