Bankr. L. Rep. P 67,266 in Re Robby Lark Olmstead, Bankrupt. Transamerica Insurance Company v. Robby Lark Olmstead, 608 F.2d 1365, 10th Cir. (1979)

608 F.
2d 1365
Bankr. L. Rep. P 67,266

In re Robby Lark OLMSTEAD, Bankrupt.
TRANSAMERICA INSURANCE COMPANY, PlaintiffAppellee,
v.
Robby Lark OLMSTEAD, Defendant-Appellant.
No. 79-1367.
United States Court of Appeals,

Tenth Circuit.
Submitted Sept. 20, 1979.
Decided Nov. 16, 1979.
Byrne A. Bowman, Oklahoma City, Okl., for plaintiff-appellee.

Ray K. Babb, Jr., Babb & Roberson, Oklahoma City, Okl., for defendantappellant.
Before LEWIS, McWILLIAMS and LOGAN, Circuit Judges.
PER CURIAM.
This is an appeal from a final order entered by the District Court for the
Western District of Oklahoma which had affirmed some designated orders of
the bankruptcy court in the case at bar. The dispositive facts necessary for our
consideration are not in dispute.
On June 2, 1978, the Federal Deposit Insurance Company (hereinafter referred

to as FDIC) filed suit against Transamerica Insurance Company, the plaintiff
herein, on two bankers' blanket bonds to recover $212,862.23 for alleged illegal
acts of three individuals, including Robby Lark Olmstead, the defendant and
bankrupt herein.1 Transamerica thereafter filed a third party complaint against
Mr. Olmstead, alleging that if FDIC recovers against it, and it pays,
Transamerica will be subrogated to the rights of FDIC against Olmstead.
On the last day of July, 1978, Mr. Olmstead filed a petition for voluntary
bankruptcy and listed FDIC and Transamerica as creditors. Filing of the
petition acted to automatically stay the FDIC v. Transamerica v. Olmstead
proceeding under rule 401 of the Rules of Bankruptcy Procedure, 11 U.S.C.
The bankruptcy court set September 25, 1978, as the last day for filing
objections to discharge of the bankrupt and as the last day for filing complaints
to determine dischargeability of any debt. Prior to that date FDIC filed a
complaint objecting to dischargeability of its claim.2
On October 24, 1978, Transamerica filed an application for modification of the

stay. This application was later amended to read "Complaint and application" as
required by rule 401 of 11 U.S.C. After reviewing the file and hearing argument
on the complaint the bankruptcy court filed an order permitting Transamerica
to proceed against the bankrupt.
On appeal to this court bankrupt contends that the lower court erred in
permitting Transamerica to file a complaint requesting modification of the
automatic stay subsequent to the last day fixed for filing objections to discharge
under bankruptcy rule 404. Bankrupt's contention is unpersuasive in several
respects. Although bankruptcy rule 404(a) requires the court to fix a specified
date for filing objections to discharge Transamerica's amended complaint was
not an objection to discharge; it was an application to modify the automatic
stay. Bankruptcy rule 401 rather than rule 404 is therefore applicable.
Significantly, rule 401 sets no time limitation for filing a complaint requesting
relief from a stay. Subsection (b) of 401 specifies that a stay, unless annulled,
terminated or otherwise modified continues until the bankrupt's case is
dismissed or the bankrupt is denied a discharge or waives or otherwise loses his
right thereto. Because the Act specifies no time limitation for dismissing a case
or determining dischargeability of a debt we are led to the conclusion that the
automatic stay may be modified pursuant to a complaint filed at any time
before the case is dismissed or discharge is denied.
Even if the rule 404(a) time limitation were applicable to Transamerica's

