Matter of Smith

United States Court of Appeals,

Fifth Circuit.

No. 93-3310.

In the Matter of Martin A. SMITH, Jr. and Linda Brightbill Smith,
Debtors.

OMNI MANUFACTURING, INC., Appellant,

v.

Martin A. SMITH, Jr. and Linda Brightball Smith, Appellees.

May 27, 1994.

Appeal from the United States District Court for the Eastern
District of Louisiana.

Before WOOD, Jr.,* JONES and SMITH, Circuit Judges.

EDITH H. JONES, Circuit Judge:

In this Chapter 11 Bankruptcy case, the bankruptcy and

district courts refused to hold that nearly $70,000 owed to Omni

was nondischargeable because the debt was not properly scheduled in

time to permit Omni to file a proof of claim and Omni had no other

notice or actual knowledge of the case. See 11 U.S.C. § 523(a)(3).

Instead, the courts authorized "for Omni's benefit" an extension of

time to file a proof of claim, and they justified the extension

under their construction of section 523(a)(3) and alternately of

Bankruptcy Code § 105 and Bankruptcy Rules 3003(c)(3) and

9006(b)(1). Neither those statutory provisions and rules nor any

case law authority supports what the courts did. We must reverse.

BACKGROUND

*
Circuit Judge of the Seventh Circuit, sitting by
designation.

1
 The Smiths filed a Chapter 11 bankruptcy proceeding in

December 1987. Omni was an unsecured creditor to which Mr. Smith

owed approximately $68,000 as a personal guarantor on a failed

lease agreement between Omni and St. Charles Health Care Center,

Inc. Omni was listed as a creditor but was not included in the

debtors' mailing matrix and was thus left out of the ordinary

bankruptcy notice loop. Somehow, the debtors also "forgot" to list

approximately 60 other creditors until years later. In March 1990,

the debtors amended their mailing matrix and added an old,

incorrect address for Omni. The debtors could have obtained Omni's

correct address from the Atlanta telephone directory, the office of

the Georgia Secretary of State, Omni's current telephone number, or

from Omni's counsel in New Orleans who had earlier represented the

company in dealings with the Smiths.

On April 3, 1990, the bankruptcy court fixed May 11, 1990 as

the last day on which proofs of claim or interest could be filed in

the debtors' case. Omni received neither this notice; nor the

debtors' second amended plan of reorganization; nor the January 3,

1991 order fixing January 30, 1991 as the last day for filing

acceptances or rejections of that plan; nor the order confirming

debtors' second amended plan which was entered February 7, 1991.

Unaware of the bankruptcy, in March 1991 Omni filed a

diversity suit in federal court seeking recovery against the Smiths

on their guarantee. On May 7, 1991, counsel for Omni was informed

of the bankruptcy proceeding for the first time by means of a

letter from the Smiths' counsel. Litigation then ensued in the

2
bankruptcy court, and the court agreed that Omni had neither been

"duly scheduled" nor "duly listed" as a creditor in the Chapter 11

case. Further, the court agreed, Omni received no actual or

constructive notice or knowledge of the bankruptcy filing until May

7, 1991, four years after it was filed, one year after the deadline

to file a proof of claim had passed, and three months after a plan

of reorganization had been approved by the creditors. The

bankruptcy court found that the debtors could have ascertained

Omni's address by simply picking up the telephone and stated, "This

court does not condone such a lack of diligence on the part of the

debtor." The bankruptcy court did not find "excusable neglect" or

"due diligence" on the part of the debtors.

Notwithstanding its apparent recognition that the debtors'

failure properly and timely to schedule Omni's claim and Omni's

total lack of knowledge of the case rendered Omni's debt

nondischargeable under section 523(a)(3), the court invoked its

"equitable" powers under 11 U.S.C. § 105(a). It refused to declare

the debt nondischargeable and instead extended the bar date at the

debtors' request in order to "enable" Omni to file a late proof of

claim and, if it so desired, to contest the Smiths' discharge or

the dischargeability of the indebtedness.

