Opinion
Case No. 93-10874-AT
January 10, 1996
John Rosenberg, Esquire, Alexandria, VA, of Counsel for the Debtors
Donald King, Esquire, Odin, Feldman Pittleman, P.C., Fairfax, VA, of Counsel for John D. Krooth Associates
MEMORANDUM OPINION
A hearing was held on January 3, 1996, on the debtors' motion to reopen their closed case to file a complaint to determine the dischargeability of a debt owed to John D. Krooth Associates ("Krooth"). Krooth objected on the ground that the debt was clearly a post-petition obligation. The court ruled from the bench that the issue was sufficiently in doubt that it could only be resolved in the context of an adversary proceeding to determine dischargeability and granted the debtors' motion. An order was subsequently entered implementing the court's ruling. Because the issue of the dischargeability of the debt may be raised in connection with pending state court proceedings to enforce two judgments obtained by Krooth against the debtors, the court believes some further discussion of the issues is warranted. Accordingly, this memorandum opinion will supplement the court's findings of fact and conclusions of law stated orally on the record at the hearing.
Findings of Fact
Tadeus and Debra J. Zubricki (collectively, "the debtors" or "the Zubrickis") filed a voluntary chapter 7 petition in this court on March 2, 1993. The case was noticed to creditors as a "no asset" case, and no deadline was ever set for the filing of proofs of claim. The debtors received their discharge on June 25, 1993, and their case was closed on June 29, 1993.
At the time the debtors filed their petition, Mr. Zubricki owned and operated — apparently through a closely-held corporation called Zed Co., Inc. — a restaurant in Fairfax County, Virginia, known as "Zed." The business premises were occupied under a written 10-year lease, either with Krooth or a predecessor in interest as landlord, that had been signed in December 1986. At the same time, the Zubrickis signed a $60,000 promissory note. The testimony was unclear whether the Zubrickis' were the actual obligors under the lease and note, or simply guarantors, but in any event they were personally liable. Notwithstanding their personal liability on the lease and note, the Zubrickis did not list any liability to Krooth on the schedules filed in their bankruptcy case. They testified the reason they did not do so because they regarded their case as a "personal" bankruptcy, and since Mr. Zubricki intended to continue operating the restaurant, they did not think they had to list "business" liabilities. There is no evidence that Krooth was ever informed of or otherwise had any knowledge of the bankruptcy filing until August of this year.
The corporation filed a chapter 11 petition in this court on November 2, 1995. The case was converted to chapter 7 on December 20, 1995, after Krooth was granted relief from the automatic stay.
There was no evidence presented as to the purpose of the note, but the court assumes it represented the purchase price of restaurant equipment used in connection with the business.
Mr. Zubricki testified that he could not remember if the rent was fully current at the time the bankruptcy petition was filed, but that there might have been a small arrearage.
Very soon after the debtors received their discharge, the rent apparently fell substantially in arrears. On August 31, 1993, the Zubrickis signed an instrument entitled "Agreement" which acknowledged $12,196.44 in lease arrearages. Under the agreement, this amount was added to the note (which apparently by then had been nearly paid down) and the payments were extended for an additional 14 months (from December 1993 to February 1995). In April 1995, apparently as part of an agreement that allowed Mr. Zubricki to remain in the premises while he attempted to sell the business, the Zubrickis' signed a confessed judgment promissory note for $22,777.63, representing past due installments of rent. When the note was not paid, Krooth caused judgment to be confessed on the note and also brought an unlawful detainer action against the Zubrickis in state court. While the sequence of events is not totally clear from the testimony and exhibits, it appears that prior to the hearing on the unlawful detainer action, the debtors mailed to Krooth on or about August 8, 1995, a copy of amended schedules adding Krooth as a creditor in their closed case and furnishing him with a copy of their discharge. Krooth nevertheless proceeded in state court to obtain a judgment for possession and a money judgment against the debtors on August 25, 1995, in the amount of $33,679.00 for unpaid rent. The debtors did not file a timely motion in the state court to set aside the confessed judgment (or judgments), nor did they plead their discharge as a defense to the prayer for a money judgment in the unlawful detainer action. The debtors' attorney represented to the court that the reason the debtors did not raise or litigate the discharge issue in the state court was because he believed that filing the amended schedules "stayed" the state court action. Krooth has served the debtors with a summons to answer interrogatories, a standard procedure in Virginia for the enforcement of judgments, and the debtors in response have filed the present motion.
