Matter of Stone ( 1994 )

United States Court of Appeals,
Fifth Circuit.
No. 93-2187.
In the Matter of Clayton Wray STONE, Jr. and Jeannine Stone, Debtors.
Clayton Wray STONE, Jr. and Wife, Jeannine Stone, Appellants,
v.
Melvin CAPLAN, et al., Appellees.
Jan. 3, 1994.
Appeal from the United States District Court for the Southern District of Texas.
Before JOHNSON, WIENER, and DeMOSS, Circuit Judges.
JOHNSON, Circuit Judge:
This is a no-asset bankruptcy case. Clayton and Jeannine Stone filed a voluntary petition for
relief in October of 1987; however, they inadvertently omitted several creditors from their section
521(1)1 schedules. Although the Stones amended the schedules to include those creditors prior to
the final discharge of the case, the bankruptcy court ruled that the debt was nondischargeable under
section 523(a)(3) of the Bankruptcy Code. The Stones appealed; the district court affirmed; this
Court reverses.
I. Facts and Procedural History
In October of 1980, Plaintiffs Solly Hemus, Ronald Fash and his wife, Leah, together with
Defendants Clayton and Jeannine Stone, purchased a condominium from Plaintiffs Melvin and Carole
Caplan. Almost five years after this transaction, Mr. Hemus and the Fashes sold their interests in the
condominium to the Stones and Ernie Beltz, a business partner of Clayton Stone.2 Soon after this
sale, the Stones began to experience substantial financial difficulties. They filed a voluntary petition
1
The statutory provisions discussed herein are found in Title 11 of the United States Code.
2
The grantees—the Stones and Mr. Beltz—were to make monthly payments to the mortgagee,
Colonial Investment Corporation, on behalf of the grantors—the Fashes and Mr. Hemus.
for bankruptcy on October 16, 1987.3 However, failing to recognize their obligation to the Plaintiffs
[hereinafter referred to as "Caplans"], the Stones neglected to list the Caplans as creditors, as required
by section 521(1) of the Bankruptcy Code.
The Caplans first learned of the Stones' bankrupt cy proceedings in March of 1989,
approximately one year after the deadline for filing proofs of claims.4 In April of 1991, the Caplans
filed a complaint in the bankruptcy court, alleging that the Stones were indebted to them. The
Caplans requested that the court deem the debt in question nondischargeable under section
523(a)(3)(A). The Stones responded by amending their schedules to include the Caplans as creditors.
In the interim, the bankruptcy trustee filed a no-asset report, declaring that the estate contained no
property for distribution.5
During a trial on the merits before the bankruptcy court, the parties stipulated that the
Caplans' sole dischargeability claim was based upon the failure-to-list provision enumerated in section
523(a)(3)(A). The Caplans also conceded that the debtors had not engaged in fraud or intentional
design in their failure to list the debt. Nevertheless, believing that the Fifth Circuit had not addressed
this issue, the bankruptcy court strictly construed section 523(a)(3)(A) and ruled that the debt owed
to the Caplans was nondischargeable. The district court, reviewing the case on appeal, affirmed. The
Stones appeal.
II. Discussion
A. Standard of Review
The standard of review in bankruptcy cases is no different from the standard of review in
other civil cases. This Court will not set aside a bankruptcy court's findings of fact unless they are
clearly erroneous. Bankr.R. 8013; In re Missionary Baptist Foundation, Inc. (Wilson v. Huffman),
3
The Stones did not originally claim that this was a no-asset case.
4
The court scheduled the creditors' meeting for December 14, 1987; therefore, February 2,
1988, was the last date on which creditors could file complaints as to dischargeability under §
523(c) and objections to discharge in general. March 12, 1988, marked the deadline for filing
proofs of claims.
5
Additionally, the Caplans deposed Mr. and Mrs. Stone in a Rule 2004 examination and
reviewed documents and things related to the Stones' indebtedness.
