Colonial Surety Co. v. Uni-Con Floors, Inc. , 564 F.3d 526 ( 2009 )

United States Court of Appeals
For the First Circuit
Nos. 08-1065, 08-1393
COLONIAL SURETY COMPANY,
Plaintiff, Appellee,
v.
AVI WEIZMAN,
Defendant, Appellant.
__________
UNI-CON FLOORS, INC., KATHERINE L. HEBERT, SCOTT HEBERT,
JOHN A. PACHECO, JAMIE K. PACHECO, KRISTINE WEIZMAN,
Defendants.
APPEALS FROM THE UNITED STATES DISTRICT COURT
FOR THE DISTRICT OF MASSACHUSETTS
[Hon. William G. Young, U.S. District Judge]
Before
Boudin, Stahl and Lipez,
Circuit Judges.
John E. Zajac with whom Carmichael & Zajac, P.C. were on brief
for appellant.
Steven Shane Smith with whom Francis A. Shannon, III and
Shannon Law Associates, Inc. were on brief for appellee.
May 6, 2009
BOUDIN, Circuit Judge. In January 2007, Colonial Surety
Company ("Colonial") brought suit in federal district court against
Uni-Con Floors, Inc. ("Uni-Con") and its indemnitors. The latter
promised reimbursement to Colonial for any losses, costs, and
expenses incurred by Colonial on bonding for certain construction
contracts entered into by Uni-Con Floors. Uni-Con defaulted on two
of these contracts, requiring Colonial to pay $813,129.61 to
complete work assured by Colonial bonds.
One of the indemnitors was Avi Weizman. Weizman and the
other defendants were defaulted for failure to appear but (for
reasons not here pertinent) the district judge thereafter vacated
the default judgment as to Weizman. Weizman in turn defended
against Colonial's claim on the ground that he had not signed the
indemnity contract (instead, his wife had signed for him) and,
alternatively, that any liability of his was discharged as a result
of his own bankruptcy discharge in 2006.
After a two-day bench trial, the district court rejected
these defenses and found Weizman liable to Colonial based on the
bonded contracts that Uni-Con Floors had failed to complete. The
court ruled that even though Weizman's signature on the 1998
indemnity agreement had been affixed by his wife, Weizman had
thereafter become liable under the agreement by signing a separate
indemnification agreement in 2005 which incorporated the 1998
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agreement by cross-reference. Weizman's arguments on appeal do not
challenge this latter ruling.
Instead, Weizman's appeal is based on his defense that
any such liability to Colonial was expunged by Weizman's discharge
in bankruptcy. Weizman had filed for chapter 7 bankruptcy in
October 2005 and had been discharged in April 2006, but he did not
list Colonial as a creditor and his schedule of debts had not
mentioned indemnity obligations.1 The district court found that
Colonial's indemnity claims against Weizman did not exist at the
time of the bankruptcy proceeding and so were not discharged.
In the district court, Weizman argued that the underlying
obligation created by the 1998 indemnification agreement, to which
he became a party in 2005, did exist at the time of bankruptcy and
could therefore be discharged. Under Weizman's theory, it mattered
not that Uni-Con's defaults on the two projects (which occurred in
September 2006) came after his bankruptcy discharge. The district
court, focusing on the claims triggered by the defaults, was not
persuaded.
Following the district court's decision on liability,
Weizman filed a Rule 59 motion asking the court to reconsider, in
part based upon a new argument. Specifically, Weizman argued that
1
The terms "listed" and "scheduled" refer to a debtor's
obligations under 11 U.S.C. § 521 (2006) to "list" creditors and
"schedule" liabilities and assets. On the bankruptcy forms,
schedules D-F call for a debtor to list creditors and the details
of each debt.
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his filing for bankruptcy was itself a breach of the 1998
indemnification agreement, which made bankruptcy of an indemnitor
an act of default; and to this extent Colonial had a matured claim
against Weizman for breach of the indemnification agreement once he
filed his bankruptcy petition in 2005. The district court denied
that motion without further discussion.
