Bougie v. Livingston et al

Filing 12

OPINION. Signed by Judge James P. Jones on 1/4/16. (ejs)

IN THE UNITED STATES DISTRICT COURT
FOR THE WESTERN DISTRICT OF VIRGINIA
ABINGDON DIVISION
IN RE JEFFERY R. AND
NANCY L. LIVINGSTON,
Debtors.

MARC BOUGIE,
Plaintiff - Appellee,
v.
JEFFERY R. LIVINGSTON,
Defendant -Appellant.

)
) Bankruptcy Case No. 13-71744
) Adversary Proceeding No. 14-07044
)

)
)
) Case No. 1:15CV00036
)
)
OPINION
)
) By: James P. Jones
) United States District Judge
)

Andrew S. Goldstein and Garren R. Laymon, Magee Goldstein Laskey &
Sayers, P.C., Roanoke, Virginia, for Appellant; David O. Williamson, Brumberg
Mackey Wall P.L.C., Roanoke, Virginia, for Appellee.
In this bankruptcy appeal, I hold that the bankruptcy court applied the wrong
test to determine whether a debt owed to a creditor is nondischargeable due to the
debtor’s listing of an incorrect address for the creditor on the schedule of debts.
Because the debtor’s reason for listing the wrong address is a question of fact, I
will remand for further proceedings.

I.
The following undisputed facts are taken from the record of the adversary
proceeding before the bankruptcy court. The creditor and appellee, Marc Bougie,
made an unsecured loan to the debtor and appellant, Jeffery R. Livingston, in the
amount of $100,000. The loan agreement provided that Bougie could demand
repayment at any time and that the amount owed upon repayment would be
$150,000. Bougie became dissatisfied with Livingston’s business decisions and
demanded repayment. When repayment was not made, Bougie filed suit in state
court seeking damages for breach of contract as well as punitive damages.
While the state court action was pending, Livingston filed for Chapter 7
bankruptcy. He included the $150,000 debt to Bougie on the schedule of debts he
filed with the bankruptcy clerk.

Instead of Bougie’s actual mailing address,

however, Livingston listed the address of attorney George R. Brittan II, who had
represented either Livingston or a company wholly owned by Livingston in the
state court litigation. The record provided to this court does not contain any
evidence as to why Livingston stated the wrong address for Bougie.
Because the schedule contained an incorrect mailing address for Bougie, he
did not receive notice of the bankruptcy prior to the deadline for filing a proof of
claim, otherwise known as the claims bar date. After the claims bar date had
passed, Bougie’s counsel in the state court case received communication from
2

Livingston’s counsel indicating that Livingston would no longer respond to any
discovery requests because Livingston had filed for bankruptcy. Bougie then
initiated an adversary proceeding in the bankruptcy court by filing a Complaint
seeking a declaration that the debt Livingston owed to Bougie was
nondischargeable.
After the claims bar date but before the trustee had finished collecting assets,
Livingston filed a proof of claim on Bougie’s behalf. As of the date of oral
argument before this court, the trustee still had not completed the collection of
assets.

Although this is not a no-asset case, the parties agree that there are

insufficient assets to make any distributions to unsecured creditors.
Bougie’s Complaint asserted several grounds for nondischargeability of the
debt, only one of which is before this court. Both Bougie and Livingston moved
for summary judgment. Livingston sought summary judgment on all counts of
Bougie’s complaint, but Bougie sought summary judgment only as to Counts III
and IV, which pertained to the erroneous address and lack of notice. Count IV
alleged that the debt was not dischargeable because it was not properly listed or
scheduled in time to allow Bougie to file a timely proof of claim, and Bougie had
no actual notice of the bankruptcy prior to the claims bar date. The bankruptcy
court issued an oral ruling in favor of Bougie on Bougie’s Motion for Summary
Judgment with respect to Count IV of the Complaint, declared that Bougie had a
3

nondischargeable debt in the amount of $150,000, and entered a final, appealable
judgment in that amount. The bankruptcy court took the remaining summary
judgment motions under advisement.
Livingston appealed the bankruptcy court’s ruling to this court. The issues
have been fully briefed and orally argued. For the foregoing reasons, I will vacate
the decision of the bankruptcy court and remand for further proceedings.
II.
Pursuant to 28 U.S.C. § 158(a), I have jurisdiction over this appeal from the
final judgment of the bankruptcy court. A bankruptcy court’s conclusions of law
are reviewed de novo. Stancill v. Harford Sands Inc. (In re Harford Sands, Inc.),
372 F.3d 637, 639 (4th Cir. 2004).
A.
Section 523(a) of the Bankruptcy Code provides, in relevant part:
(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 -....
(3) neither listed nor scheduled under section 521(a)(1)
of this title, with name, if known to the debtor, of the creditor to
whom such debt is owed, in time to permit -(A) if such debt is not of a kind specified in
paragraph (2), (4), or (6) of this subsection, timely filing
of a proof of claim, unless such creditor had notice or
actual knowledge of the case in time for such timely
filing. . . .
4

