CUDAHY, Circuit Judge.
In this case we are asked to determine whether a bankruptcy case may be reopened and the permanent injunction under 11 U.S.C. § 524 modified to permit recovery from the debtor's insurer. The issue is complicated here by two problems. First, though the debtor failed to list her insurance policy on her bankruptcy schedules, the creditor was aware of the insurance throughout the bankruptcy proceedings. And second, the state court in which the creditor seeks recovery previously dismissed the creditor's suit with prejudice on the ground that the section 524 injunction precludes judgment against the debtor. The district court affirmed the bankruptcy court's decision to reopen the case and modify the injunction, and we affirm.
The relevant facts are not disputed. On July 19, 1985, Gladys Elaine Shondel was involved in an automobile accident which resulted in the death of Jimmie D. Craft. Mary Ellen Craft (the widow) was appointed executor of Jimmie Craft's estate, and on August 15 she filed a wrongful death action against Shondel in the Circuit Court of Macon County, Illinois. On March 14, 1986, Shondel filed a voluntary petition for relief pursuant to Chapter 7 of the Bankruptcy Code, 11 U.S.C. §§ 701-766, listing Craft as a creditor. Shondel possessed automobile liability insurance, but did not list the policy as an asset of the estate. Throughout the bankruptcy proceedings, however, Craft, through her attorney, had knowledge of Shondel's insurance. Shondel received her discharge on July 9, 1986, and on August 12 she moved in state court to dismiss the wrongful death action. On January 7, 1987, the state court dismissed that action with prejudice on the basis of Shondel's discharge.
On May 13, 1988, Craft moved the bankruptcy court to reopen the bankruptcy case and lift the automatic stay to allow her to proceed against Shondel in state court to
A. Reopening of the Bankruptcy Case
Shondel's first argument on appeal is that the lower courts erred in deciding that the bankruptcy case could be reopened. Section 350(b) of the Bankruptcy Code provides: "A case may be reopened in the court in which such case was closed to administer assets, to accord relief to the debtor, or for other cause." 11 U.S.C. § 350(b). The courts below identified three factors as providing "other cause" sufficient to justify reopening the bankruptcy case: the neglect of Craft's counsel during the bankruptcy proceedings; the fact that Shondel's insurance was not listed as an asset; and the conduct of Shondel's counsel in convincing the state court to adopt an erroneous position with respect to the effect of a discharge. Shondel argues that none of these factors constitutes "other cause" under section 350(b).
The Bankruptcy Code does not define "other cause." A decision to reopen a case for "other cause" lies within the discretion of the bankruptcy court and will be reversed only for an abuse of that discretion. See, e.g., Hawkins v. Landmark Finance Co., 727 F.2d 324, 326 (4th Cir.1984); In re Thomas, 204 F.2d 788, 791 (7th Cir. 1953). In exercising its discretion to reopen a case, "the bankruptcy court should exercise its equitable powers with respect to substance and not technical considerations that will prevent substantial justice." In re Stark, 717 F.2d 322, 323 (7th Cir. 1983) (per curiam). The trend in reopening cases under section 350(b) has thus been "to allow the bankruptcy judge broad discretion to weigh the equitable factors in each case." Michael P. Saber, Section 350(b): The Law of Reopening, 5 Bankr. Dev.J. 63, 82 (1987) (collecting cases).