One other aspect of the district court proceedings bears
mention. Colonial contended in the district court that Weizman, in
listing his assets in the bankruptcy proceeding, had not disclosed
that he owned 1,000 shares of stock in a sister company of Uni-Con
Floors. Weizman's seeming position is that the shares were not
shown to have any value, but the district court expressly found the
omission fraudulent; it so advised the bankruptcy court.
However, the district court did not rest its rejection of
Weizman's bankruptcy discharge defense on the supposed fraud.
Presumably, the district court believed (correctly) that
invalidating a discharge for fraud is a matter for the bankruptcy
court, 11 U.S.C. § 727(d); by contrast, Weizman's defense in the
district court necessarily called on the district court to
determine whether the discharge encompassed the claims on which
Colonial sued.
In due course, the district court entered a final
judgment in the amount of $813,179.61 jointly and severally against
all of the defendants on the indemnity contract, representing the
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costs to complete contractually promised work at the two projects.
Weizman has now appealed to this court, pressing anew his argument
that the bankruptcy discharge bars the present judgment against
him. Colonial contends that this argument is partly forfeited but
that in any event Weizman's failure to list Colonial as a creditor
in the bankruptcy court means that such an obligation is not
discharged.2
We begin with the district court's ruling that the
discharge did not include Colonial's claims against Weizman because
they had not arisen at the time of the bankruptcy: in a nut shell,
that an April 2006 discharge could not wipe out Colonial's claims,
which arose only with the September 2006 project defaults by Uni-
Con. But the Colonial claims rest upon the indemnification
agreement that itself was made before the bankruptcy filing and it
is his obligation under the agreement that Weizman says was
discharged.
The Bankruptcy Code defines "claim[s]"--which are
potentially subject to discharge in the bankruptcy proceeding--to
include rights to payment that are inter alia "fixed, contingent,
matured, unmatured, disputed, [and] undisputed," 11 U.S.C. § 101(5)
2
As already noted, only after trial did Weizman argue for the
first time that his own bankruptcy filing breached the
indemnification agreement. We agree that the argument was forfeited
and do not address it further. See Daigle v. Me. Med. Ctr., Inc.,
14 F.3d 684, 687-88 (1st Cir. 1994); Federal Deposit Ins. Corp. v.
World Univ., Inc., 978 F.2d 10, 16 (1st Cir. 1992).
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(2006). Weizman's best argument is that the indemnification itself
was a contingent claim against Weizman that might be deemed to
mature if and as Uni-Con defaulted on bonded projects.
In his support, case law holds that the "claim" language
is to be read very broadly and can include claims that are
uncertain and difficult to estimate. Maynard v. Elliott, 283 U.S.
273, 275-78 (1931); In re THC Financial Corp., 686 F.2d 799, 802-03
(9th Cir. 1982). Seemingly Congress in adopting this language
meant to leave phrasing that had been read more grudgingly to
disallow discharge of claims that had been doubtful or speculative
at the time of bankruptcy. See S. Rep. No. 95-989, 95th Cong., 2d
Sess. (1978); H.R. Rep. No. 595, 95th Cong., 1st Sess. (1977),
reprinted in 1978 U.S.C.C.A.N. 5787.
Although Weizman and others liable on the indemnification
agreement were obligated under the agreement from the outset, it
would seem hard to value a claim under the indemnification
agreement prior to Uni-Con's defaults. And, if the primary purpose
of a claim is to allow the creditor to participate in the
distribution of assets of the estate, one blanches at the notion
that a claim could be discharged even though it was too speculative
to be valued and so to share in the bankrupt's assets.
However, some of the decisions--including one of our own-
-treat contingent claims as intrinsically dischargeable under the
present statute, saying that the court must just make the best
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estimate it can as to the present value of the claim. In re
Hemingway Transp., Inc., 954 F.2d 1, 8 (1st Cir. 1992). One of the
treatises discusses indemnity contracts not yet triggered by a
default as posing a difficult issue but assumes that estimation is
the answer. 3 Collier on Bankruptcy, ¶ 51.11, at 51-25 (15th ed.
2009).
Accordingly, we think that under Hemingway Weizman's
position is correct and that Colonial's claims rested on an earlier
obligation that comprised a contingent claim capable of being
discharged by his later bankruptcy. Technically, the discharge is
of a "debt," 11 U.S.C. § 523(a) (2006), rather than a "claim"
(which is what the debtor must list); but the code's definition of
debt and associated case law indicate that the two concepts are to
be read together. See 11 U.S.C. § 101(12) (2006).
