Ainsworth v. Corley et al

1 This is a core proceeding. 	28 U.S.C. § 157(b)(2)(I).
UNITED STATES BANKRUPTCY COURT
FOR THE DISTRICT OF NEW MEXICO
In re:
GLENN NOLAN CORLEY and
JANIE PHILLIPS CORLEY,
Debtors. 	No. 7-05-16827 SA
GARY AINSWORTH,
Plaintiff,
v. 	Adv. No. 05-1265 S
GLENN CORLEY, et al.,
Defendants.
MEMORANDUM OPINION ON REMAND
This matter is before the Court on remand from the United
States District Court for the District of New Mexico after an
appeal by Plaintiff of an Order Dismissing this adversary
proceeding. 	The Court requested briefs on the issues raised in
the remand, and now issues this Memorandum Opinion. 1 	The Court
finds that the First Amended Complaint (“Complaint”) (doc 3)
sufficiently relates back to the Creditor’s Notice of Objection
to Dischargeability of Debt under 11 USC 523 (“Notice”) (doc 1)
such that the Complaint should not be dismissed as to Mr. Corley
but should be dismissed as to Ms. Corley, and that Plaintiff
should be permitted to obtain and serve on Mr. Corley an alias
summons and the Complaint within a reasonable period of time.
BACKGROUND
On November 27, 2005, the last day to timely file complaints
objecting to discharge or dischargeability pursuant to
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2The Notice reads as follows:
CREDITOR’S NOTICE OF OBJECTION TO DISCHARGEABILITY
OF DEBT UNDER 11 USC 523
Gary Ainsworth, ... hereby files his notice of objection to
dischargeability of debt in this bankruptcy proceeding and in
support states as follows:
1. 	Gary Ainsworth is listed as a creditor in the above
bankruptcy proceeding. 	He has filed suit in the Second
Judicial District Court in New Mexico against Mr. Corley for
fraud and false statements in connection with a new home
sale in Albuquerque.
2. 	During that sale, Mr. Corley, the builder of the home, filed
an affidavit with the title company certifying that all
subcontractor liens and bills had been paid on the home. 	As
he then and there knew, that was not correct. 	Mr. Ainsworth
currently owes thousands of dollars to various
subcontractors.
3. 	Mr. Corley thereby obtained the home sale through fraud and
false pretenses. 	He did so willfully and intentionally.
4. 	Mr. Ainsworth accordingly objects to discharge of his debt,
underlying his state court suit against Mr. Corley, which is
pending and stayed in the Second Judicial District Court.
WHEREFORE Mr. Ainsworth gives notice of his objection to
dischargeability of his debt underlying his state court lawsuit
against the above debtor.
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Fed.R.Bankr.P. 4007, Plaintiff filed the Notice 2 in Debtors’
bankruptcy case, 7-05-16827 SA. 	The Notice is deficient as a
complaint: it fails to identify the defendant or defendants, it
does not contain a caption, it fails to allege jurisdiction,
venue or core/non-core status, and does not demand that the Court
declare the debt nondischargeable. 	It only gives notice that
Plaintiff objects to the discharge of his debt and provides some
factual allegations in support thereof.
The Clerk’s office treated the objection as an adversary
complaint and assigned an adversary proceeding number and later
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3Columbia State Bank, N.A. v. Daviscourt (In re Daviscourt),
353 B.R. 674 (10 th Cir. B.A.P. 2006).
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collected the filing fees. 	The Court issued a summons on
December 6, 2005, which Plaintiff never served; rather, he mailed
it to Debtors’ attorney on or about December 20, 2005.
On December 30, 2005, Plaintiff, through his newly hired
bankruptcy counsel, filed a first amended complaint that corrects
all the deficiencies of the Notice; it has a proper caption that
names both joint debtors as defendants, it alleges jurisdiction,
core status, venue, elaborates on the facts set forth in the
Notice, attaches exhibits, and seeks a declaration that the debt
is nondischargeable under 11 U.S.C. §§ 523(a)(2)(A),
523(a)(2)(B), and 523(a)(6).