The district court affirmed the § 105 holding and also

construed § 523(a)(3) to mean that Omni's debt was discharged

despite lack of notice of the case because the bankruptcy court, by

authorizing Omni's late-filed proof of claim, made it a "timely"

claim for purposes of § 523(a)(3).

3
 DISCUSSION

This court reviews findings of fact for clear error and

conclusions of law de novo.

As the courts below recognized, Omni's debt would ordinarily

have been rendered nondischargeable by the plain terms of section

523(a)(3). Section 523(a)(3) excepts from the operation of a

discharge any debt:

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 ... timely filing
of a proof of claim, unless such creditor had notice or actual
knowledge of the case in time for such timely filing....

Omission of a creditor's name from the mailing matrix is just as

impermissible as omission from the formal schedules. See Bonner v.

Adams (In re Adams), 734 F.2d 1094 (5th Cir.1984). The courts, and

the debtor on appeal, try to escape this net in several ways.

First, the debtor contends that section 523(a)(3) is concerned only

with the debtor's ability to file a "timely" proof of claim, hence

the "remedy" of allowing the creditor to file a proof of claim will

suffice. Alternatively, they relied on the equitable powers

conferred on bankruptcy courts by section 105 of the Code. As

another fallback, they invoked Bankruptcy Rules 3003(c)(3) and

9006(b)(1). Mysteriously absent from either of the lower courts'

opinions or the appellees' briefs is any decision of any court

anywhere allowing a Chapter 11 debtor to join in his bankruptcy—and

hence discharge—a creditor who had not been properly scheduled or

noticed with the proceedings at any time pertinent to the Chapter

11 process. Upon examination, the reason for this absence of

4
authority is clear: the lower courts were wrong.

A. Section 523(a)(3)

In a recent construction of section 523(a)(3), this court

held that debtors in a no-asset proceeding could re-open their case

to schedule creditors about whose claims they had accidentally

forgotten. See Stone v. Caplan (In re Stone), 10 F.3d 285 (5th

Cir.1994). This court adopted as the touchstone for interpreting

section 523(a)(3) an earlier decision of the circuit in Robinson v.

Mann, 339 F.2d 547 (5th Cir.1964). See Stone, 10 F.3d at 290.

According to Stone, the enactment of section 523(a)(3) of the

Bankruptcy Code legislatively overruled an earlier Supreme Court

decision that required strict construction of the no-notice ground

for nondischargeability. See id.1 Our court, lining up with the

decisions of several other circuit courts, employed the Robinson

test to determine nondischargeability where a creditor's claim has

not been properly scheduled prior to the bar date. See id. at 290

n. 10. Robinson identified three factors relevant to determining

whether a debtor's failure to list a creditor will prevent

discharge of the unscheduled debt. In Stone, the employment of the

Robinson test resulted in the court's granting permission to the

debtor to schedule the hitherto unlisted creditor largely because

1
Stone states that the enactment of § 523(a)(3) in the
Bankruptcy Code was intended to overrule the Supreme Court's
strict construction of its Bankruptcy Act predecessor provision §
17(a)(3) in Birkett v. Columbia Bank, 195 U.S. 345, 25 S.Ct. 38,
49 L.Ed. 231 (1904). See Stone, 10 F.3d at 290. One may argue
academically what Congress intended to do and what it actually
accomplished by the minor word changes between the two
provisions. Our court had not speculated on that question before
Stone, so Stone is now dispositive of it in our circuit.

5
the case was a no-asset case. In a Chapter 7 no-asset case, the

creditor has no obligation to file a proof of claim, see Bankruptcy

Rule 2002(e), hence nothing to gain or lose from filing a "timely"

claim.2 Additionally, it mattered to the Stone decision that the

debtors' failure to schedule the particular claim was merely

inadvertent, accompanied by no improper motive, fraud, or

intentional design. See Stone, 10 F.3d at 291.

Although this is not a no-asset case, the construction of

section 523(a)(3) adopted in Stone is binding on this panel.