Mr. Zubricki's testimony was that the amount of the confessed judgment was $60,000. No copies of any judgments were placed in evidence, and the court is left to speculate that the $60,000 may have represented both the December 1983 note (as modified by the August 1993 agreement) and the April 1995 note.
The amended schedules and certification that they had been mailed to Krooth were filed with the clerk of this court on October 24, 1995. The liability to Krooth was scheduled as being in the amount of $17,310, described as "personal loan guarantee."
Mr. Zubricki testified that he and his wife did not appear at the trial of the unlawful detainer action because their bankruptcy counsel advised them they did not need to appear.
Conclusions of Law
This court has jurisdiction of this controversy under 28 U.S.C. § 1334 and 157(a) and the general order of reference entered by the United States District Court for the Eastern District of Virginia on August 15, 1984. This is a core proceeding under 28 U.S.C. § 157(b)(2)(A).
I.
Under § 350(b) of the Bankruptcy Code, "a case may be reopened in the court in which such case was closed to administer assets, to accord relief to the debtor or for other cause." The Fourth Circuit has held that the decision whether to reopen a bankruptcy case depends on the circumstances of the individual case and is within the sound discretion of the bankruptcy court. Hawkins v. Landmark Finance Company, 727 F.2d 324, 326 (4th Cir. 1984) (affirming denial of motion to reopen case to file a lien avoidance action with respect to a debt the debtors had erroneously listed as unsecured).
The present motion involves the vexing and recurring problem of the unlisted creditor in a chapter 7 bankruptcy. The issue has been previously addressed by this court in several opinions dealing with motions by debtors to reopen their cases to add omitted creditors. In re Showalter, Va. Lawyers Weekly, Mar. 7, 1994 at 1, No. 91-13947-AB (Bankr.E.D.Va. Feb. 4, 1994) (Teel, J.); In re Walters, No. 93-10610-AB (Bankr.E.D.Va. Feb. 16, 1993) (Teel, J.); In re Woolard, Va. Lawyers Weekly, June 26, 1995, No. 93-24190-B (Bankr.E.D.Va. Jun. 6, 1995) (Mitchell, J.); In re Carberry, 186 B.R. 401 (Bankr.E.D.Va. 1995) (Tice, J.). There would be little point in recapitulating the analysis in those cases, and the reader is referred to those opinions, and the authorities cited therein, for a full discussion of the issue. Essentially, however, the opinions all conclude that in a no-asset chapter 7 bankruptcy, a debt not listed on the debtor's schedules is nevertheless discharged unless it is a debt of the kind specified in § 523(a)(2), (a)(4), or (a)(6) of the Bankruptcy Code or is nondischargeable under some other provision of the Bankruptcy Code. Conversely, if the debt is of the kind specified in § 523(a)(2), (a)(4), or (a)(6) or is otherwise nondischargeable, it is not discharged simply because the court permits amended schedules to be filed listing the debt. Furthermore, where the debt has not been listed in time to permit the creditor to file a timely nondischargeability complaint under § 523(c), Bankruptcy Code, and F.R.Bankr.P. 4007(c), a state court has concurrent jurisdiction with this court to determine whether the debt has been discharged. As succinctly explained by Judge Teel in Walters, supra, a debtor who has failed to list a creditor in a no-asset case has several avenues of relief if pursued on account of the unscheduled debt:
Such debts include those arising from false pretenses, a false representation, actual fraud, false written financial statements, fraud or defalcation while acting in a fiduciary capacity, embezzlement, larceny, or willful and malicious injury.
