Alan S. Trust, United States Bankruptcy Judge

Dilli R. Bhatta, Bhatta Law Firm, Jackson Heights, NY, for Debtor.

MEMORANDUM OPINION AND ORDER DENYING DEBTOR'S MOTION TO REOPEN

Alan S. Trust, United States Bankruptcy Judge

Pending before the Court is the motion filed by the former debtor, Mir Mohammed (“Debtor”), seeking to reopen her no asset chapter 7 case to schedule a previously undisclosed debt. The central issues here are: (i) whether an unscheduled debt is nonetheless automatically discharged in a no asset chapter 7 case; and, if so, (ii) whether a closed case should be reopened to schedule the unscheduled debt. The courts of appeals which have addressed the discharge of an unscheduled debt are split, and the Second Circuit has not yet ruled on it. For the reasons to follow, this Court concludes that the following test should be applied in these circumstances: a chapter 7 no asset case should not be reopened to allow an undisclosed debt to be scheduled unless: (i) the debtor or creditor can state a plausible basis for seeking a determination that the debt at issue does or does not fall within the category of non–dischargeable debts listed in Sections 523(a)(2), (4) or (6); or (ii) the creditor can state a plausible basis for the court to determine that assets may become available to distribute to creditors; or (iii) prejudice to either party which can be remedied by reopening the case has been demonstrated. Applying this test, the Motion will be denied.

Jurisdiction

This Court has jurisdiction over this core proceeding pursuant to 28 U.S.C. §§ 1334(b) and 157(b)(2)(A), and the Standing Orders of Reference in effect in the Eastern District of New York dated August 28, 1986, and as amended on December 5, 2012, but made effective nunc pro tunc as of June 23, 2011.

Findings of Fact and Conclusions of Law

The following constitutes the Court's findings of fact and conclusions of law to the extent Rule 7052 of the Federal Rules of Bankruptcy Procedure (the “Bankruptcy Rules”) so requires. See Fed. R. Bankr. P. 7052.

Background and Procedural History

On September 5, 2012, Jacob Milton commenced an action before the Queens County Supreme Court styled Jacob Milton v. Noor Mohammed, Mir Mohammed and Island Trading Enterprise, Inc., under index number 18478/2012, seeking damages based on alleged breaches of a loan agreement by Debtor and others (the “Contract Action”). No answer was filed, so Mr. Milton moved for a default judgment against all of the named defendants. On January 27, 2013, the state court entered an order granting the default judgment motion as to liability only. On February 14, 2013, after holding an inquest on the amount of Mr. Milton's damages, the state court entered a judgment in Mr. Milton's favor against Debtor and her co–defendants in the amount of $430,958.23 (the “Judgment”).

On June 14, 2013 (the “Petition Date”), Debtor filed a voluntary petition for relief under chapter 7 of the Bankruptcy Code, along with her bankruptcy schedules and statement of financial affairs (“SOFA”). Although Debtor listed thirty five unsecured creditors and three secured creditors holding approximately $598,509 in claims, she did not list the Judgment in her schedules, Mr. Milton in her creditor matrix, or the Contract Action in her SOFA. Debtor was represented by counsel when preparing and filing her bankruptcy petition and related papers.

Shortly after the Petition Date, the Clerk's Office generated and mailed notice of the commencement of Debtor's case to all creditors listed in her schedules. In that notice, the case was labeled a “no asset case”; thus, creditors were directed not to file proofs of claim until given notice to do otherwise; a date for the § 341 meeting of creditors was also provided. Mr. Milton did not receive this notice.

Allan B. Mendelsohn was duly appointed and qualified as the chapter 7 trustee of Debtor's bankruptcy estate (the “Trustee”).

On September 18, 2013, Debtor received a discharge. [dkt item 16]

On December 30, 2013, the Trustee issued his “Report of No Distribution”. The report indicated that after a diligent inquiry into Debtor's financial affairs, the Trustee was unable to discover any non–exempt estate property available for distribution to Debtor's creditors. Accordingly, the Clerk's Office was not required to give notice to creditors to file claims. That same day a final decree was entered [dkt item 18] and Debtor's case was closed.

Debtor neglected to disclose the existence of the Judgment or the Contract Action to the Court or to the Trustee at any point during her case. Thus, Mr. Milton did not receive notice of this case before it was closed; as such, he did not have the right to question Debtor at her § 341 meeting, to vote to elect a trustee, object to Debtor's claim of exemptions, challenge the dischargeability of his debt, or object to Debtor's right to receive a discharge.