Defendants moved to strike the Notice and to dismiss the
adversary complaint. 	The Court granted the motion and dismissed
the adversary proceeding. 	Doc 16. 	Plaintiff appealed to the
United States District Court. 	The Honorable Lorenzo F. Garcia,
United States Magistrate Judge, issued a typically thorough and
perspicacious analysis, recommending that the proceeding be
remanded to the Bankruptcy Court so that it could consider a
recently issued 10 th Circuit Bankruptcy Appellate Panel decision 3
and make findings and conclusions regarding the issue of
“relation back” principles under Fed.R.Civ.P. 15(c). 	Doc 26.
The Honorable Bruce D. Black, United States District Judge, in a
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careful and detailed response to the objections raised by the
Defendants, adopted the analysis and recommendation of the
Magistrate Judge. 	Doc 27. 	The District Court stated that the
adversary proceeding should be remanded for a consideration of,
inter alia, the relation back issue, and “[i]f ... the Bankruptcy
Court allows relation back, that court will determine what claims
and parties can be added and whether service of process affects
that decision, including whether the party to be added received
sufficient notice and knowledge of the litigation not to be
prejudiced by an amendment.” 	Id. at 7-8.
ANALYSIS
Federal Bankruptcy Rule 7015 adopts Fed.R.Civ.P. 15. 	Rule
15(c) provides, in relevant part:
(c) Relation Back of Amendments. An amendment of a
pleading relates back to the date of the original
pleading when
...
(2) the claim or defense asserted in the amended
pleading arose out of the conduct, transaction, or
occurrence set forth or attempted to be set forth
in the original pleading[.]
The Federal Practice & Procedure guide provides a useful overview
of Rule 15(c):
The first sentence of Rule 15(c) enunciates the
basic principle that an amended pleading alleging a new
or different claim or defense will not relate back
unless it arose out of the conduct, transaction, or
occurrence that was set forth or was attempted to be
set forth in the original pleading. 	When plaintiff
attempts to allege an entirely different transaction by
amendment, Rule 15(c) will not authorize relation back.
...
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[A]mendments that merely correct technical
deficiencies or expand or modify the facts alleged in
the earlier pleading meet the Rule 15(c) test and will
relate back. 	Thus, amendments that do no more than
restate the original claim with greater particularity
or amplify the details of the transaction alleged in
the preceding pleading fall within Rule 15(c). 	But, if
the alteration of the original statement is so
substantial that it cannot be said that defendant was
given adequate notice of the conduct, transaction, or
occurrence that forms the basis of the claim or
defense, then the amendment will not relate back and
will be time barred if the limitations period has
expired.
Amendments curing a defective statement of subject
matter jurisdiction, venue, or personal jurisdiction
will relate back since they do not violate the standard
prescribed by the rule.
...
Of course, amendments that go beyond the mere
correction or factual modification of the original
pleading and significantly alter the claim or defense
alleged in that pleading are treated more cautiously by
the courts in applying the relation back doctrine.
...
Because the rationale of the relation back rule is
to ameliorate the effect of the statute of limitations,
rather than to promote the joinder of claims and
parties, the standard for determining whether
amendments qualify under Rule 15(c) is not simply an
identity of transaction test; although not expressly
mentioned in the rule, the courts also inquire into
whether the opposing party has been put on notice
regarding the claim or defense raised by the amended
pleading. 	Only if the original pleading has performed
that function, which typically will be the case if the
letter of the test set forth in Rule 15(c) is
satisfied, will the amendment be allowed to relate back
to prevent the running of the limitations period in the
interim from barring the claim or defense. 	A failure
of notice will prevent relation back.
...
The fact that an amendment changes the legal
theory on which the action initially was brought is of
no consequence if the factual situation upon which the
action depends remains the same and has been brought to
defendant's attention by the original pleading.
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Thus, an amendment may set forth a different
statute as the basis of the claim, or change a common
law claim to a statutory claim or vice-versa, or shift
from a contract theory to a tort theory, or delete a
negligence count and add or substitute a claim based on
warranty, or change an allegation of negligence in
manufacture to continuing negligence in advertising.
