Colombo Bank, F.S.B. v. Barnes

UNITED STATES BANKRUPTCY COURT
FOR THE DISTRICT OF COLUMBIA
In re
JAMES G. BARNES and IRALINE
G. BARNES,
Debtors.
____________________________
COLOMBO BANK, FSB,
Plaintiff,
v.
JAMES G. BARNES,
Defendant.
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Case No. 04-01124
(Chapter 7)
Adversary Proceeding No.
06-10028
DECISION AND ORDER RE MOTION TO DISMISS
The court will deny the motion to dismiss filed by the
defendant Barnes for the following reasons.
The plaintiff seeks under 11 U.S.C. § 727(d)(3) to revoke
Barnes's discharge based on Barnes's alleged refusal to comply
with several orders. Under 11 U.S.C. § 727(d)(3), the court
shall revoke a discharge if “the debtor committed an act
specified in subsection (a)(6) of this section[.]” Section
727(a)(6), in turn, provides, in relevant part, for denial of a
The Decision and Order below is hereby signed.
Dated: August 29, 2006.
_____________________________
S. Martin Teel, Jr.
United States Bankruptcy Judge
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1 See also Longo v. McLaren (In re McLaren), 136 B.R. 705,
717 (Bankr. N.D. Ohio 1992), aff'd, 3 F.3d 958 (6th Cir. 1993);
Werner v. Puente (In re Puente), 49 B.R. 966, 969 (Bankr.
W.D.N.Y. 1985). Dicta in two other decisions supports Barnes’s
position. See Katz v. Araujo (In re Araujo), 292 B.R. 19 (Bankr.
D. Conn. 2003); Concannon v. Costantini (In re Costantini), 201
B.R. 312, 315 (Bankr. M.D. Fla. 1996).
2
discharge if “the debtor has refused, in the case . . . to obey
any lawful order of the court . . . .”
I
Under a literal reading of the statute, the complaint is
timely because 11 U.S.C. § 727(e)(2) permits a § 727(d)(3)
complaint to be pursued any time prior to the closing of the case
and the defendant's bankruptcy case was never closed. Barnes
nevertheless argues that the complaint is untimely because it is
based upon his failure to comply with orders prior to entry of
the discharge.
The holding in Canfield v. Lyons (In re Lyons), 23 B.R. 123,
125-26 (Bankr. E.D. Va. 1982),1 is consistent with Barnes's
argument. Furthermore, the Lyons decision is cited to in
Collier's for the proposition that:
The purpose of section 727(d)(3) is to make it possible
for the debtor to obtain a discharge early in the case
but, to protect the estate and creditors, make it
revocable if the debtor later refuses to obey an order
or answer a question. [Citing S. Rep. No. 1173, 91st
Cong., 2d Sess. 12 (1970).] The “refusal” under
section 727(d)(3) should be considered a refusal that
occurs after the granting of the discharge. Adequate
remedy is provided in section 727(a)(6) for any refusal
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2 As explained in n. 7, infra, 1A Collier's on Bankruptcy,
¶ 15.12B at 1511 (14th ed. 1973) took a somewhat similar view
regarding Bankruptcy Act § 15(3), but that view could be
justified by the statute's permitting the revocation proceeding
to be dismissed if the creditor was guilty of laches.
3 S. Rep. No. 1173, 91st Cong., 2d Sess. 12 (1970).
3
that occurs before discharge. [Citing Lyons.]2
6 Collier's on Bankruptcy, ¶ 727.15[5] at 727-77 (15th ed. 2003).
Neither Lyons nor Collier's persuades me that § 727(d)(3) is
limited to post-discharge refusals.
First, Lyons simply assumed that § 727(d)(3) “does not give
a party in interest, who has knowledge of the probable wrongdoing
the privilege to wait until after a discharge is granted to ask
the court to revoke the discharge.” Lyons, 23 B.R. at 126.
Moreover, Lyons was decided before a long line of Supreme Court
decisions clarified that the plain language of a statute must be
enforced if it is not the product of a scrivener's error and it
does not produce a demonstrably absurd result that Congress could
not have intended. See, e.g., United States v. Ron Pair
Enterprises, 489 U.S. 235, 241 (1989). Here, there was no such
scrivener's error or demonstrably absurd result that warrants
disregarding the statute's plain meaning.
Nothing in the Senate Report3 cited to by Collier's (if it
is even appropriate to examine that Report in interpreting the
statute despite its plain meaning) supports Collier's view of the
statute. The Bankruptcy Act, which was the subject of the Senate
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4 Although that letter addressed an earlier bill (S. 3523,
91st Cong. (1970)), and although S. 4247 91st Cong. (1970) was “a
perfected version of the bill,” S. 3523 and S. 4247 were
identical with respect to the provisions of relevance here.
4
Report cited to by Collier’s, already included a provision,
similar to current 11 U.S.C. § 727(a)(6), requiring the court not
to grant the bankrupt a discharge if the bankrupt “in the course
of a proceeding under this Act refused to obey any lawful order
of, or to answer any material question approved by, the court.”