The debtor is entitled to assert his discharge as a defense to any collection action by the creditor, assuming the debt is not of a nondischargeable character . . . as [of a] kind specified in 11 U.S.C. § 523(a)(2), (4) or (6) or under some other § 523(a) exception to discharge. Unless the creditor is suing on the basis that the claim is nondischargeable under some provision of 11 U.S.C. § 523(a), the suit against the debtor violates the discharge injunction. If the creditor continues to pursue the action, despite the debt's dischargeable character, the debtor may file a motion to reopen the case to prosecute a motion to hold the creditor in contempt of the discharge injunction. The debtor might also seek to reopen the case to file a complaint to determine whether the debt is nondischargeable, e.g. under 11 U.S.C. § 523(a)(3)(B) as of a kind specified in § 523(a)(2), (4) or (6).
Slip op. at 2.
In the present case, the debtors are seeking to pursue one of the avenues suggested by Judge Teel — that is, the reopening of their case to file a complaint to determine whether the debt to Krooth is nondischargeable. Krooth does not dispute the general proposition that the debt is not made nondischargeable solely by virtue of not having been listed on the debtors' schedules but asserts that reopening the case is unwarranted because the debt is clearly a post-petition liability. That argument, of course, essentially puts the cart before the horse. Under F.R.Bankr.P. 7001, a determination whether a particular debt has been discharged requires an adversary proceeding, which is precisely what the debtors are seeking leave to file. On the other hand, there will always be cases where it is clear from the undisputed facts that a particular debt is nondischargeable, and where reopening the case for the purpose of litigating dischargeability would be a waste of judicial resources and an unwarranted burden to the defending creditor. See, e.g., Thompson v. Commonwealth of Va. (In re Thompson), 16 F.3d 576 (4th Cir. 1994) (affirming bankruptcy court denial of chapter 7 debtor's motion to reopen case to add unpaid court costs from state court criminal conviction, since debt was nondischargeable as a matter of law).
"[A] discharge under . . . this section discharges the debtor from all debts that arose before the date of the order for relief under this chapter . . . whether or not a proof of claim based on any such debt or liability is filed . . ., and whether or not a claim based on any such debt or liability is allowed." § 727(b), Bankruptcy Code (emphasis added).
Here, however, the court cannot say with confidence that the issue of dischargeability is not fairly debatable and may not require a close inquiry into the surrounding facts. Certainly there is some force to Krooth's argument that the post-petition promissory note and post-petition rent installments constitute post-petition liabilities where the debtors remained in possession of and enjoyed the benefit of the premises for more than two years after their bankruptcy filing. At the same time, the lease itself was signed, and the debtors' liability for the rent due for the entire term of the lease became fixed, pre-petition. With respect to the promissory note, the somewhat sketchy evidentiary record suggests that the debtors may have received independent consideration in the form of the landlord's forbearance of its right to evict the debtors for nonpayment of rent. This is an issue best resolved, however, in the context of an adversary proceeding to determine the dischargeability of the confessed judgment (or judgments) on the promissory note (or notes) and the money judgment entered in the unlawful detainer action.