Indeed, an amendment that states an entirely new claim
for relief will relate back as long as it satisfies the
test embodied in the first sentence of Rule 15(c).
Wright, Miller & Kane, 6A Fed. Prac. & Proc. Civ.2d § 1497
(footnotes omitted). 	See also Weiss v. Alicea (In re Alicea),
230 B.R. 492, 498-99 (Bankr. S.D. N.Y. 1999)(Citations and
internal punctuation omitted):
Under Fed.R.Civ.P. 15(c)(2), an amended pleading
relates back to an earlier pleading if the amended
pleading sets forth claims arising out of the same
conduct, transaction or occurrence set forth or
attempted to be set forth in the earlier pleading. 	The
principal inquiry is whether adequate notice of the
matters raised in the amended pleading has been given
to the opposing party by the general fact situation
alleged in the original pleading. 	New allegations in
the amended pleading relate back if they amplify the
facts alleged in the original pleading or set forth
those facts with greater specificity. 	A revised
pleading will also relate back if it asserts new legal
theories based on the same series of transactions or
occurrences. 	Conversely, the amended complaint will
not relate back if it is based on new facts and
different transactions.
A Court applies a two part analysis to determine whether a
pleading relates back to an earlier pleading. 	First, does the
claim or defense asserted in the amended pleading arise out of
the conduct, transaction, or occurrence set forth or attempted to
be set forth in the original pleading? 	Fed.R.Civ.P. 15(c)(2).
Second, if so, does the original pleading give fair notice of the
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Page -7-
general fact situation out of which the claim or defense arises?
Columbia State Bank, N.A. v. Daviscourt (In re Daviscourt), 353
B.R. 674, 683 (10 th Cir. B.A.P. 2006)(quoting Maes v. Herrera (In
re Herrera), 36 B.R. 693, 694 (Bankr. D. Colo. 1984)). 	“[T]he
‘bottom line’ under Rule 15(c) is the notice given to the
opposing party.” 	Id. 	See also Stevelman v. Alias Research,
Inc., 174 F.3d 79, 86-87 (2 nd Cir. 1999)(“[T]he central inquiry is
whether adequate notice of the matters raised in the amended
pleading has been given to the opposing party within the statute
of limitations by the general fact situation alleged in the
original pleading.”)(Citation and internal punctuation omitted.)
1. 	The claim asserted in the amended Complaint arises out of
the conduct, transaction, or occurrence set forth in the
original Notice.
The Notice states that it seeks a determination of the non-
dischargeability of a debt that is represented by a pending state
court case against Mr. Corley for fraud and false statements in
connection with a new home sale in Albuquerque. 	It states that
Mr. Corley, as builder of the home, filed a false affidavit with
the title company alleging that all liens and bills had been
paid, but that he knew they were not. 	And, it states that Mr.
Corley obtained the home sale through fraud and false pretenses.
The First Amended Complaint (“Complaint”) provides
introductory allegations of jurisdiction, parties, and the
procedural posture of the case. 	It then states that Mr.
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Page -8-
Ainsworth and Mr. Corley executed a contract for the purchase and
sale of a new home in Albuquerque. 	It provides additional
details of the transaction, quoting from the attached purchase
agreement. 	It also provides additional details by quoting the
affidavit Mr. Corley provided to the title company. 	The
Complaint then restates that Mr. Corley misrepresented facts with
the intention to deceive or cheat, and that he knew there were
unpaid liens on the property. 	Count I states that Plaintiff is
entitled to judgment under 11 U.S.C. § 523(a)(2)(A) for false
pretenses, false representations or actual fraud. 	Count II seeks
relief under 11 U.S.C. § 523(a)(2)(B) for use of a materially
false written statement regarding his financial condition. 	Count
III seeks relief under 11 U.S.C. § 523(a)(6) for willful and
malicious injury.
Both the Notice and Complaint are based on the same set of
facts as alleged in the Notice, the purchase and sale of a house
in Albuquerque that resulted in the state court lawsuit. 	This
was also the finding of the Magistrate Judge, see Magistrate
Judge’s Analysis and Recommended Disposition, doc 26 at page 20,
and adopted by the District Court, see Order Adopting Magistrate
Judge’s Findings and Recommended Disposition, doc 27 at page 8.
