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Schedules Did Not Provide Proper Notice; Lawyer's Knowledge Not Imputed to Creditor

Monday, August 12, 2013
By Diane Davis

The U.S. Court of Appeals for the Ninth Circuit Aug. 2 held that a debtor's arbitration debt was nondischargeable in bankruptcy under Bankruptcy Code Sections 523(a)(3) and (a)(6), and the debtor's schedules did not provide a creditor with proper notice of his bankruptcy (Perle v. Fiero (In re Perle), 9th Cir., No. 11-60000, 8/2/13).

Affirming the ruling of the U.S. Bankruptcy Appellate Panel for the Ninth Circuit, Judge Larry A. Burns of the U.S. District Court for the Southern District of California, sitting by designation, concluded that the creditor's lawyer's knowledge could not be imputed to the creditor on an agency theory when the attorney learned of the bankruptcy during his representation of another client and after the completion of his representation of the creditor in relation to the debt.

The burden is on the debtor, the court explained, to list information correctly in his schedules. The debtor's “serial mischaracterization of known details of the 1998 arbitration award was far more egregious than the apparently inadvertent transposition of a single digit of a social security number” in Ellett v. Stanislaus, 506 F.3d 774 (9th Cir. 2007), the court said. Thus, the debtor's schedules did not provide the creditor with proper notice of the debtor's bankruptcy.

The court was also unwilling to impute the notice or actual knowledge of the debtor's bankruptcy filing to his former attorney because the attorney no longer represented the creditor on the debt matter and learned of the filing only in the course of representing another client.


Chapter 7 Filing
Debtor Cery Bradley Perle filed for Chapter 7 protection in 2001. Among his outstanding debts was a $350,000 arbitration award to Fiero Brothers, a New York securities dealer. The award was made in 1998 by a National Association of Securities Dealers arbitration panel, which found that the debtor had committed securities fraud.

The Fiero Brothers were represented in the arbitration by New York-based lawyer Martin Russo, but Russo did not continue to represent them in the matter after arbitration. Russo did, however, continue to represent the Fiero Brothers in other unrelated matters after the arbitration.


Debtor's Schedules
On his schedules, the debtor did not list Fiero Brothers or the $350,000 arbitration award. Instead, he listed “NASD/NASD Regulation” as the creditor on the arbitration debt, and said that the amount of the debt was “unknown.” He also reported that the debt was incurred in 1999, rather than 1998, and that the consideration for it was “arbitration.” In addition, at the top of Schedule E, there was a space to identify the type of priority claims listed below. The debtor wrote “Taxes, Governmental Debts.”

Subsequently, Corsair Capital Partners, a private equity firm, filed a nondischargeability complaint against the debtor relating to a default judgment that it had obtained against him. Corsair was represented in the bankruptcy matter by Russo. Although Russo was aware of the debtor's bankruptcy and was still representing the Fiero Brothers in other matters, he never informed the Fiero Brothers of the pending bankruptcy.

In March 2002, the debtor received a discharge of his debts and his case was closed. Four years later, the Fiero Brothers, who had assigned the arbitration award to Alfonso Fiero, filed a motion to reopen the debtor's bankruptcy in order to challenge the dischargeability of the arbitration award. The bankruptcy court granted the motion and declared the arbitration debt nondischargeable.

The U.S. Bankruptcy Appellate Panel for the Ninth Circuit upheld the bankruptcy court's ruling. The debtor appealed to the Ninth Circuit, arguing that the dischargeability of the arbitration debt was untimely.


Timeliness of Challenge
Under Federal Rule of Bankruptcy Procedure 4007(c), a creditor typically has 60 days from the first date set for the creditors meeting to file a nondischargeability complaint for certain kinds of debts, the appeals court explained. There is an exception to the 60-day rule, the court said. Under Section 523(a)(3) and (a)(6), debts that result from a debtor's willful and malicious acts that injure others remain nondischargeable if they are not listed in the debtor's schedules “in time to permit … timely filing of a proof of claim and timely request for a determination of dischargeability of such debt …, unless such creditor had notice or actual knowledge of the case in time for such timely filing and request,” the court said. This is the exception that the bankruptcy court relied on, the court explained.

The debtor did not quibble that his debt to the Fiero Brothers is of the type that is nondischargeable under Section 523(a)(3 and (a)(6), and therefore, must establish either that he adequately identified the debt on his schedules, or if not, that the Fiero Brothers had notice of or actual knowledge of his bankruptcy, the court said.


Not Proper Notice
The appeals court concluded that the debtor's schedules did not provide the Fiero Brothers with proper notice of the debtor's bankruptcy. The burden is on the debtor to list the information correctly, the court said. The debtor's “serial mischaracterization of known details of the 1998 arbitration award was far more egregious than the apparently inadvertent transposition of a single digit of a social security number inEllett,” the court said.


Notice or Actual Knowledge Not Imputed
In an alternative argument, the debtor argued that Russo's knowledge and awareness of the bankruptcy should be imputed to the Fiero Brothers on an agency theory. The agency principal, however, does not neatly fit this case, the court said. In this case, the court pointed out, Russo learned of the debtor's bankruptcy on behalf of a different client who was contesting the dischargeability of his own debt.

The debtor could not identify a single case, nor was the court able to find one, that imputed to a client knowledge that his lawyer gained while representing a different client, the court noted, citing Maldonado v. Ramirez, 757 F.2d 48 (3rd Cir. 1985). In Maldonado, the court noted, the Third Circuit held that an attorney given notice of the bankruptcy on behalf of a particular client is not called upon to review all of his or her files to ascertain whether any other client may also have a claim against the bankrupt debtor.

Because Russo no longer represented the Fiero Brothers on the debt matter when the debtor filed for Chapter 7, and learned of the bankruptcy filing only in the course of representing a different client, the appeals court was not willing to impute the notice or actual knowledge of the debtor's bankruptcy filing that he had to the Fiero Brothers.

Thus, the appeals court affirmed the BAP's ruling that the arbitration debt was nondischargeable under Sections 523(a)(3) and (a)(6). The court did not reach the question whether it was also dischargeable under Section 523(a)(19).

Judges Sandra S. Ikuta and Jacqueline H. Nguyen joined the opinion.

Janine R. Menhennet of Solana Beach, Calif., and Joseph Darrell Palmer of Law Offices of Darryll Palmer, Solana Beach, Calif., represented the appellant/debtor. Leslie Schwaebe Akins of Leslie Schwaebe Akins, A Law Corporation, Carlsbad, Calif., represented the appellee creditor.

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