Failure to Notice Creditors

From WFG Wiki

Under 11 U.S.C. §521(1), a debtor is required to "file a list of creditors, and unless the court orders other-wise, a schedule of assets and liabilities, a schedule of current income and current expenditures, and a statement of the debtor’s financial affairs."

The question becomes what happens to an unnoticed creditor when the bankruptcy proceeds to discharge.

11 U.S.C. §523(a)(3) provides that unlisted/unscheduled debts are not eliminated "unless such creditor had notice or actual knowledge of the case in time for" filing a proof of claim.

Slightly different timeframes apply to debts that may not be eligible for discharge under 11 U.S.C. §523(a)(2) (for money, property or services obtained by false pretenses, a false representation, or actual fraud or by use of a false statement in writing); (a)(4) (for fraud or defalcation while acting in a fiduciary capacity, embezzlement, or larceny); or (a)(6) (for willful and malicious injury by the debtor to another entity or to the property of another entity).

It thus becomes a facts and circumstances test. If the creditor has actual notice of the bankruptcy proceeding, the unlisted claim will be discharged. See In re Barnes, 969 F.2d 526, 527 (2nd Cir. 1992) (creditor admitted during cross-examination that he knew of bankruptcy filing very shortly after it was filed); Yukon v. Green (In re Green), 876 F.2d 854 (10th Cir. 1989), (although creditor received no formal notice, creditor learned of the bankruptcy before bar date for filing complaints to determine non-dischargeability). Other examples that have been held to constitute actual knowledge for purposes of 11 U.S.C. §523(a)(3)(A) include information obtained through a responsive pleading, knowledge obtained from reading the newspaper, and verbal communications regarding the bankruptcy proceedings. See In re Hunt, 146 B.R. 178 (N.D. Tex. 1992); Eagle Corp. v. Duhon,216 So. 2nd 367 (La. Ct. App. 1968); Michigan Consol. Gas Co. v. Wilson, 4 Mich. App. 188, 144 N.W. 2d. 682 (1966). It has been held however, that constructive notice or imputed knowledge is not enough to constitute actual notice. SeeSmall Bus. Ass’n v. Bridges, 894 F.2d 108 (5th 1990).

Most jurisdictions have allowed the former debtor was entitled to reopen a case in order to add an omitted creditor where the omission was not willful, reckless or part of a fraudulent scheme, little or no disruption would result from the amendment of the schedules after the proof of claim deadline has expired, and no creditor, including the unlisted creditor, would be prejudiced by the amendment.

The Ninth Circuit has a more restrictive view that absent actual knowledge, the omitted claim is not discharged. In re Laczko, 37 B.R. 678 (9th Cir. BAP 1984), aff’d w/o opinion, 772 F.2d 912 (9th Cir. 1985), , In re Corgiat, 123 B.R. 388, 391 (Bankr. E.D. Cal. 1991); In re Bosse, 122 B.R. 410 (Bankr. C.D. Cal. 1991).

The burden of proving actual knowledge and/or inadvertent harmless error falls on the debtor. So bankruptcy review to confirm that all recorded lienholders were noticed is a critical part of the process. Where a claimant appears to have been omitted, it becomes a risk analysis.

The American Bankruptcy Institute has a good Article Online