Summary
holding “a State court has an inescapable obligation to interpret and apply the Federal statute”
Summary of this case from In re PalumboOpinion
Argued October 19, 1976
Decided November 30, 1976
Appeal from the Appellate Division of the Supreme Court in the Fourth Judicial Department, EDWARD F. CRAWFORD, J.
Bruce B. Roswig, Syracuse, for appellant.
Kenneth D. Whitelaw and James J. Maio, Syracuse, for respondent.
Plaintiff Chevron Oil Company seeks recovery totaling $27,047.11 from defendant Edward H. Dobie as guarantor of obligations incurred by the purchase of Chevron's products by two corporations operating service stations. Dobie asserts his personal discharge in bankruptcy as a defense, but Chevron argues that the discharge was inapplicable because of inadequate scheduling of the guarantees running in favor of Chevron and lack of proper notice to Chevron of the bankruptcy proceeding. Special Term granted summary judgment to defendant guarantor, and the Appellate Division affirmed.
There are two issues. The first is whether failure to specify the contingent nature of an obligation, combined with a gross understatement of the amount of the contingent obligation, prevents an otherwise correctly listed debt from being "duly scheduled" for purposes of section 17 of the Bankruptcy Act (US Code, tit 11, § 35, subd [a], par [3]). The second, subsidiary, issue concerns the effect of a discharge in bankruptcy on a written guarantee of present and future obligations.
There should be an affirmance. Paragraph (3) of subdivision (a) of section 17 of the Bankruptcy Act is not intended to punish debtors for failure to comply with the scheduling formalities set forth in section 7 of the act (US Code, tit 11, § 25, subd [a], par [8]). The "due scheduling" requirement is intended only to assure that a debt is not discharged unless the schedule provides enough information about the creditor to allow the bankruptcy clerk to send properly addressed notice of the proceedings to that creditor. Since the schedule accurately listed "Chevron Oil Co., Perth Amboy, New Jersey" as a creditor, Chevron may not assert that the debts in issue were not "duly scheduled". Moreover, Dobie's discharge eliminated Chevron's right to enforce Dobie's agreements to guarantee corporate obligations, and Chevron is thus barred from recovery on obligations incurred after, as well as before, discharge.
On May 1, 1969, Chevron entered into agreements with Ed-Nor Associates, Inc., a close corporation in which presumably Dobie had some direct or indirect interest, under which Ed-Nor would, in essence, lease and operate a Chevron service station. On September 1, 1969, Chevron entered into similar agreements with Anciad Corp., a similar close corporation. In each case, Dobie signed the agreement on behalf of the lessee corporation, and in each case, Dobie individually guaranteed payment of charges to become due Chevron. The guarantees were to "remain in full force and effect until written notice of termination shall be delivered".
On October 7, 1970, Dobie filed a voluntary petition in bankruptcy. The required schedule of creditors listed "Chevron Oil Co., Perth Amboy, New Jersey 1969 Md.se 100.00". There was no mention of Anciad, Ed-Nor, or the contingent nature of the obligation. The two corporations then owed Chevron more than $10,000 for merchandise sold and delivered.
Notice of the first meeting of creditors and order fixing the last day for filing objections to discharge was mailed to Chevron, and to other creditors, on October 16, 1970. Chevron asserts that it has no record of receipt of the notice, but acknowledges that, since its accounts are listed only by name of principal debtor, receipt of a notice bearing only Dobie's name and not those of Anciad and Ed-Nor could have caused confusion in filing.
At the outset, a State court has an inescapable obligation to interpret and apply the Federal statute. Indeed, prior to the 1970 amendments to section 17, the Federal Bankruptcy Court did not have jurisdiction of cases like this; Federal courts, other than the Supreme Court, could pass on the effect of a discharge only if there were an independent basis for Federal jurisdiction (see 1A Collier, Bankruptcy, par 17.28). Even after the 1970 amendments, a State court remains an appropriate forum for determining the effect of a discharge, with three exceptions. Only when these exceptions, which deal with liabilities for fraud, obtaining money by false pretenses, and willful and malicious injuries, are at issue does the Bankruptcy Court have exclusive jurisdiction (Bankruptcy Act, § 17, subd [c], pars [1], [2]; US Code, tit 11, § 35, subd [c], pars [1], [2]; 1A Collier, Bankruptcy, pars 17.23[9], 17.22A). None of the exceptions is involved in this case.
