You filed a bankruptcy for a client. Now the case is over and has been closed. A discharge has been entered. Your client calls you to tell you that he failed to list a creditor on petition and now the creditor is demanding payment or otherwise asserting certain rights in real estate or property. What happens now? This is a question that comes up frequently in regards to the bankruptcy process. The answer depends on the chapter of the Bankruptcy Code you are dealing with.
The operable section of the Bankruptcy Code that deals with unlisted debt is 11 USC 523(a)(3). That section states:
(a) A discharge under section 727, 1141, 1228 (a), 1228 (b), or 1328 (b) of this title does not discharge an individual debtor from any debt—
(3) neither listed nor scheduled under section 521 (a) (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 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; or
(B) if such debt is of a kind specified in paragraph (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 creditor had notice or actual knowledge of the case in time for such timely filing and request;
CHAPTER 7. In Chapter 7, whether unlisted debt is discharged depends upon whether the case was an asset case with a distribution to creditors or a no asset case without such distribution. In cases where there are assets available to trigger a distribution to creditors, not listing the creditor will likely result in the creditor’s debt passing through the bankruptcy without being discharged. That is because the creditor would not have had notice “in time to permit — a timely filing of a proof of claim” (Sec. 523 (a) (3) (A) or for debts under Sec. 523 (2), (4), or (6) “in time to permit — timely filing of a proof of claim and timely request for a determination of dischargeability or such debt” (Sec. 523(a) (3) (B). This would then leave the Debtor with only one card to play i.e. trying to show that the creditor had notice or actual knowledge of the case in time to file its claim and/or bring its request for a determination of dischargeability. Note also that it is not enough for the debtor to show that the creditor had some knowledge of the existence of the bankruptcy case. The debtor must also show that the creditor had a reasonably sufficient time to investigate, prepare and file the appropriate pleading prior to the deadline. Even if the debtor could show the creditor learned of the case a couple of weeks ahead of the deadline, that still might not be a reasonable time to get a proof of claim or request for determination of dischargeability on file.1
Conversely, where the debtor is a “no asset” case, the unlisted creditor would be discharged. This is because 11 USC 727 discharges the debtor from all pre petition debt except that which is nondischargeable under 11 USC 523. Unlisted debt in a no asset chapter seven does not meet the requirements of Section 523(a) (3) (A) or (B) shown above. In an asset chapter seven, a creditor has 90 days after the first date set for the meeting of creditors to file a claim.
FRBP Rule 3002 (c) states:
(c) Time for Filing. In a chapter 7 liquidation, chapter 12 family farmer’s debt adjustment, or chapter 13 individual’s debt adjustment case, a proof of claim is timely filed if it is filed not later than 90 days after the first date set for the meeting of creditors called under §341(a) of the Code, except as follows:
(5) If notice of insufficient assets to pay a dividend was given to creditors under Rule 2002(e), and subsequently the trustee notifies the court that payment of a dividend appears possible, the clerk shall give at least 90 days’ notice by mail to creditors of that fact and of the date by which proofs of claim must be filed.
FRBP Rule 2002 (e) states:
(e) Notice of No Dividend. In a chapter 7 liquidation case, if it appears from the schedules that there are no assets from which a dividend can be paid, the notice of the meeting of creditors may include a statement to that effect; that it is unnecessary to file claims; and that if sufficient assets become available for the payment of a dividend, further notice will be given for the filing of claims.
When these two rules are considered together, it is clear that there is no set deadline for filing proofs of claim in a no asset chapter seven. That deadline would only arise if the case trustee later discovered non exempt assets for distribution. Therefore unlisted creditors in no asset chapter sevens would not be deprived of the ability to timely file a proof of claim in a no asset case as required for non dischargeability in Section 523(a)(3)(A). Similarly Section 523(a) (3) (B) protects creditors with claims potentially non dischargeable under Sec. 523 (a) (2), (4) or (6). The deadline to determine dischargeability in a no asset case for unlisted creditors with potentially nondischargeable debts never begins to run. Therefore the creditor (and the debtor) maintain the right to have the bankruptcy court reopen the case to determine the dischargeability of the debt at some point in the future.2
An intentional failure to list all known creditors can also be fatal to the debtor getting a discharge. In a very recent case decided by the 7th Circuit, a debtor lost her discharge due to her failure to list family members to whom she owed money. She testified at trial that because she intended to repay them, she intentionally did not list them on Schedule F of her petition.
