1. INTRODUCTION- The Ferraras, who are the chapter 7 debtors, filed an adversary proceeding to establish dischargeability of the claims of the defendant 5 ABR 27      creditors who were not scheduled or listed in time to file a timely claim under FRBP 3002(c). A claims bar date was set in the main case and this is an asset case from which there will be property to distribute to creditors with allowed claims. The Ferraras have moved for summary judgment.

Because no distributions have yet been made by the trustee of this estate, the defendants may still file a ``tardy'' claim under 11 USC § 726(a)(2)(C), since they had no knowledge of the bankruptcy in time to file a ``timely'' claim, and can file claims prior to distribution which will qualify them for the second tier of distribution, after the first tier priority claims under § 726(a)(1). Thus, they can receive distribution with ``timely'' filed claims under § 726(a)(2)(A), (B).

Omitted creditors, those not scheduled or listed by a debtor in the bankruptcy filings, even when there was no debtor fraud involved in connection with the debt, are not discharged in bankruptcy unless they learn about the bankruptcy in time to make a "timely" claim. 11 USC § 523(a)(3)(A). In granting summary judgment to the Ferraras, I interpreted the condition of filing a "timely" claim under § 523(a)(3)(A) to mean filing in time to participate in the second tier of distributions under § 726(a)(2), notwithstanding the denomination of "timely" or "tardily" in § 726(a)(2) itself.

     2. FACTS- For the purposes of summary judgment, the parties agreed to the following pertinent facts:

• On October 29, 1981, defendant Nettie Hawkins sold real property in Anchorage, Alaska to the Ferraras and the other defendants (the Thayers, the Zanteks, and the Engles). The price was $1,200,000. Part of this price was by a purchase money deed of trust in the amount of $847,942.95, payable in monthly installments. It was secured by a deed of trust on the property.

• On September 27, 1984, the Ferraras and the other defendant purchasers of the property resold it to Boettcher Properties Limited for $2,350,000. Boettcher, however, did not assume the Hawkins' obligation, but merely took subject to it. In other words, there is no recourse against Boettcher for a deficiency.

• Boettcher has defaulted and there is over $700,000 due on the note. For the purposes of this summary judgment, the parties agree that Hawkins will not be fully satisfied by the judicial 5 ABR 28      foreclosure which she has begun and there will be an unsecured deficiency judgment in the amount of $100,000. But for this bankruptcy, the judgment would probably be joint and several against the Ferraras, the Thayers, the Zanteks, and the Engles.

• The Ferraras filed a voluntary bankruptcy on January 6, 1993. The last day to object to their discharge under 11 USC § 727 was April 12, 1993, and a discharge was entered on April 16, 1993.

• A notice to file claims was sent out by the Clerk of Bankruptcy Court to listed creditors, which did not include defendants, setting a claims bar date of January 24, 1995.

• None of the defendants were listed or scheduled in the bankruptcy papers filed by plaintiffs at the inception of the case. The defendants did not have any actual or constructive knowledge or notice of the bankruptcy proceeding prior to February 1996. In April 1996, William Artus, attorney for the Ferraras, filed proofs of claim on behalf of all the defendants. None of the defendants have filed their own proofs of claim.

• There are assets available in the estate, although no distribution has been made at this time. The assets will not fully pay unsecured creditors.

• None of the defendants have claims that are subject to nondischargeability under 11 USC § 523(a)(2), (4), or (6).

The Thayers have additionally emphasized that Alfred Ferrara is a sophisticated real estate professional. He is a MAI appraiser and has been involved in substantial commercial real estate investments. The Thayers indicate that in a prior bankruptcy in the 1970's, a situation involving an omitted creditor similar to the present ones occurred.

     3. ISSUES- The key issues in this case are:

• whether the court is bound by In re Laczko, 37 BR 676 (9^th Cir BAP 1984), aff'd without opinion, 772 F2d 912 (9^th Cir 1985), and,

• if it is not, is the claim of the defendants dischargeable under § 523(a)(3)(A) because they can file a claim which will be entitled to participate in distribution under 11 USC § 726(a)(2)(C)?