712 F.2d 206, 209 (5th Cir.1983). However, the primary issue in this case—the proper construction
and application of section 523(a)(3)(A)—is a question of law which we review de novo. In re
Herby's Foods, Inc., 2 F.3d 128, 130 (5th Cir.1993).
B. History of 11 U.S.C. § 523(a)(3)(A)
Section 523(a)(3)(A) of the Bankruptcy Code penalizes a debtor for failing to list all of his
creditors and debt on applicable schedules. The statute provides that a debt may not be discharged
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
..." 11 U.S.C. § 523(a)(3)(A). Section 17(a)(3), the predecessor to section 523(a)(3)(A), similarly
provided that unscheduled debts were not dischargeable. The provision read as follows:
A discharge in bankruptcy shall release a bankrupt from all of his provable debts, whether
allowable in full or in part, except such as ... have not been duly scheduled in time for proof
and allowance, with the name of the creditor, if known to the bankrupt, unless such creditor
had notice or actual knowledge of the proceedings in bankruptcy.
Section 17(a)(3), Bankruptcy Act, codified at 11 U.S.C. § 35(a)(3) (repealed by the Bankruptcy
Reform Act of 1978) (as quoted in In re Adams, 734 F.2d 1094, 1098 (5th Cir.1984)).
The Supreme Court construed this failure-to-list provision quite strictly in Birkett v. Columbia
Bank, 195 U.S. 345, 25 S. Ct. 38, 49 L. Ed. 231 (1904). There, the debtor, Mr. Birkett, filed a
voluntary petition for bankruptcy and failed to include one of his creditors, Columbia Bank, on his
schedules. Unlike this case, however, Columbia Bank first learned of the bankruptcy proceedings
almost two months after the discharge of the case. Mr. Birkett contended that section 17(a) was
inapplicable since his failure to list Columbia Bank was due to inadvertence and since Columbia Bank
learned of the bankruptcy proceeding in time to protect its rights.
The Supreme Court rejected both arguments. As to the former contention, the Court ruled
that a debtor's neglect or inadvertence is irrelevant and cannot preclude the discharge of unscheduled
debt. Id. at 351, 25 S.Ct. at 44. As to the latter argument, the Supreme Court determined that
Columbia Bank did not have actual knowledge of the bankruptcy action. The Court ruled that actual
knowledge "is a knowledge in time to avail a creditor of the benefits of the law,—in time to give him
an equal opportunity with other creditors ..." Id. The debt in question was therefore deemed
nondischargeable under section 17(a)(3) of the Bankruptcy Act.
Almost forty years later, the Second Circuit, following the Supreme Court's guidance in
Birkett, held that section 17(a)(3) contained no exceptions. Milando v. Perrone, 157 F.2d 1002,
1004 (2d Cir.1946). In the Milando court's view, the failure-to-list provision forbade the discharge
of unlisted debt even if the creditor learned of the bankruptcy proceeding in time to participate in the
distribution of dividends. Id.
This Court construed the law quite differently in Robinson v. Mann, 339 F.2d 547 (5th
Cir.1964). Focussing upon the equitable powers of the bankruptcy court, this Court rejected other
decisions which had held that debtors were absolutely barred from amending their schedules after the
proof-of-claim period.6 Id. at 549. Unlike Birkett and Milando, the Robinson Court determined that
out-of-time amendments would be allowed—but only if exceptional circumstances and equity so
required. Id. at 550.
C. Construing Section 523(a)(3)(A)
In 1977, Congress set out to reform the Bankruptcy Act. It found contradictory
interpretations of the failure-to-list provision: Birkett focussed upon the plain language of the statute,
and Robinson focussed upon the equitable principles of bankruptcy law. Faced with this conflict,
Congress rewrote the provision.7 This case calls on the Court to properly construe that provision.
Indisputably, the goal of statutory construction is to ascertain legislative intent through the
plain language of a statute—without looking to legislative history or other extraneous sources.
Caminetti v. United States, 242 U.S. 470, 490, 37 S. Ct. 192, 195, 61 L. Ed. 442 (1917). The Court
may not look beyond the words of a statute if those words are rational and unambiguous. In re
6
Amending the schedules resolved the failure-to-list problems. See 8 COLLIER ON
BANKRUPTCY ¶ 5010.06 (15th ed. 1991).
