In re Phillips

• Decision Date: 10 May 1999
• Docket Number: Adversary No. 98-7031.,Bankruptcy No. 96-70535-LEK
• Parties: In re Michael S. PHILLIPS, Debtor. Janet S. Casciato-Northrup, Trustee, Plaintiff, v. Michael S. Phillips, Defendant.
• Court: United States Bankruptcy Courts. Fifth Circuit. U.S. Bankruptcy Court — Western District of Texas

233 B.R. 712 (1999)

In re Michael S. PHILLIPS, Debtor Janet S. Casciato-Northrup, Trustee, Plaintiff, v. Michael S. Phillips, Defendant.

Bankruptcy No. 96-70535-LEK, Adversary No. 98-7031.

United States Bankruptcy Court, W.D. Texas, Midland-Odessa Division.

May 10, 1999.

Robert R. Truitt, Jr., Midland, TX, for debtor, Michael S. Phillips.

Michael G. Kelly, Odessa, TX, for Chapter 7 trustee, Janet S. Casciato-Northrup.

MEMORANDUM OPINION REGARDING DEFENDANT'S MOTION TO DISMISS

LARRY E. KELLY, Chief Judge.

On this date came on to be considered the Motion to Dismiss for Failure to State a Cause of Action Janet S. Casciato-Northrup Chapter 7 Trustee's Complaint as to the Allegations under 11 U.S.C. § 727(d)(1), filed on behalf of Defendant Michael S. Phillips in the above-styled and numbered adversary proceeding (the "Motion to Dismiss"). The parties requested, and the court permitted, the matter to be submitted on briefs.

Thus the court has before it the Motion to Dismiss, the Trustee/Plaintiff's Response to the Motion to Dismiss, and a brief from each party in support, as well as the Trustee's First Amended Complaint (the "Complaint") and the Answer of the Debtor/Defendant. In his Motion to Dismiss the Debtor urges the court to dismiss, under Federal Rule of Bankruptcy Procedure 7012(b), one count of the Trustee's Complaint brought under § 727(d)(1).¹ That section provides:

On request of the trustee, a creditor, or the United States Trustee, and after notice and a hearing, the court shall revoke a discharge granted under subsection (a) of this section if . . . 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. . . .

The grounds for dismissal of the § 727(d)(1) count that are alleged by the Debtor are that the Trustee has failed to state a cause of action because it is timebarred.² Specifically, the Debtor argues that the action was brought more than one year after the Debtor was discharged, and in light of § 727(c)(1)'s provision that a trustee "may request a revocation of a discharge . . . under subsection (d)(1) . . . within one year after such discharge is granted," it is untimely and must be dismissed.

THE STANDARD APPLICABLE TO THE MOTION TO DISMISS

The Fifth Circuit Court of Appeals has repeatedly stated the standard to be applied by a trial court in determining whether to dismiss, under Federal Rule of Civil Procedure 12(b)(6),³ an action for failure to state a cause of action upon which relief can be granted:

A motion to dismiss under rule 12(b)(6) "is viewed with disfavor and is rarely granted." Kaiser Aluminum & Chem. Sales v. Avondale Shipyards, 677 F.2d 1045, 1050 (5th Cir.1982) cert. denied, 459 U.S. 1105, 103 S.Ct. 729, 74 L.Ed.2d 953 (1983). The complaint must be liberally construed in favor of the plaintiff, and all facts pleaded in the complaint must be taken as true. Campbell v. Wells Fargo Bank, 781 F.2d 440, 442 (5th Cir.1986) cert. denied, 476 U.S. 1159, 106 S.Ct. 2279, 90 L.Ed.2d 721 (1986). The district court may not dismiss a complaint under rule 12(b)(6) "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, 101-02, 2 L.Ed.2d 80 (1957); Blackburn v. Marshall, 42 F.3d 925, 931 (5th Cir. 1995).

This strict standard of review under rule 12(b)(6) has been summarized as follows: "The question therefore is whether in the light most favorable to the plaintiff and with every doubt resolved in his behalf, the complaint states any valid claim for relief." 5 CHARLES A. WRIGHT & ARTHUR R. MILLER, FEDERAL PRACTICE AND PROCEDURE § 1357, at 601 (1969).

Lowrey v. Texas A & M University System, 117 F.3d 242, 247 (5th Cir.1997).

FACTUAL BACKGROUND

Thus, in this case, the court takes as true the allegations of the Trustee's Complaint with respect to her § 727(d)(1) count. Those allegations that are relevant to the issues raised in the Motion to Dismiss can be summarized as follows:

The Condo Transaction and the Phillips Note Forgiveness

On March 4, 1996, the Debtor transferred a condominium unit (the "Condo") to Kathy Clarke (now Kathy Phillips, the Debtor's wife) in exchange for a $60,000 real estate lien note (the "Phillips Note"), secured by a deed of trust on the Condo. No payments were ever made on the Phillips Note and the Debtor forgave it and released the deed of trust lien on September 25, 1996, subsequent to his marriage to Kathy Clarke.