5 ABR 29           4. ANALYSIS-

     4.1. In re Laczko Has Been Presumptively Overruled or Substantially Weakened by Subsequent Precedents- In re Laczko involved a bankruptcy in which there was notice of a bar date, but no distribution of assets. The debtor sought to amend his schedules to include an omitted creditor. The debtor was, apparently, seeking to discharge the omitted claim under § 523(a)(3).

The BAP took the hardline approach to dischargeability of omitted creditors. It adopted the reasoning of Milando v. Perrone. Laczko at 678-79:

The leading case advocating a stricter construction of § 17(a)(3) is the case of Milando v. Perrone, (2nd Cir.1946) 157 F.2d 1002 where the court refused to allow the debtor to reopen bankruptcy proceedings in a no-asset case to amend schedules to include an inadvertently omitted claim and permit discharge of that debt. The court stated, ".... he who seeks the protection of a statutory bar against payment of his debts is required to bring himself within the provisions of the statutory grant'' 157 F.2d at 1004.

Cases decided under § 523(a)(3) have generally denied reopening of proceedings to allow amendment of schedules even where the exceptional circumstances exist, particularly where the claims period has expired. The court in In re Iannacone, (D.Mass.1982) 21 B.R. 153, 9 B.C.D. 571 refused to allow the debtor to reopen the bankruptcy to add an omitted creditor after the time for filing proof of claim had long since passed, holding that reopening the case would not result in relief being afforded to the debtor since the amendment would not relate back to the time prior to the claims filing bar date for the purpose of discharge. The court also held that the absence of assets for distribution did not permit the bankruptcy court to contravene the unequivocal language of § 523(a)(3).

In In re Jordan, (E.D.N.Y.1982) 21 B.R. 318, 6 C.B.C.2d 1222, the court refused to allow amendment of schedules and discharge of an omitted debt after the claims period had expired. The court specifically rejected the no-asset, no-prejudice argument raised by the debtor and held there was no way to avoid the consequences of § 17(a)(3) when the last date to file proofs of claim had been scheduled and expired. See also In re Brown, (N.D.Ohio 1982) 27 B.R. 151.

The case of In re Stark, (C.A.7th 1983) 717 F.2d 322, decided under the new Code, at first blush seems to favor appellants, but 5 ABR 30      can be distinguished. In Stark the bankruptcy court, under Bankruptcy Rule 203(b), notified creditors that there were no assets and that no claims need be filed unless and until further notice of the opportunity to file claims be given to creditors. Because the date to file claims were never set, § 523(a)(3) was never triggered.

The BAP eschewed the more liberal rule of Robinson v. Mann, which it summarized in Laczko at 678:

The liberal rule is best illustrated by Robinson v. Mann, 339 F.2d 547 (5th Cir.1964) where the court held that bankruptcy courts have the discretion to invoke their equity powers to allow amendment of schedules after the expiration of the claims period under exceptional circumstances, and the court suggested such circumstances exist where (1) the case is a no-asset one, (2) there is no fraud or intentional laches, and (3) the creditor was omitted through mistake or inadvertence.

These opinions are discussed by Judge MacDonald in In re Brosman, 119 BR 212, 1 ABR 165 (Bankr D AK 1990). Judge MacDonald criticized Laczko and cited cases which were also critical, for example, In re Hendricks, 87 BR 114, 116 (Bankr CD Cal 1988), in which the court questioned the Laczko panel's failure to discuss § 726(a)(2)(C).

In the end, Judge MacDonald indicated that Laczko, because it was a Bankruptcy Appellate Panel opinion, was not a binding precedent, and may have, in any event, been overruled. Brosman at 214.

I follow the analysis of Judge Volinn in his concurring opinion (which I recognize is not a precedent) in In re Bowen, 102 752, 755-56 (9^th Cir BAP 1989), that Laczko has been overruled sub silentio. Judge Volinn, who was the father of the Ninth Circuit BAP and was for a long time chief judge, certainly favored a world in which Ninth Circuit BAP opinions were binding on bankruptcy judges of the circuit, at least barring contrary local district court precedents. Nonetheless, he himself strained to sidestep the stringency of Laczko. In re Johnson, 46 BR 52 (Bankr ED Wash 1985).

