Opinion
Case No. 11-10130-TPA
08-14-2014
IN RE: DUSTY A. MATHENY, d/b/a ELITE ROOFING AND SIDING, Debtor DUSTY A. MATHENY, Movant v. ERIE INSURANCE EXCHANGE, Respondent
Chapter 7 Related to Doc. No. 28 MEMORANDUM ORDER
Presently before the Court is the Amended Motion to Reopen Bankruptcy Case ("Motion") filed by the Debtor at Doc. No. 28. The Motion is opposed by Respondent, Erie Insurance Exchange ("Erie"). The Parties have briefed the issues raised by the Motion and on July 28, 2014, the Court heard oral argument on the matter. For the reasons that follow, the Motion will be granted in part and denied in part.
BACKGROUND
The case was filed on January 25, 2011, as a Chapter 7 at which time a trustee was appointed. The Trustee filed a report of no distribution on March 29, 2011. The discharge order and final decree were entered on June 1, 2011, and the case was closed that same date. There was no further activity in the case until April 30, 2014, when the Debtor filed the Motion. The Debtor is seeking to reopen the case so he can file an amended Schedule F adding Erie as a creditor so that any debt he owes to Erie can be found to have been discharged. Upon reopening, the Debtor also seeks to file an amended Schedule B to list an account receivable of $13,323.34 as an asset of the estate that he says was "inadvertently omitted" from the original Schedule B.
Prior to the filing of the bankruptcy the Debtor was the sole proprietor owner of a company called Elite Roofing. On October 23, 2008, the Debtor entered into a contract with 31st Street Business Park, LLC ("31st Street") to perform certain roofing work on an old industrial building located in Pittsburgh ("the Property") that was owned by 31st Street. Erie provided insurance on the Property, which was being rehabilitated for use as a movie studio. On the morning of Sunday, May 3, 2009, one of the owners of 31st Street, Brian Kowalski, happened to stop by the Property and discovered the Debtor and two of his employees in the process of cutting copper wire from the ceiling area of the building. Brian Kowalski called his father, David Kowalski, the other owner of 31st Street, to report the incident.
The Kowalskis suspected theft and the next day contacted the police. On May 11, 2009, the Debtor and his two employees were charged with theft by unlawful taking, criminal mischief, and criminal conspiracy. One of the employees pleaded guilty, but the Debtor and the other employee went to trial in December 2009. The Debtor testified that he was removing the wire for safety reasons, and that he thought he had the approval of David Kowalski to do that. The Debtor and the remaining employee were both acquitted in the criminal case on December 21, 2009.
The acquittal is not dispositive on a dischargeability issue because the burden of proof in the criminal case was beyond a reasonable doubt, whereas for purposes of dischargeability the burden is only by a preponderance. See, In re Henton, 2014 WL 585307 footnote 2 (W.D. Pa. 2014). See also In re Dietz, 2011 WL 10637551 (Bankr. E.D. Cal. 2011) (acquittal in criminal case was not relevant to determination of dischargeability of a debt).
Sometime prior to the criminal trial, 31st Street filed a damage claim with Erie over missing copper wire and eventually negotiated a settlement in the amount of approximately $780,000, leaving Erie with a right of subrogation against the Debtor. Based on that right of subrogation, on October 23, 2010 Erie filed a civil action against the Debtor in the Allegheny County Court of Common Pleas ("the State Action") by writ of summons.
As indicated above, the Debtor filed this bankruptcy case on January 25, 2011. At that point, the Debtor had not yet been served with the writ of summons in the State Action, such service not occurring until March 23, 2011. Erie was not named as a creditor in the bankruptcy petition and the Debtor did not take any steps to add Erie or 31st Street as a creditor after he was served with the writ of summons. On June 1, 2011, a discharge order was entered and the bankruptcy case was closed as a no-asset case.
On March 2, 2012, Erie filed a complaint in the State Action, alleging claims of conversion, breach of contract and civil conspiracy against the Debtor related to the copper wire. On March 26, 2012 the Debtor filed an answer, new matter and counterclaim in the State Action. The counterclaim alleged that the Debtor was still owed money for his work on the Property. The Debtor did not raise a defense of discharge in bankruptcy as to any of the claims asserted by Erie. The State Action has proceeded, albeit at a somewhat slow pace, and remains pending. Following the closing of the bankruptcy case, no further activity took place in this Court until the original version of the Motion was filed on April 30, 2014.
DISCUSSION
The Motion was filed pursuant to 11 U.S.C. §350(b), which provides:Chief Judge Jeffery A. Deller of this Court recently summarized the applicable law to be applied in deciding a motion to reopen, stating:
(b) A case may be reopened in the court in which such case was closed to administer assets, to accord relief to the debtor, or for other cause.