Section 17 provides, in relevant part, that "(a) A discharge in bankruptcy shall release a bankrupt from all of his provable debts * * * except such as * * * (3) have not been duly scheduled in time for proof and allowance, with the name of the creditor if known to the bankrupt, unless such creditor had notice or actual knowledge of the proceedings in bankruptcy". Any reading of the plain words of the statute points to the simple rule invoked: if the debt is "duly" scheduled or if the creditor knows his debtor is in bankruptcy proceedings, a subsequent discharge is effective to discharge the debt or debts owed by the particular debtor. Put another way, a discharge is effective unless there be neither "due scheduling" nor "notice or actual knowledge" of the bankruptcy proceedings (see, e.g., Villar Co. v Conde, 30 F.2d 588, 589; United States v Scheiner, 308 F. Supp. 1315, 1318; Edwards Co. v Long Is. Trust Co., 75 Misc.2d 739, 741-742; Sline v Layden, 91 S.W.2d 983, 983-984 [Tex]; cf. Hill v Smith, 260 U.S. 592, 595). Thus, once a debt has been duly scheduled, failure to receive the notice from the bankruptcy clerk, even if such failure of receipt be conclusively established, does not exempt the debt from discharge (see Matter of Zinn v Hallock, 194 Misc. 604 [HOFSTADTER, J.], affd 275 App. Div. 818; Tamborella v Robison, 245 So.2d 476 [La]).
The due scheduling provision in section 17, which was first enacted as part of the Bankruptcy Act of 1898, was designed to avoid the injustice inherent in previous bankruptcy legislation which allowed a debt to be discharged without any notice at all to the creditor (Tyrrel v Hammerstein, 33 Misc. 505, 506-507, and cases cited; Broadway Trust Co. v Manheim, 47 Misc. 415, 417-418; 1A Collier, Bankruptcy, par 17.23 [1]). Conditioning discharge on the due scheduling of debts assures generally that no debt will be discharged unless notice of the bankruptcy proceeding is mailed by the Bankruptcy Court to the creditor.
The procedure is simple. Pursuant to instructions of the bankruptcy referee, a clerk mails to each scheduled creditor a notice of the first meeting of creditors and order fixing the last day for filing objections to the discharge (see Official Bankruptcy Form 12). The creditor may then take appropriate action.
The Bankruptcy Act in effect presumes that once a creditor knows of a pending bankruptcy proceeding, the creditor will be able to identify any debts owed by the bankrupt, and will then take appropriate action. It assumes that the creditor knows his own debtors, how much they owe, and the nature of the debts. Thus, the statute provides that mere knowledge of the proceedings is a satisfactory alternative to due scheduling. There is no requirement that the creditor be made aware of any particular debt (see Blake v Alswager, 55 N.D. 776, 779; Molloy v Molloy, 43 Ohio App. 49, 50-51; Commodore v Armour Co., 201 Kan. 412, 422).
It matters not that in today's world a creditor might not always know his debtors, that large corporations like Chevron may have thousands of debtors, including credit card carrying consumers. The statute may have been written for another age, but its command is still the law. Even a creditor who has been perfectly scheduled will receive only the bankruptcy clerk's notice of the bankruptcy proceedings, without any indication of the nature, contingency, or amount of the debtor's obligation. And because a creditor who has knowledge of the bankruptcy proceedings will be barred by a discharge, it is obvious that the data in scheduling a debt as to its nature, contingency, or amount is not material. Consequently, a debtor who has erred in scheduling is not penalized, provided always that he has, at least, taken care to ascertain, if necessary, and schedule the creditor's correct name and address (cf. Miller v Guasti, 226 U.S. 170). The mandated minimum in normal course will bring notice of the bankruptcy proceedings to the creditor. Thus, for example, in conformance with this analysis, it has been said that a mere discrepancy in amount of the debt scheduled will not affect the validity of a discharge (Molloy v Molloy, 43 Ohio App. 49, 50-51, supra; Sline v Layden, 91 S.W.2d 983, 983-984 [Tex], supra; Koen Co. v Accardo, 188 So.2d 99, 100 [La]; Claflin v Wolff, 88 N.J.L. 308, 316-318).
