Edmonds, In re

• Citation: 924 F.2d 176
• Decision Date: 22 January 1991
• Docket Number: No. 89-3338,89-3338
• Parties: Bankr. L. Rep. P 73,793 In re Benny Leigh EDMONDS and Shirley Jeannine Edmonds, Debtors. LAWRENCE NATIONAL BANK, Plaintiff-Appellant, v. Benny Leigh EDMONDS and Shirley Jeannine Edmonds, Defendants-Appellees.
• Court: United States Courts of Appeals. United States Court of Appeals (10th Circuit)

Page 176

924 F.2d 176

Bankr. L. Rep. P 73,793

In re Benny Leigh EDMONDS and Shirley Jeannine Edmonds, Debtors.

LAWRENCE NATIONAL BANK, Plaintiff-Appellant, v. Benny Leigh EDMONDS and Shirley Jeannine Edmonds,

Defendants-Appellees.

No. 89-3338.

United States Court of Appeals,

Tenth Circuit.

Jan. 22, 1991.

Donald E. Bucher (James F. Freeman, III, with him on the brief), of Gould & Moore, Kansas City, Mo., for plaintiff-appellant.

Eugene F. DeShazo of Linde, Thomson, Kansas City, Mo. (Gary H. Hanson and Tom R. Barnes, II of Stumbo, Hanson & Hendricks, Topeka, Kan., on the brief), for defendants-appellees.

Before HOLLOWAY, Chief Judge, and BALDOCK, Circuit Judge and GREENE, District Judge. ^*

BALDOCK, Circuit Judge.

Plaintiff-appellant Lawrence National Bank (creditor) appeals from the district court's affirmance of a bankruptcy court judgment dismissing its action against defendants-appellees Benny and Shirley Edmonds (debtors) for failure to state a claim and awarding debtors attorney's fees. 110 B.R. 38. We hold that the creditor's complaint stated a claim for relief and that the award of attorney's fees was improper. Consequently, we reverse.

I.

In May 1984, debtors filed a voluntary chapter 11 bankruptcy petition. See 11 U.S.C. Secs. 1101-1174. Debtors failed to schedule any interest in E-4 Excavating, Inc. Creditor moved for relief from the automatic stay. Attached to the debtors' response was the 1982 corporate tax return of E-4 Excavating which listed debtors as stockholders. Debtors' bankruptcy subsequently was converted to a chapter 7 proceeding, see 11 U.S.C. Secs. 701-766; they were granted a discharge in June 1985.

In December 1986, creditor filed a complaint to revoke debtors' discharge pursuant to 11 U.S.C. Sec. 727(d). The complaint alleged:

Lawrence National bank respectfully represents:

1. Plaintiff is a creditor, the holder of a claim against the Estate of the Debtors in the amount of [$322,002].

....

3. The Debtors were granted the discharge in this case by Order dated June 19, 1985.

4. Such discharge was obtained through fraud of the Debtors, which fraud consisted of the following:

(a) That ... Debtors made false statements under oath to conceal the ownership of assets. In particular, Debtors failed to disclose their ownership of the stock in E-4 Excavating, Inc.

(b) That the Debtors ... failed to reveal in their schedules their ownership of assets with the intent to hinder, delay or defraud a creditor of [sic] officer of the estate charged with custody of the property under this title. In particular, the Debtor, Benny Leigh Edmonds, failed to reveal his ownership of 100 shares of common stock of E-4 Excavating, Inc., doing business as a Kansas corporation.

5. That Plaintiff did not learn of such fraud until after the granting of the discharge herein.

6. That the asset in question was substantial in nature.

....

Rec. vol. 2, doc. 1. Debtors moved to dismiss the complaint on two grounds: 1) creditor's action was filed outside the one-year limitations period imposed by 11 U.S.C. Sec. 727(e)(1), and 2) revocation was precluded under 11 U.S.C. Sec. 727(d)(1) because creditor knew of debtors' alleged fraud prior to discharge. Rec. vol. II, doc. 2.

Without conducting an evidentiary hearing, the bankruptcy court determined that creditor knew or should have known of debtors' alleged fraud prior to discharge. Rec. vol. II, doc. 6 at 4. Because creditor failed to object to discharge on the basis of the debtors' fraud, the court held that the doctrine of laches barred it from seeking revocation pursuant to Sec. 727(d)(1). The bankruptcy court held that creditor's complaint also failed to state a cause of action under Sec. 727(d)(2) because it did not allege that debtor acquired the stock during the pendency of the bankruptcy proceeding. ¹ The bankruptcy court then granted debtors' motion to dismiss, found that creditor brought its action for an improper purpose and awarded attorney's fees to debtors. Rec. vol. II, doc. 7. In a subsequent order denying creditor's motion to alter or amend the judgment, the bankruptcy court emphasized that "[t]he Bank's complaint brought pursuant to Sec. 727(d)(1) and (2) was dismissed for failure to state a claim upon which relief could be granted." Rec. vol. II, doc. 10 at 1.

Creditor appealed the bankruptcy court's order to the district court. The district court found "ample support for the bankruptcy court's factual findings and legal conclusion" that creditor's action was barred by laches because creditor knew of debtors' fraud prior to discharge. Rec. vol. I, doc. 6 at 5. The court also agreed that creditor's action was brought for an improper purpose and lacked any basis in fact or law. Consequently, the district court affirmed both the bankruptcy court's dismissal of creditor's action and its award of attorney's fees.

