When debt in an “asset” case is not discharged because the creditor didn’t receive notice of the bankruptcy, the Ninth Circuit tells us that the entire debt was not discharged, not just the portion the creditor would not have received had the creditor filed a proof of claim.

A year before bankruptcy, the creditor sued the debtor in state court and received a monetary judgment of almost $32,000 for an unlawful detainer. In the schedules, the debtor used the incorrect address for the creditor. The creditor therefore did not receive a notice to file a claim and was otherwise unaware of the bankruptcy.

It was an “asset” case with an evidently large dividend for unsecured creditors. The debtor received a chapter 7 discharge.

After discharge, the creditor mounted an adversary proceeding in bankruptcy court, seeking a declaration that the entire $32,000 judgment was not discharged. The debtor opposed, arguing that the debt not discharged was only $1,500.

Advancing reasoning from “no asset” cases, the debtor contended that about $30,500 of the debt was discharged, representing the amount the creditor would have received had the creditor filed a proof of claim.

After briefing, the bankruptcy court granted summary judgment in favor of the creditor, declaring that the entire $32,000 was not discharged for lack of notice. The debtor appealed, but the Bankruptcy Appellate Panel affirmed.

Without oral argument in a precedential opinion on March 8 by Circuit Judge Holly A. Thomas, the Ninth Circuit affirmed.

The debtor cited Ninth Circuit authority holding that debt is discharged in a “no asset” chapter 7 case even if the creditor had no notice. In re Beezley, 994 F.2d 1433 (9th Cir. 1993) (per curiam); In re Nielsen, 383 F.3d 922 (9th Cir. 2004).

Judge Thomas said that the debtor’s “reasoning is flawed.” She cited Bankruptcy Rule 1007(a), which requires the debtor to show “the name and address of each entity included” on the schedules. Paraphrasing a decision by the Ninth Circuit Bankruptcy Appellate Panel, she said that the “rule is grounded in basic principles of due process: In the absence of such notice, a creditor may well be deprived of her right to have her day in court.” In re Fauchier, 71 B.R. 212, 215 (B.A.P. 9th Cir. 1987).

Beyond due process, Judge Thomas said that “the Bankruptcy Code generally makes a debt nondischargeable if the debt is ‘neither listed nor scheduled under [11 U.S.C. § 521(a)(1)] . . . 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.’ 11 U.S.C. § 523(a)(3)(A).”

Judge Thomas held that the “plain language of Section 523(a)(3)(A) therefore precludes the discharge of the unlawful detainer debt.”

Judge Thomas said that the holdings in Beezley and Nielsen did not apply because they were “no asset” chapter 7 cases where “the bankruptcy rules do not require creditors to file any claims, as there are no assets to distribute.” She said that “Section 523(a)(3)(A)’s protections are plainly irrelevant” in “no asset” cases because “creditors need not be notified of proceedings in which filing a claim would be ‘meaningless and worthless.’ In re Nielsen, 383 F.3d at 927.”

“But those protections are relevant here,” Judge Thomas said, because the debtor “had assets to distribute, and their creditors were therefore required to file claims during the Chapter 7 bankruptcy proceedings. See Fed. R. Bankr. P. 3002(a).”

In a last effort at defying the statute, the debtor launched a policy argument, contending that nondischarge would be a “windfall” given that the creditor could recover more than the distribution it would have received by filing a proof of claim.

Judge Thomas said that the policy argument “is of no moment,” because the “Bankruptcy Code states plainly, and without qualification, that a bankruptcy court’s order of discharge ‘does not discharge an individual debtor from any debt’ if the creditor was not appropriately listed. 11 U.S.C. § 523(a).”

Affirming the BAP based on the “plain language of 11 U.S.C. § 523(a)(3)(A),” Judge Thomas “decline[d] to read into Section 523(a)(3)(A) a limitation that the statute does not contain.”