     4.2. A "Tardy" Claim under § 726(a)(2)(C) Is a "Timely" Claim for the Purposes of § 523(a)(3)(A)- In re Beezley, 994 F2d 1433 (9^th Cir 1993), held that 5 ABR 31      there was no error if a bankruptcy judge refuses to reopen a case in a no-asset, no-bar date notice situation to amend schedules to include an omitted debt, since the creditor was discharged in any event. The court held that scheduling an omitted claim after the case had already been closed would have, in any event, been a ``pointless exercise.'' The per curiam opinion was a half page and alluded to none of the subtleties of the discharge issues. Judge O'Scannlain was attuned to this issue and wrote a comprehensive concurring opinion.

Although Judge O'Scannlain's concurrence is not precedent (see, 20 Am. Jur. 2d Courts § 159 (1995)), it is very instructive. Beezley, however, does not address the situation in which there is a bar date notice sent out by the bankruptcy clerk, or there are assets.

A vast majority of bankruptcy cases are no-asset cases. When I began as a bankruptcy judge in 1986, standard procedure was to send out a bar date notice with every bankruptcy case. Because of the burgeoning case load and the attendant costs of these notices, which produced little benefit in no-asset cases, FRBP 2002(e) was adopted. It provides that the clerk need not send out notices in no-asset cases. If assets are later discovered, a notice can be sent out. FRBP 3002(c)(5). In the Ferraras' case, there was no claims bar date notice sent out with the original notice of the bankruptcy. Pursuant to FRBP 2002(e), the original notice advised creditors not to file a proof of claim because the case appeared to be a no-asset case. Docket Entry 4, filed January 7, 1993. Later, when it was determined that assets would be coming into the estate, a bar date notice was sent out based on the recovery of assets by the trustee. Docket Entry 82, filed October 26, 1994, set the claims bar date for January 24, 1995.

In analyzing this problem it is easy to forget, and important to remember, the distinctions between dischargeability and allowance of claims for distribution purposes. With respect to distribution of property of the estate proceeds to claimants in chapter 7, the procedure is governed by § 726(a).⁽¹⁾

5 ABR 32      If the defendants, as creditors, had filed their own proofs of claim, which were not timely under FRBP 3002(c)⁽²⁾, they could nonetheless have participated 5 ABR 33      equally with timely claims. This is because they had no notice or knowledge of the bankruptcy.

11 USC § 501 sets out the broad rules regarding the filing of timely claims by creditors, or if the creditor does not file a timely claim, the filing of claims by others, such as a co-obligor of the debtor, the debtor or the trustee.⁽³⁾

The legislative history for the Bankruptcy Reform Act of 1978 indicates that Congress intended the time limits for filing proofs of claim to be adopted by rule making. See, Report of the Committee on the Judiciary, House of Representatives, to Accompany HR 8200, HR Rep No. 95-595, 95^th Congress, 1^st Session, Chapter 9, Miscellaneous Provisions, III The Supreme Court's Rule Making Power (September 8, 1977). Found in Collier on Bankruptcy, Appendix C, Part 4(d)(i). The Supreme Court, 5 ABR 34      promulgated rules, including time limits, for filing proofs of claims in chapter 7 cases in FRBP 3002, and, in FRBP 3004, for a debtor or trustee to file such claims if the creditor did not.

Section 726(a)(2)(C) explicitly provides that only claims filed by creditors, that is, those filing claims pursuant to § 501(a), qualify for a tardily-filed distribution, which can share in the second tier of distribution equally with timely-filed claims. Thus, the claims tardily filed by Mr. Artus on behalf of the defendants even if they were somehow timely under FRBP 3004, would not appear to qualify to allow these claims at the same level as timely-filed claims.