According to Stone, incorporating Robinson, courts must examine the

reason the debtor failed to list the creditor, the amount of

disruption which would likely occur by an untimely listing of the

claim, and any prejudice suffered by the listed creditors and the

unlisted creditor in question. See id. at 290. Stone supports the

methodology of the lower courts in this case but not their result.

First, contrary to the facts in Stone, the Smiths were not

2
Several bankruptcy courts, concerned with the disruption
that may result from reopening no-asset cases to permit the late
scheduling of creditors, have offered a different and very
persuasive reading of section 523(a)(3). These courts suggest
that under section 727(b), a debtor is statutorily entitled to a
discharge from all of his pre-petition debts, listed or unlisted,
unless a specific exception to discharge applies. Section
523(a)(3), these courts note, only applies where a proof of claim
would have been required. In no-asset cases, because the
creditors are instructed not to file proofs of claim, section
523(a)(3) does not apply. Hence, there is no justification for
re-opening the bankruptcy case to permit a futile act. As these
courts point out, the debtors can always advance the defense of
discharge in a later state or federal court proceeding on the
unscheduled debt. See, e.g., In re Stecklow, 144 B.R. 314
(Bankr.D.Md.1992); In re Guzman, 130 B.R. 489
(Bankr.W.D.Tex.1991). See generally 8 Collier on Bankruptcy ¶
5010.06 and n. 7 (15th ed. 1994).

6
without fault in failing to list Omni on their original mailing

matrix and in later listing Omni at the wrong address. Indeed, the

facts here reek of irresponsibility, if not worse.

Omni's present counsel and the Smiths' current law firm had

both been counsel of record in a previous bankruptcy proceeding

filed by the company whose debts Smith guaranteed to Omni.

Nevertheless, the Smiths have contended that they were unable to

"find" Omni in order properly to schedule and list it in their

personal bankruptcy. Omni was neither duly scheduled nor duly

listed as a creditor on the mailing matrix for the Chapter 11

proceeding. Two and one-half years after filing bankruptcy the

debtors filed a request to place Omni's address on the mailing

matrix—and they inserted the wrong address. As a result of the

debtors' carelessness, Omni did not learn of the bankruptcy filing

or pendency of the proceeding, instituted in 1987, until May 7,

1991. Omni received its first notice approximately three and

one-half years after the case was filed, one year after the bar

date for proofs of claim had passed, and three months after the

plan of reorganization had been approved by creditors. The

bankruptcy court found that the debtors could have learned Omni's

correct address by picking up the telephone and concluded that it

could not condone such "a lack of diligence on the part of the

debtor." Coupled with the fact that the debtors apparently failed

properly to schedule a number of other creditors for several years,

their error with regard to Omni can hardly be termed mere

negligence or inadvertence.

7
 The second Stone/Robinson factor focuses on undue disruption

to courts' dockets. The bankruptcy court here minimized disruption

by effectively extending the deadline for proofs of claim and

including Omni retroactively among the creditors whose claims had

been filed and approved by the court. Little disruption occurred

in the court's handling of this case.3

The third Stone/Robinson factor, which evaluates prejudice to

the creditors, is the most critical here. In Stone, the court

found no prejudice either to the creditors who were included or to

those who were omitted from the debtors' original schedules.

Because Stone was a no-asset case in which creditors were not even

required to file proofs of claim, there were no assets to be

distributed among the creditors. Here, the bankruptcy court sought

to deflect the question of prejudice to Omni by stating that no

distributions had yet been made in the case and by ordering Omni to

participate as a late-approved claimant. What the court

overlooked, however, was a critical difference between liquidation

and reorganization cases. Dramatic consequences integral to the

theory and practice of Chapter 11 accompanied the Smiths'

obligation to schedule and properly identify their creditors to the

court. As presently structured, Chapter 11 is a participatory

3
If permitting the re-opening of cases for late-filed claims
were to become widespread, courts' dockets would be disrupted.
It is not inconceivable that a late-filed claim could so alter
the distribution scheme for like creditors that they might object
to the claim, see Bankr.R. 3007, or its consequences. Disruption
could also occur from the late filing of discharge and
dischargeability complaints that must be permitted in tandem with
late-filed claims. See 11 U.S.C. § 523(a)(3).

