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CREDITORS (INCLUDING CONTEMPT & UNLISTED CREDITORS)

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Credit unions typically include cross-collateralization provisions in loans made to their members, and many consumers will not even realize that their loan and security agreements include cross-collateralization provisions. These provisions are sometimes referred to as dragnet, future-advance or all-indebtedness provisions and are usually in the boilerplate wording at the end of a loan or security agreement and are difficult for the consumer to understand.  Cross-collateralization provisions allow the credit union to bind the collateral from one loan (such as a vehicle) to secure another debt (such as a credit card or signature loan, or even another vehicle).

In a chapter 7 bankruptcy, most of a debtor’s debts are discharged in exchange for the debtor relinquishing his/her nonexempt property. For a debtor in chapter 7 to keep an asset securing a debt that would normally be discharged, the debtor must reaffirm the debt.

In chapter 13, a debtor could elect to keep his/her vehicle and pay the secured debt through the chapter 13 plan. As long as the debtor is current on his/her bankruptcy plan payments and keeps the car insured, the debtor will likely be able to keep his/her car under bankruptcy law.

However, when a debtor has two vehicles financed from a creditor and the contracts include cross-collateralization provisions as the exhibit demonstrates, the debtor’s options are not as clear as they might appear under § 1325(a)(5), which provides:

1325(a)(5) provides that with respect to each allowed secured claim provided for by the plan –

(A) the holder of such claim has accepted the plan;

(B) [the cramdown option]; or

(C) the debtor surrenders the property securing such claim to such holder….

What happens if the credit union has multiple loans with cross-collaterialized provisions (e.g. two vehicles with separate loans)?  The options under § 1325(a)(5) are unclear when dealing with a debtor who has multiple loans containing cross-collateralization provisions. Before Barragan Flores, 585 B.R. 397, 401 (W.D. Tex. 2018), it appears that no reported decisions have addressed a plan proposing a partial surrender and retention of collateral under chapter 13 with two loans that contain cross-collateralization provisions.  The results in this case is that the borrowers would have to either pay for both vehicles or surrender both.  (Note – this is not a 9th Circuit case).

See also Community Property in Arizona


Subsection (a) of 11 U.S.C. §524 addresses the split discharge, when only one spouse attains a discharge in bankruptcy, in community property states. The legislative history of this section says that “if community property was in the [bankruptcy] estate and community claims were discharged, the discharge is effective against the community creditors of the nondebtor spouse as well as of the debtor spouse. House Report No. 95-595, 95th Cong., 1st Sess. 365-6 (1977), Senate Report No. 95-989, 95th Cong., 2d Sess. 80 (1978). § 524(a)(3) treats the effect on the nondebtor spouse of a discharge of a debtor in a community property state when the nondebtor spouse is liable on the community claim, but has not filed a bankruptcy petition. That is, if one spouse in a community property state has commenced a bankruptcy case where, as here, no claim is excepted from the debtor’s discharge and is not otherwise found to be nondischargeable, and if the nondebtor spouse would not have had a claim excepted from her discharge in a hypothetical case commenced on the same day as the commencement of the debtor’s case, then the creditors of either spouse holding community claims on the date of bankruptcy are thereafter barred from asserting claims against after acquired community property.

It was the duty of the scheduled creditors in the Braden Jay Karber bankruptcy proceedings to object to the hypothetical discharge of Valerie Karber, as the nondebtor spouse, within the same time limits as their objections to the discharge of Braden Jay Karber. 11 U.S.C. § 524(b).

No such objections were filed and thus all community creditors before the Court in that case are now barred from seeking to collect their deficiencies from the after acquired community property of either Braden Jay Karber or Valerie Karber. In re Karber 25 B.R. 9, 12 (Bkrtcy.Tex.,1982) See also In re Dyson 277 B.R. 84 (Bkrtcy.M.D.La.,2002)

What happens when a financing statement purports to incorporate by reference collateral described in a document that isn’t attached?

First Midwest Bank v. Reinbold (In re 180 Equip., LLC), 591 B.R. 353 (2018) (Bankr. C.D. Ill. Aug. 20, 2018).

FACTS: 2015 180 Equipment, LLC (the “Debtor”) executed a Security Agreement giving First Midwest Bank a security interest in most of its assets.  Shortly after the Bank filed a UCC perfected its security interest, with a statement that the collateral is described in an attachment, but nothing was attached to the financing statement.