We believe that the bankruptcy court had sufficient cause to reopen Shondel's case in order to modify the permanent injunction. Initially we note that equitable considerations weigh heavily in favor of Craft. Such considerations led this Court in Stark to favor a broad policy of reopening: there we held that a debtor may reopen a case to add an omitted creditor where there is no evidence of fraud or intentional design and where the creditor is not harmed. 717 F.2d at 324. We think that a case may be reopened under analogous circumstances where a creditor seeks recovery from a previously undisclosed asset of the debtor. Here there is no evidence of fraud or intentional design on the part of Craft. Moreover, since the modified injunction prohibits any recovery from Shondel personally, she is not harmed or seriously prejudiced by the reopening. As this Court has recently concluded, "[D]ebtors-defendants suffer little prejudice when they are sued by plaintiffs who seek nothing more than declarations of liability that can serve as a predicate for a recovery against insurers, sureties, or guarantors." In re Fernstrom Storage & Van Co., 938 F.2d 731, 736 (7th Cir.1991); accord In re Holtkamp, 669 F.2d 505, 508-09 (7th Cir. 1982). Thus in Fernstrom Storage this Court found the requisite "cause" to grant relief from the automatic stay under section 362(a) where the creditor sought to sue the debtor solely to obtain recovery from the debtor's insurer. Although it involved a different provision of the Bankruptcy Code, the analogous posture of the case
With these equitable principles in mind, we turn to the specific factors relied on by the courts below in finding cause to reopen the case. First, the lower courts pointed to the neglect of Craft's original counsel in failing to take the appropriate action in the bankruptcy court to protect his client's rights.
The lower courts' second basis for reopening the case is Shondel's failure to list her liability insurance as an asset on her bankruptcy schedules. Shondel argues that this cannot be cause to reopen because Craft was aware of the insurance and therefore could not have been defrauded or harmed by its omission. The dominant view is that insurance policies that provide coverage for the debtor's liability are property of the debtor's estate. See In re Titan Energy, Inc., 837 F.2d 325, 329 (8th Cir.1988); Tringali v. Hathaway Mach. Co., 796 F.2d 553, 560 (1st Cir.1986); A.H. Robins Co. v. Piccinin, 788 F.2d 994, 1001 (4th Cir.), cert. denied, 479 U.S. 876, 107 S.Ct. 251, 93 L.Ed.2d 177 (1986); In re Minoco Group of Companies, Inc., 799 F.2d 517, 519 (9th Cir.1986). As such, they generally should be listed on the debtor's schedule of assets under 11 U.S.C. § 521(1). As the bankruptcy court noted, however, it is not current practice for debtors to list each insurance policy as an asset in every case. Bankr.Ct.Op. at 5 (Oct. 26, 1989). We nonetheless agree with the lower courts that, at least where a debtor schedules a liability claim and owns liability insurance to cover that claim, the liability insurance policy should be listed as an asset of the estate.
Shondel's failure to list her insurance policy prevented Craft from filing a proof of claim and prevented the Trustee from gaining control over the asset for administration purposes. While it is not clear whether either of these actions would
We turn finally to the lower courts' third factor supporting the reopening of the case, the conduct of Shondel's counsel in convincing the state court to adopt an erroneous position as to the effect of a discharge. As we explain below, we believe it to be reasonably clear that a discharge under section 524 does not prevent the establishment of liability for the purpose of recovering from an insurer. We also think that this was the law in 1986, when Shondel sought to have the case dismissed from the state court. Still, we do not believe that Shondel's counsel can fairly be charged with misconduct, for his argument appears to have been made in good faith, apparently in reliance upon some misleading language in In re White Motor Credit, 761 F.2d 270 (6th Cir.1985). We thus hesitate to assign substantial weight to this factor. Nonetheless, the actions of Shondel's counsel in persuading the state court to dismiss the action can properly be considered a factor in establishing cause to reopen the case, for two principal reasons. First, the equities in this case favor reopening, and this factor interrelates with the two factors discussed previously to strengthen the basis for reopening in the interest of "substantial justice." And second, the position that the state court was convinced to accept was actually an interpretation of the bankruptcy court's own injunction, see infra section II.C; since the bankruptcy court thus had a special interest in the integrity of its own judgment, it deserves some leeway in reopening a case under such circumstances. See Grand Union Equip. Co. v. Lippner, 167 F.2d 958, 960 (2d Cir.1948) (modification of bankruptcy injunction to permit recovery from insurer justified on the basis of "the prospective operation of an injunction and the continuing power of an equity court to change it when its enforcement in original form becomes inequitable").
B. Effect of the Discharge Injunction
Shondel's second argument is that her bankruptcy discharge prohibits the determination of her liability to Craft, even if such determination is solely for the purpose of recovering from Shondel's insurer. The language and intent of the relevant provision as well as the controlling case law, however, lead to the opposite conclusion.