8
endeavor in which the secured and unsecured creditors negotiate

with the debtor a plan of reorganization that suits their

individual and collective interests. If a creditor is not

scheduled or notified of the bankruptcy, it loses its opportunity

to participate and influence the negotiating process. Needless to

say, the creditor may also lose the opportunity to try to call a

halt to a Chapter 11 case that is hopelessly mismanaged or

over-extended. Moreover, without proper notice, the creditor loses

the rights to object to its initial claim-classification, to vote

on the plan, and if necessary, to object to confirmation. That the

creditor may ultimately share in the fruits of a confirmed plan is

small solace when the creditor has been left out of the process

that led to the plan's formation.4 Omni was seriously prejudiced

by the late notification of the Smiths' bankruptcy that it

received.

Prejudice to other creditors of the Smiths by authorizing

Omni's late-filed claim might also easily be hypothesized, although

the bankruptcy court believed the contrary. Including an

unanticipated claim such as Omni's in a particular creditor class

after the plan has been negotiated might upset the expectations of

recovery that supported other creditors' votes for the plan. It is

not accurate, however, to say that holding Omni's claim

nondischargeable necessarily prejudices the other creditors unless

that ruling would impair the success of the confirmed plan. The

4
Although a creditor's scope of participation in a Chapter 7
case is necessarily narrower, similar considerations could cause
prejudice in that situation as well.

9
record discloses no firm conclusion regarding prejudice to Omni's

other creditors.

The Smiths also hope to avoid the application of the

Stone/Robinson factors by an artful interpretation of section

523(a)(3) not advanced in Stone. Thus, the Smiths contend, section

523(a)(3) expresses concern only with the ability of the creditor

to file a "timely" proof of claim (or a timely complaint to avoid

dischargeability in certain cases) with two consequences for this

case. First, the bankruptcy court, by extending the due date for

Omni's proof of claim, rendered it "timely" within section

523(a)(3). Second, because the proof of claim was "timely," no

other events in the bankruptcy are relevant to assessing the

debtor's compliance with that section. If this interpretation were

correct, there would hardly be any reason for a debtor to respect

the requirement of filing timely, complete, and accurate schedules

of creditors, for it could always seek a retroactive cure for

tardiness as the debtors did here. The debtors' interpretation is

logically inconsistent with the reasoning of Stone if it affords no

room for the "equitable principles" on which Stone relied when

determining the propriety of allowing the debtor to schedule a

previously omitted claim. It is also difficult to believe that the

bankruptcy courts' timeliness fiat, which this construction of §

523(a)(3) would condone, ought to supplant so easily the bankruptcy

rules regarding the filing of schedules and bar dates for proofs of

claim. The opportunities to manipulate the bankruptcy process

would simply be too tempting to support a conclusion that Congress

10
intended "timeliness" to be determined at the sole discretion of a

bankruptcy court without reference to the circumstances of the

case.

We are thus unpersuaded that under the Stone/Robinson test, §

523(a)(3) authorized the bankruptcy court to order that Omni file

a retroactively "timely" proof of claim rather than gain a

nondischargeable debt.

B. Section 105(a)

Section 105(a) of Title 11 gives bankruptcy courts the

equitable power to issue any order "necessary or appropriate to

carry out the provisions [of the Bankruptcy Code and Rules]." From

this section emanate the general equitable powers of bankruptcy

courts. Those powers, however, have their limits, and the district

court erred in holding that section 105(a) could be invoked here.