11 U.S.C. § 523(a). Rule 1007(a) of the Federal Rules of Bankruptcy Procedure
states that a debtor must file with his petition a list containing both the names and
addresses of his creditors. Fed. R. Bankr. P. 1007(a). Section 523(a) thus appears
to create a general rule that a debt is not dischargeable in bankruptcy if the debtor
failed to list the creditor, with his correct address, in time to permit the creditor to
timely file a proof of claim.
Livingston argues that § 523(a) is not as clear as it seems. Livingston urges
the court to use its equitable powers and consider his reasons for failing to list
Bougie’s correct address, the extent to which fixing the problem now would
disrupt the bankruptcy proceedings, and whether correcting the error would
prejudice Bougie or other creditors. According to Livingston, “timely” does not
necessarily mean by the claims bar date, but rather means in time for the creditor to
protect his right to share in any distribution. Bougie, on the other hand, argues that
§ 523(a) is unambiguous and should be given its plain meaning. Each of the
parties’ competing interpretations of the statute is supported by case law from
outside the Fourth Circuit, but there is no controlling precedent governing the issue
presented.
The bankruptcy court made the following oral ruling:
The court finds as a matter of law the debtor must exercise
reasonable diligence in accurately scheduling his debts and that
includes the address where notice should be given. The question is
not whether the debtor was careless or fraudulent or willful in
5

scheduling an inaccurate address; it’s the fact of notice, not the intent,
which is controlling here. Here, the un-rebutted affidavits of the
creditor and Mr. Tomlin reflect that the scheduled address of the
creditor was not and has never been P.O. Box 718, Tazewell, Virginia.
Notice to Mr. Bougie at this address is in fact no notice at all to Mr.
Bougie.
Further, this is an asset case and the deadline for Mr. Bougie to
file a proof of claim expired before he had notice or actual knowledge
of the bankruptcy. These facts establish the requirements of nondischargeability under 11 USC Section 523(a)(3)(A) and partial
summary judgment as to non-dischargeability in the amount of 150
thousand dollars at this time is appropriate.
(Tr. of Proceedings 3-4, ECF No. 2 at 164-65.) In other words, the bankruptcy
court adopted Bougie’s interpretation of § 523(a), concluding that a debt is
nondischargeable where the debtor failed to list the creditor, with a correct address,
prior to the claims bar date, regardless of the reason for the omission or its effect
on the proceedings, the omitted creditor, or other creditors.
At least one court of appeals decision and a number of bankruptcy court
decisions support the bankruptcy court’s ruling, interpreting § 523(a) in the strictly
mechanical way that Bougie urges. See, e.g., Colonial Sur. Co. v. Weizman, 564
F.3d 526 (1st Cir. 2009); Schlueter v. State Farm Mut. Ins. Co. (In re Schlueter),
391 B.R. 112 (B.A.P. 10th Cir. 2008); Croix Oil Co. v. Mai Yer Moua (In re Mai
Yer Moua), 457 B.R. 755 (Bankr. D. Minn. 2011); Wakilpoor v. Faruque (In re
Faruque), Bankr. No. 07-13375-SSM, 2009 WL 3854941 (Bankr. E.D. Va. Nov.
17, 2009). The problem with this interpretation, however, is that it mirrors the
6

