Opinion
Civil Action No. 3:02-CV-0956-P
August 1, 2002
MEMORANDUM OPINION AND ORDER
Now before the Court is Appellants American Chiropractic Clinic — North Dallas, P.C. ("ACC"), Harry L. Cure Trustee of the Paul E. Leichty Liquidating Trust, and the Sharp Family Trust's (collectively, "Appellants") appeal of the Bankruptcy Court's Memorandum Opinion and Order (dated March 8, 2002) and Final Judgment (dated March 29, 2002) in Case Nos. 3:98-37396-SAF-7 and 00-3040, in which the Bankruptcy Court declared Rodriguez's debt owed to ACC discharged. After careful review of the Parties' briefing, the record, and the applicable law, the Court hereby AFFIRMS the Bankruptcy Court's ruling.
FACTUAL BACKGROUND
The undisputed facts are as follows: This case involves the dischargeability of a debt. On June 1, 1995, Appellee Jeff J. Rodriguez ("Rodriguez") executed a note in the principal sum of $200,000 payable to the order of ACC. Appellant Paul E. Leichty owned ACC. Rodriguez made note payments through April 1997. Rodriguez then defaulted under the note. Rodriguez still owed ACC $184,645.10 plus interest at eight percent (8%) per annum from May 1, 1997.
On August 27, 1998 Rodriguez filed Chapter 7 bankruptcy. Rodriguez attached to his bankruptcy petition a list of creditors, called a creditor matrix, which listed only one creditor. Rodriguez also signed a form stating that the list was "complete, true, and accurate." Because ACC was not listed on the original creditor matrix, ACC was not sent notice of the bankruptcy by the bankruptcy clerk at that time.
On September 14, 1998, Rodriguez filed an amended creditor matrix adding 39 other creditors, including Paul E. Leichty (as the representative of ACC). When Rodriguez filed the amended matrix, his attorney did not serve notice of the filing on the added creditors. The clerk of the court continued to use the original creditor matrix to serve notices in the bankruptcy case, including the date for the meeting of creditors, and the deadlines for filing complaints objecting to discharge or the dischargeability of a debt. Therefore, ACC did not receive notice of the case until February 6, 1999, following entry of Rodriguez's discharge on February 1, 1999.
THE ADVERSARY PROCEEDING
ACC filed an adversary proceeding to determine the dischargeability of Rodriguez's debt because of lack of notice. In the adversary proceeding, ACC contended that Rodriguez's intentional or, at least reckless, failure to notify ACC of his bankruptcy should prevent the discharge of the debt.
The Bankruptcy Judge held that the evidence did not support a finding of intentional or reckless failure by the debtor to give notice, but rather, ACC's failure to receive notice was due to ACC's lawyer's negligence. (Bankr. Order at 11-12.) The Judge also held that there would be no impact on the administration of the case and that ACC suffered no prejudice from the discharge because Rodriguez's bankruptcy case was a no-asset case. (Bankr. Order at 12-13.) Appellants appeal these conclusions.
DISCUSSION
A. APPELLANTS' ARGUMENT.
The gravamen of Appellants' argument on appeal is that the Bankruptcy Court erred in finding that Rodriguez's failure to provide notice to ACC was negligent, not intentional or reckless. Appellants argue that Rodriguez knowingly lied on his original matrix when he listed only one of forty creditors, and this knowing misrepresentation deprived ACC of notice, and caused Rodriguez's debt to be discharged under § 523(a)(3) which allows for the discharge of debts "neither listed nor scheduled". See 11 U.S.C. § 523(a)(3). In support of their argument, Appellants direct the Court's attention to Rodriguez's trial testimony in which he admits knowing the list was incomplete when he filed it and when he signed the verification of its accuracy. Appellants rely on Robinson v. Mann and its progeny, in which the Fifth Circuit enumerated certain factors that a court must weigh when determining whether a debtor's failure to list a creditor will prevent a discharge of an unscheduled debt.
