McKendry, In re, 93-1241

• Decision Date: 09 November 1994
• Docket Number: No. 93-1241,93-1241
• Court: U.S. Court of Appeals — Tenth Circuit
• Parties: , 32 Collier Bankr.Cas.2d 550, Bankr. L. Rep. P 76,184 In re Donald H. McKENDRY, individually and as officer, director and shareholder of McKendry Enterprises, Inc., and as general partner in Sixth Avenue Place Partnership and Creekside I Ltd., Debtor. RESOLUTION TRUST CORPORATION, as receiver for American Federal Savings Association of Iowa, Appellant, v. Donald H. McKENDRY, Appellee.

Page 331

40 F.3d 331

63 USLW 2313, 32 Collier Bankr.Cas.2d 550,

Bankr. L. Rep. P 76,184

In re Donald H. McKENDRY, individually and as officer,

director and shareholder of McKendry Enterprises,

Inc., and as general partner in Sixth

Avenue Place Partnership and

Creekside I Ltd., Debtor.

RESOLUTION TRUST CORPORATION, as receiver for American

Federal Savings Association of Iowa, Appellant, v. Donald H. McKENDRY, Appellee.

No. 93-1241.

United States Court of Appeals, Tenth Circuit.

Nov. 9, 1994.

Rehearing Denied Dec. 20, 1994.

Karen J. Mathis of The Mathis Law Firm, P.C. (John F. Reha of The Mathis Law Firm, P.C., and Richard A. Marsh of Massey, Showalter & Marsh, P.C., Denver, CO, on the briefs), for appellant.

Kimber Z. Smith of Sonheim, Helm & Less, Arvada, CO, for appellee.

Before KELLY and McKAY, Circuit Judges, and ROSZKOWSKI, ^* District Judge.

McKAY, Circuit Judge.

Appellant Resolution Trust Corporation (RTC) appeals from the district court's affirmance of the bankruptcy court's determination that the RTC's request for a determination of nondischargeability of a debt was barred by the state statute of limitations applicable to fraud actions.

The pertinent facts of this case as found by the bankruptcy court are as follows. On January 23, 1979, Donald McKendry and Carl Cunningham entered into a partnership ("the Partnership") whose primary purpose was to purchase certain real property and construct and operate a retail and office strip mall thereon. Also on that date, the Partnership entered into a real estate contract with Peek and McKendry Enterprises, Inc., a company controlled by McKendry and his wife, to purchase the land. That land was purchased in June 1976, at a cost of $3,096,053.

On February 7, 1979, the Partnership applied for a mortgage in the amount of $2,070,000 with Megapolitan Mortgage Company of Lakewood ("Megapolitan"). In the course of applying for the mortgage, McKendry prepared financial statements for himself, for Peek & McKendry Enterprises, and for Lu Mak Homes, Inc., another company controlled by McKendry. Megapolitan prepared a financial statement for the Partnership based on the information supplied in the financial statements. Megapolitan then packaged and submitted a loan analysis to American Federal Savings and Loan Association of Iowa ("Old American Federal"), offering Old American Federal the opportunity to purchase the proposed mortgage. On March 23, 1979, Old American Federal issued its commitment to purchase the loan. On February 28, 1980, Megapolitan closed its loan with the Partnership and sold and assigned the loan to Old American Federal.

In two transactions in July 1982 and March 1983, the Partnership sold a two-thirds interest in the strip mall to Susan Leigh. As part of the sale, Old American Federal approved the sale and assumption by Ms. Leigh of two-thirds of the obligation owed to it. Some time later, Ms. Leigh removed Mr. McKendry and Mr. Cunningham from the active management of the strip mall. During this time period, there were apparently no defaults on the loan payments. However, in February 1987, the loan went into default and on June 24, 1987, Ms. Leigh, doing business as Cedar Park Plaza Shopping Center, the mall at the center of this case, filed for reorganization under Chapter 11 of the Bankruptcy Code. After some procedural maneuvering not relevant here, Old American Federal foreclosed on the property. In 1989, Old American Federal initiated a lawsuit against McKendry and Cunningham for the deficiency. Old American Federal was placed in receivership during February 1990. On October 3, 1990, American Federal Savings Association of Iowa ("New American Federal"), the successor to Old American Federal, obtained a deficiency judgment against McKendry and Cunningham in the amount of $782,338.83, which amount included accrued interest. On October 10, 1990, McKendry filed for bankruptcy pursuant to Chapter 7 of the Bankruptcy Code. New American Federal filed a request pursuant to 11 U.S.C. Sec. 523(c) ¹ for a determination that the debt owed by McKendry was nondischargeable under 11 U.S.C. Sec. 523(a)(2). ² New American Federal was placed in receivership in February 1991 and the RTC was substituted as real party in interest.