Supreme Court’s holding in Birkett v. Columbia Bank, 195 U.S. 345 (1904), which
Congress intended to legislatively overrule when it passed the 1978 Bankruptcy
Reform Act. Stone v. Caplan (In re Stone), 10 F.3d 285, 290 (5th Cir. 1994);
Lauren A. Helbling and Hon. Christopher M. Klein, The Emerging Harmless
Innocent Omission Defense to Nondischargeability Under Bankruptcy Code
§ 523(a)(3)(A): Making Sense of the Confusion Over Reopening Cases and
Amending Schedules to Add Omitted Debts, 69 Am. Bankr. L.J. 33, 55-56 (1995).
In Birkett, the debt at issue had not been scheduled prior to discharge, and
the creditor had not received notice or actual knowledge of the bankruptcy prior to
discharge. 195 U.S. at 349. The relevant portion of the bankruptcy law then in
place stated:
A discharge in bankruptcy shall release a bankrupt from all of his
provable debts, except such . . . 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. . . .
Id. (citation omitted). Indicating that the quoted statute was “for the benefit of
creditors, not of the debtor,” the Court held that the unscheduled debt had not been
discharged. Id. at 350. The Court did not discuss the debtor’s reasons for failing
to schedule the debt or conduct any equitable analysis.
Sixty years after Birkett was decided, the Fifth Circuit took a different
approach to deciding whether an unscheduled debt had been discharged.
7

In

Robinson v. Mann, 339 F.2d 547, 549-50 (5th Cir. 1964), the court invoked its
equitable powers and allowed the debtor to amend the schedule to list the omitted
debt after the claims bar date. The court noted that a debtor in this situation should
not be permitted to correct his mistake as a matter of course; rather, the bankruptcy
court should consider the reasons for the failure to list the debt, “the degree of
disruption which would result from allowing the amendment, and whether any
creditor including the unlisted creditor would be prejudiced thereby.” Id. at 550.
Faced with these two competing cases and their progeny, Congress enacted
the Bankruptcy Reform Act of 1978, which contains § 523(a)(3)(A), the statutory
provision at issue in the instant case.
A key difference between [the failure to list provision in the prior law
and § 523(a)(3)(A)] was that under the [former] Bankruptcy Act the
omitted debt was discharged if the “creditor had notice or actual
knowledge of the proceedings in bankruptcy” while the similar
proviso in the new Code made the omitted debt dischargeable if the
“creditor had notice or actual knowledge of the case in time for such
timely filing [of a proof of claim].”
Helbling and Klein, supra, at 56. Though the significance of this change is not
immediately apparent, the legislative history reveals that Congress had come to
regard the Birkett decision as producing unduly harsh results for debtors who
innocently failed to schedule all of their debts. The House and Senate Reports
discussing the new statutory language state that it “follows current law, but
clarifies some uncertainties generated by the case law construing 17A(3). The debt
8

is excepted from discharge if it was not scheduled in time to permit timely action
by the creditor to protect his rights, unless the creditor had notice or actual
knowledge of the case.” H.R. Rep. No. 95-595 at 364 (1977); S. Rep. No. 95-989
at 78-79 (1978). A clearer pronouncement of the legislative intent appears in the
final floor statements made by Representative Edwards and Senator DeConcini
immediately prior to enactment of the new law: “‘The provision is intended to
overrule Birkett v. Columbia Bank, 195 U.S. 345 (1904).’” 124 Cong. Rec. 33,998
(1978), as reprinted in 1978 U.S.C.C.A.N. 6505, 6522 (statement of Sen.
DeConcini); 124 Cong. Rec. 32,392 (1978), as reprinted in 1978 U.S.C.C.A.N.
6436, 6453 (statement of Rep. Edwards).
The Fifth Circuit reviewed this legislative history in Stone and concluded
that when the legislature had enacted § 523(a), it had essentially affirmed the
equitable three-part test that had been articulated by the Robinson court. Stone, 10
F.3d at 290. According to Stone, to determine “whether a debtor’s failure to list a
creditor will prevent discharge of the unscheduled debt,” a court should consider
“1) the reasons the debtor failed to list the creditor, 2) the amount of disruption
which would likely occur, and 3) any prejudice suffered by the listed creditors and
the unlisted creditor in question.” Id. The Stone court applied these factors to the
case before it and held that “[b]ecause the Stones’ failure to list the Caplans as
creditors was solely due to mistake or inadvertence and because the Caplans were
9

