Source: s3://data.kl3m.ai/documents/govinfo/USCOURTS/USCOURTS-ca10-93-01241/USCOURTS-ca10-93-01241-0/pdf.json

Nature of Suit Code: 422
Nature of Suit: Bankruptcy Appeals Rule 28 USC 158
Cause of Action: 

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PUBLISH 

TENTH CIRCUIT 

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. I 

Debtor, 

RESOLUTION TRUST CORPORATION, as 

receiver for American Federal 

Savings Association of Iowa, 

Appellant, 

v. 

DONALD H. MCKENDRY I 

Appellee. 

NOV 0 t 1994 

No. 93-1241 

APPEAL FROM THE UNITED STATES DISTRICT COURT 

FOR THE DISTRICT OF COLORADO 

(D.C. No. 92-Z-2132) 

Karen J. Mathis of The Mathis Law Fir.m, P.C, Denver, Colorado 

(John F. Reha of The Mathis Law Firm, P.C., Denver, Colorado, and 

Richard A. Marsh of Massey, Showalter & Marsh, P.C., Denver, 

Colorado, on the briefs), for Appellant. 

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

Appellee. 

Appellate Case: 93-1241 Document: 01019286958 Date Filed: 11/09/1994 Page: 1 
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 

* Honorable Stanley J. Roszkowski, Senior United States 

District Judge for the Northern District of Illinois, sitting by 

designation. 

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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 

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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. § 523(c)1 for a determination that the debt owed by 

McKendry was nondischargeable under 11 U.S.C. § 523(a) (2) .2 New 

1 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) or (6), as the case may be, of subsection 

(a) of this section. 

11 U.S. C. § 523 (c). 

2 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 debtor 

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). 

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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§ 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§ 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 twothirds interest to Ms. Leigh in 1982 and 1983; when it reviewed 

the file in 1986 as a result of the delinquencies; in July 1987 

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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§ 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 (1942), and its statutory counterpart, 

12 U.S.C. § 1823(e), and that under that doctrine the RTC cannot 

be charged with what Old American Federal "should" have known. 

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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 

Dar. Inc., 996 F.2d 237, 241 (lOth 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, (lOth Cir. 1975), cert. denied sub nom, 

421 U.S. 1012 (1975). However, the Supreme Court took a different 

view in Brown v. Felson, 442 U.S. 127 (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. 

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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 record, and held that because neither the state court 

judgment nor the record in that case revealed that the basis ·for 

the suit was fraud, the creditor had failed to prove that the debt 

was nondischargeable under§ 17{a} {2}. Id. at 130. The district 

court affirmed as did this court, in an unpublished disposition. 

The Supreme Court in Brown reasoned that applying res 

judicata to prior state court judgments when resolving questions 

of dischargeability 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 

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· 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. Forcing a creditor to anticipate a 

hypothetical bankruptcy filing in his state court action on the 

debt and therefore to pursue all potential claims relevant to 

discharge in addition to those necessary to establish the debt 

would frequently entail needless additional litigation. Moreover, 

the Court reasoned, the 1970 amendments to the Bankruptcy Act 

removed certain dischargeability actions, including those for 

fraud under section 17(a) (2) of the Bankruptcy Act, from state 

courts that seldom dealt with such issues and placed them within 

the exclusive jurisdiction of the bankruptcy courts in order that 

they might develop expertise in the area. Id. at 135-36. The 

Court observed that it would "make[] little sense ... to resolve 

a federal dischargeability question according to whether or not 

the parties in state court waived their right to engage in hypothetical litigation in an inappropriate forum." Id. at 137. The 

Court reasoned that it would be inconsistent with the philosophy 

underlying the amendments to the Bankruptcy Act to apply res 

judicata in such a way as to force dischargeability questions back 

on the state courts. Id. at 136. The Court concluded that 

refusing to apply res judicata to a prior state court judgment 

would allow the bankruptcy court to accurately determine whether 

the debt was in fact incurred as a result of fraud, a question 

squarely in issue for the first time before the bankruptcy court, 

a question that the debtor had placed in issue by filing for 

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bankruptcy, and a question that Congress clearly intended to be 

heard and determined by the bankruptcy courts. Id. at 138. 

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, 442 U.S. at 129 

n.1; 3 Collier on Bankruptcy,, 523.05 at 523-18 {1993 ed.). 

In enacting the Bankruptcy Reform Act, Congress delegated to 

the bankruptcy courts jurisdiction to adjudicate "core proceedings," including determinations as to the dischargeability of 

particular debts. 28 U.S.C. § 157(b) {1), (b) (2) (I). Among the 

dischargeability determinations delegated exclusively to the 

bankruptcy courts are those arising under§ 523(a) (2), the basis 

for nondischargeability 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. 4007.3 As the 

Court held in Brown with respect to res judicata, allowing state 

3 By contrast, claims that debts falling within§ 523(a) {1), 

{3), {5), (7), (8), and (9) are nondischargeable are not exclusively within the jurisdiction of the bankruptcy courts--rather, 

the bankruptcy court holds jurisdiction over these claims concurrently with any appropriate nonbankruptcy forum, including 

state courts. Advisory Committee Note {1983) to Fed. R. Bankr. 

4007; 3 Collier on Bankruptcy ,, 523.06 at 523-40 (1993}. 

