Opinion
BK. NO. 88-20589, AP NO. 92-2059
September 24, 1992
DECISION AND ORDER
BACKGROUND
This matter is before the Court on a motion for Summary Judgment on the issue of whether, in this no asset case, a debt is discharged under Section 727, even though the debt was never listed on the debtor's Schedules before the case was closed and the creditor incurred substantial expenses in pursuing the collection of the debt before the Debtor formally raised the issue of discharge.
On May 10, 1988 the debtor, Gerald Yehl (the "Debtor"), filed a petition initiating a Chapter 7 case. A Section 341 meeting notice (a "No-Asset Notice") was sent on May 11, 1988 informing creditors that this was a No-Asset case and advising them "Do not file claim unless later notified to do so." The Chapter 7 Trustee reported that this was a No-Asset case on June 28, 1988, the Debtor was granted a discharge on August 2, 1988 and the bankruptcy case was closed on September 13, 1988.
The creditor in this Adversary Proceeding, Carol Patterson ("Patterson"), was not listed on the Schedules filed by the Debtor in his bankruptcy case. On June 3, 1991 a Summons and Complaint was personally served on the Debtor which commenced a state court action (the "State Court Action") by Patterson to collect an unpaid debt of $5,650.00 owed to her for expenses incurred while the Debtor lived with her. These expenses included rent, gas, electric and Visa credit card bills. There was a written acknowledgment by the Debtor of at least a portion of this indebtedness dated prior to May 10, 1988. It also appears that some portion of this unpaid $5,650.00 indebtedness was incurred for periods after the filing of the Debtor's petition on May 10, 1988.
Although the Debtor's attorney contacted Patterson's attorney concerning the State Court Action, no formal answer was ever interposed on behalf of the Debtor, and a default judgment was entered against him on August 7, 1991 in the amount of $6,842.25.
Thereafter, the creditor obtained an income execution against the Debtor on November 6, 1991 and deductions were made from the Debtor's wages. On or about January 8, 1992 the Debtor moved to reopen his bankruptcy case ex parte to be able to amend his petition to add Patterson as a creditor. The affidavit of the Debtor's attorney on the motion to reopen stated that Patterson was a creditor with a disputed claim, she was inadvertently left off of the Debtor's Schedules as originally filed, and no prejudice would inure to the creditors in this No-Asset case as a result of reopening the case and amending the Schedules to add Patterson as a creditor. The affidavit indicated nothing about the State Court Action or Patterson's ongoing collection efforts. Prior to January 2, 1992 when the Honorable Edward D. Hayes retired, it had always been the policy of this Court to reopen cases to allow unscheduled creditors to be added where the case was a No-Asset case. That policy had not changed as of March 1992, and the Debtor's case was reopened on that basis on March 2, 1992. On the same date, the necessary forms were filed with the Court to add Patterson as a creditor to the Debtor's Schedules in the amount of $5,650.00.
The Debtor filed this Adversary Proceeding alleging that the debt due Patterson, although not listed on the Schedules at the time his discharge was granted, was nevertheless discharged on August 2, 1988. The Debtor made a motion for Summary Judgment seeking a determination that his debt to Patterson is discharged pursuant to Section 523(a)(3) because this was a No-Asset case and the time to file claims has not yet expired.
The issue of whether under Section 523(a)(3) the debt due Patterson is discharged solely on the ground that the creditor had notice or actual knowledge of the bankruptcy case before it was closed, which is also alleged by the Debtor, is a factual question still to be determined in the Adversary Proceeding.
DISCUSSION
This Court has recently considered the issue of whether an unscheduled debt is discharged in a No-Asset case where a No-Asset Notice is given and the time to file claims has not expired. The Court determined that such a debt is discharged unless there has been fraud, intentional or reckless failure to schedule the creditor, prejudice to the creditor or intentional laches. In re Tucker, Case No. 91-21046 (Bank. W.D.N.Y. August 1992). In this case, there has not been any clear showing of fraud, intentional laches or an intentional or reckless failure to schedule the creditor at the time the case was filed (at a trial an intentional or reckless failure to schedule the creditor might be proved in view of the prepetition acknowledgment of at least a portion of the debt in question). However, Patterson argues that she has been substantially prejudiced by the Debtor's failure to: (1) initially schedule her as a creditor resulting in her commencing the State Court Action; (2) interpose any defense whatsoever in the State Court Action, including an affirmative defense that her debt was discharged pursuant to Section 523(a)(3) with specific detail and authority so that the State Court and her attorneys would be able to address and determine the discharge issue; (3) move to vacate the default judgment in the State Court within the time period prescribed by the New York Civil Practice Law and Rules; or (4) reopen his bankruptcy case and attempt to obtain a resolution of the discharge issue until long after an income execution had been served and remissions made. These failures and omissions by the Debtor caused Patterson to incur substantial attorney's fees and disbursements, court costs, execution fees and personal time and effort.