scheduled in time to protect their rights, section 523(a)(3)(A) is inapplicable here.”
Id. at 292. Although Stone was a no-asset case, its three-part test applies to asset
cases as well. See Omni Mfg, Inc. v. Smith (In re Smith), 21 F.3d 660, 664, (5th
Cir. 1994).
The Fifth Circuit is not the only court of appeals that has adopted an
equitable test for determining whether a debt is nondischargeable due to the
debtor’s failure to properly schedule it. The Seventh Circuit applied a similar
analysis in Stark v. St. Mary’s Hospital (In re Stark), 717 F.2d 322, 324 (7th Cir.
1983), though the holding in Stark was stated in a way that might limit its
application solely to no-asset cases. In Rosinski v. Boyd (In re Rosinski), 759 F.2d
539, 541 (6th Cir. 1985), also a no-asset case, the Sixth Circuit, citing Stark,
concluded that “harm to the creditor rather than notice is the key issue here,” along
with “whether there was evidence that the exclusion was fraudulent or intentional.”
Notably, the Rosinski court indicated that “only the creditors’ rights to participate
in a dividend and to obtain a determination of dischargeability are of such
importance that their los[s] mandates exception of a late scheduled debt from
discharge.” Id. at 542. And in Samuel v. Baitcher (In re Baitcher), 781 F.2d 1529,
1534 (11th Cir. 1986), another no-asset case, the Eleventh Circuit concluded that if
a debtor could show absence of fraud and prejudice, she should have her debt
discharged.
10

Following Rosinski, the Sixth Circuit in Soult v. Maddox (In re Soult), 894
F.2d 815 (6th Cir. 1990), applied an equitable test in a case where, unlike most noasset cases, a claims bar date had been set and had passed before the creditor
learned of the bankruptcy. Importantly, the court found that Rosinski “did not turn
on the absence of a bar date.” Id. at 817. The Soult court noted that the omission
of the debtor from the schedule was an inadvertent mistake and reasoned that the
creditor “ha[d] not lost any meaningful right that he would have enjoyed if he had
been properly listed in the first place.” Id. Therefore, the court affirmed the
bankruptcy court’s decision to reopen the closed bankruptcy case to allow listing
of the omitted creditor.
Although the Fourth Circuit has not spoken on the issue of whether to
discharge an innocently omitted debt, our court of appeals has said the following
about statutory interpretation:
When conducting statutory analysis, we must first determine whether
the meaning of the statute is ascertainable through the text alone. The
plainness or ambiguity of statutory language is determined by
reference to the language itself, the specific context in which that
language is used, and the broader context of the statute as a whole.
This includes employing various grammatical and structural canons of
statutory interpretation which are helpful in guiding our reading of the
text.
Healthkeepers, Inc. v. Richmond Ambulance Auth., 642 F.3d 466, 471 (4th Cir.
2011) (internal quotation marks and citations omitted).

Unless Congress has

indicated otherwise, the Fourth Circuit gives “statutory terms their ordinary,
11

contemporary, common meaning.” Othi v. Holder, 734 F.3d 259, 265 (4th Cir.
2013) (internal quotation marks and citation omitted). However, the Fourth Circuit
has recognized an exception to the plain meaning rule that can be applied “when
literal application of the statutory language at issue produces an outcome that is
demonstrably at odds with clearly expressed congressional intent.” Sigmon Coal
Co. v. Apfel, 226 F.3d 291, 304 (4th Cir. 2000) (internal quotation marks and
citation omitted).
I find that this is one of those rare instances in which a mechanical
application of § 523(a)(3)(A) produces a result that is contrary to the unequivocally
expressed intent of the legislature. Congress meant to overrule Birkett, and a
strictly literal reading of § 523(a)(3)(A) leads to the same inflexible, creditorfocused analysis applied in Birkett. The equitable approach employed by the Fifth,
Sixth, Seventh, and Eleventh Circuits achieves Congress’s purpose and
appropriately balances the interests of the debtor and creditors. On remand, the
bankruptcy court should apply the three-part test articulated in Stone, considering
“1) the reasons the debtor failed to list the creditor, 2) the amount of disruption
which would likely occur, and 3) any prejudice suffered by the listed creditors and
the unlisted creditor in question.” Stone, 10 F.3d at 290.