7
Section 17(a)(3) of the Bankruptcy Act became codified at section 523(a)(3) of the
Bankruptcy Code. The failure-to-list statute now forbids the discharge of debt which was
"neither listed nor scheduled ... in time to permit ... timely filing of a proof of claim, unless [the]
creditor had notice or actual knowledge of the case in time for ... timely filing." 11 U.S.C. §
523(a)(3)(A).
Hammers, 988 F.2d 32, 34 (5th Cir.1993).
Though the words in section 523(a)(3)(A) are rational, they are not unambiguous. The
parties and the bankruptcy court proffered three distinct interpretations of the failure-to-list statute.8
The Caplans, citing In re Reese, 133 B.R. 245 (Bankr.M.D.Fla.1991), contend that the provision
refers to Bankruptcy Rule 4007(c). Rule 4007(c) requires creditors to file dischargeability complaints
which are based upon section 523(c) no later than sixty days after the first date set for the creditors'
meeting. BANKR.R. 4007(c). In the Caplans' view, therefore, to escape the consequences of section
523(a)(3)(A), debtors must schedule all debts prior to the expiration of those sixty days.9
The bankruptcy court's conclusion and the Stones' interpretation, though inconsistent, are far
more persuasive. The court determined that the word "timely," in the phrase "timely filing of a proof
of claim" in section 523(a)(3)(A), refers to Bankruptcy Rule 3002(c). This rule requires creditors to
file their proofs of claims within ninety days following the first date set for the creditors' meeting.
BANKR.R. 3002(c). The Stones, on the other hand, argue that in a no-asset case, no definitive
deadline exists since creditors are not required to file proofs of claims unless and until assets are
discovered.10 BANKR.R. 3002(c)(5).
With so many possible interpretations of the provision in question, one thing seems altogether
clear: The words of the section 523(a)(3)(A) are anything but clear and unambiguous. Congress is
presumed to have known of the conflicting interpretations in Birkett and Robinson, and it apparently
8
COLLIER ON BANKRUPTCY provides yet another exegesis of this statute. The treatise explains
that amending schedules in no-asset cases—as occurred here—" "cure[s]' the section
523(a)(3)(A) dischargeability problem where the only issue is negligent failure to schedule." 8
COLLIER ON BANKRUPTCY ¶ 5010.06 (15th ed. 1991).
9
Their contention is not at all persuasive here. The Caplans based their dischargeability claim
on § 523(a)(3)(A), not § 523(c), and those rules, by their clear terms, are mutually exclusive.
Compare 11 U.S.C. § 523(a)(3)(A) with 11 U.S.C. § 523(c); see also BANKR.R. 4007(b)
(explaining that all complaints which are not based upon § 523(c) may be filed at any time, even
after the final discharge of the case).
10
The Courts of Appeals for the Sixth and Seventh Circuits have construed § 523(a)(3)(A)
quite similarly. See In re Rosinski, 759 F.2d 539, 542 (6th Cir.1985); In re Stark, 717 F.2d 322,
324 (7th Cir.1983). The Sixth Circuit has further ruled that the extended filing date allowed
under Rule 3002(c)(5) is available even if the creditor did not receive Rule 2002(e) notice that the
debtors possessed no assets. Rosinski, 759 F.2d at 542.
revised the statute to affirm one and overrule the other. See Shapiro v. United States, 335 U.S. 1,
16, 68 S. Ct. 1375, 1383, 92 L. Ed. 1787 (1948) (stati ng that Congress is presumed to know the
construction courts have given a statute prior to the congressional modification of that statute); In
re Hill (Zielinski v. Hill), 972 F.2d 116, 120 (5th Cir.1992) (same). However, discovering which
interpretation Congress approved, unaided by extraneous sources, would be no more than a guessing
game here. We therefore turn to the legislative history accompanying the 1978 Bankruptcy Reform
Act for assistance.