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statutes of limitations to decide if a claim can be brought to 

determine that a debt is nondischargeable under§ 523(c) would 

allow the exclusive jurisdiction of the bankruptcy courts over 

core proceedings to be divested by operation of state law and 

would be inimical to the philosophy underlying the Bankruptcy 

Code. 

This conclusion is supported by the language and structure of 

Bankruptcy Rule 4007. Rule 4007(b) provides that complaints for 

nondischargeability other than those filed under§ 523(c) may be 

filed at any time. Fed. R. Bankr. P. 4007(b). By contrast, 

subsection (c) imposes a sixty-day deadline for filing complaints 

to determine the dischargeability of debts under§ 523(c), i.e. 

complaints alleging nondischargeability under§ 523(a) (2), (4) and 

(6). Fed. R. Bankr. P. 4007(c). If claims of nondischargeability 

under§ 523(c) are not brought within the sixty-day period, the 

debts are discharged. 11 U.S.C. § 523(c). The Advisory Committee 

Note to Rule 4007 explains the difference by noting that the 

bankruptcy courts have exclusive jurisdiction over the claims 

covered by Rule 4007(c), while the bankruptcy courts share 

jurisdiction over the claims covered under subsection (b) with any 

appropriate nonbankruptcy forum. Advisory Committee Note (1983) 

to Fed. R. Bankr. P. 4007. It would make little sense to impose a 

sixty-day filing period for claims of nondischargeability under 

Rule 4007(c) only to have the question of the timeliness of the 

claim determined by a state statute of limitations. We do not 

believe such was the intent of Congress. 

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We are aware that some bankruptcy courts have concluded that 

state statutes of limitations are applicable to questions of 

dischargeability arising under § 523. For example, in In re 

Pascucci, 90 B.R. 438 {Bankr. C.D. Cal. 1988), the creditor sought 

a determination of nondischargeability under§ 523(a) (2). The 

court concluded without any substantial analysis that "[w]here the 

Bankruptcy Code is silent, and no uniform bankruptcy rule is 

required, the rights of the parties are governed by the underlying 

non-bankruptcy law." Id. at 442. Accordingly, the court applied 

the three year California statute of limitations for fraud actions 

but concluded that it had been tolled by the bankruptcy action. 

Similarly, in In re Taylor, 137 B.R. 925 (Bankr. S.D. Ind. 

1991) , the bankruptcy court held that the principles underlying 

the Supreme Court's decision in Brown were inapplicable where the 

state court action to establish the debt had been based on contract principles and at the time that action was brought, any 

fraud claims would have been barred by the state statute of limitations. Id. at 928. The Taylor court concluded that under 

these circumstances, the state statute of limitations was a bar to 

the determination of dischargeability under§ 523(a) (2). 

We find the analyses in Pascucci and Taylor unpersuasive.4 

Rather, we agree with the analysis of In re Moran, 152 B.R. 493 

4 Mr. McKendry correctly notes that this court cited Pascucci . in a per curiam decision in Paul v. Monts, 906 F.2d 1468, 1475 

{lOth Cir. 1990). However, we did so only in our discussion of 

whether the remedies provided by the Bankruptcy Code for enforcing 

a Chapter 11 plan of reorganization are exclusive and preempt 

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{Bankr. S.D. Oh. 1993). In that case, the creditor had brought 

suit in state court to establish a debt arising out of certain 

stock transactions. The complaint in the state court proceeding 

did not specifically plead the elements of fraud as required by 

Ohio law. The debtor argued that because the creditor had not 

pled fraud with specificity, the creditor had not brought the suit 

within the four year Ohio statute of limitations and the claim of 

nondischargeability was therefore barred. Id. at 494. In a 

comprehensive analysis, the bankruptcy court noted the distinction 

that we believe the Pascucci and Taylor courts overlooked. The 

Moran court observed that 

[t]here is a fundamental flaw in the debtor'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 dischargeability 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., 

state law remedies. The discussion is therefore not pertinent to 

the issue before us today. 

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whether the debt is of a type determined by Congress to 

be nondischargeable, is to be decided by this court. 

Moran, 152 B.R. at 495. Cf. In re Corwin, 76 B.R. 221, 223 

(Bankr. S.D. Fla. 1987) ("The applicability of 11 U.S.C. § 523 is 

a federal question and, therefore, this court is not precluded 

from finding embezzlement was committed by the debtor even though 

the state court judgment included only breaches of contract and 

fiduciary duty.") We likewise find two distinct issues in a 

nondischargeability proceeding. The first, the establishment of 

the debt itself, is governed by the state statute of limitations--

if suit is not brought within the time period allotted under state 

law, the debt cannot be established. However, the question of the 

dischargeability of the debt under the Bankruptcy Code is a distinct issue governed solely by the limitations periods established 

by bankruptcy law. In this case, the debt has already been 

established, so the state statute of limitations is immaterial. 

The only applicable limitations period is the sixty day period 

provided by§ 523(c). Because the RTC filed its complaint for a 

determination of dischargeability within the sixty day period 

provided in§ 523(c), the district court erred in holding that the 

RTC was barred by the state statute of limitations from proving 

the underlying nature of the debt. 

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., 315 U.S. 830 {1942). 

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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. Doc. 2 at 11), and 

explicitly stated that "[b]ecause 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 a determination of nondischargeability. 

REVERSED and REMANDED. 

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