Opinion
Adv. No. 98-1619, Case No. 97-16406-DK
August 1999
MEMORANDUM OF DECISION
Before the court are cross motions for summary judgment. The court has reviewed the pleadings and finds that the legal arguments are adequately set forth and that oral argument would not aid in the decisional process. For the reasons set forth herein, Plaintiff's motion for summary judgment on the complaint is granted and Defendants' motion for summary judgment on the complaint is denied.
Plaintiff/Debtor initiated this adversary proceeding after his Chapter 7 case was reopened for the purpose of bringing this action. In his complaint Debtor requests a determination that debts owed to Defendants by Debtor were discharged by the Chapter 7 discharge Order entered in his bankruptcy case ("Discharge Order") and that Defendants have violated that Discharge Order. The undisputed facts reveal the following. The parties entered into a joint business venture in 1996, whereby Debtor executed, as maker, a $10,000 balloon note in favor of Jimmy Moss or HD Bridges, Inc. ("Defendants"), as lender. In 1997 Debtor filed bankruptcy and although he listed the partnership interest on his Schedule B, he omitted any reference to the Defendants or debts owed to Defendants in his lists of creditors and debts.
Despite the lack of disclosure in Debtor's Schedules, at some point in time no later than August 5, 1997, Defendants became aware that Debtor had filed bankruptcy. Defendants never received notice of the bankruptcy case, or any other information from the bankruptcy court. The deadline for filing a complaint objecting to the entry of a discharge order, or for determination of non-dischargeability of a debt expired on December 13, 1997.
During the course of the bankruptcy case, Debtor represented to Defendants that he intended to fulfill his obligations under the $10,000 balloon note. Debtor received his Discharge Order on December 19, 1997. In May 1998, Defendants filed a civil action against Debtor in the Superior Court for the District of Columbia seeking collection of pre-petition debts.
In his Motion For Summary Judgment, Debtor sets forth two reasons why his pre-petition debts owed to Defendants were discharged. First, Debtor argues that no reaffirmation agreement was filed with the court and therefore, there can be no valid reaffirmation of the debt. Second, Debtor maintains that because Defendants had knowledge of the bankruptcy, the debts are not non-dischargeable pursuant to 11 U.S.C. § 523(a)(3).
Hereafter, all code sections refer to the United States Bankruptcy Code found at Title 11 of the United States Code.
Defendants, both in response to Debtor's motion for summary judgment and in support of their own motion for summary judgment, contend that the debts owed to them by Debtor were excluded from the Discharge Order for four reasons. First, Defendants argue that Debtor is equitably estopped from preventing collection of these debts. Second, Defendants assert that the equitable doctrine of "unclean hands" should bar Debtor from avoiding repayment of the debts. Next, Defendants insist that a debt that was not properly disclosed on Debtor's schedules cannot be discharged. Finally, it is averred that despite their knowledge of Debtor's pending bankruptcy, Defendants were not given notice of the bankruptcy as intended by Section 523(a)(3).
Under Rule 56 of the Federal Rules of Civil Procedure, made applicable to bankruptcy cases by Rule 7056 of the Federal Rules of Bankruptcy Procedure, summary judgment is appropriate only if there is no genuine issue of material fact and the moving party is entitled to judgment as a matter of law. Lujan v. National Wildlife Federation, 497 U.S. 871, 883-84, 110 S.Ct. 3177, 3186, 111 L.Ed.2d 695 (1990); Sylvia Dev. Corp. v. Calvert County, Maryland, 48 F.3d 810, 817 (4th Cir. 1995). In considering a motion for summary judgment the court must view all permissible inferences in a light most favorable to the non-moving party. Matsushita Elec. Indus. Co. v. Zenith Radio Corp., 475 U.S. 574, 587-88, 106 S.Ct. 1348, 1356, 89 L.Ed.2d 538 (1986); Tuck v. Henkel Corp., 973 F.2d 371, 374 (4th Cir. 1992), cert. denied, 507 U.S. 918, 113 S.Ct. 1276, 122 L.Ed.2d 671 (1993). Summary judgment is appropriate only if, taking the record as a whole, a reasonable jury could not possibly return a verdict in favor of the non-moving party. Matsushita, 475 U.S. at 587, 106 S.Ct. at 1356; Anderson v. Liberty Lobby, Inc., 477 U.S. 242, 248, 106 S.Ct. 2505, 2510, 91 L.Ed.2d 202 (1986).
