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

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PUBLISH 

UNITED STATES COURT OF APPEALS 

TENTH CIRCUIT 

In re BENNY LEIGH EDMONDS and 

SHIRLEY JEANNINE EDMONDS, 

Debtors. 

LAWRENCE NATIONAL BANK, 

Plaintiff-Appellant, 

JAN 2 2 1991 

~OBERT L. HOECKFI, 

Clerk 

vs. 

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No. 89-3338 

BENNY LEIGH EDMONDS and 

SHIRLEY JEANNINE EDMONDS, 

Defendants-Appellees. 

APPEAL FROM THE UNITED STATES DISTRICT COURT 

FOR THE DISTRICT OF KANSAS 

(D.C. No. 87-4196-R) 

110 B.R. 38 

Donald E. Bucher (James F. Freeman, III, with him on the brief), 

of Gould & Moore, Kansas City, Missouri, for Plaintiff-Appellant. 

Eugene F. Deshazo of Linde, Thomson, Kansas City, Missouri (Gary 

H. Hanson and Tom R. Barnes, II of Stumbo, Hanson & Hendricks, 

Topeka, Kansas, on the brief), for Defendants-Appellees. 

Before, HOLLOWAY, Chief Judge, BALDOCK, Circuit Judge and GREENE, 

District Judge.* 

BALDOCK, Circuit Judge. 

* The Honorable J. Thomas Greene, United States District Judge 

for the District of Utah, sitting by designation. 

Appellate Case: 89-3338 Document: 010110016291 Date Filed: 01/22/1991 Page: 1 
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. 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 11 u.s.c. §§ 1101-1174. Debtors failed to schedule 

any interest in E-4 Excavating, Inc .. Creditor moved for relief 

from the automatic stay. Attached to the debtors' response was 

the 1982 corporate tax return of E-4 Excavating which listed 

debtors as stockholders. Debtors' bankruptcy subsequently was 

converted to a chapter 7 proceeding, see 11 u.s.c. §§ 701-766; 

they were granted a discharge in June 1985. 

In December 1986, creditor filed a complaint to revoke 

debtors' discharge pursuant to 11 u.s.c. § 727(d). The complaint 

alleged: 

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. 

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4. Such 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 11 u.s.c. § 727(e)(l), and 2) 

revocation was precluded under 11 u.s.c. 727(d)(l) because 

creditor knew of debtors' alleged fraud prior to discharge. Rec. 

vol. II, doc 2. 

Without conducting an evidentiary hearing, the 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 the doctrine of laches 

barred it from seeking revocation pursuant to§ 727(d)(l). The 

bankruptcy court held that creditor's complaint also failed to 

state a cause of action under§ 727(d)(2) because it did not 

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Appellate Case: 89-3338 Document: 010110016291 Date Filed: 01/22/1991 Page: 3 
allege that debtor acquired 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, doc 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 

§ 727(d)(l) 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 

1 Creditor does not appeal the bankruptcy court's dismissal of 

that portion of its action brought under 11 u.s.c. § 727(d)(2). 

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Appellate Case: 89-3338 Document: 010110016291 Date Filed: 01/22/1991 Page: 4 
suggests that the court in reality granted debtors summary 

judgment pursuant to Fed. R. Bankr. P. 7056 on the basis of 

information contained outside the pleadings. However, on three 

occasions, the bankruptcy court stated that creditor's action was 

being dismissed, thus suggesting that the court acted pursuant to 

Fed. R. Bankr. P. 7012(b). See rec. vol. II, docs. 6, 7 & 10. 

Moreover, the record does not indicate that creditor received any 

notice that the court was converting debtors' motion to dismiss 

into one for summary judgment. Therefore, bereft of any help from 

the pleadings or the litigants, 2 we review the bankruptcy court's 

action as an order of dismissal for failure to state a claim as 

noted in its order. See rec. vol. II, doc 10 at 1. 