Debtor filed a Chapter 7 and Bank claimed it was owed over $7.6 million, filing a lawsuit against the chapter trustee arguing that Article 9 allows for “any other method” to describe collateral.  The issue before the court was whether the collateral, subject to the UCC, was adequately described. The Trustee argued that a financing statement must contain a stand-alone description of the collateral.

FINDING: the court found that the Bank’s financing statement failed to describe the collateral and therefore failed to provide notice to any third party as to what collateral was covered by the financing statement. By authorizing usage of a supergeneric description in financing statements, the drafters of Revised Article 9 drew a line in the sand at that point for the most general type of collateral description that could be used in order to sufficiently indicate the collateral. The drafters could have gone one step further by authorizing a mere reference to the underlying security agreement as an acceptable method of identifying the collateral. They did not do so, however, and neither will this Court.


Johnson v. Binkley (Ariz. App., 2013) October 9, 2013 memorandum decision …an intention of the party to make the chattel a permanent accession to the freehold. We apply the Fish rule in the absence of an agreement between the parties fixing the character of the property. Voight v. Ott, 86 Ariz. 128, 133, 341 P.2d 923, 926 (1959). Of the three parts of the Fish test, the most important is the intent of the parties respecting the property’s use and adaptability. Murray v. Zerbel, 159 Ariz. 99, 101, 764 P.2d 1158, 1160 (App. 1988). When the affixor and purchaser of property have no relationship, we consider only objective manifestations of intent. Id. Permanent…

III. Fixtures

¶17 The Binkleys next argue the trial court erred by concluding the storage containers, fuel system, and fertilizer tanks were personal property, rather than fixtures. Section 47-9102(41), A.R.S., defines “fixtures” as “goods that have become so related to particular real property that an interest in them arises under real property law.” In Fish v. Valley National Bank of Phoenix, 64 Ariz. 164, 170, 167 P.2d 107, 111 (1946), the court articulated the test in Arizona for whether an item of personal property has become a fixture:

The rule is that for a chattel to become a fixture and be considered as real estate, three requisites must unite: There must be an annexation to the realty or something appurtenant thereto; the chattel must have adaptability or application as affixed to the use for which the real estate is appropriated; and there must be an intention of the party to make the chattel a permanent accession to the freehold.

We apply the Fish rule in the absence of an agreement between the parties fixing the character of the property. Voight v. Ott, 86 Ariz. 128, 133, 341 P.2d 923, 926 (1959). Of the three parts of the Fish test, the most important is the intent of the parties respecting the property’s use and adaptability. Murray v. Zerbel, 159 Ariz. 99, 101, 764 P.2d 1158, 1160 (App. 1988). When the affixor and purchaser of property have no relationship, we consider only objective manifestations of intent. Id. Permanent accession generally is presumed where the affixor also is the owner of the realty. Id. However, whether property has become a fixture depends upon the particular facts and circumstances of each case. See Voight, 86 Ariz. at 134, 341 P.2d at 927.

Johnson v. Brimlow, 791 P.2d 1101, 164 Ariz. 218 (Ariz. App., 1990) May 17, 1990 …the intent that it become a part thereof, Murray v. Zerbel, 159 Ariz. 99, 101, 764 P.2d 1158, 1160 (App.1988), or there must be an agreement between the parties that it be treated as a fixture. Voight v. Ott, 86 Ariz. 128, 133, 341 P.2d 923, 926 (1959). Appellant cited no evidence in the record that any chattel became a fixture either through attachment or agreement of the parties. Furthermore, appellant failed to cite any evidence that items which may have been fixtures were not sold along with the realty, for which she was paid under…

Murray v. Zerbel, 764 P.2d 1158, 159 Ariz. 99 (Ariz. App., 1988) November 29, 1988 … Fish v. Valley National Bank, 64 Ariz. 164, 170, 167 P.2d 107, 111 (1946). Of the three parts, the most important is “the intention of the parties as respects the use and adaptability thereof.” Voight v. Ott, 86 Ariz. 128, 134, 341 P.2d 923, 927 (1959). The above test applies when the parties have not entered into an agreement which characterizes the item as real or personal. Gomez v. Dykes, 89 Ariz. 171, 359 P.2d 760 (1961). Finally, for purposes of determining the intention of the parties, we may examine the parties’ relationship to each other. City of Phoenix v. Linsenmeyer, 78…