While the court is concerned over the debtors' failure to list what they considered "business" rather than "personal" debts and to inform the landlord of the filing, there is no suggestion that the failure to list their liabilities to Krooth was motivated by any desire or plan to hinder, delay, or deceive Krooth, nor does it appear that the debtors deliberately gained an unfair advantage or otherwise acted in bad faith. The court also has some concern over the debtors' failure to plead their discharge in connection with the confessed judgment on the note or the unlawful detainer action. As noted above, state courts have concurrent jurisdiction with this court to decide whether or not the debts in question were included within the scope of the debtors' discharge. The state court, had the issue been brought to its attention, might well have decided it in the debtors' favor with less delay and expense to the creditor than will occur as a result of bringing the matter back to this court. Alternatively, the debtors could have requested the state court to stay its proceedings while the debtors returned to this court to obtain a ruling on the issue. That motion, if granted, might also have saved Krooth some time and expense in the state court. On the other hand, it appears that Krooth had actual knowledge prior to the trial of the unlawful detainer action that the debtors considered their liability under the lease to have been discharged. By choosing to go forward, Krooth ran the risk that the debtors might avail themselves of the very remedy they now seek. In any event, the discharge granted to the debtor in a chapter 7 case is such a central component of the fresh start that Congress intended to confer on honest debtors that bankruptcy courts should be vigilant to ensure its enforcement. Accordingly, having considered all the equities, the court concludes that the case should be reopened to permit the issue of dischargeability to be litigated in this court.
Debtor's counsel is obviously not free from fault with respect to the failure to list the debtors' personal liability on the lease and promissory note. While it is easy to understand how unsophisticated debtors might misunderstand the necessity to list "business" debts (particularly if payments were current and the liability was contingent, which may or may not have been the situation in the Zubrickis' case) when filing a "personal" bankruptcy, certainly debtor's counsel would have understood that all liabilities had to be listed. The debtors' schedules disclosed their interest in Zed Co., Inc., and it is difficult to understand how the potential personal liability on the business's debts would not have surfaced if counsel had done an adequate job of interviewing his clients. Put another way, it is not sufficient for counsel to give clients desiring to file bankruptcy a worksheet and tell them to list "all" their debts; given the large number of potential liabilities that consumer debtors may not even realize they have, a debtor's attorney has a duty to explore the existence of such hidden liabilities with his client to ensure that the schedules are accurate and complete.
Of course, since the landlord was not given notice of the bankruptcy filing, the landlord had no opportunity to negotiate a timely reaffirmation agreement with the debtors. See, § 524(c), Bankruptcy Code (agreement between debtor and creditor, "the consideration for which, in whole or in part, is based on a debt that is dischargeable," is enforceable only if certain specified conditions are met, one of which is that "such agreement was made before the granting of the discharge.")
See Local Loan Co. v. Hunt, 292 U.S. 234, 244-245, 54 S.Ct. 695, 78 L.Ed. 1230 (1934):
One of the primary purposes of the Bankruptcy Act is to `relieve the honest debtor from the weight of oppressive indebtedness, and permit him to start afresh free from the obligations and responsibilities consequent upon business misfortunes.' This purpose of the act has been again and again emphasized by the courts as being of public as well as private interest, in that it gives to the honest but unfortunate debtor who surrenders for distribution the property which he owns at the time of bankruptcy, a new opportunity in life and a clear field for future effort, unhampered by the pressure and discouragement of pre-existing debt.
(internal citations omitted).
Nothing in this opinion should be construed as expressing a view on the ultimate issue of dischargeability.
II.
One additional matter merits discussion. As noted above, the debtors' attorney represented that pleadings were not filed in the state court asserting the debtors' discharge because the debtors had given Krooth notice of the intent to add him as a creditor under a procedure recently adopted by this court and believed that such notice and subsequent filing "stayed" the proceedings in the state court. The procedure referred to was adopted subsequent to Judge Teel's decisions in Showalter and Walters, supra, holding that reopening a closed no-asset chapter 7 case for the purpose of filing amended schedules was a futile act, because the omitted debt either had been discharged or was nondischargeable, and adding it to the schedules would not change its status. In response to those and similar decisions, this court adopted an administrative procedure permitting the filing of amended schedules in closed no-asset cases without a formal motion to reopen, if the amended schedules were accompanied by a certification (1) that the creditor to be added was given 30 days notice of the intended amendment and did not file an objection to the amendment; (2) that the debtor did not intentionally omit the creditor from the original schedules; and (3) that the debtor did not intend to hinder, delay or defraud the creditor. If no objection were filed within the 30-day period, the clerk was authorized to file the amended schedules in the closed case. As explained in Woolard, supra, however, this procedure was not adopted with the view that filing amended schedules had any legal effect on the dischargeability of the newly-added debts, but as a pragmatic response to the concern of many debtor's attorneys that most creditors, and a significant number of state court judges, assumed (incorrectly) that a debt not listed on a debtor's schedules was per se excepted from the debtor's discharge, and that the best evidence the debt was discharged was a copy of the discharge order and the debtor's schedules listing the debt.