In this case, Chevron was scheduled, and its address was listed as "Perth Amboy, New Jersey". Although much depends on the facts of each case, failure to include a street address in the schedule generally has not been held fatal to a bankrupt's cause (Kreitlein v Ferger, 238 U.S. 21, 30-34 ["Indianapolis" held sufficient]; Little Neck Investors v Kurzius, 88 N.Y.S.2d 707, 708, affd 275 App. Div. 1049, mot for rearg and mot for lv to app den 276 App. Div. 775 ["Little Neck, N.Y."]; Schill Co. v Larsen, 135 N.J.L. 335, 337-338, affd 136 N.J.L. 197 ["Irvington, New Jersey"]; but see Cagliostro v Indelli, 53 Misc. 44 ["Mulberry street, New York City"]). Here, however, this court need not decide whether those holdings rest on an outmoded view of the efficiency of the postal service, for Chevron's own invoices listed no street address. Certainly, Dobie was justified in relying on an address provided by the very creditor who now seeks to assert its insufficiency.
The debt here was "duly" scheduled. Hence, it was not excepted from discharge.
Chevron also contends that even if the discharge as to it be sustained, Dobie should remain liable as guarantor for debts incurred by Anciad and Ed-Nor after the date of discharge. Chevron contends that the agreement to guarantee future debts of Anciad and Ed-Nor survived the discharge in bankruptcy, and that only those debts already incurred by the two corporations at the time of Dobie's bankruptcy were affected by the discharge. In statutory terms, the question is whether Dobie's obligation to guarantee future loans was a "provable", and therefore dischargeable, debt under sections 17 and 63 of the Bankruptcy Act.
The 1938 Bankruptcy Act explicitly made provable "contingent contractual liabilities" (§ 63, subd [a], cl [8]; US Code, tit 11, § 103, subd [a], cl [8]). Even earlier, however, it was well established that a guarantee, as a debt founded upon "contract, express or implied", is a provable debt, even if the principal's default should not occur until after bankruptcy (§ 63, subd [a], cl [4]; US Code, tit 11, § 103, subd [a], cl [4]; Maynard v Elliott, 283 U.S. 273; see, also, Edwards Co. v Long Is. Trust Co., 75 Misc.2d 739, 741-744, supra). Chevron seeks to distinguish the Maynard case on the ground that the "post-discharge debts" of Anciad and Ed-Nor did not themselves exist at the time of discharge. The distinction is not determinative (see Associated Food Stores v Seigel, 20 Misc.2d 952, 953, mod on other issues 10 A.D.2d 1003, affd 9 N.Y.2d 816). It was always within Chevron's control to prevent Anciad and Ed-Nor from incurring new liability. Thus, the amount of Dobie's liability was not "dependent upon an event so fortuitous as to make it uncertain whether liability will ever attach." (Maynard v Elliott, supra, p 278.) Moreover, if Chevron's argument be accepted, a guarantor of future obligations, deprived even of the refuge of bankruptcy proceedings, would forever be at the mercy of the principals to the transaction. This result would clearly be out of harmony with the objectives of the Bankruptcy Act (see pp 277-278). Hence, all of the obligations arising out of Dobie's guarantee agreement must have been discharged.
