Hill v. Smith

Background

A creditor had a judgment against Warren H. Hill that remained unpaid. Hill filed for bankruptcy and received a discharge, then died and his executors took his place in the lawsuit. At trial the plaintiff showed the judgment was unpaid; the defendants proved the bankruptcy discharge. In rebuttal the plaintiff introduced the debtor’s bankruptcy schedules, which did not list the plaintiff’s name. The defendants asked the judge to rule that the plaintiff had the burden to prove he lacked notice of the bankruptcy; those requests were refused and the judge found for the plaintiff. The state supreme court affirmed, and this Court granted review and affirmed the judgment.

Reasoning

The central question was who must prove whether the creditor knew about the bankruptcy when the creditor’s name was omitted from the schedules. The Court relied on the Bankruptcy Act’s language that a discharge releases provable debts except those not duly scheduled "unless such creditor had notice or actual knowledge of the proceedings." The Court explained that the discharge is granted subject to that statutory exception, and a party seeking the benefit of the exception must offer proof. Applying that principle, the Court held that the debtor (or the debtor’s executors) must prove that the creditor had notice or actual knowledge to prevent the creditor from collecting.

Real world impact

The decision means that when a creditor’s name is omitted from bankruptcy schedules, the burden falls on the bankrupt estate to prove the creditor knew of the bankruptcy. Factual questions about whether the debtor knew the creditor’s name or scheduled the debt under another name were left to the trial court and were not reopened here.