12

B.
Aside from the equitable analysis, Livingston also advances a different
argument, invoking 11 U.S.C. § 726(a)(2)(C) and interpreting “timely” as used in
§ 523(a) to mean in time to participate in distribution of the estate, rather than by
the claims bar date. That was the approach taken by the bankruptcy court in Lott
Furniture, Inc. v. Ricks (In re Ricks), 253 B.R. 734, 745-46 (Bankr. M.D. La.
2000), and adopted by the Sixth Circuit in an unreported decision in Kowalski v.
Romano (In re Romano), 59 F. App’x 709, 713-14 (6th Cir. 2003) (unpublished).
Section 726, which governs distribution of the estate in a Chapter 7
bankruptcy case, provides that an allowed unsecured claim that is “tardily filed” by
the creditor has the same priority as an allowed unsecured claim that is “timely
filed under § 501,” as long as the creditor did not have notice or actual knowledge
of the bankruptcy “in time for timely filing of a proof of such claim under section
501(a) of this title” and the proof of claim is filed “in time to permit payment of
such claim.” 11 U.S.C. § 726(a)(2)(C). Bougie concedes that § 726(a)(2)(C)
allows a creditor who did not receive notice by the claims bar date “to file a proof
of claim and receive distributions, in contravention of Rule 3002(c).” (Br. of
Appellee Marc Bougie in Opp’n to Br. of Appellant Jeffery P. Livingston 14, ECF
No. 6.) Although Bougie has not yet filed a proof of claim, he could still do so,

13

and his claim would have the same priority as though he had timely filed a proof of
claim. 1
Section 726(a)(2)(C) uses the phrase “timely filed” and the phrase “tardily
filed,” and it is clear that those phrases mean two different things. A tardily filed
proof of claim is placed on the same playing field as a timely filed proof of claim
only if the creditor did not know about the bankruptcy “in time for timely filing of
a proof of such claim under section 501(a).” While a “tardily filed” claim under
§ 726(a)(2)(C) is treated like a timely filed proof of claim, it is not actually timely
filed.
The phrase “timely filed” is defined in the rules. Rule 3002(c) states that “a
proof of claim is timely filed if it is filed not later than 90 days after the first date
set for the meeting of creditors called under § 341(a) of the Code.” Fed. R. Bankr.
P. 3002(c). “Timely filed” is thus defined by reference to the claims bar date.
1

Section 501(a) permits a creditor to file a proof of claim. Section 501(c) states,
“If a creditor does not timely file a proof of such creditor’s claim, the debtor or the trustee
may file a proof of such claim.” 11 U.S.C. § 501(c). Section 726(a)(2)(c) addresses only
tardily filed proofs of claims filed by the creditor under § 501(a), not tardily filed proofs
of claims filed by the debtor on behalf of the creditor under § 501(c). Therefore, the
proof of claim filed by Livingston on behalf of Bougie, which was filed long after the
claims bar date, cannot be considered a “tardily filed” claim for purposes of §
726(a)(2)(C) that would be given equal priority with timely filed proofs of claim. See
Fed. R. Bankr. P. 3004 (“If a creditor does not timely file a proof of claim under Rule
3002(c) or 3003(c), the debtor or trustee may file a proof of the claim within 30 days after
the expiration of the time for filing claims prescribed by Rule 3002(c) or 3003(c),
whichever is applicable.”). However, Bougie still has the opportunity to file his own
proof of claim, which would be given the same priority as proofs of unsecured claims that
were timely filed.
14

Interpreting “timely filed” as used in § 523(a)(3)(A) to include tardily filed proofs
of claim under § 726(a)(2)(C) is a strained interpretation of the statutory text.
In my view, the better approach is to consider § 726(a)(2)(C) as part of the
prejudice analysis that comprises the third prong of the Stone test. If an innocently
omitted creditor learns of the bankruptcy prior to distribution, when he is still able
to file a proof of claim and ensure that his claim will be given the same priority as
if it had been timely filed, then the omitted creditor likely has not suffered any
prejudice due to the earlier omission or mistake. Where, as in this case, the
outcome for the omitted creditor and the other creditors would be the same
regardless of whether the omitted creditor had received notice before or after the
claims bar date, the third prong of the Stone test weighs in favor of finding the debt
dischargeable.
Contrary to Bougie’s contention, a creditor in this situation should not be
permitted to take advantage of an innocent mistake and allowed to choose whether
he would prefer to participate in the distribution or have his claim declared
nondischargeable. That outcome would give too much power to the omitted debtor
and would not serve the Bankruptcy Code’s purpose of giving the “honest but
unfortunate debtor” a fresh start.

Nunnery v. Rountree (In re Rountree), 478 F.3d

215, 220 (4th Cir. 2007) (quoting Local Loan v. Hunt, 292 U.S. 234, 244 (1934)).

15

III.
For the foregoing reasons, the judgment of the bankruptcy court will be
vacated and the case remanded for further proceedings in accordance with this
Opinion. A separate judgment will be entered herewith.

DATED: January 4, 2016
/s/ James P. Jones
United States District Judge

16