Utah State Medical Ass’n v. Utah State Employees Credit Union, 655 P.2d 643 (Utah, 1982) September 8, 1982  …to air conditioning equipment attached to and sold as a part of the realty, with the result that the seller is charged with no implied warranty of fitness.” 15 A.L.R.3d 1207, Sec. 7. See also Voight v. Ott, 86 Ariz. 128, 341 P.2d 923 (1959) (holding that unless the parties agree otherwise, an air-conditioning system that is an integral part of a house, and is necessary for comfortable living, is a fixture and therefore not subject to any implied warranties when sold with the house).        The clear majority of the courts have deemed it…

Smith v. Continental Bank, 636 P.2d 98, 130 Ariz. 320 (Ariz., 1981) October 26, 1981  …of the earlier decisions by this court have held that the rule of implied warranties is inapplicable to the sale of real property. Allen v. Reichert, 73 Ariz. 91, 93, 237 P.2d 818, 819-820 (1951); Voight v. Ott, 86 Ariz. 128, 132, 341 P.2d 923, 925 (1959). The theory of the older cases was that the seller does not impliedly warrant the conditions of the premises because the provisions of the contract of sale are deemed to merge into those of the deed, which embodies the full agreement of the parties. Later cases have cast doubt on the rule stated in Voight. See Kubby v. Crescent Steel,…

Gomez v. Dykes, 359 P.2d 760, 89 Ariz. 171, 82 A.L.R.2d 1093 (Ariz., 1961) February 23, 1961 …rule applies in the absence of an agreement between the parties which would otherwise determine the character of the item.  As this Court stated in Voight v. Ott, 86 Ariz. 128, 134, 341 P.2d 923, 927: ‘The modern tendency is to place less emphasis on the method or mode of annexation of the chattel and to give greater consideration to the intention of the parties as respects the use and adaptability thereof. * * *’   Based on this law we find that the evidence supports the trial court’s…

Outside of bankruptcy, perfection is not a condition to a valid lien.

So, for example, if a title loan company (or any loan company) does not perfect the lien at all, then provided that no other lienholders have recorded anything with DMV, the lender can repossess if you don’t stay current.  Perfection is about notice only.  Lack of perfection does not make the lien invalid, but it does make it junior in priority to any other liens subsequently recorded.

This is true with any lien (not just DMV liens) but also liens for personal property recorded as UCCs, lender’s liens on real property that are not recorded with the recorder’s office, etc.)

However, once a borrower files BK, the bankruptcy code requires a lien to be perfected within 30 days after taking out the loan.

If not, the bankruptcy code allows a trustee to avoid it at the trustee’s discretion.  So, once the debtor files BK, timely perfection was necessary to preserve the lien and to prohibit a trustee from avoiding the lien.

If the trustee elects not to avoid the lien for any reason, then after BK, the lien still exists, and the lender is back to the status quo of enforcing its lien, even though it was not perfected.  Lack of perfection risks the lien being avoided under the BK code.


Article: Collateral Descriptions in UCC Financing Statements

Lenders and their counsel know that it is important to properly describe the collateral on which a lien (mortgage or security interest) is being granted. The purpose of this post is to discuss some recent decisions contrary to what many corporate counsel thought they knew concerning collateral descriptions in security agreements and UCC financing statements.

A discussion of collateral descriptions for UCC issues starts with Section 9-108, which governs the sufficiency of description of the collateral for both security agreements and financing statements.


In re Cortez, 191 B.R. 174 (1995) : an unavoided, non-perfected lien still is valid. “An unrecorded, thus unperfected, deed of trust is subject to avoidance by the bankruptcy trustee as a hypothetical lien creditor, pursuant to § 544. The appellee’s unperfected deed of trust was subject to avoidance during the debtors’ bankruptcy. However, because it was not avoided, it survived the bankruptcy, even though it was not perfected. In re Eakin, 153 B.R. 59, 60 (Bankr.D.Idaho 1993) (so long as the lien, although it could have been, was not avoided, a valid security interest passes through a bankruptcy filing unaffected). In the instant case, while the appellee was listed as an unsecured creditor and the debt was discharged, the appellee was actually a secured creditor under California law by virtue of the deed of trust lien which had not been avoided in bankruptcy. Its lien survived the bankruptcy; thus, the bankruptcy court did not err by denying the debtors’ motion to reopen the case to avoid the lien.”