Noticeably absent from Appellants' brief is any mention of the amended creditor matrix that was filed fifteen days after the original creditor matrix. Nowhere in the briefing do the Appellants explain that the Bankruptcy Judge relied heavily on the existence of the amended matrix when it analyzed the first Robinson factor (concerning the circumstances surrounding the debtor's failure to list the creditor). Rather, Appellants mischaracterize the underlying facts of the case and the reasoning of the Bankruptcy Court in their effort to prevail on appeal.
B. ANALYSIS.
1. Standard of Review.
When reviewing a bankruptcy court's decision in a core proceeding, the district court functions as an appellate court and applies the standards of review generally applied by federal appellate courts. See In re Webb, 954 F.2d 1102, 1103-04 (5th Cir. 1992). Moreover, it is well-settled that factual findings of the Bankruptcy Court are reviewed under the "clearly erroneous" standard, whereas issues of law are reviewed de novo. See In re Stone, 10 F.3d 285, 288 (5th Cir. 1994); United States v. Luongo, 255 B.R. 424, 425 (Bankr. N.D. Tex. 2000). On questions of law, the district court is to independently determine the correctness of the bankruptcy judge's legal conclusions by examining the law and drawing its own conclusions after applying the law to the facts. See Luongo, 255 B.R. at 425; In re Cumpton, 30 B.R. 49, 50 (Bankr. N.D. Tex. 1983).
2. Analysis.
The Bankruptcy Code allows a debtor to discharge all debts incurred prior to bankruptcy, subject to certain exceptions. See 11 U.S.C. § 727(b); In re Greenway, 71 F.3d 1177, 1179 (5th Cir. 1996). In keeping with the policy of giving the debtor a fresh start, the exceptions to discharge are strictly construed and evidence must be viewed in the light most favorable to the debtor. See In re McClure, 210 B.R. 985, 988 (Bankr. N.D. Tex. 1997); In re Cole, 136 B.R. 453, 456 (N.D. Tex. 1992). One of the exceptions forbids discharge of a debt when the debtor fails to list the creditor and the debt on applicable schedules. See 11 U.S.C. § 523(a)(2)(A).
The statute provides, "A discharge . . . does not discharge an individual from any debt . . . neither listed nor scheduled under section 521(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 . . . timely filing of a proof of claim . . ." 11 U.S.C. § 523(a)(2)(A).
In Robinson v. Mann, the Fifth Circuit enumerated three factors that courts must weigh when determining whether a debtor's failure to list a creditor will prevent a discharge of the unscheduled debt. 339 F.2d 547 (5th Cir. 1964). Courts must examine: (1) the circumstances surrounding the debtor's failure to list the creditor; (2) the amount of administrative disruption that would likely occur due to that failure; and (3) any prejudice suffered by the listed and unlisted creditors in question. Id. at 550.
a. Debtor's Reason for Failure to List.
In In re Stone, the Fifth Circuit held that a "court shall not discharge a debt under § 523(a)(3) if the debtor's failure to schedule that debt was due to intentional design, fraud, or improper motive. 10 F.3d 285, 291 (5th Cir. 1994). If the failure is attributable solely to negligence or inadvertence, however, equity points toward discharge of the debt." Id. at 291.
In this case, the Bankruptcy Court found that the debtor's failure to give notice was not due to intentional design, fraud, or improper motive. ( See Bankr. Order at 11-12.) The Bankruptcy Court considered that the original creditor matrix did not list all of Rodriguez's creditors, but that Rodriguez's amended matrix did list ACC as a creditor. ( See Bank. Order at 11.) The Bankruptcy Court heard Rodriguez's trial testimony that he gave his counsel the names of all of his creditors at or before the beginning of the case. ( See Tr. at 73.) Debtor's counsel prepared a "short" matrix for the debtor to sign, advising the debtor that the other creditors could be added later. ( See Tr. at 100.) Debtor, on the advice of his counsel, signed counsel's "short" matrix. ( See Tr. at 78, 100, 119.)
