In re Licup (Nondischargeability Under Section 523(a)(3)(A))

By: Uzzi O. Raanan

In a published decision purporting to answer a question previously unresolved in this circuit, the Ninth Circuit Court of Appeals ruled that a debtor’s failure in an asset chapter 7 case to list or schedule a debt, as required by 11 U.S.C. section 521(a)(1), in time for the creditor to timely file a proof of claim, renders the debt nondischargeable in its entirety, unless the creditor had actual knowledge of the bankruptcy case in time to timely file a proof of claim. In re Licup, 95 F.4th 1234 (9th Cir. 2024). To read the entire opinion, click here: https://cdn.ca9.uscourts.gov/datastore/opinions/2024/03/18/23-60017.pdf 

In January 2013, creditor Jefferson Avenue Temecula, LLC (“Creditor”) obtained a default unlawful detainer judgment (“Judgment”) against Christine Tracy Castro (“Castro”) in the amount of $31,780.29.  Though the caption on the Judgment identified the defendant as “Christina Castro, D.D.S.,” the body of the Judgment erroneously stated that the Judgment debtor was “Christina Castro, LLC.”

In February 2014, Castro and her spouse Edwin Licup (“Licup,” and collectively “Debtors”) filed for bankruptcy under Chapter 7.  For some unknown reason, their bankruptcy schedules and creditor list provided an incorrect mailing address for the Creditor’s counsel.  The Creditor did not file a proof of claim in this case, where the allowed unsecured creditors received a distribution of around 5.5%.  The debt to the Creditor was nevertheless listed as discharged.

In July 2021, the Creditor filed a nondischargeability action against the Debtors pursuant to 11 U.S.C. section 523(a)(3)(A), arguing that it never received notice of the bankruptcy case.  Debtors filed a motion for summary judgment, arguing among other that the Creditor was entitled to receive a nondischargeability judgment only as to the amount it would have received had it filed a timely proof of claim, calculated at $1,614.74.  Debtors argued that the remaining portion of the debt should be discharged as it would have been had the Creditor filed a timely proof of claim.

The Ninth Circuit disagreed, affirming prior rulings by the Bankruptcy Appellate Panel (BAP) and bankruptcy court.  It held that the “plain language” in section 523(a)(3)(A) mandates that, where a creditor was not listed or scheduled and had no notice or actual knowledge of the bankruptcy case, its entire debt would be nondischargeable, regardless of the distributions creditors ultimately received in the case.  The court distinguished non-asset chapter 7 cases where a claims bar date was never set.

Practice pointer:  check and double check with the client(s) that all creditors are properly listed and scheduled.  Failure to do so could result in significant damage to the client(s) and potential malpractice exposure.