Bankruptcy Appeal Determines Unknown and Unlisted Debts Are Discharged In Bankrupcy

Bankruptcy matters can be mentally and financially frustrating, especially when they involve the state court and bankruptcy court concurrently.  Julie Camden of Camden & Meridew, P.C. recently litigated Muirs v. McWilliams, 517 B.R. 132 (S.D. Ind. 2014), in state and bankruptcy court, and successfully prevailed on her appeal in the Southern District of Indiana.

What began as a simple Chapter 7 bankruptcy in 2012, resulted in a two year nuisance for the Muirs over a house they sold to the McWilliams a year prior to their Chapter 7 filing.  When the Muirs filed their Chapter 7 bankruptcy in April 2012, they properly listed all the “known” debts. The Muirs rightfully received a discharge of all of their pre-petition debt in July, 2012.

However, in May, 2013, the McWilliams sued the Muirs for mold in the basement of their house which the Muirs had sold them in August, 2011. The Muirs had no knowledge of the mold because when a flood had occurred, all recommended repairs were made.  Despite the repairs being done, McWilliams commenced a suit against the Muirs for fraudulent concealment of the mold in the state court. The Muirs continuously offered to determine the dischargeability of this debt in bankruptcy court, but the McWilliams refused.

Because the Muirs received a discharge of all their debt in 2012, by the McWilliams bringing action against the Muirs it violated the bankruptcy discharge injunction.  Id. at 134. Further, because it was wrongfully brought in state court as opposed to the bankruptcy court it infringed on the exclusive jurisdiction of the bankruptcy court to determine the dischargeability of the debt that the McWilliams claimed to have over the Muirs.

The bankruptcy court erred in agreeing with the McWilliams allowing the McWilliams to proceed in state court, instead of declaring the debt discharged and by granting the McWilliams’ motion to dismiss.  Id. at 140.  The McWilliams attempted to assert that their claim against the Muirs fell within the exception under § 523(a)(3)(B), which allowed the state courts to have concurrent jurisdiction with the bankruptcy court to determine the dischargeability.

The bankruptcy court erred in its reasoning by focusing on the irrelevant difference of whether a claim under § 523(a)(3)(B) was an inadvertent or intentional omission by the Muirs. Id at 139The fact was that the Muirs did not know about the alleged debt until one year after their bankruptcy; therefore, it was irrelevant if they inadvertently or intentionally omitted the McWilliams as a creditor when filing their Chapter 7.  Simply, “In [s]um, § 523(a)(3)(B) does not apply to the McWilliams’ claim because it was “not known” to the Muirs until after they received their bankruptcy discharge” Id.  

In the end, the Muirs’ troubles finally ended with judgment in their favor that the debt had been discharged. Currently, the McWilliams are facing an appeal regarding paying all of Muirs’ attorney’s fees.  The lesson is, if one has bankruptcy issues they should immediately and without hesitation determine dischargeability in bankruptcy court.

If you are facing issues involving bankruptcy and need an experienced attorney, call Julie Camden of Camden & Meridew, P.C. at 317-770-0000 or fill out our online contact form.

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