Presumably, in those instances where a creditor is given notice of the intended amendment and does not file an objection, the creditor accepts the debtor's characterization of the debt as having been discharged, and the matter is laid to rest. Nevertheless, as discussed in Walters, Woolard, and Carberry, supra, simply amending the schedules in a no-asset case to add a previously-omitted creditor does not affect the dischargeability of the debt. At best, it places the affected creditor on notice that the debtor considers the debt to have been discharged, so that if the creditor, disagreeing with the debtor's characterization, proceeds with enforcement action, it does so at its peril. A cautious creditor, of course, may itself seek to reopen the debtor's case and obtain a declaratory judgment from the bankruptcy court. Alternatively, and less cautiously, it may proceed in a nonbankruptcy forum if it believes in good faith that the debt is nondischargeable. If it does so, however, it runs the risk that the debtor may bring a motion in the bankruptcy court to hold the creditor in contempt for violation of the discharge injunction.
In any event, it should be clear that filing amended schedules adding an omitted creditor in a closed case does not by itself "stay" proceedings to enforce the debt in another forum. Under § 362(a), Bankruptcy Code, the filing of a bankruptcy petition creates an automatic stay of most actions against the debtor to enforce a pre-petition liability. The stay is not permanent, however, and terminates when the debtor receives a discharge. § 362(c)(2)(C), Bankruptcy Code. It is replaced, with respect to dischargeable debts, by the discharge injunction of § 524 of the Bankruptcy Code:
Of course, a debtor filing a complaint in this court to determine the dischargeability of an added debt could also seek a preliminary injunction to prevent the creditor from proceeding in another forum. Whether such an injunction would be granted in a particular case would require consideration of the balancing-of-harms test enunciated in Blackwelder Furniture Co. v. Seilig Mfg. Co, Inc., 550 F.2d 189 (4th Cir. 1977).
(a) A discharge in a case under this title —
(1) voids any judgment at any time obtained, to the extent that such judgment is a determination of the personal liability of the debtor with respect to any debt discharged under section 727 . . ., whether or not discharge of such debt is waived.
(2) operates as an injunction against the commencement or continuation of an action, the employment of process, or an act, to collect, recover or offset any such debt as a personal liability of the debtor, whether or not discharge of such debt is waived;
Of course, a creditor whose claim has been discharged is in effect permanently stayed and may be held in contempt for actions that violate the discharge injunction. But a creditor is not prohibited from enforcing a nondischargeable debt — or as Krooth asserts here, a post-petition debt — simply because the debt has been added to the schedules in the debtor's closed case. Put another way, adding a creditor after the debtor has received his or her discharge does not revive the § 362 automatic stay and does not automatically suspend proceedings in another forum. Whether the proceedings in another forum are enjoined is solely a function of whether the debt has been discharged.
Conclusion
For the reasons stated in this opinion, the court concludes that proper cause exists to reopen the debtors' case in order to file a complaint to determine the dischargeability of the debts owed to Krooth. As set forth in the order separately entered by this court, the complaint must be filed within 30 days of the hearing (i.e., not later than February 2, 1996). Since the case is being reopened for a matter relating to the debtors' discharge, the filing fee will be waived. Nothing in this opinion is intended as expressing a view as to whether the debtors' liability on the debts in question constitute pre-petition or post-petition liabilities; that issue will have to be determined within the context of the adversary proceeding.