See also: North Canyon Ranch Owners Association v. Allen No. 1 CA-CV 17-0227 (2018 Ariz. App. Case – unpublished) that confirms this rule of law and cites Cortez (although this case dealt with an HOA which does not have to be recorded).

In re McMinn, – B.R. , 2011 WL 2945787 (Bankr. D. Kan. Jul 18, 2011) HELD: COURT COULD GRANT EXTENSION OF STAY WITHOUT AN ACTUAL HEARING – MOTION FILED 2 DAYS PRIOR TO 30TH DAY EXPIRATION

Automatic stay——Extension under Code § 362(c)(3): Although the debtor filed her motion to extend the automatic stay under Code § 362(c)(3) only two days before the time expired to hold a hearing, the court could grant the motion without holding a hearing in the absence of any objections.

While § 362(c)(3)(B) provides that the court may grant the motion ““after notice and a hearing completed before the expiration of the 30-day period,”” Code § 102(1) states that ““after notice and a hearing”” means ““such opportunity for a hearing as is appropriate in the particular circumstances,”” and this allows the court to expedite or dispense with hearings when speed is essential.

In re Ketaw, __ B.R. ___ case no. 1:11-bk-380) (Bankruptcy Judge S. Martin Teel Jr.)
HELD: MOTION TO EXTEND STAY DENIED WHERE INSUFFICIENT TIME TO HOLD HEARING
Motion to extend stay under Code § 362(c)(3) was not filed in time to allow hearing:

The debtor’s Emergency Motion to Extend the Automatic Stay would be denied, as the motion was not filed in sufficient time to permit, as required by Code § 362(c)(3)(B), an order to issue “after notice and a hearing completed before the expiration of the 30–day period” after the filing of the case, where the debtor filed the motion at 5:47 p.m. on the 30th day after the commencement of the case.

As a practical matter, the 30–day deadline of § 362(c)(3)(B) imposes upon the debtor’s counsel these obligations:
· A motion for relief under that provision must be filed with, or promptly after, the filing of the debtor’s petition.
· The motion must include a notice under Local Bankruptcy Rule 9013–1(b)(3) and Local Official Form 3 of the opportunity to oppose the motion.
· The debtor’s counsel must obtain a hearing date from the clerk, and must give notice of that hearing with the filing of the motion, or shortly thereafter, in order to assure that, with reasonable advance notice to affected creditors, any actual hearing is held prior to the expiration of the 30–day deadline.

Sterling-Pacific Lending Inc. v. Moser (In re Moser), 18-01037 (B.A.P. 9th Cir. April 15, 2020)  The Bankruptcy Appellate Panel for the Ninth Circuit held in substance that a bankruptcy court cannot decline to rule on a request for a comfort order and must tell a creditor whether its contemplated action will or will not violate the discharge injunction.

The Bankruptcy Court for the Northern District of Illinois took decisive action to sanction an internationally active telecommunications company, Owtel Inc., for persistent violations of the automatic stay under section 362(a)(6). In re Galutan, No. 12-31837 (Bankr. N.D. Ill. Nov. 16, 2012). The court found that Owtel was informed of the debtor’s bankruptcy filing on August 12, 2012, but continued to dun her for payments of the $74.00 debt with repeated letters and telephone calls to her home phone and cell phone as often as twice a day. Finding that the conduct was willful the court turned to the appropriate damage award under section 362(k). Although the Seventh Circuit does not permit monetary awards for emotional distress the court found actual damages in the amount of $2,940.00 for attorney fees and costs incurred in pursuing the stay violation. In addition, the court found that the egregious nature of Owtel’s relentless pursuit warranted a punitive damage award of $15,000.00. The court ended with the warning that if the violations continue, it would consider further sanctions in the amount of $500.00 per day.

In general, an oversecured creditor (a creditor whose collateral is valued at more than its claim) is entitled to collect interest until such time as the sum of the principal and interest equals the value of its collateral. However, the Bankruptcy Code does not specify the rate at which the oversecured creditor may collect interest. In a recent decision, the Bankruptcy Court for the Southern District of New York held that an oversecured creditor is generally entitled to collect both pre-petition and post-petition interest at the default rate, but not late payment fees. See In re 785 Partners LLC, 2012 WL 1154282 (Bankr. S.D.N.Y. Apr. 9, 2012).