The key issue in my mind is whether § 523(a)(3)(A)⁽⁴⁾ is similarly restricted. That is, do only claims which are ``timely'' in the sense of § 726(a)(2)(A),(B) qualify under § 523(a)(3)(A), or does a tardy claim under § 726(a)(2)(C) also qualify because it is equivalent in its power to share in distribution to those under § 726(a)(2)(A),(B)? There is a split of authority on this issue.

Cases holding that ``timely'' under § 523(a)(3)(A) means any claim filed in time to get a second tier distribution equivalent to either ``timely'' filed claims under § 726(a)(2)(A), (B), or ``tardy'' claims under § 726(a)(2)(C), include In re Brosman, 119 BR at 214-215; In re Sandoval, 102 BR 220 (Bankr DNM 1989); In re Kuhr, 132 BR 421, 423-24 (Bankr ED Cal 1991); In re Butts, 68 BR 1001, 1003 (Bankr CD Ill 5 ABR 35      1987); and, In re Beshensky, 68 BR 452, 454, (Bankr ED Wisc 1987).

To the contrary are cases like In re Bosse, 122 BR 410, 416 (Bankr CD Cal 1990); and, In re Walendy, 118 BR 774 (Bankr CD Cal 1990).

I will follow the cases taking a more liberal Brosman approach since I think it is probably what Congress intended and it is better suited to promote the fresh-start policies of the bankruptcy code. The legislative history regarding § 523(a)(3) appears in several short statements. Two similar statements with respect to HR 8200 and S2266, the House and Senate bills, were the immediate predecessors to the final enacted Bankruptcy Reform of 1978. The final version of § 523(a)(3) does not appear to have changed from its form in these two legislative proposals. The statements are:

Unscheduled debts are excepted from discharge under paragraph (3). The provision, derived from section 17a(3), follows current law, but clarifies some uncertainties generated by the case law construing 17a(3). The debt 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. [ italics added]

The House Report (Report 95-595, February 1, September 28, October 6, 1979) on HR8200 can be found in Collier on Bankruptcy, Appendix C, Part 4(d)(1). The Senate Report (Report 95-989, September 7, 22, October 5, 1978) is in Part 4(e). The committee reports were supplemented by the floor statements of Senator Dennis DeConcini and Congressman Don Edwards:

Section 523(a)(3) of the House amendment is derived from the Senate amendment. The provision is intended to overrule Birkett v. Columbia Bank, 195 U.S. 345 (1904).

Reported in Collier, id.

Birkett v. Columbia Bank was analyzed by Judge O'Scannlain in In re Beezley at 1439 FN 4. Judge O'Scannlain discusses Birkett in the context of ``good faith,'' but a key aspect of the short Supreme Court opinion was the effect of a creditor's inability to participate in the administration of the bankruptcy because of the creditor's omission from the schedules. Birkett found this inability to participate critical in denying the discharge of a debt, even though the creditor could still 5 ABR 36      participate in a distribution of the estate's property.

I agree with Judge O'Scannlain that neither the strict and the lenient approach to an interpretation of § 523(a)(3) is correct. The court should not import its equitable notions in determining dischargeability.

While I have no empirical information, I have experience with many, many bankruptcy cases, in which creditors are inadvertently left off schedules, either through unsophistication or some degree of negligence, but without any bad faith. In many of these situations, the omitted creditor learns of the situation well after the bar date. It would appear to me to be unduly restrictive to limit dischargeability to those omitted creditors who, within the small window of time for filing claims, learn about the bankruptcy, discover the bar date, and file their claims. Rather, I believe that Congress meant to punish the debtor with nondischargeability only in those cases, where there was no fraud involved with the debt, in which a creditor is actually harmed by loss of the right to a distribution.

The Supreme Court of the United States, in Dewsnup v. Timm, 112 SCt 773 (1992) interpreted the same words which appear in 11 USC § 506(a) and § 506(d) differently based on historical interpretation. Because the word ``timely'' appears in different sections (§ 523(a)(3)(A) and § 726(a)(2)(C)) and relate to different issues (dischargeability versus allowance for distribution), giving a different interpretation in each section is contradictory, or in any event as contradictory as the sections involved in the in Dewsnup case. There is good reason to surmise that this is what Congress intended. As in Birkett, the defendants in this adversary proceeding can still file claims which will be valid as if timely filed, but they have been denied the right of participation. The legislative history indicates that these claims should be dischargeable under the fact of this adversary proceeding.