During the hearings on the dischargeability issue, McKendry argued that the RTC's claim for nondischargeability was barred by the state statute of limitation. He contended that because the claim for nondischargeability was based on fraud, a state common law cause of action, the state statute of limitations was applicable, and the limitation period for fraud actions had expired long before the bankruptcy proceedings had begun. The RTC countered that the only applicable statute of limitations was that provided under Bankruptcy Rule 4007(c), which states that "[a] complaint to determine the dischargeability of any debt pursuant to Sec. 523(c) of the Code shall be filed not later than 60 days following the first date set for the meeting of creditors held pursuant to Sec. 341(a)." Fed.R.Bankr.P. 4007(c). There is no dispute that the RTC's claim for a determination of nondischargeability was filed within the period established in Rule 4007(c). The bankruptcy court held that the applicable statute of limitations was the Colorado provision limiting causes of action for fraud to claims brought within three years after accrual thereof. The bankruptcy court further held that Old American Federal, and therefore the RTC, should have been aware of the alleged fraud at one of the following times: when it purchased the loan in 1980; when it approved the sale of the two-thirds interest to Ms. Leigh in 1982 and 1983; when it reviewed the file in 1986 as a result of the delinquencies; in July 1987 when it sought relief from stay in Ms. Leigh's bankruptcy case; or in October 1987 when it signed a proposed stipulation releasing McKendry and Cunningham from any claim of delinquency on the loan, although that stipulation was never signed by McKendry or Cunningham or approved by the court. Accordingly, the bankruptcy court held that the RTC's complaint for a determination of nondischargeability pursuant to Sec. 523(c) was time-barred. The RTC appealed to the district court, which made oral findings of fact and conclusions of law and affirmed.

On appeal, the RTC asserts that the bankruptcy court erred in concluding that the state statute of limitations applied to bar its complaint for determination of nondischargeability because the only statute of limitations applicable in dischargeability proceedings is the sixty day provision in Federal Rule of Bankruptcy Procedure 4007(c). The RTC further argues that, assuming that the three year state statute of limitations for fraud is applicable to a determination of nondischargeability, the bankruptcy court erred in holding that Old American Federal should have known of the fraud prior to the expiration of the limitations period. Finally, the RTC argues that the bankruptcy court erred in its application of the doctrine of D'Oench, Duhme & Co. v. Federal Deposit Insurance Co., 315 U.S. 447, 62 S.Ct. 676, 86 L.Ed. 956 (1942), and its statutory counterpart, 12 U.S.C. Sec. 1823(e), and that under that doctrine the RTC cannot be charged with what Old American Federal "should" have known.

The question in this case is, where a debt has been reduced to judgment in state court, can the bankruptcy court be barred by a state statute of limitations from considering the underlying nature of the debt in determining whether that debt is dischargeable. In this case, the RTC has obtained a deficiency judgment against McKendry establishing both the existence and the amount of the debt; the only question before the bankruptcy court and the district court was whether the RTC may attempt to prove that that established debt is nondischargeable due to fraud. The conclusion of the bankruptcy court and the district court that the dischargeability action was barred by the state statute of limitations is a question of law that we review de novo. In re Wes Dor, Inc., 996 F.2d 237, 241 (10th Cir.1993).

In a case decided under the former Bankruptcy Act, this court held that principles of res judicata barred the bankruptcy court from considering a creditor's claim that the debt underlying a state court judgment had been incurred as the result of fraud and was therefore nondischargeable under section 17(c). In re Nicholas, 510 F.2d 160 (10th Cir.1975), cert. denied sub nom., 421 U.S. 1012, 95 S.Ct. 2417, 44 L.Ed.2d 680 (1975). However, the Supreme Court took a different view in Brown v. Felsen, 442 U.S. 127, 99 S.Ct. 2205, 60 L.Ed.2d 767 (1979). In Brown, the Supreme Court held that res judicata did not apply to determinations of the dischargeability of a debt under section 17. Accordingly, the bankruptcy court could consider evidence extrinsic to the state court record to determine the true nature of the underlying debt.

We believe that the Supreme Court's analysis in Brown makes clear that the bankruptcy court in this case erred in holding the dischargeability question barred by the state statute of limitations. In Brown, the creditor brought a collection suit against the debtor in state court. That suit alleged that the debt was obtained by means of fraud. Ultimately, the parties settled the suit by a stipulation that did not indicate the basis for the suit. After judgment was entered on the stipulation, the debtor filed for bankruptcy and sought to have the debt discharged. The creditor sought to establish that the debt was nondischargeable because it was the product of the debtor's fraud. The bankruptcy court, considering itself bound by this court's holding in Nicholas, held that the prior state-court action was res judicata with respect to the issue of fraud and confined its consideration to the record of the state court proceeding. The bankruptcy court accordingly refused to consider other evidence extrinsic to the state court...