In the case of In re Gilbert, 38 B.R. 948 (Bankr. N.D.Ohio 1984), the Bankruptcy Court considered whether a creditor was prejudiced and took into account the fact that the creditor had incurred expenses pursuing the debt through the Court of Common Pleas. The Court found that a loss of both the debt and the State Court expenses was not within the contemplation of the dischargeability provision nor the equitable notice of the Bankruptcy Code. 38 B.R. at 951. "If the debt [had] been scheduled in the initial petition that action could not have been filed, thereby precluding the possibility that the plaintiff would needlessly incur additional litigation expenses." Id. On similar facts to the instant case, the Bankruptcy Court of the Eastern District of New York also found the creditor had been harmed by the delay in the debtor not listing the debt and refused to reopen the case since the Court would find the debt nondischargeable. In re Tinnenberg, 57 B.R. 430, 432 (Bankr. E.D.N.Y. 1985). The Court noted that the debtors did not appear in the state court action and argue that the debt was dischargeable nor did they move to reopen the Bankruptcy case until after a judgment was taken, which caused the creditor to incur needless costs when the issue of dischargeability could have been resolved in the state court which had concurrent jurisdiction. The Court went on to state, "In short, debtor's failure to appear in the state court action makes it beyond the sound discretion of the court to reopen this case to discharge the state court judgment." 57 B.R. at 432.
In this case Patterson has been severely prejudiced by the Debtor not initially having scheduled her and then not taking steps in connection with the State Court Action and related collection efforts to eliminate or minimize further prejudice and the incurring of additional and substantial expenses.
Prior to this Court's August 12, 1992 decision in In re Tucker, to this Court's knowledge, there was no published Bankruptcy or District Court decision in the Western District of New York holding that an inadvertently unscheduled debt in a closed No-Asset Chapter 7 case in which the time to file proofs of claim had not expired was nondischargeable absent an intentional or reckless failure to schedule the creditor, fraud, intentional laches or prejudice to the creditor. Although this Court had routinely entered orders allowing cases to be reopened to add unscheduled creditors and even entered orders allowing such creditors to be added to a debtor's Schedules, such orders were not understood by the Court to be a determination that the debts in question were or were not discharged. Therefore, in this pre-Tucker period it would not be reasonable to expect that simply advising an unscheduled creditor or its attorneys of a debtor's prior closed bankruptcy case, without raising dischargeability as an affirmative defense in a pending state court action, would result in a discontinuance of the state court action or related collection efforts. In this pre-Tucker period, it would be reasonable for such an unscheduled creditor to believe that pursuant to Section 523(a)(3) its unscheduled debt was not discharged.
In this case, the Debtor's attorney could not simply state that the Debtor had filed bankruptcy and it was a No-Asset case and expect the creditor or its attorney to discontinue the State Court Action or cease collection efforts when the debt was unscheduled, a discharge was granted almost three years earlier and the case was closed over two and one-half years ago. Therefore, the Debtor allowed Patterson to be prejudiced in her collection efforts by not raising this defense in the State Court Action or otherwise obtaining a determination of the dis-charge issue prior to the creditor incurring substantial expenses.
Under the New York Civil Practice Law and Rules the time to vacate the default judgment entered in the State Court Action has expired. Therefore the determination of the amount of the debt due Patterson is res judicata . See Kelleran v. Andrijevic, 825 F.2d 692, 695 (2d Cir. 1987).
CONCLUSION
In view of the substantial prejudice to Patterson from the Debtor's actions and omissions, the Court finds that her debt as evidenced by the default judgment is nondischargeable, unless under Section 523(a)(3) Patterson is shown to have had notice or actual knowledge of the Debtor's bankruptcy case before it was closed.
IT IS SO ORDERED.