On November 26, 1996, the Debtor filed his Chapter 7 case. He did not disclose on his Schedules, his Section 341 Meeting Questionnaire, or at his Section 341 Meeting either the transfer of the Condo or the forgiveness of the Phillips Note, nor were they otherwise known to the Trustee before the Debtor received his discharge on March 28, 1997.

The Primary Management Note and Payments

As of November 26, 1996, when the Debtor filed his bankruptcy case, he was the owner and holder of a promissory note from Primary Management, Inc. in the amount of $5,000 (the "Primary Management Note"). During his case, he received five monthly payments on the Primary Management Note totaling $2,197.90. The Primary Management Note was never disclosed on his Schedules, his Section 341 Meeting Questionnaire, or at his Section 341 Meeting. Neither it nor the payments he received post-petition under it were known to the Trustee before the Debtor received his discharge on March 28, 1997.

The Accounts Receivable and Their Collection

As of November 26, 1996, when the Debtor filed his bankruptcy case, he had accounts receivable from his medical practice of $8,418.16. During his case, he collected a portion of these. The existence of the accounts receivable was never disclosed on his Schedules, his Section 341 Meeting Questionnaire, or at his Section 341 Meeting, nor was it or the payments he received post-petition on those accounts receivable otherwise known to the Trustee before the Debtor received his discharge on March 28, 1997.

The Bank Account and the Debtor's Use of Funds

As of November 26, 1996, when the Debtor filed his bankruptcy case, he had on deposit at Canyon Creek National Bank $682.77 (the "Bank Account"). During his case, he used these funds. The existence of the Bank Account was never disclosed on his Schedules, his Section 341 Meeting Questionnaire, or at his Section 341 Meeting, nor was it or his post-petition use of the funds otherwise known to the Trustee before the Debtor received his discharge on March 28, 1997.

The Filing of the Trustee's Complaint

The Trustee's Complaint was originally filed on November 19, 1998, almost one year and eight months after the Debtor received his discharge.

ANALYSIS

The Debtor seeks dismissal of the Trustee's § 727(d)(1) count because it was not filed within one year of his discharge, as required by § 727(e)(1). The Trustee concedes this fact, but argues that the doctrine of "equitable tolling" applies to toll the statute of limitations in § 727(e)(1) and make the filing timely. She claims that equitable tolling applies because of the Debtor's fraud and concealment of the facts that form the basis of the Trustee's cause of action. The Debtor contends that as a matter of law equitable tolling does not apply to extend the time period in § 727(e)(1).

The doctrine of equitable tolling was defined by the Supreme Court in Holmberg v. Armbrecht, 327 U.S. 392, 66 S.Ct. 582, 90 L.Ed. 743 (1946), as follows:

This Court long ago adopted as its own the old chancery rule that where a plaintiff has been injured by fraud and "remains in ignorance of it without any fault or want of diligence or care on his part, the bar of the statute does not begin to run until the fraud is discovered, though there be no special circumstances or efforts on the part of the party committing the fraud to conceal it from the knowledge of the other party."

Id. at 397, 66 S.Ct. 582 (quoting Bailey v. Glover, 21 Wall. 342, 88 U.S. 342, 22 L.Ed. 636 (1874)). The Supreme Court went on to note that "this equitable doctrine is read into every federal statute of limitation." Id.

The relatively few courts that have addressed whether equitable tolling may be applied to 11 U.S.C. § 727(e)(1) are virtually unanimous in holding that it may not. E.g., Roost v. Reynolds (In re Reynolds), 189 B.R. 199 (Bankr.D.Or.1995); International State Bank v. Fresquez (In re Fresquez), 167 B.R. 973 (Bankr.D.N.M.1994); Malloy v. Frank (In re Frank), 146 B.R. 851 (Bankr.N.D.Okla.1992). See also Gordon v. Bulbin (In re Bulbin), 122 B.R. 161 (Bankr.D.C.1990) (holding that plaintiff's lack of knowledge of the bankruptcy case doesn't affect the deadline in § 727(e)(1) for filing a § 727(d)(1) complaint, but not expressly discussing equitable tolling); Santos v. Mast Construction Company (In re Santos), 24 B.R. 688 (Bankr.D.R.I.1982) (holding § 727(d)(1) complaint was untimely and noting the one year period for filing runs from discharge rather than discovery of the fraud, but not addressing expressly equitable tolling); In re Schneider, 37 B.R. 115, 119 (Bankr.E.D.N.Y.1984) (not addressing equitable tolling because complaint was filed within one year of discharge, but stating that "while a discharge can be denied if the debtor conceals assets or otherwise deals dishonestly with his creditor, it passes beyond recall, whatever the facts, with the termination of the proceeding or the lapse of time."); Ford v. Ford (In re Ford), 159 B.R. 590 (Bankr. D.Or.1993) (holding that Rule 60(b) was not applicable to extend the time to file an action to revoke a discharge under grounds of mistake, and not addressing equitable tolling).

The only decision this court could locate where the court apparently held that equitable tolling was applicable to § 727(e)(1) is the unpublished District Court decision that reversed Clay County Bank v. Culton (In re...