Looking at section 523(a)(3) through the lenses of that legislative history brings the legislative
intent into distinct focus. As revealed by House and Senate Judiciary Committee reports on the 1978
Bankruptcy Reform Act, Congress' sole purpose in revising the failure-to-list provision was to
validate the liberal, Robinson-type approach and to overrule Birkett, which strictly construed section
17(a)(3). Both House and Senate reports explicated that under section 523(a)(3), "debt is excepted
from discharge if it was not scheduled in time to permit timely action by the creditor to protect his
rights ..." S.REP. No. 989, 95th Cong., 2d Sess. (1978), reprinted in 1978 U.S.C.C.A.N. 5787, 5864
(emphasis added); H.R.REP. No. 595, 95th Cong., 2d Sess. (1977), 1978 U.S.S.C.A.N. 5963, 6320
(emphasis added). The House Judiciary Committee expounded with greater specificity: "Section
523(a)(3) of the House amendment is derived from the Senate Amendment. The provision is
intended to overrule Birkett v. Columbia Bank, 195 U.S. 345, 25 S. Ct. 38, 49 L. Ed. 231 (1904)."
H.R.REP. No. 595, 95th Cong., 2d Sess. (1977), 1978 U.S.S.C.A.N. 5963 (emphasis added).
It seems clear to this Court that this legislative history validates our Robinson decision. We
therefore hold that section 523(a)(3) must be construed with an eye toward the equitable principles
which underlie bankruptcy law:11 The statute must be applied consistently with the guidance set forth
in Robinson v. Mann.
11
The Ninth Circuit is the only Court of Appeals which has approved of the strict construction
of § 523(a)(3). However, it did so without opinion and stated that its decision was relevant only
for law of the case, res judicata, and collateral estoppel purposes. In re Laczko, 722 F.2d 912
(1985). All other Courts of Appeals which have addressed the issue have construed the statute as
we do. See In re Soult, 894 F.2d 815, 817 (6th Cir.1990); In re Baitcher, 781 F.2d 1529, 1534
(11th Cir.1986); In re Rosinski, 759 F.2d 539, 542 (6th Cir.1985); In re Stark, 717 F.2d 322,
324 (7th Cir.1983).
D. Robinson and the Stones
The Robinson Court outlined three factors which courts must consider in determining
whether a debtor's failure to list a creditor will prevent discharge of the unscheduled debt. Courts
must examine 1) the reasons the debtor failed to list the creditor, 2) the amount of disruption which
would likely occur, and 3) any prejudice suffered by the listed creditors and the unlisted creditor in
question. Although the bankruptcy court strictly construed the failure-to-list provision, that court
made findings of fact which permit this Court to review the case sub judice in light of the three
Robinson factors.12
1. Reasons For The Failure To File
As our distinguished colleagues in the Sixth, Seventh, and Eleventh Circuits have determined,
a court should not discharge a debt under section 523(a)(3) if the debtor's failure to schedule that debt
was due to intentional design, fraud, or improper motive. Soult, 894 F.2d at 817; Baitcher, 781 F.2d
at 1534; Rosinski, 759 F.2d at 541; Stark, 717 F.2d at 323-34. If the failure is attributable solely
to negligence or inadvertence, however, equity points toward discharge of the debt.
In this case, the parties stipulated—and the bankruptcy court found—that the Stones' failure
to list the Caplans on the section 521(1) schedules was completely due to mistake or inadvertence.
In fact, the bankruptcy court specifically found that no evidence whatever demonstrated that the
Stones had fraudulently or intentionally failed to list the Caplans as creditors. Hence, the first factor
supports discharge.
2. Disruption To The Courts
The second factor focusses on undue disruption to courts' dockets. While bankruptcy courts
will certainly experience some disruption by allowing debtors to amend their schedules and creditors
to submit proofs of claims outside the Rule 3002(c) time period, such disruption is not so inordinate
as to tip the scales against discharging the debt.13 Here, the Caplans have not suggested even one
12
Neither party has intimated, let alone argued, that the bankruptcy court's findings were
clearly erroneous. In fact, the parties stipulated that most of those findings were correct.