     5. CONCLUSION- The defendants still have time to file a proof of claim and participate on the same level as timely-filed proofs of claim. Under my interpretation of § 523(a)(3)(A), their claims are dischargeable. A judgment will be entered separately.

The court leaves any ruling on costs and attorney fees. Brosman at 215, 216, held that an omitted creditor, even if losing the dischargeability issue, may still 5 ABR 37      be entitled to recover some costs and attorney fees.

DATED:     July 25, 1997

HERBERT A. ROSS
U.S. Bankruptcy Judge

1. 5 ABR 31 11 USC § 726(a)(1), (2) provides (with italics added):

(a) Except as provided in section 510 of this title, property of the estate shall be distributed--
(1) first, in payment of claims of the kind specified in, and in the order specified in, section 507 of this title, proof of which is timely filed under section 501 of this title or tardily filed before the date on which the trustee commences distribution under this section;
(2) second, in payment of any allowed unsecured claim, other than a claim of a kind specified in paragraph (1), (3), or (4) of this subsection, proof of which is--
(A) timely filed under section 501(a) of this title;
(B) timely filed under section 501(b) or 501(c) of this title; or
(C) tardily filed under section 501(a) of this title, if--

(i) the creditor that holds such claim did not have notice or actual knowledge of the case in time for timely filing of a proof of such claim under section 501(a) of this title; and

(ii) proof of such claim is filed in time to permit payment of such claim; . . .

2. 5 ABR 32 FRBP 3002(c) provides:

(c) Time for Filing. In a chapter 7 liquidation, chapter 12 family farmer's debt adjustment, or chapter 13 individual's debt adjustment case, a proof of claim shall be filed within 90 days after the first date set for the meeting of creditors called pursuant to § 341(a) of the Code, except as follows:

(1) A proof of claim filed by a governmental unit is timely filed if it is filed not later than 180 days after the date of the order for relief. On motion of a governmental unit before the expiration of such period and for cause shown, the court may extend the time for filing of a claim by the governmental unit.

(2) In the interest of justice and if it will not unduly delay the administration of the case, the court may extend the time for filing a proof of claim by an infant or incompetent person or the representative of either.

(3) An unsecured claim which arises in favor of an entity or becomes allowable as a result of a judgment may be filed within 30 days after the judgment becomes final if the judgment is for the recovery of money or property from that entity or denies or avoids the entity's interest in property. If the judgment imposes a liability which is not satisfied, or a duty which is not performed within such period or such further time as the court may permit, the claim shall not be allowed.

(4) A claim arising from the rejection of an executory contract or unexpired lease of the debtor may be filed within such time as the court may direct.

(5) If notice of insufficient assets to pay a dividend was given to creditors pursuant to Rule 2002(e), and subsequently the trustee notifies the court that payment of a dividend appears possible, the clerk shall notify the creditors of that fact and that they may file proofs of claim within 90 days after the mailing of the notice.

(6) In a chapter 7 liquidation case, if a surplus remains after all claims allowed have been paid in full, the court may grant an extension of time for the filing of claims against the surplus not filed within the time hereinabove prescribed.

3. 5 ABR 33 11 USC § 501 provides (with italics added):

§ 501.Filing of proofs of claims or interests.

(a) A creditor or an indenture trustee may file a proof of claim. An equity security holder may file a proof of interest.

(b) If a creditor does not timely file a proof of such creditor's claim, an entity that is liable to such creditor with the debtor, or that has secured such creditor, may file a proof of claim.

(c) 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.

(d) A claim of a kind specified in section 502(e)(2), 502(f), 502(g), 502(h), or 502(i) of this title may be filed under subsection (a), (b), or (c) of this section the same as if such claim were a claim against the debtor and had arisen before the date of the filing of the petition.

4. 5 ABR 34 11 USC § 523(a)(3) provides (with italics added):

(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(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--.

(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; or

(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;