Resolution Trust Corp. v. McKendry (In re McKendry)Resolution Trust Corp. v. McKendry (In re McKendry)
Aрpellant Resolution Trust Corporation (RTC) appeals from the district court’s affir-mance 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 Cаrl 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 purchаse 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, McKen-dry 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”), offer
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 obligаtion 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 Bankruрtcy 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 Amеrican 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 Bank-ruptey Code. New American Federal filed a request pursuant to 11 U.S.C. § 523(c)
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 limitаtion 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 discharge-ability of any debt pursuant to § 523(c) of the Code shall be filed not later than 60 days following the first date set for the meeting of crеditors held pursuant to § 341(a).” Fed. R.Bankr.P. 4007(e). There is no dispute that the RTC’s claim for a determination of non-dischargeability 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 Americаn Federal, and therefore the RTC, should have been aware of the alleged fraud at one of the following times: when it pur
On appeal, the RTC asserts thаt the bankruptcy court erred in concluding that the state statute of limitations applied to bar its complaint for determination of nondis-chargeability 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 non-dischargeability, 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.,
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 MeKendry 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 nondisehargeable due to fraud. The conclusion of the bankruptcy court and the district court that the dis-chargeability action was barred by the state statute of limitations is a question of law that we review de novo. In re Wes Dor, Inc.,
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 nondisehargeable under section 17(e). In re Nicholas,
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 debt- or in state court. That suit alleged that the debt was obtained by means of fraud. Ultimately, the parties settled the suit by a stipulаtion 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 nondisehargeable 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 record, and held
The Supreme Court in Brown reasoned that applying res judicata to prior state court judgments when resolving questions of dis-chargeability under the bankruptcy laws would serve neither the interests underlying the doctrine of res judicata nor the policies underlying the bankruptcy laws. The Court recognized that the issues presented in a state court action on a-debt are quite different from those presented in an action to prevent discharge. Id. at 134-35,
As noted, the analysis in Brown was based on section 17 of the former Bankruptcy Act. In 1978 Congress repealed the Bankruptcy Act and replaced it with the current Bankruptcy Code. Bankruptcy Reform Act of 1978, Pub.L. 95-598 (codified as amended at 11 U.S.C. 101). Nevertheless, we believe that the same reasoning applies to the question of dischargeability under § 523(a)(2) of the current Bankruptcy Code, which is substantially identical to former section 17(c). See Brown,
In enacting the Bankruptcy Reform Act, Congress delegated to the bankruptcy courts jurisdiction to adjudicate “core proceedings,” including determinations as to the discharge-ability of particular debts. 28 U.S.C. § 157(b)(1), (b)(2)(I). Among the discharge-ability determinations delegated exclusively to the bankruptcy courts are thоse arising under § 523(a)(2), the basis for nondis-chargeability alleged in this case, as well as those arising under §§ 523(a)(4) and (6). 11 U.S.C. § 523(c)(1); Advisory Committee Note (1983) to Fed.R.Bankr.P. 4007.
We are aware that some bankruptcy courts have concluded that state statutes of limitations are applicable to questions of discharge-ability arising under § 523. For example, in In re Pascucci
Similarly, in In re Taylor,
We find the analyses in Pascucci and Taylor unpersuasive.
[t]here is a fundamental flaw in the debt- or’s position in that it fails to recognize the distinction between a suit brought under state law to enforce state created rights and a suit filed in bankruptcy court to determine dischargeability issues under § 523(a) of the Bankruptcy Code. In bankruptcy court there are two separate and distinct causes of action:
One cause of action is on the debt and the other cause of action is on the dis-chargeability of that debt, a cause of action that arises solely by virtue of the Bankruptcy Code and its discharge provisions. Brockenbrough v. Taylor (In re Taylor),54 B.R. 515 , 517-18 (Bankr. E.D.Va.1985) (quoting 3 Collier on Bankruptcy para. 523.11 at 523-75 n. 9 (15th ed. 1985)).
Until the debtor filed his petition for relief under the Bankruptcy Code, the plaintiffs obviously had no cause of action under § 523(a)(4)_ The only relevant question with respect to Ohio’s statute of limitations is whether the plaintiffs sought to enforce their “debt” against the debtor within the period prescribed by the statute of limitations. The debtor does not dispute that the plaintiffs did so. In the instant adversary proceeding, the nature of the alleged debt, i.e., whether the debt is of a type determined by Congress to be nondischargeable, is to be decided by this court.
Moran,
Because we hold that the bankruptcy court erred in applying the state statute of limitations for fraud actions to bar the RTC’s claim of nondischargeability, we need not reach the issue of that court’s application of the doctrine of D’Oench, Duhme and Co. v. Federal Deposit Insurance Co.,
Mr. McKendry argues that this matter need not be remanded because the bankruptcy court ruled on the merits that there had been no fraud. We do not read the bankruptcy court’s decision as having reached the merits of the RTC’s claim of nondischargeability. In its Order of June 8, 1992, the bankruptcy court specifically limited itself to determining the issues relating to the statute of limitations, (Appellant’s App. Doe. 2 at 11), and explicitly stated thаt “[b]e-cause this Court has determined that this action is barred by the statute of limitations, it is unnecessary to determine whether any fraud took place in 1979 or 1980 when the loan was made.” Id. at 19. While the bankruptcy court did comment on what it perceived as the paucity of evidence establishing the fraud, it did not decide the issue. Accordingly, we must remand for a determination on the merits of the RTC’s complaint for а determination of nondischargeability.
REVERSED and REMANDED.
Notes
. Except as provided in subsection (a)(3)(B) of this section, the debtor shall be discharged from a debt of a kind specified in paragraph (2), (4) or (6) of subsection (a) of this section, unless, on request of the creditor to whom such debt is owed, and after notice and a hearing, the court determines such debt to be excepted from discharge under paragraph (2), (4) оr (6), as the case may be, of subsection (a) of this section.
11 U.S.C. § 523(c).
. Section 523(a)(2) provides in pertinent part that a discharge does not apply to any debt
for money, property, services, or an extension, renewal, or refinancing of credit, to the extent obtained by—
(A) false pretenses, a false representation, or actual fraud, other than a statement respecting the debtor's or an insider’s financial condition;
(B) use of a statement in writing—
(i) that is materially false;
(ii) respecting the debtor's or an insider's financial condition;
(iii) on which the creditor to whom the debt- or is liable for such money, property, services, or credit reasonable relied; and
(iv) that the debtor caused to be made or published with intent to deceive.
11 U.S.C. § 523(a)(2).
. By contrast, claims that debts falling within § 523(a)(1), (3), (5), (7), (8), and (9) are nondis-chargeable are not exclusively within the jurisdiction оf the bankruptcy courts — -rather, the bankruptcy court holds jurisdiction over these claims concurrently with any appropriate non-bankruptcy forum, including state courts. Advisory Committee Note (1983) to Fed.R.Bankr. 4007; 3 Collier on Bankruptcy ¶ 523.06 at 523-40 (1993).
. Mr. McKendry correctly notes that this court cited Pascucci in a per curiam decision in Paul v. Monts,