The party moving to reopen the case has the burden of proof .... The decision to reopen a case is within the sound discretion of the Court .... In exercising its discretion, a bankruptcy court is to give consideration as to whether similar proceedings are pending in a state court and determine which forum is the most appropriate to adjudicate the issues raised by the motion to reopen ....In re Scheib, 2014 WL 3571010 *3 (Bankr. W.D. Pa. July 18, 2014) (citations omitted).
The reopening of a case is a ministerial act that does not have any substantive independent effect .... Rather, it provides a moving party with the opportunity to seek substantive relief .... The moving party must ordinarily demonstrate that there is a compelling cause .... However, "a closed bankruptcy proceeding should not be reopened where it appears that to do so would be futile and a waste of judicial resources.".... In such an instance, no purpose would be served by reopening and, accordingly, there would be no cause to reopen.
As previously noted, the "substantive relief" that the Debtor ultimately seeks to accomplish by getting the case reopened is two-fold. The primary reason appears to be so that he may add Erie as a creditor on his Schedule F. The ultimate purpose for doing so would be to ensure that any debt he might owe to Erie has been discharged. Such relief is necessary because the Debtor's potential debt to Erie was not previously listed or scheduled.
In a no-asset Chapter 7 case, such as the present one, debt is typically discharged pursuant to 11 U.S.C. §727(b) even if it was not scheduled. See, Judd v. Warner, 78 F.3d 110, 114 (3rd Cir. 1996). That is because
[a]n omitted creditor who would not have received anything even if he had been originally scheduled, has not been harmed by omission from the bankrupt's schedules and the lack of notice to file a proof of claim.Id. at 115. However, the Judd court also recognized that an exception to this general rule is created for debt that was incurred as a result of "intentional tort." This results from the operation of 11 U.S.C. §523(a)(3)(B) , which provides:
(a) 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-Thus, under Section 523(a)(3)(B), if a debt falls within any of these intentional tort exceptions it will not be discharged unless it was listed or scheduled in time to permit the creditor to receive notice of the deadline to file a complaint to determine the dischargeability of the debt, i.e., within 60 days of the meeting of creditors. See Fed.R.Bankr.P. 4007(c)). As there was no debt to Erie listed in the present case, Section 523(a)(3)(B) is directly implicated.
...
(3) neither listed nor scheduled under section 521(a)(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-
...
(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; ....
The "paragraph (2), (4), or (6) of this subsection" language refers to 11 U.S.C.§§523(a)(2), 523(a)(4), and 523(a)(6). These provisions except from discharge debts incurred by "false pretenses, false representation or actual fraud" (§523(a)(2)), by"fraud or defalcation while acting as a fiduciary" (§523(a)(4)), and by "willful and malicious injury" (§523(a)(6)).
The procedure to be followed in such circumstances presents something of a conundrum. If a debt is listed, and if the creditor believes it should be excepted from discharge because it was the product of an intentional tort, then it is up to the creditor to take the initiative to seek such a determination, and it is the exclusive province of the bankruptcy court to make that determination. See, 11 U.S.C. §523(c)(1). But if a debt has not been listed in a no-asset chapter 7 case, how is one to know whether it is of the type that was not discharged under Section 523(a)(3)(B)? Neither the Bankruptcy Code nor the Rules specify how the determination is to be made in those circumstances as to whether a debt is of the kind specified in Section 523(a)(2), (4) or (6), and therefore excepted from discharge. Must the determination still be made exclusively by the bankruptcy court, in which case the Motion would have to be granted, or may another court, for example the court in the State Action, make that determination?
The Debtor argues that bankruptcy court exclusivity still applies in these circumstances. He relies on In re Padilla, 84 B.R. 194 (Bankr. D. Col. 1987), where the debtors in a closed no-asset chapter 7 case moved to reopen to add two unsecured creditors to their schedules, and the court held as follows:
11 U.S.C. § 350(b) provides that the Court may reopen a case "to accord relief to the debtor, or for other cause". In a no-asset Chapter 7 case there would be no purpose served by reopening a case to allow a debtor to add an omitted creditor to his schedules unless that debt falls under §§ 523(a)(2), (4), or (6). If it is not a debt under §§ 523(a)(2), (4), or (6), it is discharged whether or not it was listed. If it is a debt under §§ 523(a)(2), (4), or (6) it is not discharged by reason of § 523(a)(3)(B). But this Court will not know which type of debt it is unless the case is reopened and the omitted creditor is given an opportunity to prove that the debt falls under §§ 523(a)(2), (4), or (6). And because the Bankruptcy Court has exclusive jurisdiction to make that determination, there is "cause" under § 350(b) to reopen no-asset Chapter 7 cases, on motion of either the debtor or the omitted creditor so that such a determination can be made.84 B.R. at 197.