Is a secured creditor is entitled to contractual default-rate interest?

It is well settled that an “oversecured” creditor is entitled to interest and, to the extent provided for under a loan agreement, related fees and charges as part of its secured claim in a bankruptcy case. Although section 506(b) of the Bankruptcy Code provides that fees, costs or charges allowed as part of a secured claim must be “reasonable,” the provision does not expressly impose any restrictions on the amount or nature of interest allowable as part of a secured claim. The Eighth Circuit BAP recently considered whether a secured creditor is entitled to contractual default-rate interest under section 506(b).

In In re Family Pharmacy, Inc., 614 B.R. 58 (B.A.P. 8th Cir. 2020), the panel reversed a bankruptcy court’s order disallowing a secured creditor’s claim for interest at the default rate under the parties’ contract, using a penalty-type analysis generally applied to liquidated damages provisions. According to the panel, such an analysis cannot be applied to default interest provisions. The panel also held that the bankruptcy court erred when it held that the default interest rate was unenforceable based on “equitable considerations.”


It is a well-established principle of bankruptcy law that claims generally crystallize as of the bankruptcy petition date. Of course, section 506(b) of the bankruptcy code allows over-secured, secured creditors to recover post-petition interest and costs, including reasonable legal fees, if their documentation provides them with the right to recover these costs. But what about unsecured creditors – are post-petition legal fees incurred by an unsecured creditor whose contract with the debtor provides for reimbursement of legal fees allowed or not?

Summitbridge National Investments, (4th Cir Ct Appeals, February 8, 2019).  Yes. The debtor opposed the allowance of these fees relying, for the most part, on section 506(b). Since that section allows these fees only on over-secured, secured claims, clearly, the argument goes, they are not allowed on unsecured claims. Finding: The question in this appeal is whether the Bankruptcy Code bars a creditor from asserting an unsecured claim for attorneys’ fees, if those fees are incurred after the filing of a bankruptcy petition but guaranteed by a pre-petition contract. We join other federal courts of appeals in holding that the Code does not preclude such claims. Accordingly, we reverse the contrary determination of the district court and remand for further proceedings.

In re Beezley, 994 F.2d 1433 (9th Cir. 1993)  No asset, ct declined to reopen – no need to reopen because creditor suffered no prejudice; bankruptcy proof of claim deadline has not come and gone.  see also State of Texas v Walker, (5th Circ 1998) – endorsed Beezley. The First Circuit contrasted the Ninth Circuit’s approach with the Seventh Circuit’s decision in In re Stark, 717 F.2d 322 (7th Cir. 1983) and went with the Seventh Circuit’s analysis. 2009 the First Circuit held that where a claim is not listed and the creditor is not notified of the bankruptcy, and does not otherwise learn of the bankruptcy, the debt is not discharged due to section 523(a)(3)(A). Colonial Sur. Co. v. Weizman, 564 F.3d 526 (1st Cir. 2009). The First circuit recognized that the Ninth Circuit had adopted a version of the “no harm, no foul” approach to the discharge of unlisted claims in no assets cases, which most circuits have followed as in Beezley.

In re Lakhany, No. CC-14-1486-BrDKi (9th Cir. B.A.P. Sep. 28, 2015).
A creditor without notice of a chapter 7 case may bring a § 523 action after the deadline applicable to creditors with notice—and after case closure. A closed case need not be reopened before a § 523 action is filed.

In re Lasko – failure to list creditor, if no asset then debt is discharged.

In re Nielsen (09/07/04 – No. 02-35983, 9th Cir Ct. Apps) Failure to list a creditor in a no-assets, no-bar-date Chapter 7 bankruptcy does not justify revocation of the discharge.

McGhan v. Rutz (05/07/02 – No. 99-56956) (9th Cir Ct Apps) State courts lack 1) jurisdiction to determine whether a listed and scheduled creditor received adequate notice of discharge proceedings and 2) authority to modify bankruptcy court orders discharging a claim and enjoining collection on a debt; bankruptcy court was required to reopen proceedings to protect jurisdiction over enforcement of its own orders.