The Bankruptcy Court, after hearing this testimony, concluded that the evidence that Rodriguez followed his counsel's advice did not support a finding of intentional or reckless failure by the debtor. In fact, there is no finding that Rodriguez acted negligently in following his counsel's advice.
The Bankruptcy Court did, however, conclude that based on the circumstances, Rodriguez's attorney's failure to serve notice of the amended matrix to the creditors who were added did constitute negligent conduct on his part. ( See Bankr. Order at 11.) Yet, the Bankruptcy Court did not find that Rodriguez's attorney acted with recklessness or actual intent to defraud.
Appellants argue that Rodriguez's incomplete original matrix, which Rodriguez admitted he knew was false when he signed it, constitutes intentional design, fraud, or improper motive. That may be so — absent any other facts. However, Appellants' argument is flawed because it does not take into consideration the fact that Rodriguez was acting on his counsel's advice and that he timely filed an amended matrix that included the omitted creditors. This fact must be analyzed as part of the circumstances surrounding the debtor's failure to list ACC. Rodriguez did list ACC as a creditor — but he failed to do so in his original creditor matrix.
In evaluating the debtor's motives, the district court must give "deference to the critical role bankruptcy judges play in making credibility determinations." In re Faden, 96 F.3d 792, 796 (5th Cir. 1996). There is no evidence that Rodriguez acted with recklessness or actual intent to defraud the Bankruptcy Court and/or the creditors. Likewise, there is no evidence suggesting that Rodriguez's counsel acted with recklessness or actual intent to defraud the Bankruptcy Court and/or the creditors. Because there is no evidence to suggest that the Bankruptcy Court's finding is clearly erroneous, the Bankruptcy Court did not err in its ruling. Therefore, this factor favors discharge.
b. Disruption to Bankruptcy Administration.
The Court must next determine whether the administration of the bankruptcy was disrupted by Rodriguez's failure to list ACC as a creditor. See In re Stone, 10 F.3d at 290-91. The Bankruptcy Court found that because this was a no-asset case, there was no administrative disruption. This Court agrees.
Because this is a no-asset case, creditors were advised not to file proofs of claim. Since, presumably, all creditors would have been notified in the event that assets were found and a distribution would have been possible, there has been no disruption to the administration of this case. See In re Stone, 10 F.3d at 291.
ACC argues that administration of bankruptcy cases would be disrupted and the entire system compromised if debtors and their attorneys were permitted to "knowingly leave virtually all their creditors out of the bankruptcy notice loop." (Appellants' Br. at 17.) The Court agrees that debtors and their attorneys should not be permitted to file an incomplete list of creditors when the debtors and/or their attorneys do so with an improper motive and/or an intent to defraud. However, in this case, there is no evidence to contradict either Rodriguez's testimony that he signed the matrix on his counsel's advice or his attorney's testimony that as a Chapter 13 practitioner, did not know he was supposed to serve notice on the added creditors in this Chapter 7 case. (Tr. at 78, 100, 118, 119.) In other words, there is no evidence to contradict the testimony that both Rodriguez and his counsel were acting without fraudulent intent or improper motive.
c. Prejudice Suffered.
"Creditors are prejudiced only if their rights to receive their share of dividends and obtain dischargeability determinations are compromised." See In re Stone, 10 F.3d at 291. Rodriguez contends, and the Bankruptcy Court agreed, that because this was a no-asset case, ACC was not deprived of the opportunity to file a proof of claim and would not have received any dividends even if it had. Moreover, the Bankruptcy Court found that ACC has had an opportunity to brief and argue its dischargeability claim before the Bankruptcy Judge — and this right has not been compromised. ( See Bankr. Order at 12-13.) This Court agrees.
Even if ACC had received notice, ACC would not have been able to file a proof of claim or receive any dividends from the bankrupt estate because this was a no-asset case. Therefore, ACC has suffered no prejudice as a result of its lack of notice. See In re Stone, 10 F.3d at 291-92.
CONCLUSION
Therefore, for the reasons stated herein, the Bankruptcy Judge's Ruling of March 8, 2002 is hereby AFFIRMED.