Still, not all dischargeable debts are then discharged,
and we agree with Colonial that Weizman's discharge in bankruptcy
did not include the claim or claims at issue here. Section
523(a)(3)(A) of the bankruptcy code precludes discharge of a debt
if it was
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, unless such
creditor had notice or actual knowledge of the
case in time for such timely filing.3
3
Subsection (A), in words omitted from the quotation, applies
this restriction to most debts including those at issue here;
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This language, as we read it, provides what one might expect to be
the general rule: that if the debtor fails to list a supposed
creditor's claim--meaning that the creditor will not be notified of
the opportunity to participate in the proceeding (and the creditor
does not otherwise happen to know of the bankruptcy), the debt is
not discharged.
Conceivably (Weizman so argues in this case) a debtor
might not realize that contingent contractual obligation to
indemnify constitutes a claim or debt that could be discharged.
But, as between the debtor who knows what contracts he has signed
and the creditor ignorant of the bankruptcy filing, surely the
debtor is best suited to identify those from whom it desires a
discharge so they can be provided with notice. This, we think, is
the plain message of section 523(a)(3).
Colonial says that this outcome is compelled because
otherwise the bankruptcy code would deny the creditor an
opportunity to be heard before being deprived of its property. See
Mullane v. Cent. Hanover Bank & Trust Co., 339 U.S. 306, 314
(1950). Because we think that section 523(a)(3) makes listing (or
actual notice or knowledge) a condition of discharge, the
constitutional claim need not be considered. This is so even
though our reading is not universally shared.
subsection (B) applies a somewhat similar rule to debts, primarily
related to deliberate wrongdoing, not captured by the general rule
under subsection (A). 11 U.S.C. § 523(a)(3).
-8-
In a leading decision by a highly respected judge, the
Ninth Circuit has construed section 523(a)(3) not to apply to so-
called no asset bankruptcies, which is what Weizman claims his
proceeding to have been. See In re Beezley, 994 F.2d 1433, 1435-37
(9th Cir. 1993) (O'Scannlain, J., concurring).4 A no asset
bankruptcy is one in which the bankrupt claims in his filing that
he has no assets to distribute to ordinary creditors. As the
Administrative Office explains:
If all the debtor's assets are exempt or
subject to valid liens, the trustee will
normally file a "no asset" report with the
court, and there will be no distribution to
unsecured creditors. Most chapter 7 cases
involving individual debtors are no asset
cases.
http://www.uscourts.gov/bankruptcycourts/bankruptcybasics.html.
Although chapter 7 does not distinguish no asset
bankruptcies, the bankruptcy courts do curtail proceedings in no
asset cases and may choose not to fix a bar date for submitting
claims. E.g., In re Walendy, 118 B.R. 774, 775 (Bkrtcy C.D. Cal.
1990). The creditors may be notified that the debtor purports to
have no assets and that they need not file claims. Fed. R. Bankr.
Proc. 2002(e). Yet a creditor, if notified, could appear to
contend that the debtor does have assets.
4
Beezley itself was a short per curiam opinion but in In re
Nielsen, 383 F.3d 922, 925 (9th Cir. 2004), a full panel ruled that
"the reasoning in [Beezley] was set out in a concurrence rather
than in the terse per curiam opinion. We follow the holding of
that opinion and adopt the reasoning of the concurrence.").
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Section 523(a)((3) uses the phrase "in time to permit .
. . timely filing of a proof of claim," and Beezley reasoned that
the no-notice/no discharge provision does not apply to no asset
cases because no bar date is ever established and therefore no
filing of a claim is ever rendered untimely. With respect, we
think that the statute aims to assure creditor notice before
discharge and the idea that "timely filing" remains available after
the bankruptcy proceeding closed is surely not what Congress had in
mind. The history of the provision bears this out.