Quin v. County of Kauai Department of Transportation, No. 10-16000  US Ninth Circuit, 7/24/13.   Good discussion about “mistaken or inadvertent”.  Summary judgment for defendant holding that judicial estoppel prohibited the plaintiff from proceeding with her employment discrimination action, which she had failed to list in her bankruptcy schedules, is vacated and remanded, where: 1) the district court applied the wrong legal standard in determining whether the plaintiff’s bankruptcy omission was mistaken or inadvertent; and 2) when a plaintiff-debtor has reopened the bankruptcy proceedings and has corrected the initial filing error, narrow interpretations of mistake and inadvertence do not apply, and instead, judicial estoppel requires an inquiry into whether the plaintiff’s bankruptcy filing was, in fact, inadvertent or mistaken, as those terms are commonly understood.

In re Beezley, 994 F.2d 1433 (9th Cir. 1993)  No asset, ct declined to reopen – no need to reopen because creditor suffered no prejudice; bankruptcy proof of claim deadline has not come and gone.  see also State of Texas v Walker, (5th Circ 1998) – endorsed Beezley. The First Circuit contrasted the Ninth Circuit’s approach with the Seventh Circuit’s decision in In re Stark, 717 F.2d 322 (7th Cir. 1983) and went with the Seventh Circuit’s analysis. 2009 the First Circuit held that where a claim is not listed and the creditor is not notified of the bankruptcy, and does not otherwise learn of the bankruptcy, the debt is not discharged due to section 523(a)(3)(A). Colonial Sur. Co. v. Weizman, 564 F.3d 526 (1st Cir. 2009). The First circuit recognized that the Ninth Circuit had adopted a version of the “no harm, no foul” approach to the discharge of unlisted claims in no assets cases, which most circuits have followed as in Beezley.


In re Ray, Case No. 2:18-bk-09137-DPC.   Debtor failed to list a creditor and after discharge tried to reopen case to add new creditors.  Court denied: IT IS ORDERED denying Debtor’s Motion because Debtor’s pre-petition debts, whether or not properly scheduled, have been discharged in this no-asset chapter 7
bankruptcy. 


OMITTED CREDITORS IN CHAPTER 7 (as provided by Dan Furlong) A CASE WITH NO DEADLINE TO FILE PROOF OF CLAIM AND OMITTED CREDITOR DOES NOT HAVE A FRAUD ETC. CLAIM

A debt is discharged in most chapter 7 bankruptcy cases, even if the debt is not listed in the bankruptcy and the creditor is not notified of the bankruptcy. The following must apply:

  1. The Court never set a deadline for creditors to file a proof of claim. This is true in most cases, because they are no asset cases. The unlisted creditor is not harmed, because there was no distribution for the creditor to receive.
    2. The creditor does not have the type of claim for which the creditor could have filed a lawsuit in the bankruptcy court to have the debt declared not discharged, such as for fraud or intentional injury.
    3. The creditor does not have the type of claim which is never discharged, such as child support, spousal maintenance, most taxes, etc.
    The bankruptcy courts will not normally allow a closed case to be reopened for the purpose of listing an omitted creditor, since there is no need.

In re Egan, 11-13924-JMD  (Bankruptcy court, Dis NH) Avoiding a non-domesticated foreign judgment by 522(f) – unpublished case with very good road map.

OMITTED CREDITORS IN CHAPTER 7 (as provided by Dan Furlong) A CASE WITH A DEADLINE TO FILE PROOF OF CLAIM AND OMITTED CREDITOR DOES NOT HAVE A FRAUD ETC. CLAIM

If the court set a deadline for filing proofs of claim, then the creditor is not discharged if the creditor was not listed in the bankruptcy and did not otherwise receive notice of the bankruptcy in time to file a proof of claim.

It is the deadline for the filing of a proof of claim that is important. It does not matter whether the creditor would have received any distribution from the trustee on the claim. It does not matter that no distribution was made by the trustee to any creditors. It does not matter if a distribution was made by the trustee, which the omitted creditor would not have been paid anything if a proof of claim had been timely filed. (Such as if the distribution went all towards administrative costs and priority claims.)

However, a creditor, trustee, or any personal liable with the debtor on a debt has 30 days after the normal deadline in which to file a proof of claim on behalf of a creditor if a creditor fails to do so by the normal deadline. If a debtor failed to list a creditor, and the creditor did not know of the bankruptcy, and there was a deadline to file a proof of claim, and the creditor did not file a proof of claim by the deadline, the creditor would be discharged if the debtor filed a proof of claim on behalf of the creditor within the extra 30 days. In re Hatley, 20 CBN 404 (Bankr. E.D. Tenn. 2010).