Padilla, however, represents the minority view. The majority view, and the "better" one according to Collier on Bankruptcy, see ¶ 523.09[3][b], is that once a debtor fails to list a debt and the time for filing a dischargeability action has expired under Rule 4007(c), thereby triggering Section 523(a)(3)(B), the bankruptcy court no longer has exclusive jurisdiction of the nondischargeability determination and such determination can also be made in a state court.
Padilla has also been rejected by another judge of the same court. See, In re Manning, 2012 WL 2328236 (Bankr. D. Col. June 19, 2012).
A representative decision espousing the majority view is In re Stano, 248 B.R. 493 (Bankr. D. N.J. 2000), where the overall conclusion of the court was as follows:
... this court concludes that while the bankruptcy court is the forum of choice because of its expertise on dischargeability issues, it is not the exclusive forum in which the dischargeability of an intentional tort debt must be litigated. Rather, bankruptcy courts share jurisdiction with other courts to determine whether a "debt is of a kind specified in paragraph (2), (4), or (6) of this subsection [523(a)]." § 523(a)(3)(B). The bankruptcy court's decision to accept jurisdiction to determine the dischargeability of unscheduled, intentional tort debts is discretionary, entailing a case by case analysis, similar to that used in discretionary abstention where jurisdiction is shared with other courts.248 B.R. at 495-96. The Strano court reached this result by noting that Section 523(c)(1), the provision discussed above that generally confers exclusive jurisdiction on bankruptcy courts to determine dischargeability of intentional tort debts, contains an exception for unscheduled, intentional tort debts. The Strano court quoted the following with approval:
Section 523(c), by its own terms, does not apply to Section 523(a)(3)(B) claims. Therefore, the exclusive jurisdiction provisions of Section 523(c) are not applicable to the issue of dischargeability under Section 523(a)(3)(B). The time limitation of Bankruptcy Rule248 B.R. at 501-502 (quoting In re Mendiola, 99 B.R. 864, 868 (Bankr. N.D. Ill. 1989)). The end result is that :
4007(c) is also inapplicable, since that Rule applies only to complaints under Section 523(c), not to complaints under Section 523(a)(3)(B). In effect, a debtor who failed to list a creditor loses the jurisdictional and time-limit protections of Sections 523(c) and Rule 4007(b) [sic, should be 4007(c)] with respect to that creditor.
... a debtor who fails to schedule an intentional tort debt before the bar date loses the benefit of both the bar date and the exclusive jurisdiction of the bankruptcy court. Although Congress sought to protect debtors from abuse by harassing creditors when it gave bankruptcy courts exclusive jurisdiction over intentional tort debts in 1970, that protection is reserved for debtors who schedule such debts.Id. at 502. For other cases adopting the majority view that state courts have concurrent jurisdiction to make a dischargeability determination with respect to non-scheduled debts, see Casey v. Mohamed, 323 B.R. 834 (S.D.N.Y. 2005), In re Milburn, 218 B.R. 862 (Bankr. W.D. Ky. 1998), In re Toussaint, 259 B.R. 96 (Bankr. E.D. N.C. 2000), In re Gustin, 343 B.R. 909 (Bankr. W.D. Wisc. 2005).
Section 523(c)(1) provides: Except as provided in subsection (a)(3)(B) of this section, the debtor shall be discharged from a debt of a kind specified in paragraph (2), (4), or (6) of subsection (a) of this section, unless, on request of the creditor to whom such debt is owed, and after notice and a hearing, the court determines such debt to be excepted from discharge under paragraph (2), (4), or (6), as the case may be, of subsection (a) of this section. [Emphasis added].
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The Court finds the majority view persuasive and adopts it. The question then becomes whether the Court should grant the Motion and reopen the case for the purpose of deciding the dischargeability issue, or deny the Motion and defer to the already-ongoing State Action. For a number of reasons, the Court will follow the latter approach. First, the Court is familiar with the court in which the State Action is pending and is confident that the Parties will receive a fair hearing there. Second, even though the Debtor has somewhat inexplicably never pleaded discharge in bankruptcy as an affirmative defense in his answer in the State Action, as he would be required to do under the Pennsylvania Rules of Civil Procedure if he wished to preserve such defense, at oral argument on the Motion Counsel for Erie represented that Erie would not oppose a motion by the Debtor to amend to add such defense. The dischargeability issue can thus be heard in the State Action.