The original 1898 Bankruptcy Act provided that a
discharge was barred for debts that "have not been duly scheduled
in time for proof and allowance" unless the creditor had notice or
actual knowledge of the bankruptcy, section 17(a)(3); and the
slightly more permissive present language ("neither listed or
scheduled . . . in time to permit . . . timely filing of a proof of
claim") was substituted in the 1978 Bankruptcy Code for a narrow
and specific purpose, namely, to "overrule" a 1904 Supreme Court
decision, Birkett v. Columbia Bank, 195 U.S. 345 (1904). H.R. Rep.
No. 95-595 (1977), reprinted in 1978 U.S.C.C.A.N 5963.
Birkett dealt with an unusual case where a creditor was
not listed, a discharge was granted and in the relatively brief
period between the discharge and the full distribution of assets,
the creditor learned of the bankruptcy--and did so in time that a
proof of claim could have been filed entitling the creditor to
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participate in the estate. Even so, the Supreme Court held that
the 1898 language ("not been duly scheduled") governed and the
debtor was unprotected by the discharge. Birkett, 195 U.S. at 350.
The 1978 Bankruptcy Code substitution was apparently meant only to
undo this overly-rigid reading.
Even so, the Ninth Circuit reading has been followed,
usually without much analysis, by other circuits; stress is usually
placed on the absence of prejudice and on remedies available to the
un-notified creditor if the debtor acted with fraudulent intent or
if unlisted assets held are later discovered.5 By contrast, the
Seventh Circuit took a different approach--broadly consistent with
our view--in which it assumed that an unlisted debt was not
discharged. In re Stark, 717 F.2d 322 (7th Cir. 1983).
In Stark, the holding was that that a no asset debtor
could, long after the discharge, ask the bankruptcy court to reopen
the proceeding to list belatedly a creditor who was innocently
omitted and who would have received no benefit from notice. 717 F.
2d at 324. But such a course properly leaves the burden on the
debtor to show that the law and equities justify this relief--
absent which the debt will remain undischarged.
Weizman was free to seek that relief and started down
that path; he did file a motion in the bankruptcy court, after the
5
In re Madaj, 149 F.3d 467, 470 (6th Cir. 1998); Judd v.
Wolfe, 78 F.3d 110, 111 (3d Cir. 1996); Stone v. Caplan, 10 F.3d
285, 291 n.13 (5th Cir. 1994).
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present district court litigation began, seeking to list his
obligation to Colonial and so obtain the benefit of the discharge
despite the lack of original notice. But he thereafter withdrew
the request, possibly not caring to face the charge (endorsed by
the district judge) of fraudulent concealment of assets in the
original bankruptcy.
Nothing in the language or history of the 1978 revision
of section 523(a)(3) indicates that Congress aimed to carve out no
asset bankruptcies from what we perceive to be a general rule that
listing the creditor is a condition of discharge. The qualifying
phrase about timely filing recognizes that notice may be given late
in the bankruptcy-proceeding day but still in time for the creditor
to participate in the bankruptcy proceeding. Here, the bankruptcy
proceeding was completed with no notice to Colonial.
That the debtor claims to have no distributable assets
might make one think that the creditor is not harmed by the lack of
notice and so the Ninth Circuit reading is just a shortcut to a no
harm, no foul outcome. But no asset claims are easy to make; a
creditor might want notice precisely to argue that there are assets
even though the debtor asserts otherwise. Colonial also argues
that notice would have permitted it to take earlier action against
other indemnitors to protect itself.
It is true that an unnotified creditor is not entirely
helpless even after the bankruptcy proceeding is long over: the
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discovery of overlooked assets and the opportunity to prove fraud
can be grounds for reopening the bankruptcy. But so, too, can a
debtor move to reopen to list a debt where the failure to give
notice was innocent and can be shown to have caused no harm;
consistent with Stark, we conclude that in such a case the debtor
would be entitled to such relief. Yet the burden of doing so is
fairly upon the debtor who failed to give notice--or so Congress
seems to have thought.
But it is not merely a matter of burdens. Beezley means
that the un-notified creditor gets protection only if limited
specified grounds can be established; by contrast, a debtor who
moves to reopen to list a debt long after discharge surely must
show that the omission was innocent and, even so, can probably be
countered by anything that makes it inequitable to grant such
relief. As between Beezley and Stark, we think that the latter
best fulfills the aim of Congress.
Affirmed.
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