Wednesday, September 8, 2004
Chapter 7 Bankruptcy Cannot Be Set Aside for Fraud Absent Showing of Assets, Ninth Circuit Rules
By a MetNews Staff Writer
The failure of a Chapter 7 debtor to list a creditor—even if intentional—is not a basis for revoking the resulting discharge of debts unless the creditor shows the debtor had assets, the Ninth U.S. Circuit Court of Appeals ruled yesterday.
In a no-assets bankruptcy, in which normally no deadline is set for creditor’s claims, proper notice to the creditor could not have changed the outcome, Judge Andrew J. Kleinfeld explained in an opinion joined by Judges Ronald M. Gould and Richard C. Tallman.
While 11 U.S.C. Sec. 727(d)(1) permits a court to revoke a discharge “obtained through the fraud of the debtor,” Kleinfeld acknowledged, he said that to come within that provision a creditor would have to show that, but for the fraud, the discharge would not have been granted.
“‘[O]btained through’ is causation language,” the judge declared. “Fraud in the air will not suffice.”
Sharon White sought the revocation after she failed to receive notice of the bankruptcy filing of Randall Nielsen and his wife. White, a customer of Nielsen’s satellite television and television repair business, helped Nielsen get an $8,000 loan by pledging her certificate of deposit as security.
White, who was Nielsen’s largest unsecured creditor, first learned of the bankruptcy when she make an attempt to collect after the discharge.
Though the Nielsens had listed White on their schedule of creditors, she appeared on the “matrix” used to actually notify creditors only as a handwritten addendum, which apparently was not picked up by the bankruptcy court’s scanning equipment. She contended Nielsen deliberately omitted her from the original list to prevent her from receiving notice.
Bankruptcy Judge Paul B. Snyder of the Western District of Washington found White had not established fraudulent intent, but ruled it would have made no difference if she had. Since there were no non-exempt assets to distribute, any omission was immaterial, Snyder said.
U.S. District Judge Robert J. Bryan affirmed, and Kleinfeld said both were right.
“Ms. White’s brief makes the good point that just because a bankrupt says he has no assets, that does not make it true,” Kleinfeld wrote. “The bankrupt may purposely leave a creditor off the list if that creditor would have knowledge of assets, or if, as with Ms. White, that creditor would have a larger incentive than others to look for assets or find some other reason to thwart discharge. Had Ms. White, in her proceeding to revoke the discharge, shown that, in truth, there were assets, or that there was some reason that the Nielsens should not have been discharged, this would be quite a different case. But she had just as much incentive to find such information prior to filing her complaint in this action as she would have had during the original proceedings, had she received proper notice. So far as the record indicates, she has not found any such information.”
Kleinfeld said the court was publishing its decision “primarily to reaffirm” the identical result reached in In re Beezley, 994 F.2d 1433 (9th Cir. 1993). He pointed out that the per curiam opinion Beezley was “terse,” with “much of the reasoning—set out in a concurrence” by Judge Diarmuid F. O’Scannlain.
O’Scannlain’s “scholarly” concurrence pointed out, Kleinfeld said, that while a failure to schedule a creditor can make an otherwise dischargeable debt non-dischargeable under 11 U.S.C. Sec. 523(a)(3)(A), that statute does not apply in a no-assets Chapter 7 bankruptcy, since there is no distribution of assets for the creditor to participate in.
“This reasoning applies to this case. The clerk did not send a notice that non-exempt assets had been located, because there were none, so the date to file claims was never set, and section 523(a)(3)(A) was never triggered. This is not to say that if Ms. White’s debt is non-dischargeable, she has lost the opportunity to litigate its dischargeability. Rather, if the debt is non-dischargeable for reasons other than failure to schedule it, then it was not discharged, and nondischargeability can be litigated outside the normal time limits. But other than her argument based on section 523(a)(3)(A), she asserts no basis for her debt being non-dischargeable.”
White’s due process claim failed for the same reasons, Kleinfeld declared.
“If she had a dischargeable debt, its discharge was not brought about by the lack of notice,” he explained. “If she had a non-dischargeable debt, she still has it. The lack of notice had no effect on her.”
The case is In re Nielsen, 02-35983.
Copyright 2004, Metropolitan News Company