In re Beezley says if debt is 523(a)(3)(A) it is discharged regardless of notice in no asset case. If debt is 523(a)(3)(B) then not discharged.


The rules are different for an omitted creditor that has the type of claim for which the creditor could have filed a lawsuit in the bankruptcy court to have the debt declared not discharged, such as for fraud or intentional injury. Such an unlisted creditor is not bound by the normal statute of limitations to file a non-discharge suit, which is 60 days after the meeting of creditors.

If this creditor is not listed in the bankruptcy or did not otherwise receive notice of the bankruptcy in time to file a non-discharge suit, then this unlisted creditor is not discharged.

Rather, the debtor loses the right to raise the deadline as a defense to such a claim. The creditor still must file a suit under section 523 to determine the dischargeability of the debt. The debt is not automatically excepted from discharge simply because the creditor was not notified. If the creditor later learns of the bankruptcy, the creditor must then file a complaint and prove the debt is the type of debt not discharged before the creditor takes additional collection actions.

The creditor may lose the right to file the 523 suit if the creditor waits an unduly long period of time after learning of the bankruptcy. Under certain limited circumstances, laches may bar the 523 complaint. In re Staffer, ______F.3d _______, 9th Cir. September 27, 2002; Beaty v. Selinger, ______F.3d _______, 9th Cir. September 26, 2002. The suit may possibly be filed in state or bankruptcy court.

(One court has ruled that the debt is not discharged if the debtor intentionally failed to list the debt in time for the creditor to file a complaint objecting to discharge before the deadline, and if this is proven, then the creditor need not prove the debt is the type of debt not discharged. (see Chart #2) In re Paylan, 18 CBN 1113 Bankr. M.D. Fla. 2008). Collateral estoppel or issue preclusion applies only if the issue was actually litigated. A default judgment is not litigated.

Therefore an Arizona state court default judgment for fraud does not establish fraud in a later non-discharge suit in bankruptcy court under sec 523. Weber vs. Grindle Audio Productions, Inc.,

1CA-CV, 02-0008, Ariz. Court Of Appeals, November 21, 2002.

Mahakian v. William Maxwell Investments, LLC (In re Mahakian)
BAP No. NV-14-1115-JuKuD  (Ninth Cir,. April 13, 2015)
Ruling:  The BAP affirmed – held that the Debtor’s failure to schedule a creditor in an asset chapter 7 case, such that the creditor did not have notice and thus did not timely file a proof of claim, meant that the prepetition the debt of WMI had not been discharged because it had never been scheduled (MSJ Judgment).

The difficulty is convincing an omitted creditor that its claim was discharged and that the post-discharge injunction of 11 USC §524 prohibits collection efforts. At a minimum the creditor should be sent a letter advising of the law and the court rulings, which are in the following cases. The debtor may re-open the bankruptcy and request sanctions against a creditor that refused to stop collection efforts.

CASES:

In re Beezley, 994 F.2d 1333, 9th Cir. 1993;
In re Neilsen, 02-35983, 9th Cir. filed September 7, 2004.
Weber vs. Grindle Audio Productions, Inc., 1CA-CV, 02-0008,Ariz.
Court Of Appeals, November 21, 2002.
Jones V. Warren Construction, No. 302-09099, Adv. No. 30-0216A,
In re Staffer, ______F.3d _______, 9th Cir. September 27, 2002;
Beaty v. Selinger, ______F.3d _______, 9th Cir. September 26, 2002


In Dahlin v. Lyondell Chemical Co., ___ F.3d ___ (8th Cir. Jan. 26, 2018), the Eight Circuit Court of Appeals recently weighed in on the extent to which a debtor must search for “known” creditors in order to provide sufficient notice of its bankruptcy and satisfy due process.  the Eighth Circuit determined that a “known” creditor is one that is reasonably ascertainable, and a debtor need not perform more than one reasonably diligent search to unveil the identity of “known” creditors.

In Dewalt, the Ninth Circuit held where notice is inadequate, Creditor should have at least thirty (30) days to file a Complaint for Non-dischargability. The present Complaint was brought within 21 days of the certificate of mailing of the Order of reinstatement.  Any other reading of the bar date deadline “unfairly punishes creditors, holding them to the highest standards of diligence in a situation caused by negligence of a debtor, and rewarding the debtor, in effect, for negligent filing.”  Dewalt at 850.