Closed bankruptcy case may be reopened to litigate dischargeability issue

ONCE a Chapter 7 bankruptcy is filed, the clerk of court sends out a notice of case commencement to all creditors listed in the mailing list of the petition. The notice includes deadlines to object to dischargeability of debts. If a creditor fails to timely file an objection to dischargeability, or fails to timely file a motion to extend the time to file an objection, then the creditor’s right to object to dischargeability is forever lost, unless the creditor was not listed in the mailing list. For example, debtor owes you $200,000 because you sold him a restaurant. Out of the $200,000, debtor paid only $20,000. Thus, debtor still owes you $180,000 of the purchase price. With the $20,000 payment, the restaurant is turned over to debtor who operates it for one year. Unable to turn a profit, debtor decides to shutter the restaurant after 12 months. He does not pay you the balance of $180,000. He files for Chapter 7 bankruptcy but does not list you as a creditor. Unaware of his bankruptcy, you sue in state court to recover the $180,000. Eventually, he gets a discharge. In his state court lawsuit, one of his defenses is that he has a bankruptcy discharge that wipes out your claim completely. His bankruptcy case has been closed for 90 days when you find out about it. The deadline to object to dischargeability of your claim expired 150 days ago.
Can you file a motion to reopen the bankruptcy case on the ground that you were not listed in the petition as a creditor, had no notice of the bankruptcy, so the deadline to object to dischargeability does not apply to you? You sure can.
In Re Steward, the debtor wife, prior to filing for bankruptcy, pleaded guilty in state court to embezzling funds from her former employer, Erwin Quarder Inc. Quarder waived any claim to restitution during the criminal case in an agreement that preserved the right of Quarder’s insurance carrier to assert a claim against the debtor. Debtor did not list Quarder or the insurance company in her schedules when she filed for Chapter 7 relief on October 2, 2012. She received a discharge in February 2013, and the case closed in April 2013. On October 15, 2013, the insurance company, as subrogee of Quarder, sued debtor alleging theft, embezzlement and common law conversion against the debtor wife. Debtor responded by asking the bankruptcy court to reopen their case so they could add the insurance company as creditor. The court granted the motion, finding that the insurance company’s claim was arguably “of a kind” specified in Section 523(a)(2),(4), or (6). The court concluded that it would give the parties the option of having the bankruptcy court decide whether the claim was nondischargeable pursuant to Section 523(a)(2),(4), or (6), or to have a state court determine that the claim was nondischargeable pursuant to Section 523(a)(3)(B). “For the state court, even though title 28 does not preempt its jurisdiction, its authority in matters involving the discharge is not without limits, making it difficult for the court to know how to proceed. For example, although a state court has authority to determine the scope of the discharge, it only has the authority to determine the scope of a bankruptcy discharge if it gets the answer right; Hamilton v. Herr 6th cir. 2008. In other words, state courts are not allowed to construe the discharge incorrectly, because an incorrect application of the discharge order would be equivalent to a modification of the discharge order. “It is not surprising that many state court judges are reluctant to wade into the discharge quagmire.” the court said.
Thus, the bankruptcy court granted the motion to reopen the case and allowed the parties to agree upon a single forum to litigate the issue of dischargeability. The better part of caution is to litigate the dischargeability issue in bankruptcy court because bankruptcy judges are very familiar with dischargeability issues, and dischargeability issues are complicated legal matters that state court judges are not familiar with.
“The Lord delights in those who fear him, who put their hope in his unfailing love.” – Psalm 147:11.

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Lawrence Bautista Yang specializes in bankruptcy, business, real estate and civil litigation and has successfully represented more than five thousand clients in California.  Please call Angie, Barbara or Jess at (626) 284-1142 for an appointment at 1000 S Fremont Ave Mailstop 58 Bldg A-1 Suite 1125 Alhambra, CA 91803. 

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