In Re Edmonds
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
In December 1986, creditor filed a complaint to revoke debtors’ discharge pursuant to
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. Suсh 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
Without conducting an evidentiary hearing, thе 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 thе 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 aсquired 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, dоc. 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
“[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 clаim 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
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 grаnting 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 оf or entitlement to such property, or to deliver or surrender such property to the trustee....
As a gеneral 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,
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 dismiss pursuant to
Creditor‘s complaint stated all of the elements of a cause of action for revocation of discharge under Sec. 727(d)(1) and satisfied the particularity requirement of
B.
We now turn to thе district court‘s affirmance of the bankruptcy court‘s award of attorney‘s fees pursuant to
“Rule 11 imposes a duty on attorneys to certify that they have conducted a reasonable inquiry and have determinеd that any papers filed with the court are well-grounded in fact, legally tenable, and ‘not imposed for any improper purpose.’ ” Cooter & Gell 110 S.Ct. at 2454 (quoting
Part of a reasonable attorney‘s prefiling investigation must include determining whether any obvious affirmative defensеs bar the case. (citations omitted). An attorney need not forbear to file her action if she has a colorable argument as to why an otherwise applicable affirmative defense is inapplicable in a given situation. For instance, an otherwise time-barred claim may be filed, with no mention of the statute of limitations if the attorney has a nonfrivolous argument that the limitation was tolled for part of the period. The attorney‘s argument must be nonfrivolous, however; she runs the risk of sanctions if her оnly response to an affirmative defense is unreasonable.
White v. General Motors Corp., 908 F.2d 675, 682 (10th Cir.1990) (citations omitted).
In awarding sanctions under
The judgment of the district court is REVERSED and REMANDED for further proceedings consistent with this opinion. The debtors’ motion to supplement the record is DENIED.