13
As demonstrated in Robinson, bankruptcy courts may need to reopen cases pursuant to
Bankruptcy Rule 5010, in order to allow debtors to amend their schedules. BANKR.R. 5010; see
way in which the discharge can or will unduly disrupt the courts, and this Court finds that no such
disruption would occur. Therefore, the second factor likewise favors discharge.
3. Prejudice to Creditors
Without question, the third factor, which focusses on prejudice to the creditors—in
conjunction with the first factor—is the most critical.14 Creditors are prejudiced only if their rights
to receive their share of dividends and obtain dischargeability determinations are compromised. Soult,
894 F.2d at 817; Rosinski, 759 F.2d at 542; see also In re Haga (Haga v. National Union Fire
Insurance Company), 131 B.R. 320, 326 (Bankr.W.D.Tex.1991) (stating that "Congress apparently
only considered [the omitted creditor's rights to share in any distribution and obtain a determination
of dischargeability] as being material because only the inability to timely file a proof of claim and a
dischargeability action are sufficient grounds under the Code to penalize the debtor" (citing In re
Anderson, 72 B.R. 783, 786 (Bankr.D.Minn.1987))).
No creditor has been or will be prejudiced here. The Caplans, themselves, point to no
prejudice they would experience if the debt were discharged, and they cannot so do: Because this
is a no-asset case, no creditor will receive any dividends. Indeed, the Caplans' rights to participate
in dividends would not be any different had they been listed first on the Stones' schedules.
Further, the Caplans have stipulated that their only dischargeability claim arises from the
failure-to-list statute. There is no question but that the Caplans have had full opportunity to develop,
also Soult, 894 F.2d at 817; 8 COLLIER ON BANKRUPTCY ¶ 5010.06 (15th ed. 1991).
Indubitably, bankruptcy courts will have to review the facts of each case in light of Robinson to
determine whether § 523(a)(3)(A) is applicable. Such disruption is to be expected. It does not
portend against discharging the debt.
On the other hand, if no proof-of-claim deadline has ever been set, § 523(a)(3)(A),
by its own terms, is inapplicable. Bankruptcy courts obviously need not review such cases
in light of Robinson. In re Bulbin (Gordon v. Bulbin), 122 B.R. 161, 161
(Bankr.D.D.C.1990); In re Hunter, 116 B.R. 3, 4 (Bankr.D.D.C.1990).
14
The Sixth and Seventh Circuits focus solely on those two factors. The Sixth Circuit
explained in Rosinski that section 523(a)(3) applies "only if [the] failure to include the creditor on
the original schedule can be shown to have prejudiced him in some way or to have been part of a
scheme of fraud or intentional design." 759 F.2d at 541; see also Soult, 894 F.2d at 817
(determining that bankruptcy courts may reopen cases so as to allow amendment of schedules and
discharge of debt if the "failure to schedule a debt was simply inadvertent and did not prejudice
the creditor in any way").
brief, and argue that claim before this Court, the district court, and the bankruptcy court. Hence, the
Caplans' right to have their dischargeability claim decided has not been compromised in any way.
Additionally, the parties have not suggested—and we cannot fathom—any way that a listed creditor's
right to a dischargeability decision could be prejudiced here. Thus, the third factor, like the first and
second factors, favors discharge.
Applying the Robinson factors to the case sub judice leads to the inescapable conclusion that
the bankruptcy court erred in holding that the Stones' debt to the Caplans was nondischargeable.
Because the Stones' failure to list the Caplans as creditors was solely due to mistake or inadvertence
and because the Caplans were scheduled in time to protect their rights, section 523(a)(3)(A) is
inapplicable here.
III. Conclusion
Because section 523(a)(3)(A) is inapplicable in the case sub judice, the Stones' debt to the
Caplans is dischargeable. The bankruptcy court erred in ruling otherwise. This Court therefore is
compelled to REVERSE.