October 24th complaint the lower court's judgment would not be erroneous.
Subsection (c) of rule 404 states: "The court may for cause, on its own
initiative, or on application of any party in interest, extend the time for filing a
complaint objecting to discharge." The bankruptcy court permitted the October
24th filing and lifted the stay so that "the ends of justice might be served." That
justice might be served is sufficient cause to extend the time for pleading and
for this court to sustain that ruling. See United States v. Hall, 5 Cir., 565 F.2d
917.
8
Bankrupt further contends that the district court erred by affirming the
bankruptcy court's modification of the automatic stay without first determining
dischargeability of Transamerica's claim. Section 17 of the Bankruptcy Act, 11
U.S.C. 35, provides that only provable debts are dischargeable in bankruptcy.
Section 57(d) of the Act, 11 U.S.C. 93(d), mandates that contingent or
unliquidated claims be liquidated or reasonably estimated "in the manner and
within the time directed by the court." This latter provision has been interpreted
as giving the bankruptcy court discretion to chose the most appropriate means
of liquidating a claim. See Wood v. Fiedler, 8 Cir., 548 F.2d 216. In the instant
case Transamerica's claim against the bankrupt is contingent upon the outcome
of FDIC's claim against Transamerica. Consequently, it is within the
bankruptcy court's discretion to determine how the claim will be liquidated,
whether that be by judgment of another court or by estimation on its own
behalf.
We think it clear that the 1970 amendment to 11 U.S.C. 35 did not divest the
bankruptcy court of the discretion granted it in 11 U.S.C. 93(d). The 1970
amendment requires the bankruptcy court upon appropriate application, to
finally determine the dischargeability of any debt. 11 U.S.C. 35(c)(3). This
amendment was enacted to prevent a particular abuse that existed prior thereto.
Before the 1970 amendment a debt discharged in bankruptcy was waived by
failure of the bankrupt to properly plead the discharge in defense of an action
on the debt. Consequently, creditors whose claims had been discharged in
bankruptcy would often sue the bankrupt in state courts intending that the
bankrupt default because of a misplaced reliance on the discharge or because
the bankrupt was unable to afford an attorney to defend the claim. See
H.Rep.No.91-1173, 91st Cong., 2d Sess. (1970); 1A Collier, Bankruptcy P
17.28A, 1735-1736.
10
Modification of the stay on the FDIC v. Transamerica v. Olmstead action prior

to a determination of dischargeability will not subject the bankrupt to the abuse
which the 1970 amendment was designed to prevent. The bankruptcy court is
not abdicating its duty to determine dischargeability of the debt; it is only
deferring that determination until another court determines Olmstead's liability.
When the bankruptcy court finally determines dischargeability of the debt it
will carry the same effect as if the determination had been made prior to
conclusion of the personal liability action. See In re Mountjoy (W.D.Mo.), 368
F.Supp. 1087; 1A Collier Bankruptcy P 17.17 at 1666-1667.
11
It is therefore our conclusion that the bankruptcy court may, in the exercise of
its discretion, defer its determination of the dischargeability of a debt until the
creditor's claim is liquidated in another court of competent jurisdiction absent
prejudice to the bankrupt. Accord, Wood v. Fiedler, 8 Cir., 548 F.2d 216; In re
Lebow (S.D.N.Y.), 397 F.Supp. 487; In re Mountjoy, supra.
12
On this appeal bankrupt has failed to allege any facts demonstrating that he will
be prejudiced if the Transamerica action is permitted to proceed before
dischargeability of the debt is determined. It is obvious, however, that the
bankruptcy court will save considerable time, effort, and money by awaiting
the outcome of the liability proceeding and reviewing facts there presented to
liquidate and determine dischargeability of the debt. Consequently, we cannot
say that the bankruptcy court abused its discretion by deferring its
determination of dischargeability until the FDIC v. Transamerica v. Olmstead
action is concluded. The judgment and order of the district court is, therefore
13
AFFIRMED.
It is alleged that Mr. Olmstead, former president of First State Bank, Foss,
Oklahoma, as a result of dishonest and illegal actions caused the default or
delinquency of some $365,815.00 of First State Bank auto loans. Furthermore,
Mr. Olmstead pleaded guilty and received a three year suspended sentence for
aiding and abetting another officer of First State Bank in the willful
misapplication of money, funds or credits of the First State Bank of Foss in
violation of 18 U.S.C. 656 and 2
The essence of FDIC's claim is that the bankrupt's debt is not dischargeable
under 11 U.S.C. 35(a)(4) because it was created by his "fraud, embezzlement,
misappropriation or defalcation while acting as an officer or in a fiduciary
capacity."

Bankr. L. Rep. P 67,266 in Re Robby Lark Olmstead, Bankrupt. Transamerica Insurance Company v. Robby Lark Olmstead, 608 F.2d 1365, 10th Cir. (1979)

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608 F.

Bankr. L. Rep. P 67,266

United States Court of Appeals,

Byrne A. Bowman, Oklahoma City, Okl., for plaintiff-appellee.

On June 2, 1978, the Federal Deposit Insurance Company (hereinafter referred

On October 24, 1978, Transamerica filed an application for modification of the

Even if the rule 404(a) time limitation were applicable to Transamerica's

Modification of the stay on the FDIC v. Transamerica v. Olmstead action prior

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