GREGORY F. KISHEL, Chief Judge.
This adversary proceeding came before the Court on April 8, 2011, on the Plaintiff's motion for summary judgment. The Plaintiff appeared by its attorney, Matthew T. Collins. The Defendant appeared by her attorney, Sean M. Linnan. The following memorandum sets forth the Court's disposition of the motion, which is granted.
This is an adversary proceeding for determination of dischargeability of debt.
The parties' dispute is one of those oddments that can arise only in the context of bankruptcy: it sprang out of the procedural dynamic of bankruptcy; its outcome is driven by the dictates of that dynamic; and all of that is quite abstract, a matter of necessary court processes and the relevant parties' participation or non-engagement in them. Nonetheless, the outcome bodes a real, substantive impact on both the Plaintiff and the Defendant; it will control the Plaintiff's right as a pre-bankruptcy creditor of the Defendant to enforce its claim against her in the wake of her bankruptcy filing. Ultimately, the result is dictated by what happened in the Defendant's case under Chapter 7.
More than two decades ago, it was observed that "[s]ection 523(a)(3) is designed to remedy the harm to creditors that results from not being able to participate in the bankruptcy case." In re Anderson, 72 B.R. 783, 786 (Bankr. D.Minn.1987) (citing Stark v. St. Mary's Hospital, 717 F.2d 322, 324 (7th Cir.1983)). Only two forms of creditor participation are protected via the statute's exception from discharge, however. Id. Under § 523(a)(3)(A), "the right of the creditor that is protected ... is the right to timely
For the motion at bar, the material facts
Under the construction that has prevailed in this district, § 523(a)(3) is applied according to its plain language, and strongly in mind of the orientation of the statutory text toward the process of bankruptcy. The statute recognizes "sharing and distribution from an asset-bearing [bankruptcy] estate" as one of the means by which a creditor participates in the bankruptcy process to its potential benefit. In re Hauge, 232 B.R. 141, 147 (Bankr. D.Minn.1999) (citing In re Anderson, 72 B.R. at 786). The Plaintiff maintains that it was deprived of this right once the deadline for timely filing proofs of claim in an asset-bearing bankruptcy case had passed, while the Defendant's status in bankruptcy and the date of the deadline were both unknown to the Plaintiff. The Plaintiff argues that that alone is sufficient to except the full debt from discharge, under Hauge's reasoning.
That would be the end of the story, under the state of analysis in local case law when Hauge was issued. 232 B.R. at 141 (in case where clerk issues notice of deadline for timely filing of proofs of claim against asset-bearing estate, creditor that was omitted from debtor's bankruptcy schedules and that did not have actual notice of debtor's bankruptcy filing in time to meet deadline is entitled to exception from discharge, under plain meaning of § 523(a)(2)(A)). However, the Defendant resists this motion by invoking a chain of published decisions from other districts, in particular In re Ricks, 253 B.R. 734 (Bankr.M.D.La.2000).
Of the eight decisions cited by the Defendant, two are entirely off-point; they involved cases noticed and administered as no-asset cases. See In re Baskowitz, 194 B.R. 839 (Bankr.E.D.Mo.1996) and In re Hendricks, 87 B.R. 114 (Bankr.C.D.Cal. 1988). Under the no-harm, no-foul rule first framed by Judge Kressel, "[c]ourts... view[ ] no-asset cases differently under § 523(a)(3) because ... proofs of claim are either unnecessary or not accepted for filing" in them. 72 B.R. at 787. Where the initial notice of the case includes a statement that "it appears from the [debtor's] schedules that there are no assets from which a dividend can be paid," Fed.R.
Of the remaining six decisions, only Ricks warrants any discussion. The balance are either short in length of text or light on analysis; they turn in part on the lack of ultimate prejudice to a plaintiff-creditor because the case closed without distribution despite having been noticed as asset-bearing; or they rely on the dicta in Hendricks.
The Court in Ricks, however, took large pains to rationalize a dispensation for debtors in situations like the one at bar. It did so by invoking the "holistic approach" to statutory construction, under which provisions of a comprehensive enactment that are extraneous to the one that specifically governs the subject matter in suit are considered in order to determine the meaning of words in the governing provision. The Defendant cites United Savings Assoc. of Texas v. Timbers of Inwood Forest Assoc., Ltd., 484 U.S. 365, 371, 108 S.Ct. 626, 98 L.Ed.2d 740 (1988), for her proposition that "[s]tatutory construction is a holistic endeavor" (emphasis added). The analysis of Ricks also cites Timbers of Inwood Forest as authority.