The effect of a discharge is governed by 11 U.S.C. § 524. Section 524(a) provides that a discharge "operates as an injunction against the commencement or continuation of an action ... to collect, recover or offset any such debt as a personal liability of the debtor...." On its face, the provision prevents suits and renders judgments void only with respect to the "personal liability" of the debtor; it does not preclude a determination of the debtor's liability on the basis of which indemnification would be owed by another party. Indeed, section 524(e) explicitly provides that a debtor's discharge "does not affect the liability of any other entity on, or the property of any other entity for, such debt." In explaining these provisions, Collier observes:
3 Roy Babitt et al., Collier on Bankruptcy ¶ 524.01, at 524-16 (15th ed. 1991) (footnotes omitted).
The Eleventh Circuit's decision in In re Jet Florida Systems, Inc., 883 F.2d 970 (11th Cir.1989), directly supports our conclusion that a discharge injunction under section 524 does not preclude the determination of a debtor's liability for the purpose of recovery from an insurer. In that case a defamation action against the debtor had been dismissed on the basis of the section 524 post-discharge injunction. After the bankruptcy court refused to vacate the injunction to allow recovery from the debtor's insurer, the district court reversed. After thoroughly reviewing the relevant cases and the background of section 524, the district court held that "a plaintiff may proceed against the debtor simply in order to establish liability as a prerequisite to recover from another, an insurer, who may be liable." Id. at 976. The Eleventh Circuit affirmed, and adopted the district court's opinion as its own.
The reasoning of this Court's recent decision in In re Fernstrom Storage & Van Co., 938 F.2d 731 (7th Cir.1991), further supports the conclusion reached here. Fernstrom Storage held that neither the failure to file a proof of claim nor the automatic stay of section 362(a) precludes an action against a debtor to obtain recovery from the debtor's insurer. The court reasoned: "This determination [of liability] will neither deplete the debtor's assets or otherwise interfere with the administration of the bankruptcy proceeding, nor hinder the debtor's fresh start at the close of the proceeding. Rather, it will operate only as `a prerequisite to recovery against another entity.'" Id. at 734 (quoting In re Walker, 927 F.2d 1138, 1142 (10th Cir.1991)). The rationale of Fernstrom Storage applies with equal force in this case. See also Foust v. Munson S.S. Lines, 299 U.S. 77, 87, 57 S.Ct. 90, 95, 81 L.Ed. 49 (1936) (allowing wrongful death action against bankrupt to proceed despite stay for amount "not exceeding the amount of insurer's liability to the debtor under the policy"); In re Holtkamp, 669 F.2d 505, 508-09 (7th Cir.1982) (allowing personal injury action to proceed against debtor despite section 362(a)'s automatic stay provision where stay prohibited recovery from debtor and insurer provided defense to debtor in litigation).
In addition to the Eleventh Circuit in Jet Florida, the lower courts that have considered this issue under section 524 have agreed with our conclusion, apparently without exception. These courts have allowed actions against debtors to proceed for insurance recovery in spite of the discharge and concomitant injunction, either by explicitly modifying the injunction or by simply issuing an order allowing the suit. See In re Catania, 94 B.R. 250 (Bankr. D.Mass.1989); In re White, 73 B.R. 983 (Bankr.D.D.C.1987); In re Mann, 58 B.R. 953 (Bankr.W.D.Va.1986); In re Hirsch, 50 B.R. 8 (Bankr.S.D.Fla.1985); In re McGraw, 18 B.R. 140 (Bankr.W.D.Wis. 1982).