Bankruptcy Act § 14c(6). However, at the time of the Senate
Report, the Act included no provision for revocation of a
discharge based on a refusal to comply with an order of the
court. Included in the Senate Report was a letter from the
National Bankruptcy Conference4 which had as an attachment an
explanatory memorandum stating in pertinent part:
Revocation, under the proposal, would be proper in addition
to the present ground of fraud, where the bankrupt . . .
refused to obey a lawful order of the court or answer any
material question approved by the court any time during the
pendency of the action. For such refusal the time to apply
for revocation is the present 1-year period or any time
during the pendency of the proceeding, whichever is longer.
This change would render it unnecessary for the bankruptcy
court to delay determining whether the bankrupt is entitled
to a discharge in order to make sure that the bankrupt
complies with orders and responds to questions after
granting of the discharge. Revocation of discharge rather
than delay in granting would be a preferable procedure and
is of sufficient strength to prevent abusive tactics by a
bankrupt.
S. Rep. No. 1173, 91st Cong., 2d Sess. 12 (1970). The memorandum
is consistent with a literal interpretation of the statute as
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5 See Union Bank v. Wolas, 502 U.S. 151, 157-58 (1991)
(“[E]ven if Congress adopted the 1984 amendment [to § 547(c)(2)]
to redress particular problems of specific short-term creditors,
it remains true that Congress redressed those problems by
entirely deleting the time limitation in § 547(c)(2). The fact
that Congress may not have foreseen all of the consequences of a
statutory enactment is not a sufficient reason for refusing to
give effect to its plain meaning.”); Toibb v. Radloff, 501 U.S.
157, 164 (1991) (“[I]t makes no difference whether the
legislative history affirmatively reflects such an intent,
because the plain language of [§ 109] allows a consumer debtor to
proceed under Chapter 11.”).
5
covering both pre-discharge and post-discharge refusals, as the
memorandum expressly describes the statute as including refusals
arising “any time during the pendency of the action.” That the
last two quoted sentences of the memorandum can be read as
singling out post-discharge refusals for special comment does not
alter the memorandum's earlier acknowledgment that both pre-
discharge and post-discharge refusals are grounds for revocation
of the discharge. Furthermore, that Congress may have focused on
a specific problem in enacting a statute does not limit the
statute's plain language to only that problem.5 The Senate
Report, therefore, does not support Collier's position.
Moreover, the statute itself contains strong evidence that §
727(d)(3) is not limited to refusals arising post-discharge.
Section 727(d)(1) permits revocation of the discharge if:
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.
A similar limitation could easily have been written into §
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6 As observed by the plaintiff in footnote 2 of its
memorandum:
[T]o extend Canfield to a situation where no party had any
reason to know prior to discharge that the debtor’s
disobedience was material would simply invite creditors in
the future to defensively file objections to discharge even
for seemingly-immaterial violations merely to preserve their
rights – hardly a result this Court should encourage unless
explicitly required by statute.
7 Presumably this is why an earlier edition of Collier’s
opined that a failure to object to the granting of a discharge
based on a refusal occurring prior to discharge “might preclude
its use thereafter for the revocation of the discharge.” 1A
Collier's on Bankruptcy, ¶ 15.12B at 1511 (14th ed. 1973).
6
727(d)(3), and if Congress wanted such a limitation, it
presumably would have included it in § 727(d)(3). Although there
are policy justifications for including such a limitation in §
727(d)(3), Congress may have determined that those policy
considerations were outweighed by other competing policy
considerations (one of which may have been the difficulty a
trustee faces in ascertaining, at an early stage of a debtor's
failure to comply with an order, whether the failure is based on
a refusal instead of mistake or inability to comply).6
Furthermore, under Bankruptcy Act § 15 only a party in
interest “who has not been guilty of laches” could seek to revoke
a discharge, thus enabling the court to deny revocation when the
party seeking revocation had been aware of the debtor's refusal
well before the grant of the debtor's discharge.7 Congress did
not see fit to include the laches clause as part of Bankruptcy
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8 It has been held that under Bankruptcy Code § 727(d)(1),
knowledge prior to discharge of facts that indicate a possible
fraud suffices to constitute knowledge of the fraud, thus barring
a revocation of the discharge. Mid-Tech Consulting, Inc. v.
Swendra, 938 F.2d 885, 888 (8th Cir. 1991). In that sense, there
is a duty under § 727(d)(1) to investigate diligently before
discharge any conduct known to be possible fraud, but it is
inaccurate to refer to a failure to fulfill that duty as
presenting a laches defense.
7
Code § 727(d)(3) and § 727(e), arguably reflecting a policy
determination that no laches defense should be available for
reasons similar to those leading Congress not to include in §
727(d)(3) the qualification on revocation of discharge found in §
727(d)(1). See W. Suburban Bank of Darien v. Arianoutsos (In re
Arianoutsos), 116 B.R. 116, 118-19 (Bankr. N.D. Ill. 1990); In re
McDonald, 25 B.R. 186, 188 (Bankr. N.D. Ohio 1982).8 In any
event, the failure to include a laches defense in Bankruptcy Code
§ 727(d)(3) removed any basis for inferring a requirement that
for § 727(d)(3) to apply, the complaint must plead that the
refusal to comply with an order arose post-discharge.