On December 5, 2014, nearly one year after her case had been closed, Debtor filed a motion to reopen her bankruptcy case in order to add Mr. Milton's Judgment to her schedules and “allowing the discharge to be entered” (the “Motion”). [dkt item 19] In her Motion, Debtor argues that her failure to disclose the Judgment was inadvertent; although she knew of the Judgment, she avers that she did not list it in her schedules because she mistakenly believed that she “was not part of the alleged debt”. Debtor further contends that her belief was corroborated by the fact that the Judgment did not appear on her credit report at the time she filed her petition. Debtor also somewhat inconsistently states that “[t]he omission of the creditor from Schedule F was not intentional because the alleged debt was disputed.”

Debtor initially failed to serve the Motion on Mr. Milton.

On December 16 and 17, 2014, Debtor filed an amended Schedule F and Statement of Financial Affairs to which she added the Judgment and the Contract Action, respectively. On January 5, 2015, Mr. Milton filed a pro se objection to the Motion asking the Court to conduct a hearing on the Motion and for additional time to retain counsel to file a response (the “Opposition”). [dkt item 24]

The Court held a hearing on Debtor's Motion on February 24, 2015, at which Debtor, through counsel, and Mr. Milton, now through counsel, appeared. Mr. Milton contended that Debtor's omission of the Judgment from her schedules was not inadvertent because in the Contract Action she was served with a summons and complaint, various pleadings, and notices of hearings, including an inquest, before her bankruptcy filing. Therefore, he argues, Debtor was on notice of the Contract Action and the Judgment. Noting that the potential for an unsecured debt to be discharged through a bankruptcy case does not constitute legal prejudice, the Court inquired of Mr. Milton as to what prejudice he would suffer by having this bankruptcy case reopened. Mr. Milton only pointed to the time spent and fees he incurred in connection with prosecuting the Contract Action before Debtor's bankruptcy case had been filed. Debtor did not elaborate on her request for a discharge of the Judgment. At the conclusion of that hearing, the Court directed Debtor to file an affidavit regarding her failure to schedule the Judgment, and gave Mr. Milton an opportunity to file a response, after which the Court would take the matter under submission. The parties thereafter filed their affidavits.

Discussion

1. The Standard for Reopening a Closed Bankruptcy Case

Bankruptcy Rule 5010 authorizes debtors or other parties in interest to move to reopen a closed bankruptcy case within a reasonable time. See Fed. R. Bankr. P. 5010, 9024 . Section 350(b) of the Bankruptcy Code authorizes courts to reopen a case “to administer assets, to accord relief to the debtor, or for other cause.” 11 U.S.C. § 350(b). This Court has previously stated that “[t]he statute's permissive language provides the Court with broad discretion to determine whether a debtor filed a motion to reopen in good faith or has demonstrated good cause.” In re Farley, 451 B.R. 235, 237 (Bankr.E.D.N.Y.2011).

The decision to reopen a case “invoke[s] the exercise of a bankruptcy court's equitable powers, which is dependent upon the facts and circumstances of each case.” Katz v. I.A. Alliance Corp. (In re I. Appel Corp.), 104 Fed.Appx. 199, 200 (2d Cir.2004) (quoting State Bank of India v. Chalasani (In re Chalasani), 92 F.3d 1300, 1307 (2d Cir.1996) ). Although a motion to reopen is generally considered a “ministerial act,” in determining whether to grant the motion, it is appropriate for the Court to review the legal merits of the relief sought upon reopening. See In re Smith, 426 B.R. 435, 440 (E.D.N.Y.2010)aff'd Smith v. Silverman (In re Smith), 645 F.3d 186 (2d Cir.2011). This Court will limit the exercise of its discretion to reopen a closed case “in circumstances where relief may ultimately be afforded to a party, but not where reopening is futile or a waste of judicial resources.” Farley, 451 B.R. at 237.

The moving party carries the burden of proof in establishing cause to reopen. In re Arana, 456 B.R. 161, 172 (Bankr.E.D.N.Y.2011)appeal dismissed 2012 WL 3307357, 2012 U.S. Dist. LEXIS 113133 (E.D.N.Y. Aug. 12, 2012). While the Bankruptcy Code does not define what constitutes “cause” under § 350(b), courts have found that “cause to reopen a bankruptcy case includes the need to amend schedules to add assets or creditors”. Stein, 394 B.R. at 15.

In determining whether cause exists, courts must also consider “whether reopening a case would prejudice the adversary's position.” Id. at 16 (quoting In re Emmerling, 223 B.R. 860, 864 (2d Cir. BAP 1997) ); see Harbour Trust Co. v. Aaron (In re Plusfunds Group, Inc.), 589 Fed.Appx. 41, 42–43 (2d Cir.2015) (remanding case to the bankruptcy court to explain what prejudice, if any, would result to the adversary from reopening the case).

In Warmbrand this Court articulated a test for determining whether a debtor's case should be reopened to allow a debtor to schedule a previously undisclosed personal injury action as an asset. However, a different analysis should be employed to determine whether to reopen a case to allow a creditor to be added.