The only case cited by Shondel that arguably supports her position is In re White Motor Credit, 761 F.2d 270 (6th Cir.1985). There, 160 tort plaintiffs were permitted to obtain judgments in various courts against the debtor and then to collect from the debtor's insurers. Far from adopting Shondel's interpretation of a section 524 discharge, the court upheld the lower court's basic plan, reasoning that "a modification or temporary lifting of the permanent injunction is necessary" in furtherance of "the overall purposes of the Code." Id. at 274. The one brief portion of the opinion finding error in the lower court's order states that all pre-petition and post-petition claims that have not been filed with the bankruptcy court should be barred, although it proceeds to "express no opinion as to whether the District Court
Shondel also cites Illinois cases for the proposition that an insurer cannot be liable for a debt for which the insured is not primarily liable. But the cases do not support this assertion, at least not in the sense required for the argument. It is true that Illinois prohibits direct actions against insurers. See Richardson v. Economy Fire & Casualty Co., 109 Ill.2d 41, 49-51, 92 Ill.Dec. 516, 520, 485 N.E.2d 327, 331 (1985); Zegar v. Sears, Roebuck & Co., 211 Ill.App.3d 1025, 156 Ill.Dec. 454, 458, 570 N.E.2d 1176, 1180 (1st Dist.1991). This rule means that Craft must obtain a judgment against Shondel as a prerequisite to recovering from Shondel's insurer. But it simply says nothing about when or how such a judgment may be obtained against a debtor under the Bankruptcy Code.
A bankruptcy discharge and the accompanying injunction against subsequent actions are intended to give the debtor an economic "fresh start" in life. See generally Lines v. Frederick, 400 U.S. 18, 91 S.Ct. 113, 27 L.Ed.2d 124 (1970); Thomas H. Jackson, The Fresh-Start Policy in Bankruptcy Law, 98 Harv.L.Rev. 1393, 1396-97 (1985). But the "fresh-start" policy "is not intended to provide a method by which an insurer can escape its obligations based simply on the financial misfortunes of the insured." Jet Florida, 883 F.2d at 975.
C. State Court Dismissal as Bar to Reopening of Shondel's Case
Shondel argues finally that the state court's dismissal of Craft's lawsuit precludes the reopening of her case through the principles of res judicata and full faith and credit and, in addition, argues that the decision to reopen represents an advisory opinion. Shondel's arguments rest on a fundamental misunderstanding of the nature of the proceedings below. The state court's dismissal of Craft's suit was based on the bankruptcy court's discharge injunction issued on July 9, 1986 pursuant to section 524. Bankr.Ct.Order (July 9, 1986). The bankruptcy court has done nothing to overturn, set aside or otherwise interfere with the state court's dismissal. It has, however, reopened the case and modified the injunction "to allow Ms. Craft to proceed with her wrongful death action against the Debtor but ... barr[ing] and enjoin[ing] [her] from collecting from the Debtor, the Debtor's property or property of the bankruptcy estate any judgment awarded in the wrongful death action." Bankr.Ct.Order (Oct. 26, 1989). The motivation for the modified injunction is immaterial as regards res judicata and full faith and credit; since there is now a new injunction, the state court's prior dismissal (under the previous injunction) is not in point. There has been no relitigation of claims or issues that were decided on the merits, Bunker Ramo Corp. v. United Business Forms, Inc., 713 F.2d 1272, 1277 (7th Cir. 1983), because the "claims," the "issues," and indeed, "the merits" are all different in this proceeding by virtue of the modification of the injunction.
We have already concluded that the bankruptcy court had the authority to reopen this case. See supra section II.A. We also have little difficulty concluding that the bankruptcy court had the power to modify the injunction issued pursuant to section 524. Such modifications are frequently made in order to effectuate various provisions of the Bankruptcy Code, such as section 524(e)'s exemption of "any other entity" which may be liable on the debtor's behalf from the statutory injunction. See, e.g., Jet Florida, 883 F.2d at 973; McGraw, 18 B.R. at 140. Moreover, the power to modify a post-discharge injunction has been
The argument that the decision below is an unconstitutional advisory opinion is also without merit. It is clear that the bankruptcy court gave actual relief here by modifying the injunction to allow Craft to proceed against Shondel in state court. Shondel argues that this case involves "a federal court providing an advisory opinion that the effect of a discharge ... does not include barring litigation to collect only insurance proceeds." Appellant's Br. at 39. Far from "advising" as to the effect of a discharge, the bankruptcy court issued an injunction with respect to the effect of a discharge, pursuant to its authority under the Code to reopen a case and modify a section 524 injunction. This decision affects the legal rights of the parties and is a "case" within the meaning of Article III.
For the foregoing reasons, the decision of the district court is