However—and both Ricks and the Defendant elide this—Timbers of Inwood Forest specifies two situations where a holistic approach is appropriate: (1) when "[a] provision that may seem ambiguous in isolation is [] clarified by the remainder of the statutory scheme-because the same terminology is used elsewhere in a context that makes its meaning clear;" or (2) "because only one of the permissible meanings produces a substantive effect that is compatible with the rest of the law." 484 U.S. at 371, 108 S.Ct. 626. Both of these situations involve statutory provisions that are ambiguous on their face, or are subject to more than one "permissible meaning" when read in isolation. And, even when an appellate court has chosen to interpret a provision of the Bankruptcy Code "in light of the remainder of the statutory scheme" without first finding ambiguity, it has done so based on "[s]everal provisions of the bankruptcy code," not just one, that demonstrate an underlying principle guiding the entire Code. See, for example, In the Matter of Howard, 972 F.2d 639, 640 (5th Cir.1992) (finding that § 1327(a)-(c) must be read in conjunction with §§ 501, 502(a), 506(a), Fed. R. Bankr.P. 3001 and 3007, all provisions "provid[ing] special procedures to protect secured creditors and their liens." Id. at 640.). In other words, in the absence of ambiguity or structural inconsistency, there is no need to go beyond the plain language of the statute. United States v. Ron Pair Ents., Inc., 489 U.S. 235, 240-241, 109 S.Ct. 1026, 103 L.Ed.2d 290 (1989).
In turn, 11 U.S.C. § 726(a)(3) assigns third priority to:
The net effect of §§ 726(a)(2) and 726(a)(3) is that third-priority claims can not receive distribution from the estate unless all allowed second-priority claims are paid in full. This, of course, is the harm that can result from an otherwise-allowable unsecured claim remaining unscheduled, and its holder remaining unaware of the bankruptcy case: the probable disbursement of the full estate to other unsecured claimants and the loss of the right to a pro rata share of the funds distributed.
Section 726(a)(2)(C), however, offers a haven to the late-coming claimant, as long as the herd has not left the barn. As the Ricks court would have it, the mere presence of this provision in the statute saves the day for the delinquent debtor in a different context, when an omitted creditor seeks an exception from discharge under § 523(a)(3)(A). 253 B.R. at 743-747.
Ricks was issued after Hauge. Though Hauge cited the express distinction between "timely" and "tardily" filed claims in § 726(a)(2)(C) as evidence that "Congress clearly contemplated a material difference" between them, "a classification that must be enforced just as it reads" in § 523(a)(3)(A), 232 B.R. at 149 n. 10, the Ricks court terms that "a distinction without meaning in the context of § 726(a)(2)," 253 B.R. at 745.
Ricks's rationale ignores the clear import of the pivotal word within the relevant provision, § 523(a)(3)(A). And, even if Ricks's forced "holistic" analysis is examined on its terms, its abstractions do not fit into the actual, hands-on administration of bankruptcy estates. Section 726(a)(2) governs that process, yes; but because § 523(a)(3)(A) protects a right to meaningfully participate in the estate, actual administrative performance is the context that has to be considered in determining the congressional intent behind its words. The practicalities of bankruptcy administration frame the meaning of the Code's vocabulary in both instances.
Ricks gives overpowering meaning to the mere presence of § 726(a)(2)(C) in the statutory ordering of claims. Section 726(a)(2)(C) permits tardily-filed claims to be treated as if they had been timely-filed claims. But, it merely advances them in priority, upon the satisfaction of two specified requirements. Such claims are still, in their original assertion, tardily filed. The statute does not make or even deem them timely-filed claims.
In turn, § 523(a)(3)(A) categorizes a claim by the act of filing, qualified by its timeliness. It does not refer to the ultimate treatment of the claim, as that may
The actual function of estate administration by trustees bears this out. As trustees administer estates every week in this district, tardily-filed claims do not get the advancement of § 726(a)(2)(C) automatically—even if the tardily-filing creditor asserts a right to it on the proof of claim or elsewhere.
The first comes out of the legal underpinnings of the trustee function. A trustee coming across a tardily-filed claim on the court's register can not just plop it into the basket for second priority, on his own initiative. The statute requires a specific historical circumstance, of a subjective character, as a threshold matter: that "the creditor ... did not have actual notice or actual knowledge of the case in time for timely filing...." This is the sort of legal requirement that requires an adjudication of a fact, on some sort of evidence. Under the fundamental division between the judicial and administrative functions in bankruptcy—a basic feature of the law since the current Code became effective in 1979—a trustee does not have this power. No responsible trustee would purport to exercise it, on a tacit basis, by giving a creditor the benefit of the doubt on the issue of actual notice or knowledge, and slipping a tardily-filed claim into second priority. That would be a violation of the trustee's obligation to treat all claims according to their proper tenor under bankruptcy and non-bankruptcy law, on their face, and to relegate disputes over claims to the judicial process. See 11 U.S.C. § 704(a)(5) (including, among duties of trustee in Chapter 7 case, "if a purpose would be served, [to] examine proofs of claim and object to the allowance of any claim that is improper"). Further, a trustee might violate her general fiduciary obligation to the estate as a whole, were she to formally seek a judicial upgrade for tardily-filed claims against an insolvent estate.