"[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 claim which would entitle him to 

relief." Conley v. Gibson, 355 U.S. 41, 45-46 (1957); TM also 

McLain v. Real Estate Bd. of New Orleans, 444 U.S. 232, 246 

(1980). In adjudicating a motion to dismiss pursuant to Fed. R. 

Bankr. P. P. 7012(b), which incorporates Fed. R. Civ. P. 12(b)(6), 

a bankruptcy court must assume all facts alleged in the complaint 

to be true. In re Garafano, 99 B.R. 624 (Bankr. E.D. Pa. 1989). 

Under this standard, dismissal is inappropriate unless plaintiff 

can prove no set of facts which would entitle him to relief. In 

re Kelpe, 98 B.R. 479, 480 (Bankr. W.D. Mo. 1989); In re 

2 At oral argument, neither counsel could elucidate for the 

court whether the bankruptcy court dismissed creditor's action for 

failure to state a claim or granted summary judgment to debtors. 

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Appellate Case: 89-3338 Document: 010110016291 Date Filed: 01/22/1991 Page: 5 
Smurzynski, 72 B.R. 368, 370 (Bankr. N.D. Ill. 1987). Disposition 

under Fed. R. Bankr. P. 7012(b) also is inappropriate when the 

bankruptcy court examines matters outside the pleadings; rather, 

the court must proceed under Fed. R. Bankr. P. 7056 which 

incorporates the summary judgment standard of Fed. R. Civ. P. 

56(b). In re Amatex Corp., 97 B.R. 220, 223 (Bankr. E.D. Pa. 

1989), aff'd, 102 B.R. 411 (E.D. Pa. 1989), aff'd, 908 F.2d 961 

(2d Cir. 1990). However, in such cases, the court "'should give 

the parties notice of the changed status of the motion and thereby 

provide the parties to the proceedings the opportunity to present 

to the court all material made pertinent to such motion by Rule 

56.'" Nichols v. United States, 796 F.2d 361, 364 (10th Cir. 

1986) (quoting State of Ohio v. Peterson, Lowry, Rall, Barber & 

Ross, 585 F.2d 454, 457 (10th Cir. 1978)). 

In the instant case, creditor sought revocation of debtors' 

discharge pursuant to§ 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 granting 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 of or entitlement to such property, or 

to deliver or surrender such property to the 

trustee •••. 

11 u.s.c. § 727(d) (West Supp. 1990). To revoke a discharge under 

§ 727(d), the debtor must have committed a fraud in fact which 

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would have barred the discharge had the fraud been known. In re 

Peli, 31 B.R. 953, 955 (Bankr. E.D.N.Y. 1983); see 4 L. King, 

(ed.) Collier on Bankruptcy§ 727.15 (1990); see,~, In Re 

Burke, 99 B.R. 431, 433-34 (Bankr. W.D. Mo. 1989) (trustee awarded 

monies concealed by debtor when discharge obtained through fraud); 

see generally Ginsberg v. Thomas, 170 F.2d 1, 4 (10th Cir. 1948) 

(discussing revocation of discharge under old Bankruptcy Act). 

Such fraud must be discovered after discharge to effectuate 

revocation under§ 727(d), In re Dietz, 914 F.2d 161, 163 (9th 

Cir. 1990), 

As a general rule, to obtain relief under§ 727(d)(l), 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, Fed. R. Bankr. P. 7009, which 

incorporates Fed. R. Civ. P. 9(b)(l), requires that a complaint 

brought under§ 727(d) set forth the time, place and contents of 

the false representation, the identity of the party making the 

false statement and the consequences thereof. See Jones, 71 B.R. 

at 683; In re Hollis & Co., 86 B.R. 152, 156 (Bankr. E.D. Ark. 

1988); In re Baker, 66 B.R. 652, 653 (Bankr. D. Nev. 1986). 