Bankruptcy courts cannot use their equity powers under

Section 105(a) to fashion substantive rights and remedies not

contained in the Bankruptcy Code or Rules or to negate substantive

rights or remedies that are available. See Official Committee of

Equity Sec. Holders v. Mabey, 832 F.2d 299, 302 (4th Cir.1987),

cert. denied, 485 U.S. 962, 108 S.Ct. 1228, 99 L.Ed.2d 428 (1988),

cited with approval in Browning v. Navarro, 887 F.2d 553, 559 (5th

Cir.1989). Federal Rules of Bankruptcy Procedure 3003(c)(3) and

9006(b)(1) govern extensions of time, and those rules provide, in

pertinent part, "The court shall fix and for cause shown may extend

the time within which proofs of claim or interest may be filed."

Fed.R.Bankr.P. 3003(c)(3) (regarding cases filed under Chapter 9 or

11
Chapter 11).

[W]hen an act is required or allowed to be done at or within
a specified period by these rules or by a notice given
thereunder or by order of court, the court for cause shown may
at any time in its discretion (1) with or without motion or
notice order the period enlarged if the request therefor is
made before the expiration of the period originally prescribed
or as extended by a previous order or (2) on motion made after
the expiration of the specified period permit the act to be
done where the failure to act was the result of excusable
neglect.

Fed.R.Bankr.P. 9006(b)(1).

Rules 3003(c)(3) and 9006(b)(1), which courts have held must

be read together, provide the criteria the bankruptcy court should

have used to analyze whether to extend the deadline for filing a

proof of claim in the Smiths' reorganization case. See Brunswick

Assocs. Ltd. Partnership v. Pioneer Inv. Servs. Co. (In re Pioneer

Inv. Servs. Co.), 943 F.2d 673, 676 (6th Cir.1991), aff'd, --- U.S.

----, 113 S.Ct. 1489, 123 L.Ed.2d 74 (1993); Wright v. Placid Oil

Co., 107 B.R. 104, 105-06 (N.D.Tex.1989). Bankruptcy courts cannot

use their equitable powers created by Section 105(a) to expand the

requirements of Rules 3003(c)(3) and 9006(b)(1). Thus, the

district court erred in justifying the extension of time for filing

based on Section 105(a).

C. Bankruptcy Rules 3003(c)(3) and 9006(b)(1)

Moreover, to the extent that the decision of the bankruptcy

court to extend the deadline for filing a proof of claim was based

on Rules 3003(c)(3) and 9006(b)(1), it was wrong. Rule 3003(c)(3),

read together with Rule 9006(b)(1), asks first whether the request

for enlargement of time was made before the deadline expired. See

Fed.R.Bankr.P. 9006(b)(1). In this case, that deadline long since

12
had expired. Thus, the crux of the matter is the second question

in Rule 9006(b)(1), whether the failure was a result of excusable

neglect.

The Smiths' neglect to notify Omni of the bankruptcy

proceedings for almost four years was not excusable. Excusable

neglect is the "failure to timely perform a duty due to

circumstances that were beyond the reasonable control of the person

whose duty it was to perform." The bankruptcy court, however,

specifically found "a lack of diligence" on the part of the Smiths5

and extended the time in which to file a proof of claim based on

considerations other than excusable neglect. Doing so circumvented

Rules 3003(c)(3) and 9006(b)(1).

CONCLUSION

The factors employed by this court under Stone/Robinson and §

523(a)(3) to evaluate a debtor's request to authorize late filing

of a proof of claim do not justify granting relief to the Smiths in

this case. Neither § 105(a) nor the Bankruptcy Rules authorized

the lower courts' actions. Under § 523(a)(3), the debt owed to

Omni, which had no timely actual or constructive notice of the

Smiths' Chapter 11 case, was not discharged.

The judgments of the bankruptcy and district courts are

5
The district court characterized the Smiths' conduct as
"good faith mistakes" and stated that the bankruptcy court found
that the Smiths used reasonable diligence. As for good faith,
the bankruptcy court made no such finding, and as for reasonable
diligence, the bankruptcy court found that the Smiths had not
been diligent. Given that the district court failed to explain
how the bankruptcy court's factual findings were clearly
erroneous, the district court erred in finding that the Smiths
acted in good faith using reasonable diligence.

13
REVERSED, and the case is REMANDED with instructions to enter

judgment declaring that Omni's debt is not discharged.

14