She also failed to list other items throughout the petition. Bankruptcy Judge Wedoff found that she had adequate explanations for the missing items and had no fraudulent intent. He allowed her discharge to enter.
The objecting creditor appealed to the District Court where Judge Norgle overturned the Bankruptcy Court’s decision. The 7th Circuit upheld the District Court saying the lack of fraudulent intent was irrelevant. All consumer debtor attorneys would well advised to read this decision.3
CHAPTER 13. The right to a discharge in Chapter 13 is set forth in states:
(a) Subject to subsection (d), as soon as practicable after completion by the debtor of all payments under the plan, and in the case of a debtor who is required by a judicial or administrative order, or by statute, to pay a domestic support obligation, after such debtor certifies that all amounts payable under such order or such statute that are due on or before the date of the certification (including amounts due before the petition was filed, but only to the extent provided for by the plan) have been paid, unless the court approves a written waiver of discharge executed by the debtor after the order for relief under this chapter, the court shall grant the debtor a discharge of all debts provided for by the plan or disallowed under section 502 of this title, except any debt —
(2) of the kind specified in section 507 (a)(8)(C) or in paragraph (1)(B), (1)(C), (2), (3), (4), (5), (8), or (9) of section 523 (a);
Note that Section 1328 excepts from discharge unlisted debts as defined in Section 523(a)(3) just as Section 727 does for unlisted Chapter 7 debts. Therefore the controlling statute for both Chapters is the same. The difference is that in Chapter 13 cases, by definition there is no such thing as a “no asset” case. Every case with a confirmed plan calls for a distribution to creditors. Therefore, in Chapter 13 cases, the “no harm — no foul” analysis of no asset chapter 7 cases is not available. Creditors who do not receive notice of the case filing in time to file a proof of claim will have their debt survive the Chapter 13 discharge.
Again, the debtors would have the option to try to prove that the creditor had actual notice of the filing in sufficient time to permit the filing of a proof of claim.
Occasionally, creditors have been allowed to file late proofs of claim in cases where they had no notice, if they did so promptly after finding out about the Chapter 13 and where there would be little or no prejudice to the other creditors or the debtor.4 Debtors should report any post-bar date creditors to their counsel so that a motion to amend the plan to include them can be filed. However, the best course of action is to be especially careful to list all creditors.
CHAPTER 11. In Chapter 11, as in asset Chapter 7s and Chapter 13s, notice is critical to a creditor’s debt being discharged or their claims or rights modified in any way. Note that the definition of claims in a bankruptcy matter is extremely broad. 11 USC 101 (5) defines a claim as follows:
“(5) The term “claim” means —
(A) right to payment, whether or not such right is reduced to judgment, liquidated, unliquidated, fixed, contingent, matured, unmatured, disputed, undisputed, legal, equitable, secured, or unsecured; or
(B) right to an equitable remedy for breach of performance if such breach gives rise to a right to payment, whether or not such right to an equitable remedy is reduced to judgment, fixed, contingent, matured, unmatured, disputed, undisputed, secured, or unsecured.”
The definition is broad so that all possible creditor issues a Chapter 11 debtor may have can be addressed within the boundaries of the individual Chapter 11 case.
The Seventh Circuit in In Re: Longardner and Associates, Inc., 855 F.2d 455 (1988) cert. denied, 489 U.S. 1015, 109 S. Ct. 1130, 103 L.Ed. 2d 191 (1989) stated:
“The fifth amendment requires that a party must be provided with notice of the pendency of an action and an opportunity to be heard before being deprived of a protected property interest.”
The Longardner court went on to quote Reliable Elec. Co. Inc. v. Olson Constr. Co., 726 F.2d 620, 623 (10th Cir. 1984) which stated that:
“the discharge of a claim without reasonable notice of the confirmation hearing is violative of the fifth amendment.”
