Opinion
Case No. 94-32089-T Chapter 7.
September 24, 1999.
Darryl A. Parker, Esquire, Richmond, VA, Counsel for Debtors.
AutoInfo Finance of Virginia, Inc., Norfolk, VA.
Mr. William Bischoff, Esquire, Virginia Beach, VA, Counsel for Heritage Financial Services.
Greg Nivala, Richmond, VA, Assistant United States Trustee.
Harry Shaia, Jr., Richmond, VA, Chapter 7 Trustee.
MEMORANDUM OPINION AND ORDER
This matter comes before the Court on the debtors' motion to reopen a no-asset chapter 7 case more than one year after discharge to allow debtors to add an omitted creditor. For reasons stated in this memorandum opinion, the debtors' motion will be denied without prejudice.
Facts
On June 7, 1994, debtors filed a chapter 13. Subsequently, on September 30, 1996, the case was converted to a chapter 7 no-asset bankruptcy. On April 18, 1997, this court entered a discharge for the debtors. The debtors' bankruptcy schedules did not include a debt they owed to AutoInfo Finance of Virginia, Inc. The assignee of this debt, Heritage Financial Services, as of May 12, 1994, had a garnishment proceeding pending against the debtors. See Letter from Brandon H. Zeigler, Stallings Richardson, P.C., counsel for Heritage Financial Services, to Robert M. Wiley, Clerk of Court (May 12, 1999). The creditor has indicated that it would object to any amendment of the schedules and further requested to be sent notification of any attempted amendment. See id. On September 15, 1999, the debtors by counsel, came before the court on a Motion to Reopen the case for the purpose of amending their schedules to include this debt. Notice of the Motion to Reopen was properly served on AutoInfo Finance of Virginia, Inc., and counsel for Heritage Financial Services.
Conclusions of Law
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. See Hawkins v. Landmark Finance Company, 727 F.2d 324, 326 (4th Cir. 1984)). There are currently two divergent lines of authority which are being used in Virginia. See In re Woolard, 190 B.R. 70, 73 (Bankr.E.D.Va. 1995) (Mitchell, J.).
In re Woolard, 190 B.R. 70 (Bankr.E.D.Va. 1995), the creditor had intentionally not put a debt on the schedules. Judge Mitchell did not decide which approach should be followed. He held that where the creditor had intentionally not put a debt in the schedules, a reopening of the debtors' case was not warranted by either approach.
One approach holds that the debtor's bad faith (if any) is irrelevant and that in a no-asset case the creditor cannot be prejudiced because whether the debt is scheduled has no effect on its dischargeability. See id. at 73-74 (discussing Beezely v. California Land Title Co. (In re Beezley), 994 F.2d 1433 (9th Cir. 1993) (holding that after a no-asset case is closed, dischargeability is unaffected by scheduling and that amending the schedules would be "a pointless exercise"); In re Showalter, 1994 WL 876416 (Bankr.E.D.Va 1994); In re Walters, No. 93-10610-AB (Bankr.E.D.Va 1994)).
The other approach focuses on the subjective intentions of the debtor in failing to list the creditor and any resulting prejudice to that creditor. See id. (discussing In re Rosinski, 759 F.2d 539 (6th Cir. 1985) (holding debtor may be prevented from amending his schedules only if it can be shown that the creditor was prejudiced or that the omission was "part of a scheme of fraud or intentional design"); Stark v. St. Mary's Hospital (In re Stark), 717 F.2d 322 (7th Cir. 1983) (holding that in a no-asset bankruptcy where proper notice has been given, a debtor may reopen the estate to add an omitted creditor "where there is no evidence of fraud or intentional design"); In re Godley, 62 B.R. 258 (Bankr. E.D. Va 1986) (Shelley J.)).
In this court's view where a debtor has unintentionally omitted a prepetition creditor from the bankruptcy schedules in a no-asset chapter 7 case that has been closed, and there is no indication of fraud or intentional design in such omission, that debt is discharged and amending the schedules would be a "pointless exercise." More specifically, unless AutoInfo Finance of Virginia, Inc., or Heritage Financial Services wish to challenge the debtors' discharge, their prepetition unsecured debt has already been discharged.
This Court recognizes two practical difficulties with refusing to reopen a closed case to add an omitted creditor. See id. at 75, 76. First, where the case has been closed for over one year after the discharge, the creditor would be deprived of the right to object to such a discharge should the case be reopened. See id. at 76. Section 727(d) allows a bankruptcy court to revoke a previously granted discharge if such discharge was "obtained through fraud of the debtor, and the requesting party did not know of such fraud until after the granting of such discharge." See 11 U.S.C. § 727(d). This provision, however, is limited by § 727(e), which requires that requests for the revocation of a discharge be made within one year after such discharge is granted. See 11 U.S.C. § 727(e). The concern is that a debtor might intentionally leave off of the schedule a creditor who could have successfully challenged debtor's discharge and later amend the schedule after the time for contesting discharge under § 727 had expired. This is a due process concern that can be addressed by giving that creditor a limited period in which to object to the discharge.
Second, many collection attorneys and state court judges assume that a debt not listed on a debtor's schedules is per se excepted from the debtor's discharge and that the best evidence the debt was discharged is a copy of the discharge order and the debtor's filed schedules listing the debt. See In re Woolard, 190 B.R. at 75. In holding that an unintentionally omitted prepetition debt in a closed no-asset chapter 7 case is discharged absent any indication of fraud, we note that debtors are not without avenues of potential relief against recalcitrant creditors. See id. The debtor can assert his or her discharge as a defense to any collection action by the creditor, file a motion in this case to hold the creditor in contempt of the discharge injunction, or file a complaint to determine whether the debt is dischargeable. See id.
Accordingly,
IT IS ORDERED that to the debtors' motion to reopen case is DENIED without prejudice; and
IT IS FURTHER ORDERED that either AutoInfo Finance of Virginia, Inc., or Heritage Financial Services has 30 days from the entry of this order to file an adversary proceeding either to determine the dischargeability of the debt under 11 U.S.C. § 523 or to object to the debtors' discharge under 11 U.S.C. § 727.