A third reason for deferring to the State Action is that answering the question of whether any debt that the Debtor might be found to owe Erie falls under one of the Section 523(a) intentional tort exceptions does not appear particularly difficult. It seems fairly clear that if any liability on the conversion or civil conspiracy claims is found to exist in the State Action it would fall directly within the intentional tort exceptions of Section 523(a). Furthermore, even though the third claim in the State Action is entitled as "one in breach of contract," Counsel for Erie acknowledged at the oral argument that its claim is based solely on the allegation that Matheny wilfully and wrongly took copper from the Property, thereby violating the contract as well. Any liability found on this breach of contract claim would thus likely implicate the intentional tort exception. See, e.g., In re Singh, 2012 WL 993782 (Bankr. D. N.J. 2012) (although Section 523(a)(6) generally applies to torts rather than contracts and an intentional breach of contract will not give rise to a non-dischargeable debt, where an intentional breach of contract is accompanied by tortious conduct which results in willful and malicious injury, the resulting debt is excepted from discharge under Section 523(a)(6)). In short, the determination of liability in the State Action appears to be coextensive with the dischargeability determination.
A fourth reason for the Court's decision is the length of time that the State Action has been ongoing. While the pace of that action does seem to have been somewhat slow, it is nevertheless fairly far advanced and it makes little sense to restart the whole process in this Court. A fifth factor concerns the long delay that occurred before the Debtor filed his Motion. While there is no absolute deadline for filing a motion to reopen, laches can be a valid ground for a court denying such a motion. See, e.g., In re Am. Remaufacturers, Inc., 439 B.R. 633, 636 (Bankr. D. Del. 2010). The Court does not find that the Debtor here is absolutely barred by laches from filing the Motion, but the lengthy delay does at least weigh against a grant of the Motion.
Finally, although the Court is deferring to the State Action at this time, that does not necessarily preclude the Court from revisiting the issue in the future. In particular, if the State Court were to determine that the Debtor is liable to Erie, and that the debt was not discharged by the bankruptcy, the Court could potentially void such judgment pursuant to 11 U.S.C. §524(a)(1), though it would not anticipate taking such step absent exceptional circumstances. See, e.g., In re Kenom, 231 B.R. 116 (Bankr. M.D. Ga. 1999) ( court found that under Section 524(a)(1) it would have the power to void a state court finding of non-dischargeability that was "clearly erroneous").
The second ground upon which the Debtor is seeking to reopen the case is so he can add an account receivable to his Schedule B. This appears to relate to a counterclaim he filed in the State Action pursuant to which he is seeking to recover the amount of $13,323.34 that he claims is still owed to him on the contract with 31st Street. It is unclear whether this counterclaim has any merit or not, but if it does it could potentially be a source of funds to make payments to the creditors of the Debtor. The Court will exercise its discretion and grant the Motion for the limited purpose of allowing the Debtor to amend his Schedule B. See, e.g., Matter of Mesta Mach. Co., 67 B.R. 147 (Bankr. W.D. Pa. 1985) (reopening case for limited purpose). The Trustee will be given an opportunity to determine whether he would like to keep the case open so that he can administer the asset, move to abandon it, or move to allow the Debtor to continue pursuing the counterclaim while keeping the Trustee informed so that the Trustee can make a determination whether to seek a further reopening of the case to administer the asset.
AND NOW, this 14th day of August, 2014, for the reasons stated above and on the record at the time of the oral argument, it is ORDERED, ADJUDGED and DECREED that,
(1) The Amended Motion to Reopen Bankruptcy Case is DENIED in part with respect to the request to reopen the case for the purpose of filing an amended Schedule F adding Erie Insurance Exchange as a creditor in the case.
(2) The Amended Motion to Reopen Bankruptcy Case is GRANTED in part with respect to the request to reopen the case for the limited purpose of filing an amended Schedule B adding an account receivable in the amount of $13,323.34.
(3) The case is reopened for the limited purpose as set forth in Paragraph 2 above, and if the Debtor wishes to file an amended Schedule B, he shall do so on or before September 2, 2014, or the case will be re-closed effective September 3, 2014 without further Order.
(4) If the Debtor does timely file an amended Schedule B, then the United States Trustee is directed to forthwith take whatever action is appropriate to re-appoint a Chapter 7 Trustee. Thereafter, on or before September 23, 2014, in addition to his other statutory duties, the Chapter 7 Trustee shall either: file a notice indicating that he wishes the case to remain open so that he may administer the new asset; file a motion to abandon the new asset and close the case; or, file a motion to close the case but allow the Debtor to continue pursuing the counterclaim while keeping the Trustee apprised of the status so the Trustee can make a determination whether to seek a further reopening of the case to administer the asset.
/s/__________
Thomas P. Agresti, Judge
United States Bankruptcy Court
Case administrator to serve:
Michael Hughes, Esq.
Kyle McGee, Esq.
Debtor
Richard Roeder, Esq.
Daniel Foster, Esq.
Joseph Sisca, Esq., Office of the U.S. Trustee