II.

A.

As a threshold matter, we must determine the posture of this case on appeal. One reading of the bankruptcy court's order suggests that the court in reality granted debtors summary judgment pursuant to Fed.R.Bankr.P. 7056 on the basis of information contained outside the pleadings. However, on three occasions, the bankruptcy court stated that creditor's action was being dismissed, thus suggesting that the court acted pursuant to Fed.R.Bankr.P. 7012(b). See rec. vol. II, docs. 6, 7 & 10. Moreover, the record does not indicate that creditor received any notice that the court was converting debtors' motion to dismiss into one for summary judgment. Therefore, bereft of any help from the pleadings or the litigants, ² we review the bankruptcy court's action as an order of dismissal for failure to state a claim as noted in its order. See rec. vol. II, doc. 10 at 1.

"[A] complaint should not be dismissed for failure to state a claim unless it appears beyond doubt that the plaintiff can prove no set of facts in support of his claim which would entitle him to relief." Conley v. Gibson, 355 U.S. 41, 45-46, 78 S.Ct. 99, 102, 2 L.Ed.2d 80 (1957); see also McLain v. Real Estate Bd. of New Orleans, 444 U.S. 232, 246, 100 S.Ct. 502, 511, 62 L.Ed.2d 441 (1980). In adjudicating a motion to dismiss pursuant to Fed.R.Bankr.P. 7012(b), which incorporates Fed.R.Civ.P. 12(b)(6), a bankruptcy court must assume all facts alleged in the complaint to be true. In re Garafano, 99 B.R. 624 (Bankr.E.D.Pa.1989). Under this standard, dismissal is inappropriate unless plaintiff can prove no set of facts which would entitle him to relief. In re Kelpe, 98 B.R. 479, 480 (Bankr.W.D.Mo.1989); In re Smurzynski, 72 B.R. 368, 370 (Bankr.N.D.Ill.1987). Disposition under Fed.R.Bankr.P. 7012(b) also is inappropriate when the bankruptcy court examines matters outside the pleadings; rather, the court must proceed under Fed.R.Bankr.P. 7056 which incorporates the summary judgment standard of Fed.R.Civ.P. 56(b). In re Amatex Corp., 97 B.R. 220, 223 (Bankr.E.D.Pa.1989), aff'd, 102 B.R. 411 (E.D.Pa.1989), aff'd, 908 F.2d 961 (2d Cir.1990). However, in such cases, the court " 'should give the parties notice of the changed status of the motion and thereby provide the parties to the proceedings the opportunity to present to the court all material made pertinent to such motion by Rule 56.' " Nichols v. United States, 796 F.2d 361, 364 (10th Cir.1986) (quoting State of Ohio v. Peterson, Lowry, Rall, Barber & Ross, 585 F.2d 454, 457 (10th Cir.1978)).

In the instant case, creditor sought revocation of debtors' discharge pursuant to Sec. 727(d) which provides in pertinent part:

On request of the trustee, a creditor, or the United States trustee, and after notice and hearing, the court shall revoke a discharge ... if--

(1) such discharge was obtained through the fraud of the debtor, and the requesting party did not know of such fraud until after the granting of such discharge;

(2) the debtor acquired property that is property of the estate, or became entitled to acquire property that would be property of the estate, and knowingly and fraudulently failed to report the acquisition of or entitlement to such property, or to deliver or surrender such property to the trustee....

11 U.S.C. Sec. 727(d) (West Supp.1990). To revoke a discharge under Sec. 727(d), the debtor must have committed a fraud in fact which would have barred the discharge had the fraud been known. In re Peli, 31 B.R. 952, 955 (Bankr.E.D.N.Y.1983); see 4 L.King, (ed.) Collier on Bankruptcy Sec. 727.15 (1990); see, e.g., In re Burke, 99 B.R. 431, 433-34 (Bankr.W.D.Mo.1989) (trustee awarded monies concealed by debtor when discharge obtained through fraud); see generally Ginsberg v. Thomas, 170 F.2d 1, 4 (10th Cir.1948) (discussing revocation of discharge under old Bankruptcy Act). Such fraud must be discovered after discharge to effectuate revocation under Sec. 727(d). In re Dietz, 914 F.2d 161, 163 (9th Cir.1990).

As a general rule, to obtain relief under Sec. 727(d)(1), it is insufficient that a debtor's fraud rendered a particular debt nondischargeable; claimant must allege that the entire discharge would not have been granted but for debtor's fraud. In re Jones, 71 B.R. 682, 684 (S.D.Ill.1987); In re Shelton, 58 B.R. 746, 748 (Bankr.N.D.Ill.1986). Moreover, Fed.R.Bankr.P. 7009, which incorporates Fed.R.Civ.P. 9(b)(1), requires that a complaint brought under Sec. 727(d) set forth the time, place and contents of the false representation, the identity of the party making the false statement and the consequences thereof. See Jones, 71 B.R. at 683; In re Hollis & Co., 86 B.R. 152, 156 (Bankr.E.D.Ark.1988); In re Baker, 66 B.R. 652, 653 (Bankr.D.Nev.1986).

Here, a fair reading of creditor's complaint reveals that creditor alleged: 1) that debtors' discharge was obtained through fraud, 2) such fraud consisted of the failure to disclose ownership of stock in E-4 Excavating, 3) this interest was substantial, and 4) creditor did not learn of such fraud until after debtors' discharge. In adjudicating debtors' motion to...