Eighth Circuit BAP Permits Claim Against Bankruptcy Filers to Proceed - Hathorn v. Petty

May 10, 2013

Vincent Howard and our San Bernardino County personal bankruptcy lawyers occasionally represent someone who files for bankruptcy with a lawsuit pending against them. This is understandable--financial trouble often leads to conflict. But if you're being sued, it's important to fully disclose this to the bankruptcy court so you can avoid the appearance of misconduct during your bankruptcy case. Hiding it and hoping nobody notices generally won't work; trustees can even reopen the bankruptcy after the fact to account for it and seek penalties against you for being dishonest. In Hathorn v. Petty, however, both sides apparently made mistakes with the process. In this case from the Bankruptcy Appellate Panel of the Eighth Circuit, the Hathorns sued the Pettys, who later filed for bankruptcy.

Corwin and Rachel Petty filed for Chapter 7 bankruptcy in 2012. At the time, there was a lawsuit pending against them by Michael and Michele Hathorn, alleging intentional torts among other things. The case was listed as a pending legal proceeding in the Pettys' statement of financial affairs, but the claims weren't listed on the bankruptcy schedules and the Hathorns were not included in a list of interested parties to mail. Thus, they didn't receive notice of the filing and the deadline for filing dischargeability claims. Their attorney learned of the bankruptcy case six days before the deadline to file such a claim, but they didn't file their adversary proceeding until two months later, which was one month after the Pettys added them to the bankruptcy schedules. The Pettys moved to dismiss the adversary proceeding for untimeliness and the bankruptcy court agreed.

The BAP for the Eighth U.S. Circuit Court of Appeals reversed and remanded the case, saying the Hathorns can bring their case under a different standard that has no deadline. Their adversary proceeding was originally brought as an argument that the Pettys' prospective debt was caused by their willful and malicious injury. Claiming this type of debt required the Hathorns to file a dischargeability complaint by a certain deadline. It's undisputed that the complaint was filed after that time, the BAP said. And while there may have been a good reason, the panel noted that it was unable to consider an extension because they didn't file a request for one before the deadline. However, the panel also noted that the bankruptcy code creates another exemption from discharge for debts that are otherwise exemptable and were not properly scheduled. The panel said it's undisputed that the Hathornes' claim meets those requirements. The bankruptcy court itself conceded that six days of actual notice is insufficient notice to file a claim. Thus, it reversed and remanded.

This case underscores the importance of making your filings timely--an issue that affects anyone involved in a legal case. The Hathornes' claim may or may not have merit, but the bankruptcy court didn't investigate that; it simply dismissed because they didn't meet the deadline. This can happen to the bankruptcy filer too, which is one reason Vincent Howard and our Costa Mesa consumer bankruptcy attorneys request clear disclosures of all important information and cooperation from our clients. Without disclosure and cooperation, it's easy to have setbacks in your case for avoidable reasons like missed deadlines. And here, the initial failure to list the claim against them didn't truly help the Pettys; the claim will still be tried, but their case is now longer and more expensive. At Howard Law, P.C., our Moreno Valley individual bankruptcy lawyers prefer to help our clients get through bankruptcy smoothly and quickly whenever possible.

If you feel overwhelmed by your debt and you'd like to discuss the possibility of a bankruptcy with an experienced attorney, call Vincent Howard and the team at Howard Law. You can reach us toll-free at 1-800-872-5925 or send us an email.

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