The statutory provisions at issue in this case may appear unduly protective of the interests of careless bankrupts. In fact, they may be so. But it is also imperative to recognize that a truly diligent creditor, no matter how large and organizationally complex, is not hopelessly disadvantaged by the statute. Had Chevron included a street address on its invoices, notice would undoubtedly have been addressed there and probably received. Had Chevron kept some readily accessible record of Dobie's obligation, the notice, if received, could have been properly filed by it. Had Chevron been more attentive to the financial difficulties of both its principal debtors and its guarantor, the postdischarge debts might not have been incurred at all. Chevron, however, did none of these things.
In any event, if creditors are to receive greater protection than they now have, or larger corporations assisted in more easily screening their mail, it will require congressional amendment to the statute. Indeed, that was the reason and the way the statute was amended in 1898, in order to provide scheduling and mailed notices for creditors. It is both persuasive and of interest that a proposed recasting of the Bankruptcy Act does not, in the respects relevant to the issues in this case, increase the protection to creditors (Report of the Commission on the Bankruptcy Laws of the United States, HR Doc No. 137, 93d Cong, 1st Sess, pt 2, § 4-506, subd [a], cl [4], at p 136).
Nevertheless, it should not pass without comment that Dobie could have and should have done better in scheduling the contingent obligation he owed Chevron. But he may not be denied the benefit of the Federal statute.
Accordingly, the order of the Appellate Division should be affirmed, without costs.
In order for the defendant to successfully assert the defense of discharge in bankruptcy, it must be shown that the debt in question was properly scheduled in time for proof and allowance or that the plaintiff creditor did receive notice or have actual knowledge of the pending bankruptcy proceeding (Bankruptcy Act, § 17, subd [a], par [3]; US Code, tit 11, § 35, subd [a], par [3]).
Regarding the scheduling of a debt sought to be discharged, the statute requires that the bankrupt shall prepare a schedule of creditors, stating the creditor's name, address, the amount due to or claimed by the creditor, the consideration, the security, if any, held by the creditor and whether the claim is contingent, unliquidated or disputed (Bankruptcy Act, § 7, subd [a], par [8]; US Code, tit 11, § 25, subd [a], par [8]). In view of these requirements, we cannot accede to the view that the instant debt was duly scheduled.
It is noted that although the defendant was a principal of each of the corporations whose debts he had personally guaranteed, the schedule misstated the amount of the debt as $100 when at the time of the bankruptcy approximately $10,000 was due, and that the consideration for the debt was listed as merchandise with no reference to the outstanding rentals due. Further, the debts are not characterized as contingent — i.e., there is no reference whatsoever to the fact that they arose out of a guarantee of the debts of third parties. Nor did the schedule state Chevron's full address.
While any one of these defects might not be sufficient to reach a holding that the debt was not properly scheduled (cf. Miller v Guasti, 226 U.S. 170) taken together we believe that these defects cannot be considered mere irregularities. Chevron is a large concern with many debtors ranging from consumers using credit cards in their gasoline and automotive repair transactions, to gas station lessees with considerably larger indebtedness, to other substantial debtors. Further, the debtor stood to materially gain from keeping Chevron in the dark and thereby continuing to enjoy the extension of credit to the third parties whose debt he had guaranteed and in which he had an ownership interest. For no articulated legitimate reason it would appear that the debtor grossly misstated the amount due as well as the nature of the account and the contingency of the debt.
Cumulatively, the myriad facts and circumstances arouse curiosity with respect to the existence of an intent to circumvent the statutory safeguards provided a bankrupt's creditors. Although custom might countenance these shadowy actions by allowing this defendant to be declared a bankrupt in the absence of strict compliance with the statute, we are of the opinion that it would be most inequitable to allow him to escape liability through contrivance and deception. To do so on a motion for summary judgment, thereby denying the plaintiff the opportunity to expose this illicit conduct, adds to the injustice.
Accordingly, the defendant's motion for summary judgment should have been denied.
Judges JASEN, JONES, FUCHSBERG and COOKE concur with Chief Judge BREITEL; Judge WACHTLER dissents and votes to reverse in a separate opinion in which Judge GABRIELLI concurs.
Order affirmed.