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Wednesday, September 23, 2009

Ind. Decisions - Of interest 7th Circuit bankruptcy opinion today

In In re Bruce S. Smith, M.D., a 28-page opinion, Judge Rovner writes:

When defendant-appellant Dr. Bruce S. Smith filed a Chapter 7 bankruptcy petition in September 2005, he failed to include appellees Trina Tidwell and Sandra Sterling-Ahlla on his schedule of creditors holding unsecured, nonpriority claims. Tidwell and Sterling-Ahlla had sued Smith in state court for sexual assault. Because Smith omitted Tidwell and Sterling-Ahlla from his list of creditors, neither of them was sent notice of his bankruptcy petition. Their counsel learned of Smith’s pending bankruptcy only weeks before his discharge and took no action at that time.

Roughly one year after the discharge, Tidwell and Sterling-Ahlla (whom we shall also refer to as the “plaintiffs”) filed motions asking the bankruptcy court for leave to proceed with their lawsuits against Smith, along with adversary complaints asking the court to declare their claims against Smith nondischargeable pursuant to 11 U.S.C. § 523(a)(3)(B) and (a)(6). Following an evidentiary hearing, the court granted their request in part. The court found that Smith had deliberately and fraudulently failed to schedule the plaintiffs’ claims and that their counsel had not been put on notice of the bankruptcy in time enough to permit them to seek a declaration of nondischargeability prior to Smith’s discharge. Tidwell v. Smith (In re Smith), 379 B.R. 315 (Bankr. N.D. Ill. 2007). The court therefore granted Tidwell and Sterling-Ahlla leave to proceed with their suits against Smith in state court and reserved judgment as to whether their claims were in fact nondischargeable pursuant to section 523(a)(6) until such time as they prevailed in the state-court litigation. Smith appealed to the district court, which affirmed the bankruptcy court’s decision. Smith v. Tidwell (In re Smith), No. 08 C 46, 2008 WL 4067306 (N.D. Ill. Aug. 27, 2008).

Smith again appeals, contending that the evidence does not support the bankruptcy court’s findings that he deliberately omitted Tidwell and Sterling-Ahlla from his schedule of unsecured creditors and that they did not become aware of his bankruptcy in time to seek a declaration of nondischargeability before the bankruptcy proceeding was closed. We agree with the lower courts that the eleventh-hour notice of the bankruptcy that Tidwell and Sterling-Ahlla received did not afford them sufficient time in which to protect their rights before Smith was discharged. Their post-discharge complaints were therefore timely, and we affirm on that basis without reaching the question of whether Smith omitted Tidwell and Sterling-Ahlla from his list of unsecured creditors with fraudulent intent. * * *

Under these circumstances, the bankruptcy court appropriately exercised its discretion to allow the state-court cases against Smith to proceed. It committed no error in finding that Tidwell and Sterling-Ahlla received insufficient notice of Smith’s petition to have compelled them to take action to preserve their rights before the bar date and before Smith was discharged; their post-discharge adversary complaints and requests for leave to proceed with the state-court litigation were therefore timely. AFFIRMED.

Posted by Marcia Oddi on September 23, 2009 03:45 PM
Posted to Ind. (7th Cir.) Decisions