II
Section 15 of the Bankruptcy Act included an express
provision barring parties who were guilty of laches from seeking
revocation of a debtor’s discharge, whereas the Bankruptcy Code
contains no similar provision. Barnes has not briefed the issue
of whether nevertheless the doctrine of laches can be applied to
a § 727(d)(3) complaint, and the court will not consider that
issue in disposing of this motion. If laches is an available
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8
defense, it is an affirmative defense to be pled and proven. See
Rezin v. Barr (In re Barr), 207 B.R. 168, 174 (Bankr. N.D. Ill.
1997). The court's ruling does not preclude Barnes from
supplying arguments at a later stage to justify the application
of laches notwithstanding that Congress elected not to include
lack of laches as an express element of a § 727(d)(3) complaint.
III
Barnes argues that a debtor’s mere failure to comply with an
order does not constitute a refusal within the meaning of §
727(d)(3) where a creditor does not show willful or intentional
disobedience, as opposed to inability, inadvertence, or mistake.
However, paragraph 51 of the complaint alleges that Barnes
refused to obey each of the orders. The plaintiff is thus
entitled to present evidence to show that Barnes's failure to
comply with the orders arose from a refusal.
IV
Barnes argues that failure to comply with two of the six
orders at issue (the two orders entered after the discharge was
granted) ought not be a basis for revoking the discharge because
Barnes eventually complied, citing In re Weisberg, 202 B.R. 332
(Bankr. D.N.H. 1996). Although it is tempting to follow Weisberg
because experience teaches that in almost all instances belated
compliance with a routine order to correct filing deficiencies
will not rise to the level of the debtor having, before such
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9
compliance, “refused” to comply, the issue is one that ought to
be addressed at a trial. A creditor might show that the debtor's
failure was a deliberate disregard of the court's orders--as
opposed to a misunderstanding of what was required, or inaction
attributable to circumstances which prevented the debtor timely
to respond to the court's order–-and that no other circumstances
justify treating the failure, despite the routine nature of the
order, as other than a “refusal.”
In this regard, Barnes suggests that the revocation of a
debtor's discharge is discretionary. This may have been true
under the Bankruptcy Act § 15 (using the word “may”), but it is
not true under Bankruptcy Code § 727(d) (using the word “shall”)
unless “discretion” is understood to mean the court's exercising
discretion in the fact finding process of determining whether a
“refusal” occurred.
Additionally, the parties have not fully briefed what
factors the court can take into account in exercising its fact
finding discretion in determining whether there was a “refusal.”
For example, to establish a “refusal” does it suffice to show
that the debtor engaged in conduct demonstrating an intentional
failure to comply, despite an ability to do so, with what he
understood an order to command? Or may the court in deciding
whether a “refusal” occurred consider additional factors such as
whether the failure to comply caused no difficulties for the
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10
trustee and creditors? See Commerce Bank & Trust Co. v. Burgess
(In re Burgess), 955 F.2d 134, 138 (1st Cir. 1992); Friendly Fin.
Disc. Corp. v. Jones (In re Jones), 490 F.2d 452 (5th Cir. 1974)
(Bankruptcy Act decision); In re Kokoszka, 479 F.2d 990, 997-98
(2d Cir. 1973) (Bankruptcy Act decision). Although that may be a
legal question, it is best decided in the context of a fully
developed factual record.
V
Although the complaint additionally points to false
statements in Barnes's schedules, the deadline to seek revocation
of Barnes's discharge pursuant to 11 U.S.C. § 727(d)(1) based on
those false statements expired under 11 U.S.C. § 727(e)(1) prior
to the filing of the plaintiff's complaint, and the discharge
cannot be revoked based on such false statements. Accordingly,
the complaint, which does not invoke § 727(d)(1), is limited to
seeking a revocation of the discharge under § 727(d)(3).
VI
Barnes also seeks dismissal based on lack of standing,
contending that the plaintiff has not alleged that it is a
creditor. However, the plaintiff alleges that it was owed a debt
by Barnes on the petition date, which establishes creditor status
on the petition date. 11 U.S.C. § 101(10). The complaint then
makes clear that the plaintiff is pursuing relief precisely
because competing liens not scheduled by Barnes left no equity in
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11	O:\JUDGTEMP\Colombobank vs Barnes Decision re MTD v5.wpd
Barnes's real property from which the plaintiff's “debt owed to
it,” secured by a judgment lien on the property, could be paid.
This suffices to allege an unpaid debt. In any event, the
plaintiff's memorandum asserts that the plaintiff has not been
paid, and the court will deem the complaint amended to include
that allegation if it is not clear from the complaint already.
VII
In accordance with the foregoing, it is
ORDERED that the defendant’s Motion to Dismiss (D.E. No. 5)
is DENIED.
[Signed and dated above.]
Copies to:
Office of the United States Trustee; all counsel of record.
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