In a recent published decision, the U.S. Court of Appeals for the Ninth Circuit addressed a previously unresolved question in that circuit: whether a debtor's failure to properly schedule a debt in an "asset case" renders the debt nondischargeable. Answering the question in the affirmative, the court held that, with the exception of a "no asset" bankruptcy case, a debt is nondischargeable in its entirety if the debtor fails to properly schedule the debt. See In re Licup, 95 F.4th 1234 (9th Cir. 2024).

Background

In this case, creditor Jefferson Avenue Temecula LLC filed an unlawful detainer action against Christine Tracy Castro in 2012. In January 2013, Jefferson obtained a default judgment against Castro that included a monetary award to Jefferson in the amount of $31,780.29.

In February 2014, Castro and her husband, Edwin C. Licup, filed a voluntary Chapter 7 petition. Although Castro and Licup submitted the required schedule, or list, of their creditors' names and mailing addresses (also known as a creditor matrix), the document listed an incorrect address for Jefferson's counsel. Although there were assets for the trustee to distribute in the case, Jefferson never filed a proof of claim. It was undisputed that Jefferson failed to receive notice of the bankruptcy filing, and otherwise did not have knowledge of it in time to timely file a claim. The debtors later received a discharge that listed the debt owed to Jefferson as discharged. The bankruptcy case was closed in September 2016.

Nearly five years later, in July 2021, Jefferson commenced an adversary proceeding in the bankruptcy court for a determination that its judgment against Castro was not discharged because Jefferson was never provided notice of the bankruptcy. Castro and Licup, in turn, moved for summary judgment, arguing that the judgment should only be nondischargeable in the amount of $1,614.74, which is the amount the debtors calculated Jefferson would have received in their bankruptcy case had Jefferson received proper notice and filed a timely proof of claim. The debtors argued that the balance of the debt (approximately $30,165.55) was discharged.

The bankruptcy court ultimately granted summary judgment in favor of Jefferson, finding that the judgment was nondischargeable in its entirety because Jefferson had "undisputedly" failed to receive notice of the bankruptcy. The Bankruptcy Appellate Panel (BAP) for the Ninth Circuit Court of Appeals affirmed the bankruptcy court's ruling. Appealing the BAP's decision to the court, the debtors renewed their argument that only $1,614.74 of the judgment is nondischargeable. The debtors contended, among other things, that if the judgment were nondischargeable in its entirety, Jefferson would unfairly receive a "windfall" because it could potentially recover more on its judgment than it would have received in distributions had it filed a timely claim.

The Ninth Circuit's Analysis

Evaluating the debtors' arguments, the court first examined case law interpreting Rule 1007 of the Federal Rules of Bankruptcy Procedure. This rule requires, among other things, that a debtor file with its bankruptcy petition a "list containing the name and address of each entity included or to be included" in bankruptcy schedules D through H. The court explained that "in order for a debt to be duly listed" in accordance with this rule, "the debtor must state the name and address of the creditor," quoting In re Fauchier, 71 B.R. 212, 215 (9th Cir. BAP 1987).

This requirement (i.e., that a debtor provide an accurate list, or mailing matrix, of creditor names and addresses) is, as opined by the court, "grounded in basic principles of due process." If a creditor's address is not listed correctly, then the creditor likely will not receive notice of a debtor's bankruptcy filing or other important events in the case, such as the deadline to file proofs of claim. Without proper notice, the court explained, a creditor may be denied its "right to have its day in court," thereby denying the creditor its rights of due process.

The court then examined Section 523(a)(3)(A) of the Bankruptcy Code, which provides a measure of protection to a creditor that is not properly listed. Specifically, Section 523(a)(3)(A) provides that a debt of an individual debtor is not discharged if the debt is not "listed or 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" to timely file a proof of claim. Here, it was undisputed that the debtors did not correctly list Jefferson's address, and Jefferson did not have actual knowledge of the bankruptcy filing. Accordingly, the court ruled that the "plain language" of Section 523(a)(3)(A) rendered the judgment nondischargeable in its entirety.

In reaching its holding, the court distinguished the holdings of two of its prior decisions relied upon by the debtors: In re Beezley, 994 F.2d 1433 (9th Cir. 1993), and In re Nielsen, 383 F.3d 922 (9th Cir. 2004).

Beezley and Nielsen both held that in "no-assets, no-bar-date Chapter 7 bankruptcy cases," the failure to properly list or otherwise notify a creditor does not render the creditor's debt nondischargeable under Section 523(a)(3)(A). This is because the Bankruptcy rules "do not require creditors to file any claims in no-asset cases, as there are no assets to distribute." The protections of Section 523(a)(3)(A) therefore are "plainly irrelevant in such cases" since "creditors need not be notified of proceedings in which filing a claim would be 'meaningless and worthless.'" However, in this case, since there were assets to distribute, creditors were required to file proofs of claim and receive proper notice, triggering the statute's protections.

Notably, the court rejected the debtors' "windfall" argument. The fact that Jefferson could potentially collect the full amount of its nondischargeable judgment—in contrast to the smaller distribution it would have received with a timely filed claim—was irrelevant to the analysis. Section 523(a)(3)(A) does not contain any language that would make a debt partially nondischargeable under certain circumstances, and the court "declined to read into Section 523(a)(3)(A) a limitation that the statute does not contain."

The court also rejected the debtors' argument that Jefferson lacked standing to enforce the judgment because the judgment had been entered against "Christina Castro, LLC" as opposed to Castro personally. The only material issue presented in the adversary proceeding, the court explained, was "whether any debt held by Jefferson … was nondischargeable." Since it was undisputed that Jefferson suffered an injury that could be redressed by a nondischargeability judgment, Jefferson had standing to file the adversary proceeding. To the extent the debtors disputed the enforceability of the underlying default judgment, the state court could address the matter.

Conclusion

As the Licup court's decision makes clear, in the event there are assets to distribute, a debtor's failure to list a creditor's name and address accurately could be catastrophic to the debtor's fresh start. Inattention to detail, or even simple oversight in the rush to prepare a bankruptcy petition and related papers, could end up burdening an individual debtor with the "albatross" of a significant nondischargeable debt. Debtors and their counsel should carefully review the creditor matrix and other initial bankruptcy papers for accuracy and completeness before filing, and promptly amend any such document if an error is found post-filing.

Reprinted with permission from The Legal Intelligencer, © ALM Media Properties LLC. All rights reserved.