The court first addresses the issues raised regarding Section 523(a)(3). That section reads:
A discharge under section 727, 1141, 1228(a), 1228(b), or 1328(b) of this title does not discharge an individual debtor from any debt. . . .
(3) neither listed nor scheduled under section 521(1) of this title, with the name, if known to the debtor, of the creditor to whom such debt is owed, in time to permit —
(A) if such debt is not of a kind specified in paragraph (2), (4), or (6) of this subsection, timely filing of a proof of claim, unless such creditor had notice or actual knowledge of the case in time for such timely filing; or
(B) if such debt is of a kind specified in paragraph (2), (4), or (6) of this subsection, timely filing of a proof of claim and timely request for a determination of dischargeability of such debt under one of such paragraphs, unless such creditor had notice or actual knowledge of the case in time for such timely filing and request. . . .
Under Section 523(a)(3), a debt is not discharged if the holder of that claim neither receives notice nor has knowledge of the bankruptcy case within sufficient time to file a non-dischargeability action or proof of claim. As no deadline for filing proofs of claims was ever set in Debtor's no-asset case, subsection 523(a)(3)(A) is inapplicable. See, e.g., McMahon v. Harmon (In re Harmon), 213 B.R. 805, 808 (Bankr. D. Md. 1997). Under subsection 523(a)(3)(B), a debt would not be discharged if the creditor could have filed a complaint for non-dischargeability pursuant to Section 523(a)(2), (4) or (6), but was prevented. There are no facts alleged from which this court can infer that the debt was incurred by fraud, by embezzlement or breach of a fiduciary duty, or as a result of a willful and malicious injury. The action brought by the Defendants against Debtor in the Superior Court for the District of Columbia was upon a cause of action for breach of contract. Thus, there are no facts from which this court could find that the creditor was deprived of an opportunity to bring an action for non-dischargeability under Section 523(a)(2), (4) or (6).
Accordingly, even if other requirements of Section 523(a)(3) were satisfied, this court has no basis upon which to find that Section 523(a)(3) precluded the discharge of this debt.
Nevertheless, assuming arguendo that the indebtedness held by the Defendants was of a type described in Section 523(a)(2), (4) or (6), Defendants would have to show that they did not have "actual knowledge of the case in time for such timely filing and request" for non-dischargeability pursuant to Section 523(a)(2), (4) or (6). Defendants concede that more than four months before the deadline for filing non-dischargeability complaints, they were informed through correspondence between Debtor's bankruptcy counsel and Defendants' counsel that Debtor had filed bankruptcy.
However, Defendants maintain that they did not have "proper" notice of the bankruptcy because Debtor told Defendants that the bankruptcy would not affect the debts owed to Defendants.
In GAC Enterprises, Inc. v. Medaglia (In re Medaglia), 52 F.3d 451 (2nd Cir. 1995), the United States Court of Appeals for the Second Circuit looked at whether the actual knowledge provision of Section 523(a)(3)(B) satisfied due process requirements. Plaintiffs therein had argued that their debts could not be discharged because although they were aware of the bankruptcy case, they had not received formal notice of the case or the bar date for filing non-dischargeability complaints. In rejecting that argument the court wrote:
The statute itself, in § 523(a)(3)(B), does contain a constructive notice clause that makes crystal clear that a creditor with timely, actual knowledge of the "case" does not have the "right to assume" that it will receive formal notice before its claims are barred. Section 523(a)(3)(B) specifically qualifies any right to assume receipt of formal notice.
Id. at 457. See also Lawrence Steel Erection Co., Inc. v. Piercy (In re Piercy), 140 B.R. 108 (Bankr. D. Md. 1992) (refusing to extend the time to file non-dischargeability complaints when the creditor had actual knowledge of the bankruptcy before the bar date, notwithstanding the fact that debtor had not listed creditor in his schedules).
Likewise in the case at bar, Defendants had actual knowledge of the Debtor's bankruptcy case. Defendants were not prevented from filing a complaint to determine non-dischargeability by a lack of notice and therefore are not entitled to non-dischargeability pursuant to Section 523(a)(3)(B).