2. Whether an Unscheduled Debt is Automatically Discharged in a No Asset Chapter 7 Case

Following an opinion by the Eastern District of New York and similar decisions within the Second Circuit, this Court held that the failure to schedule a prepetition debt in a chapter 7 no asset case has no impact on the dischargeability of a debtor's personal liability on a mortgage debt, so long as the debt at issue does not fall within the category of non–dischargeable debts listed in Sections 523(a)(2), (4) or (6). See In re Haemmerle, 529 B.R. 17, 24 (Bankr.E.D.N.Y.2015) (following In re Herzig, 238 B.R. 5 (E.D.N.Y.1998) (Hurley, J.). In Haemmerle, this Court addressed whether a creditor whose mortgage debt was not scheduled violated the debtor's discharge injunction by repeatedly seeking to collect on the debtor's pre–petition personal liability several years after the debtor had received his discharge. To make this determination, the Court had to first analyze whether the unscheduled debt had in fact been discharged. Adopting a plain meaning analysis for § 523(a)(3) , this Court determined that an unscheduled debt held by a creditor who had no knowledge of the bankruptcy case is discharged in a no asset chapter 7 case by operation of law under § 727(b), because § 523(a)(3) only excludes unscheduled debts from being automatically discharged if the unscheduled debt falls within § 523(a)(2), (4), or (6) and the creditor did not have “notice or actual knowledge of the case in time to permit” timely filing of a claim. As noted in Haemmerle, in a no asset chapter 7 case, creditors are directed not to file a claim, unless later advised to do so, and “where there is no deadline set to file a claim in a no asset chapter 7 case, if the debt at issue does not fall within the category of non–dischargeable debts listed in Sections 523(a)(2), (4) or (6), there is no deadline for the creditor to file a timely claim, and, therefore, the creditor could not have notice of actual knowledge of a deadline to file a claim that has not been set.” Id. The Court then went on to note that because claims that fall within Sections 523(a)(2), (4) or (6) are discharged unless a timely adversary proceeding is filed as required by Section 523(c) and Bankruptcy Rule 4007 (60 days after the date first set for the creditors meeting held under § 341(a)), due process requires the creditor to have notice or knowledge of the dischargeability deadline before the otherwise non–dischargeable claim could be discharged. Id.

This plain meaning analysis, also referred to as the “mechanical approach”, has been adopted by the Third, Sixth, Ninth and Tenth Circuit Courts of Appeals ; however, the mechanical approach has been rejected in favor of an equitable approach by the First, Fifth Seventh and Eleventh Circuits . The Second Circuit has yet to rule on this issue, and there is a split amongst Second Circuit courts.

Several courts which have followed the mechanical approach have denied a debtor's motion to reopen a no asset case for the sole purpose of listing an omitted debt on the basis that doing so would serve no purpose, as the debt in question has already been discharged and thus, reopening would not afford any relief to the debtor. See, e.g., Madaj, 149 at 472, (affirming bankruptcy court's order denying the debtors' motion to reopen to amend schedules because the debt had been discharged and amending the schedules would have no effect); Beezley, 994 F.2d at 1435–37 (concluding that because debtor's case was a no asset / no bar date case, and since dischargeability was unaffected by scheduling the claim, amendment of the schedules was a pointless exercise). Other courts which have followed the mechanical approach have authorized a debtor to reopen the no asset case to add the omitted debt, despite the underlying debt having been discharged, because reopening the case would serve some other purpose. See e.g., Judd, 78 F.3d at 113–15 (affirming bankruptcy court's decision to not reopen the case to schedule an already discharged debt but, nevertheless, remanding the case to consider whether amending the schedules to ensure the comprehensiveness of the debtor's discharge or allowing the creditor to participate in a later distribution would be appropriate); Deutsch–Sokol, 290 B.R. at 32 (reopening would allow the affected creditor to file a claim and participate in a distribution in the event assets were later discovered); In re Cruz, 254 B.R. at 807 (granting the debtor's motion for administrative purposes in order to provide a complete schedule of debts).

Courts which have followed the equitable approach and granted motions to reopen to add a previously unscheduled creditor have typically afforded the omitted creditors an opportunity to file a non–dischargeability complaint, relying on the premise that innocently omitted debts are not automatically discharged in a no asset case, and fraudulently omitted debts are not discharged at all. See, e.g., Stark, 717 F.2d at 323–34 (holding that the debtor's no asset chapter 7 case should be reopened to schedule an inadvertently omitted creditor and agreeing with the district court below that “§ 523(a)(3) should not be mechanically applied to deprive a debtor of a discharge”); Moyette, 231 B.R. at 497 (concluding that the omission was an oversight and reversing the bankruptcy court's denial of the motion to reopen in order to afford the creditor the opportunity to file a claim and a nondischargeability complaint); Candelaria, 121 B.R. at 142 (remanding case to the bankruptcy court to consider whether the failure to schedule the debt was the result of fraud, or other misconduct, and if not, directing the court to give the creditor time to file a nondischargeability complaint). These courts examine the circumstances surrounding a debtor's failure to list a certain creditor in determining whether to reopen a case to allow the debtor to schedule the omitted creditor and, thus, obtain a discharge of that debt.See id.

