It occasionally happens in bankruptcy cases that a debtor will forget to list a creditor on his or her bankruptcy forms and schedules. The Bankruptcy Code permits a debtor to amend his schedules to include the missed creditor, even long after a case is closed or discharged. It also (much more rarely) happens that assets will be identified or recovered long after a bankruptcy has been closed. But how long is too long?
Or is there any time limit beyond which a creditor cannot be added? Is there any time limit beyond which a late-discovered asset with tangible value is irrelevant? Apparently not, one court has ruled. The case is In Re Dunning Brothers Co., 410 B.R. 877 (Bankr. E.D. Cal. 2009). In this case, a bankruptcy court ruled that a case that had been closed over seventy years earlier could be reopened to include some assets that had not been listed in the case.
In Dunning, the original case had been filed in 1936 as a corporate case. Over seventy years later, it was discovered that the corporation had failed to list some land which it had an ownership interest in. How was this discovered? A railroad company seeking to buy a right-of-way to lay some tracks probed into the ownership records of the land in question. When this was done, it became evident that the bankrupt company was still listed as having an ownership interest in the land.
The railroad company wished to buy the land, but due the fact that Dunning had been liquidated by a trustee, the proper owner of the land was actually Dunning’s bankruptcy trustee. But could the case be reopened to distribute the money from the sale of the land for the benefit of Dunning’s creditors (assuming they were still around)?
In ruling that the old bankruptcy case should be reopened, the bankruptcy court looked at the U.S.’s old Bankruptcy Act of 1898, and also cited an old Supreme Court case named First National Bank v. Lasater 196 U.S. 115, (1905). Lasater stood for the proposition that a debtor cannot later claim title to assets that it failed to disclose. Vital to the court’s consideration was also whether reopening the case would serve any purpose, that it, whether there were actually assets to distribute.
Length of time after the closing of an old case was not relevant; as long as good cause existed to reopen the case, it should be reopened. The modern Bankruptcy Code embodies this same principle in Section 544(d), which states that all property not abandoned or administered remains property of the bankruptcy estate.
In “no-asset” Chapter 7 cases, the general rule now followed by most bankruptcy courts is that in a “no asset” case (i.e., there is no property to distribute to creditors), debts owed to unlisted or improperly listed creditors are dischargeable under Section 523(a)(3) even if the creditor did not receive notice or have knowledge of the bankruptcy case until after the discharge was granted, as long as the omission of the creditor was not deliberate, and as long as the debt is not an otherwise nondischargeable debt.
The better practice, however, would be to add the creditor into the case anyway so that needless disputes do not develop with the creditor.
Debtors should be mindful of the two sides of the Janus-face here, each of which reflect two purposes of the Bankruptcy Code, which are: to protect the legal and equitable interests of possible claimants (creditors) in a bankruptcy estate, and to protect the ability of a debtor acting in good faith to make amendments to schedules long after the case is finished.
On the one hand, courts will not permit a debtor to use time to “hide the ball” from creditors. On the other hand, courts will also be flexible in permitting a debtor acting in good faith to amend his or her schedules long after the fact, once new and relevant information related to the case is discovered. A bankruptcy estate truly is an estate.
Read More: Bankruptcy Adversary Proceedings Under Section 523: Objecting To Certain Debts
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