Defendants also argue that the Debtor should be estopped from asserting discharge of the debts because Defendants were told by Debtor or his attorney that their claim was not included in the bankruptcy and that Debtor intended to repay the debt. A promise to repay a pre-petition debt can only be enforced when the debtor and creditor have executed and filed a reaffirmation agreement in accordance with Section 524(c) and (d). Liptz, Roberts, Chartered Pension Plan Trust v. Stevens (In re Stevens), 217 B.R. 757 (Bankr. D. Md. 1998). In Stevens, this court stated: "the court cannot exercise its equitable powers in contradiction of the Bankruptcy Code. The Code provides a specific procedure for debtors who wish to reaffirm their obligations. . . . Section 524 lists no exceptions to the reaffirmation rules." Id. at 761 (citing Norwest Bank Worthington v. Ahlers, 485 U.S. 197, 206, 108 S.Ct. 963, 969, 99 L.Ed.2d 169 (1988).
Section 523(c) reads in pertinent part:
An agreement between a holder of a claim and the debtor, the consideration for which, in whole or in part, is based on a debt that is dischargeable in a case under this title is enforceable only to any extent enforceable under applicable non-bankruptcy law, whether or not discharge of such debt is waived, only if —
(1) such agreement was made before the granting of the discharge under section 727, 1141, 1228, or 1328 of this title;
(2) (A) such agreement contains a clear and conspicuous statement which advises the debtor that the agreement may be rescinded at any time prior to discharge or within sixty days after such agreement is filed with the court, whichever occurs later, by giving notice of rescission to the holder of such claim; and
(B) such agreement contains a clear and conspicuous statement which advises the debtor that such agreement is not required under this title, under non-bankruptcy law, Dor under any agreement not in accordance with the provisions of this subsection;
(3) such agreement has been filed with the court. . . .
The court takes judicial notice of the case history in finding that no reaffirmation agreement was filed with the court. Debtor was not restricted from attempting to repay the debt owed to Defendants, as "[n]othing contained in subsection (c) or (d) of [Section 524] prevents a debtor from voluntarily repaying any debt." 11 U.S.C. § 524(f). However, a debtor cannot be compelled to repay a discharged debt.
"The doctrine of equitable estoppel allows `a person's act, conduct or silence when it is his duty to speak,' to preclude him from asserting a right he otherwise would have had against another who relied on that voluntary action." First Union Comm. Corp. v. Nelson, Mullins, Riley and Scarborough (In re Varat Enterprises, Inc., 81 F.3d 1310, 1317 (4th Cir. 1996) (citing Black's Law Dictionary, at 538). As further stated by the United States Court of Appeals for the Fourth Circuit,
The doctrine [of equitable estoppel] applies in the bankruptcy context when four criteria are met: 1) the party estopped knew the relevant facts; 2) the party estopped intended for its conduct to be acted or relied upon, or the party acting had the right to believe the conduct was so intended; 3) the party acting was ignorant of the true facts; and, 4) the party acting relied on the conduct to its injury.
Id. Reliance on a misrepresentation must be reasonable.
If, at the time when he acted, such party had knowledge of the truth, or had the means by which with reasonable diligence he could acquire the knowledge so that it would be negligence on his part to remain ignorant by not using those means, he cannot claim to have been misled by relying upon the representation or concealment.
Heckler v. Community Health Servs. of Crawford County, Inc., 467 U.S. 51, 59-60 n. 10, 104 S.Ct. 2218, 2223-24 n. 10, 81 L.Ed.2d 42 (1984).
No authority has been provided for the proposition that the equitable doctrine of estoppel can form the basis for excepting a debt from discharge, where no statutory grounds exist for such a result. "[W]hatever equitable powers remain in the bankruptcy courts must and can only be exercised within the confines of the Bankruptcy Code." Norwest Bank, supra, at 206, 108 S.Ct. at 969. Estoppel may prevent the denial of an element of a statutory basis for non-dischargeability. Viewing the facts in the light most favorable to Defendants by accepting Defendants' averment that Debtor told them that their claim was not included in the bankruptcy, the trier of fact could not find a basis for the imposition of equitable estoppel. The fourth prong of the test for equitable estoppel requiring "reliance" cannot be met.
Defendants' reliance on any statement made to them by Debtor would be unreasonable. Defendants were represented by counsel and either were or should have been informed of the effect of a bankruptcy discharge upon their alleged claim, in the absence of a valid reaffirmation agreement. To hold otherwise would vitiate the clear statutory requirement that post-bankruptcy promises to repay pre-petition debts are not enforceable unless contained in reaffirmation agreements that comply with 11 U.S.C. § 524.
