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Debtor's Failure to List & Schedule a Debt Renders Debt Non-Dischargeable

A creditor's attorney is often in a love/hate relationship with the bankruptcy court. Although the entire premise of the bankruptcy court is for a debtor to honestly disclose his assets and liabilities and in return receive his discharge and a fresh start, it often feels like it is the creditor's job through their attorney to ferret out the misrepresentations, investigate the assets and then hope against hope, the trustee sees some value worth pursuing.

There is nothing worse than working a case through judgment and then finding out after the fact, that a debtor filed bankruptcy and failed to list your client's debt and provide you or your client with any notice of the filing. While there are situations where a debtor honestly does not know who owns a judgment, especially if there has been an assignment, that is not always the case.

A recent holding by the 9th Circuit BAP makes clear that a debtor's failure to list and schedule a debt renders the debt non-dischargeable. In Re Mahakian (9th Cir. BAP) NV-14-1115-JuKuD (April 2015). The Debtor, Mahakian, filed a no-asset bare bones Chapter 7 bankruptcy. Although the debtor (along with his brother) co-guarantied a debt for their LLC to Union Bank, the Debtor neglected to list Union Bank as a creditor, or schedule the debt. Union Bank then sold the debt to William Maxwell Investments, LLC ("WM"). The debtor received his discharge. Afterwards, the trustee noticed the case as an asset case and set a claims bar date. WM did not receive notice of the claims bar date and did not file a proof of claim (POC).

The debtor then amended his bankruptcy Schedule F to include WM and the debtor filed an untimely proof of claim on behalf of the WM. In the meantime, WM sued the debtor and his brother in state court. The Debtor then sought to have the proof of claim deemed as timely filed based on excusable neglect, i.e., that he did not schedule the Union Bank debt or list it as a creditor because he had an agreement with his brother that he was not responsible for the debt. The debtor (in an ironic twist of fate - "ironie du sort") filed an adversary proceeding seeking a determination that the debt was discharged based on the amended Schedule F and the untimely POC filed by the debtor on behalf of the previously unknown creditor WM as Assignee of Union Bank.

The BAP ruled against the debtor and found that creditor WM's debt was excepted from discharge under 11 U.S.C. Section 523(a)(3)(A), which essentially provides that a debt is excepted from discharge if the creditor was neither listed nor scheduled and did not otherwise know of the bankruptcy case in sufficient time to file a proof of claim. Essentially, the Court found that the scope and aim of §§ 502(b)(9) and 726(a)(2)(C) was distinct from and not connected to the dischargeability of a debt. Thus, the Debtor's attempts to bootstrap himself into a dischargeable debt based on excusable neglect was ultimately, unsuccessful. The Court stated that while excusable neglect might be relevant to determine whether a late-filed POC under Rule 3004 should be deemed timely filed, such a finding does not translate into a timely filed claim for purposes of § 523(a)(3)(A).

To discuss your credit collections issue, contact experienced Los Angeles collections attorney Ronald P. Slates today.

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