And then there is the practical administrative conundrum for the trustee that Ricks creates but does not even recognize, which comes out of the second requirement of § 726(a)(2)(C): just what is "fil[ing] in time to permit payment of [the tardily-filed] claim," in the real-life process that trustees have to follow? It is one thing to have the issue come to the trustee—or even before the court—when the
But what if a tardily-filed claim comes in after the trustee has filed a final report and proposed distribution, or has noticed one to creditors, but the checks have not been cut? Should the trustee be under an (uncompensated) obligation to redo and renotice everything, to defer to the late-coming claimant at that time? And what if another tardily-filed claim came in after that, but before the checks were cut on the new calculation?
These questions are not rhetorical. They have answers as to the trustee's administration, and most of those can be formulated in practical terms—the assessment of attorney fees to make the estate whole against a creditor that does satisfy § 726(a)(2), and the like. But that is not the genesis of the matter at bar. Ricks assumes that the abstract presence of § 726(a)(2)(C) in the statute somehow makes it all better for the matter of timeliness under § 523(a)(3)(A). However, it does not recognize the legal limitations on a trustee's powers or the practical burden on a trustee's operation that its conclusory prescriptions imply.
When presented with these conundra at argument, the Defendant's counsel acknowledged that some sort of judicial proceeding was required for a tardily-filing creditor to gain the protection of § 726(a)(2)(C). However, he maintained that in all situations this should be incumbent on the creditor, and it definitely was not a debtor's burden. Thus, he argued, the Plaintiff was not entitled to any deference on the issue of timeliness under § 523(a)(3)(A) because it had failed to take legal action to elevate its claim in priority when it found out about the Defendant's case in July, 2010.
That point is not the one most dispositive of his argument, but it simply cannot prevail. The Defendant's interpretation shifts the impact of a separate statutory onus entirely away from the debtor in bankruptcy—the party originally at fault— and onto a non-culpable creditor. This would not be consistent with the text and the tenor of the Bankruptcy Code, particularly since the 2005 amendments. Several provisions explicitly and implicitly require the debtor to file accurate schedules of creditors' claims in the first instance, just to protect their right to participate in the case. E.g., 11 U.S.C. §§ 521(a)(1)(A) and 521(a)(1)(B)(i) (debtor shall file list of creditors and schedule of assets and liabilities, early in bankruptcy case); 11 U.S.C. § 707(a)(1) (failure to timely file information required by § 521(a)(1) is ground for dismissal of Chapter 7 case); 11 U.S.C. § 707(b)(4)(D) (attorney's signature on Chapter 7 petition constitutes certification that attorney has no knowledge that information in debtor's schedules is incorrect); Mertz v. Rott, 955 F.2d 596, 598 (8th Cir. 1992) (applying 11 U.S.C. § 727(a)(4)(A); emphasizing that statements and schedules "must be accurate and reliable, without the necessity of digging out and conducting independent examinations to get the fact"); In re Sears, 246 B.R. 341, 347 (8th Cir.BAP 2000).
Even if the holistic approach were applied as Ricks premises, its analysis does not make sense in the real world of the bankruptcy process. The right to "timely" file a proof of claim, to stake out a share in the estate without the cost and uncertainty of a judicial proceeding over its priority, is the only right to participate in the bankruptcy process that is cognizable under § 523(a)(3)(A). The rationale that started in this district with Anderson, and went through Hauge, is still the only one to be applied. Accord, In re Schlueter, 391 B.R. 112 (10th Cir. BAP 2008). And under this analysis, the relative value of the lost distribution is irrelevant. In re Jongquist, 125 B.R. 558, 560 (Bankr. D.Minn.1991) (determining debt of $28,857.23 nondischargeable under § 523(a)(3)(A) despite fact that trustee had distributed total of only $54.00 to unsecured creditors, and "the most [the plaintiff-creditor] would have received was a distribution of a few dollars...."). The debt is nondischargeable in its entirety.
As a result, the Plaintiff is entitled to judgment in its favor as a matter of law.
IT IS THEREFORE ORDERED, ADJUDGED, AND DECREED:
1. The Plaintiff's motion for summary judgment is granted.
2. Defendant's debt to Plaintiff, as fixed and liquidated via a judgment entered on June 22, 2010 in the Minnesota State District Court for the Tenth Judicial District, Washington County, Minnesota, Court File No. 82-CV-10-724, was excepted from the discharge granted to the Defendant in BKY 09-38291, by operation of § 523(a)(3)(A).