3. Debtor's Case Should not be Reopened

In this Court's view, a chapter 7 no asset case should not be reopened to allow an undisclosed debt to be scheduled unless: (i) the debtor or creditor can state a plausible basis for seeking a determination that the debt at issue does or does not fall within the category of non–dischargeable debts listed in Sections 523(a)(2), (4) or (6) ; or (ii) the creditor can state a plausible basis for the court to determine that assets may become available to distribute to creditors; or (iii) prejudice to either party which can be remedied by reopening the case has been demonstrated. Mr. Milton has not suggested that the Judgment, which sounded in contract, is a debt that falls within Sections 523(a)(2), (4) or (6), nor has he suggested that assets may be available for creditors; further, neither side has demonstrated any prejudice that will result which can be remedied by reopening the case; therefore, this case will not be reopened. Said otherwise, no purpose would be served by reopening this case.

Because this Court is following the mechanical approach adopted in cases such as Herzig, which in this Court's view is more consistent with the language of the Bankruptcy Code , this Court need not apply an equitable balancing test, such as the one undertaken by the District Court in Moyette. However, this Court does note that even if it were to apply the Moyette test and reopen the case, the Judgment would still be discharged.

In Moyette, the bankruptcy court denied a debtor's motion to reopen his no asset chapter 7 case to add a previously unscheduled creditor. Apparently concerned that not reopening the case would result in the unscheduled debt not being discharged, the district court reversed, and because the debtor's omission was inadvertent directed the bankruptcy court to reopen the case to allow the debtor to amend his schedules but to also afford the creditor a “reasonable time to file a dischargeability complaint.” Moyette, 231 B.R. at 500. The district court also considered the objecting creditor's claims that it was deprived of various rights afforded to a scheduled creditor in a no asset case, but noted that “Congress chose not to provide a remedy for creditors whose only loss was the opportunity to elect a trustee, question the debtor at the meeting of creditors, object to the debtor's claims of exempt property or object to discharge”. Id. at 499.

This Court could not conclude that Debtor's omission was a product of fraud, recklessness or intentional design on her part. While Debtor's excuses are not completely satisfactory, there is no evidence before this Court of any advantage that Debtor could have gained by failing to schedule Mr. Milton, the Judgment or the Contract Action or from which this Court would conclude that Debtor acted with improper intent.

As for prejudice, as the Judgment has been discharged, and Debtor has not sought to add the Judgment for the purposes of completeness or accuracy of her schedules; thus, there is no prejudice to Debtor in denying her Motion. Further, while Mr. Milton has opposed reopening, he has not demonstrated cognizable prejudice to him from denying the Motion. He has not been deprived of a distribution as there has not been one nor has either party suggested there may be one, and he has not requested that he be allowed to file a claim. He has not been deprived of an ability to file a complaint under § 523(a)(2), (4), or (6) as he has not suggested he has any basis to do so. While Mr. Milton was not allowed to vote for a trustee in this no asset case, question the debtor at the meeting of creditors, object to Debtor's claims of exempt property or object to Debtor's discharge, he has not suggested that reopening this case would remedy any of these. Thus, he is in no worse a position then he would be if the Court were to reopen the case and allow Debtor to amend her schedules.

This decision should not be taken as an endorsement of Debtor's failure to schedule Mr. Milton. There is no doubt that Debtor should have listed Mr. Milton as a creditor and listed the Contract Action in her SOFA. See 11 U.S.C. § 521(a)(1) ; In re Lowery, 398 B.R. 512, 515 (Bankr.E.D.N.Y.2008) ( “Full and honest disclosure in a bankruptcy case is crucial to the effective functioning of the bankruptcy system. Because the bankruptcy court, trustees, and creditors rely on the information disclosed by a debtor, the importance of full disclosure cannot be overemphasized”). The narrow issue here is whether this case should be reopened to allow Debtor to amend her schedules, and this Court has concluded it should not.

Conclusion

Having considered all of the facts and circumstances present in this closed bankruptcy case, the Court finds that Debtor's case should not be reopened as Mr. Milton's debt has been discharged.

Based on the foregoing, it is hereby

ORDERED, that pursuant to 11 U.S.C. § 350(b) and Fed. R. Bankr. P. 5010, the Motion is denied.