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 

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substantial, and 4) creditor did not learn of such fraud until 

after debtors' discharge. In adjudicating debtors' motion to 

dismiss pursuant to Fed. R. Bankr. P. 7012(b), the bankruptcy 

court was obliged to accept as true all the allegations in 

creditor's complaint. Although a copy of E-4 Excavating, Inc.'s 

tax return was appended to debtors' motion to dismiss, nothing in 

the record indicates that the bankruptcy court notified creditor 

that it was converting debtors' motion to dismiss into one for 

summary judgment. Thus, in finding that creditor knew or should 

have known of debtors' fraud prior to discharge on the basis of 

the tax returns of E-4 Excavating, the court improperly considered 

matters outside the pleadings in this particular case. See 

Nichols, 796 F.2d at 364. 

Creditor's complaint stated all of the elements of a cause of 

action for revocation of discharge under§ 727(d)(l) and satisfied 

the particularity requirement of Fed. R. Bankr. P. 7009. See In 

re Peli, 31 B.R. 952, 954-55 (Bankr. E.D.N.Y. 1983). We express 

no opinion on whether, after further proceedings, creditor's 

action should be barred by either laches or the statute of 

limitations. 3 Rather, we hold only that creditor's complaint 

3 In dismissing creditor's complaint, the bankruptcy court 

explicitly declined to address debtors' contention that creditor's 

action was time-barred under 11 u.s.c. § 727(e). See rec. vol. 

II, doc. 10 at 1-2. Nevertheless, debtors argue on appeal that 

creditor's action is untimely and have moved to supplement the 

record with supporting documentation. Because no court below has 

ruled on debtors' limitation argument, we decline to reach the 

issue for the first time on appeal and deny debtors' motion to 

supplement the record. 

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stated a colorable claim for relief barring dismissal under Fed. 

R. Bankr. P. 7012(b). 

B. 

We now turn to the district court's affirmance of the 

bankruptcy court's award of attorney's fees pursuant Fed. R. 

Bankr. P. 9011 which incorporates Fed. R. Civ. P. 11. The legal 

and factual determinations underlying a court's imposition of Rule 

11 sanctions are reviewed for abuse of discretion. Cooter & Gell 

v. Hartmarx Corp., 110 s. Ct. 2447, 2460-61 (1990). Here, 

however, not only was fee award of attorney's fees unjustified, it 

was based on an erroneous interpretation of the law, i.e., that 

dismissal was warranted under Fed. R. Bankr. P. 7012(b). 

"Rule 11 imposes a duty on attorneys to certify that they 

have conducted a reasonable inquiry and have determined that any 

papers filed with the court are well-grounded in fact, legally 

tenable, and 'not imposed for any improper purpose.'" Id. at 2454 

(quoting Fed. R. Civ. P. 11). 

Part of a reasonable attorney's prefiling investigation 

must include determining whether any obvious affirmative 

defenses 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 only response to 

an affirmative defense is unreasonable. 

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White v. General Motors Corp., 908 F.2d 675, 682 (10th Cir. 1990) 

(citations omitted). 

In awarding sanctions under Fed. R. Bankr. P. 9011, the 

bankruptcy court held that because creditor had a duty to 

determine debtors' financial situation based upon the information 

available at the time of discharge, its revocation action 

constituted an improper attempt to collect a discharged debt. 

However, in its pleadings before the bankruptcy court, creditor 

advanced a colorable argument why the affirmative defense of 

laches and the one-year statute of limitations should not bar its 

revocation. See rec. vol. II, docs. 4 & 8. Creditor contended 

that, because it lacked actual knowledge of debtors' alleged 

fraud, imposition of laches· was improper. Creditor also argued 

that debtors engaged in fraudulent settlement negotiations 

warranting the invocation of the court's equitable power to toll 

the statute of limitations. After further proceedings, the court 

may deem creditor's arguments to be unpersuasive, although we 

express no opinion here. Thus, because creditor advanced "a 

colorable argument as to why an otherwise applicable affirmative 

defense is inapplicable," White, 908 F.2d at 682, the bankruptcy 

court abused its discretion in determining that creditor's action 

was filed for an improper purpose and assessing sanctions pursuant 

to Fed. R. Bankr. P. 9011. 

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. 

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