In re Steward

Citations: 509 B.R. 123; 2014 Bankr. LEXIS 1610; 2014 WL 1356558Docket: No. HG 12-08814

Court: United States Bankruptcy Court, W.D. Michigan; April 4, 2014; Us Bankruptcy; United States Bankruptcy Court

SummaryOriginalCytator Case TreatmentBackward CitatorAnalysis

EnglishEspañolSimplified EnglishEspañol Fácil

Matthew and Jennifer Steward (the "Debtors") filed a motion to reopen their Chapter 7 bankruptcy case to include creditors they inadvertently omitted from their original schedules. The case was closed on April 22, 2013, after the trustee reported no distribution and the court issued a discharge. Cincinnati Insurance Company (CIC), as subrogee of the Debtors' former employer, opposes the motion. A hearing was held on April 2, 2014, where the court took the motion under advisement and ultimately decided to grant it.

Before filing for bankruptcy, Mrs. Steward pled guilty to embezzlement from her employer. The employer waived restitution claims but allowed CIC to assert a subrogation claim. The Debtors did not list either the employer or CIC in their schedules. Following the closure of their case, CIC sued the Debtors for theft and embezzlement in state court.

Under 11 U.S.C. § 350(b), a bankruptcy case may be reopened for various reasons, including to address claims from omitted creditors. The Debtors seek to reopen the case to defend against CIC's lawsuit, citing the Sixth Circuit's ruling in In re Madaj, which indicates that in no-asset cases, omitted creditors' claims can be discharged despite lack of notice. Specifically, the court noted that a claim is discharged if the omitted creditor holds an ordinary unsecured claim and receives notice of the bankruptcy case, as per § 523(a)(3)(A).

In no-asset bankruptcy cases, courts issue a "Madaj Order" to clarify the implications of omitted creditors from schedules. When omitted claims relate to exceptions under 11 U.S.C. § 523(a)(2), (4), or (6), the determination of dischargeability becomes complex. Only federal courts have the authority to declare these debts excepted from discharge per § 523(c), unless a creditor formally requests this determination after notice and a hearing. The interpretation of "the court" in this context refers to the bankruptcy court, establishing exclusive federal authority over these exceptions.

However, there is an important exception in § 523(a)(3)(B) for debts held by omitted creditors, allowing concurrent state court authority to determine exceptions from discharge under this provision. The Michigan Court of Appeals affirmed this concurrent jurisdiction, despite differing from the Sixth Circuit's interpretation. Title 28 U.S.C. supports state court jurisdiction over bankruptcy-related proceedings, allowing state courts to adjudicate issues related to omitted creditors.

A debtor omitting a creditor risks that the creditor's claim may be excepted from discharge under § 523(a)(3)(B), potentially necessitating a state court decision. Nonetheless, state courts face challenges in navigating the discharge scope, as they can only interpret it correctly; incorrect interpretations could inadvertently modify the discharge order. This complexity makes many state court judges hesitant to engage in such matters.

The court has granted a motion to reopen the case for sixty days, allowing the parties to file an adversary proceeding regarding the dischargeability of Cincinnati Insurance Company’s (CIC) claims under 11 U.S.C. § 523(a)(3). The divergence of legal interpretations between the Michigan Court of Appeals (First Source Bank) and the Sixth Circuit (Madaj) may influence the dispute, particularly for Mr. Steward, and could lead to the necessity for CIC to litigate in both state and federal courts, which introduces additional costs and risks of inconsistent rulings. The court emphasizes the importance of the parties working together to select a single forum for resolution. If no complaints are filed within the allotted time, the case will be closed without a determination on dischargeability. The court has determined that reappointment of a trustee is unnecessary and that no reopening fee will be charged. The court also acknowledges the concurrent jurisdiction of Michigan courts to adjudicate issues related to CIC’s claims and the Debtors' discharge. The Clerk is directed to serve copies of the order to relevant attorneys and deliver a courtesy copy to the Kent County Circuit Judge. Statutory references pertain to Title 11 of the U.S. Code unless noted otherwise.

Section 523(a)(3) presents a challenge in determining the applicability of subsections (a)(3)(A) or (a)(3)(B) since it requires first identifying whether the debt aligns with categories outlined in paragraphs (2), (4), or (6). Ordinary debts, such as credit card bills or medical expenses, generally qualify under 523(a)(3)(A). However, cases where the classification is less clear complicate matters for both parties and the court. The Code states that claims described in 523(a)(2), (4), or (6) are excepted from discharge if the creditor was unaware of the bankruptcy proceedings in time to petition the court for a determination regarding their claim's classification. This raises the question of how to ascertain the applicable subsection in ambiguous situations. Additionally, while state courts possess broad jurisdiction, federal courts operate under limited jurisdiction defined by Congress. Timely invocation of the bankruptcy court's removal jurisdiction allows debtors to shift disputes to federal court, as stipulated by 28 U.S.C. 1452 and Fed. R. Bankr. P. 9027(c), which prohibits further state court proceedings after a notice of removal is filed. During hearings, Debtors' counsel acknowledged that Mrs. Steward’s guilty plea likely confirms the non-dischargeable nature of CIC’s claim against her, although the debt's amount is still contested. Mr. Steward is not accused of embezzling from Mrs. Steward’s previous employer; however, CIC alleges he facilitated her receipt and possession of the funds she embezzled from Quarder.