The court next turns to Defendants' argument regarding the equitable doctrine of "unclean hands." It appears from Defendants' argument that they do not understand the difference between the issue raised in this adversary proceeding of whether pre-petition indebtedness owed by Debtor to Defendants is dischargeable and an issue of whether a discharge order should be entered or revoked.
This adversary proceeding was filed for the purpose of obtaining a declaratory judgment of the dischargeability of the Debtor's debt to Defendants. No adversary proceeding was ever brought, prior to the entry of Debtor's Discharge Order, objecting to the entry of a discharge, nor has there been an action brought requesting a revocation of the Discharge Order.
Moreover, the time for seeking revocation of discharge has expired.
Defendants, misapprehending the difference between these two legal doctrines, cites to language contained in Section 727 (which is applicable only to a complaint objecting to the entry of the Discharge Order) in arguing that the "unclean hands" doctrine creates a basis to determine that their alleged claims are non-dischargeable and were not discharged by the Order entered in this case. The grounds for determining a specific debt to be non-dischargeable are all set forth by Congress in Section 523(a). Section 727 of the Code does not create any additional basis to determine a specific debt to be non-dischargeable. For the reasons set forth hereinabove, no basis under Section 523(a) exists to find this indebtedness non-dischargeable. The invocation of "unclean hands" forms no non-statutory additional basis and therefore the indebtedness cannot and will not be determined to be non-dischargeable for such reason.
Similarly, there is no basis contained in the Bankruptcy Code to determine a debt to be non-dischargeable because the debt was "not disclosed." Non-disclosure which results in failure to receive actual notice or knowledge is described in Section 523(a)(3), which has been discussed above. While it is true that under Section 727(a)(4), a knowing and fraudulent false oath (such as a knowing and fraudulent inaccurate schedule of debt) could have formed the basis for a successful complaint objecting to the entry of the Discharge Order, no such complaint was timely brought, nor was a timely complaint to revoke discharge filed by this creditor. From the undisputed facts, it is clear that the creditor, through counsel, knew of the existence of this bankruptcy case four months before the statutory bar date for the filing of a complaint objecting to the entry of order of discharge. Clearly such knowledge was well in advance of the date before which a complaint to revoke the entry of the Order of discharge was required. These statutory bar dates have expired as to any action based upon an assertion of fraudulent and knowing incomplete schedules.
11 U.S.C. § 727(e) provides that such complaint must be brought no later than one year after the entry of the discharge order.
For the reasons set forth above, the court denies Defendants' motion for summary judgment and grants Plaintiff's motion for summary judgment as to the issue of non-dischargeability.
Debtor has also requested attorneys fees by his complaint and motion for summary judgment. The court does not find a basis for awarding attorneys fees in this matter and therefore declines to so order.
"Subject to the traditional `judicially fashioned exceptions', to which Congress is deemed to have acquiesced, federal courts are not free to award fees to litigants except under the authority of a statute." Cordeco Development Corp. v. Santiago Vasquez, 539 F.2d 256, 263 n. 11 (1st Cir. 1976), cert denied, 97 S.Ct. 488 (1976) (citation omitted). Section 524 does not provide authority for an award of attorneys fees, therefore the court must look to the exceptions. There are three judicially created grounds for awarding attorneys fees outside of a statute or contract providing for such: "(1) when the litigant preserves or recovers a fund for the benefit of others; (2) when a losing party acts in bad faith, vexatiously, wantonly, or for oppressive reasons; or (3) when a defendant wilfully disobeys a court order." Brantley v. Weeks, (In re Brantley), 116 B.R. 443 (Bankr. D.Md. 1990) (citing Alyeska Pipeline Service Company v. Wilderness Society, 421 U.S. 240, 95 S.Ct. 1612 (1975)).
Debtor has produced no evidence to the court in support of his motion for summary judgment that would cause this court to find that Defendants acted in bad faith. As Debtor has recited, he intended to repay the debt owed to Defendants, as he was entitled to do pursuant to Section 524(f). Defendants' pursuit of their claims was in violation of the court's Discharge Order, but Debtor has made no allegation or produced evidence which can substantiate his request for attorneys' fees. Any further attempts by Defendants to collect prepetition/preconversion debts from Plaintiff would be in willful violation of Plaintiff's Discharge Order and would likely subject Defendants to contempt proceedings before this court.
An Order in conformity with this decision will be entered herewith.
cc: all parties all counsel
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