The Reliable Electric case was also cited by Bankruptcy Judge Schmetterer in his decision in In Re: Kewanee Boiler Corp. 297 B.R. 720, 728 (Bankr. N.D. IL. 2003), in which he wrote that:
It is well established that the debtor’s failure to schedule or notify a creditor of a Chapter 11 proceeding and the confirmation hearing precludes the creditor’s claim from being discharged in the bankruptcy proceeding.… “A creditor’s claim cannot be subjected to a confirmed plan that it had no opportunity to dispute.” [string cite omitted] See also In Re: Big O Movers and Storage, Inc. 326 B.R. 434 (Bankr. N.D. Il. 2005- Schmetterer J.) and In Re: UAL Corporation, 386 B.R. 701 (Bankr. N.D. Il. Wedoff J. 2008), on appeal 398 B.R. 243 (N.D. Il. 2008 Darrah J.). Chicago Cable Communications et al v. Chicago Cable Commission et al. 879 F.2d 1540 (7th Cir. 1989).
Creditors that are known to the Debtor have a right to receive actual notice of the Chapter 11 proceeding and failure to do so is a denial of due process.5 If there is no notice, there is no due process and there is no discharge of debt, nor modification or extinguishment of any claim the creditor may hold. If a creditor in a Chapter 11 does not receive notice, that creditor’s claim or debt will not be adjudicated in the Chapter 11 and will pass through the Chapter 11 untouched and will not be subject to the plan confirmation order. Justice Brennen wrote in his concurring and dissenting opinion in National Labor Relations Board v. Bildisco & Bildisco (referring to executory contracts in a Chapter 11 case):
“In the unlikely event that the contract is neither accepted nor rejected, it will “ride through” the bankruptcy proceeding and be binding on the debtor even after a discharge is granted. The nondebtor party’s claim will therefore survive the bankruptcy proceeding.”6
CONCLUSION. It is essential in all chapters of the code that the debtor be instructed to list all creditors and their claims, even ones that are disputed, contingent, unliquidated or unmatured.
Bankruptcy gives the debtor a chance to wipe the slate clean. To do so requires notice to all creditors. Without proper notice the debtors are opening themselves up to future claims and unresolved issues that can cost them significantly at a later date. A brief lecture to your clients prior to filing the petition on the importance of having a complete creditor list should be part of your petition signing conference with your clients. If an individual debtor wants to pay a family member or friend in full, they are allowed to do so after the bankruptcy is over. However, that family member or friend must be listed as a creditor on the petition. Petition amendments are allowed at any time up to the discharge, so if a creditor is omitted, urge your client to let you know so that amendment gets filed.
1 See Tidwell and Sterling-Ahlla v. Smith, 582 F.3d 767 (7th Cir. 2009).
2 See In Re: Mendiola, 99 B.R. 864 (Bankr. N.D. Ill, 1989, J. Ginsberg).
3 See Skavysh v. Katsman (No. 13-1881- 7th Circuit, Nov. 2014).
4 See In re: Tarble, 431 B.R. 826 (Bankr. W.D. Wis. 2010, J. Martin).
5 Reliable Elec. Co. Inc. v. Olson Constr. Co. cited above, also, In Re:Arch Wireless, et al., 332 B.R. 241, 248, 45 Bankr.Ct.Dec 124, (Bankr D. Mass. 2005).
6 National Labor Relations Board v. Bildisco & Bildisco, 465 U.S. 513, 546 n.12, 104 S. Ct. 1188, 79 L.Ed. 2d 482 (1984).
Kent Gaertner has practiced Bankruptcy law for over 35 years. He represents clients in Chapters 7, 11, and 13 of the Code and in non-bankruptcy workouts and reorganizations. His clients include consumers and businesses, debtors and well as creditors. He is experienced in all facets of bankruptcy litigation having represented both plaintiffs and defendants in lawsuits arising out of the bankruptcy process. Professionally, Mr. Gaertner is active in the DuPage and Kane County Bar Associations. He is a Past President of the DCBA (2009 to 2010). He previously served the DCBA as a Director for five years and has served on the Audit Committee and the Executive Board. He helped establish the first Bankruptcy Committee for the DCBA and is now serving as its Chairman for the fourth time. He is a hearing officer with the Illinois ARDC. Mr. Gaertner is on his third term as an elected Delegate to the Illinois State Bar Association Assembly from DuPage County. He serves on the Commercial Banking, Collection and Bankruptcy Section Counsel and the Marketing and Communications Committee of the ISBA.
Mr. Gaertner is a regular contributor to “The Brief” magazine of the DuPage County Bar Association with articles on bankruptcy practice. He is a frequent speaker on bankruptcy topics at continuing legal education seminars for attorneys and has been selected as a moderator for bankruptcy related seminars given by the Illinois Institute For Continuing Legal Education and the Illinois State Bar Association.