Defendants argue that the Amended Complaint improperly
included allegations not in the Notice, such as that Mr. Corley
acted with malice and that the Plaintiffs reasonably relied on
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Page -9-
his affidavit. 	Doc 31 at pages 3-4. 	Defendants argue that these
additional allegations cure defects in the Notice by stating
required elements of a nondischargeability complaint. 	This is
not improper. 	As long as the claim in the amended pleading
arises out of the same transaction alleged in the original
pleading, relation back is allowed. 	See Alicea, 230 B.R. at 498,
quoted above.
Therefore, the first step of the analysis indicates that the
Amended Complaint may well relate back to the date of the Notice.
The Court now turns to the second step, whether the original
pleading gave fair notice of the general fact situation out of
which the claim arises.
2. 	The Notice gave fair notice of the general fact situation
out of which the claim arises.
The Notice was very specific – it complained about damages
that resulted when the Defendant sold a house to Plaintiff and
made misrepresentations about outstanding bills and liens. 	This
Court finds that the Notice did give fair notice that Plaintiff
was complaining about a specific transaction and the damages that
flowed from it. 	As the Magistrate Judge noted, “neither Glenn
Corley nor Janie P. Corley can ‘claim to have been surprised by
the claims set forth in the amended complaint’ as the allegations
in the Notice of Objection are based on the same conduct as that
alleged in the state court case, and the Corleys cannot have been
taken by surprise when Mr. Ainsworth challenged the
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Page -10-
dischargeability of his debt on the basis of fraud and
misrepresentation.” 	Doc 26, at page 19.
3. 	The Notice did not give fair notice that a
nondischargeability claim was being asserted against
Defendant Janie P. Corley.
In light of the explicit description contained in the
Notice, there is no question that the Defendants were from the
outset on notice of the claims against Mr. Corley. 	Just as
clearly, however, the same cannot be said of Ms. Corley. 	The
only explicit or implicit mention of Ms. Corley in the Notice, is
in the style of the bankruptcy case, where both Debtors’ names
would be expected to appear regardless of what relief is being
sought in the document at issue. 	Nothing in the Notice otherwise
refers to Ms. Corley; it speaks explicitly and only of Mr. Corley
and his actions. 	Therefore both Defendants, and especially Ms.
Corley, were likely quite surprised to see her named as a
defendant in the Complaint. 	Indeed, the Complaint itself
continues to recite only the actions of Mr. Corley as giving rise
to the alleged nondischargeable claims. 	Aside from her name
appearing in the bankruptcy case style, Ms. Corley is mentioned
in the Complaint only in the adversary proceeding case style, in
the introductory paragraph to the complaint identifying parties,
in the opening line of the prayer for relief (referring to
“Defendants”), in paragraph A of the prayer (referring to
“Defendants’ debt”), and perhaps in paragraph B (reciting “[t]hat
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4 Plaintiff also asks that “the community claims and debts”
identified in the Complaint not be discharged. 	In this decision
the Court does not rule on the legal effects of holding
nondischargeable some or all of (only) Mr. Corley’s debt to
Plaintiff.
Page -11-
Defendants owes [sic] Plaintiff....”). 4 	The precise wording of
the Complaint, as drafted by counsel clearly complying with
ethical and professional standards of conduct, provides further
support for the conclusion that the Notice did not even intend to
include Ms. Corley. 	Therefore the Court concludes that the
Complaint relates back to the Notice only as to Mr. Corley.
4. 	Other issues on remand.
The District Court also remanded for findings on the
electronic filing of Mr. Ainsworth’s Notice “to the extent Judge
Starzynski determines those findings are pertinent.” 	Mr. Bowles’
explanation that he inadvertently used the previous login and
password provides is reasonable and provides no basis for any
finding of bad faith. 	In addition, there has been no showing of
any legal prejudice to Mr. Corley. 	This Court agrees with
District Court Judge Black that the objection is hypertechnical,
and provides no basis for not permitting the action to go
forward.
The Magistrate Judge also recommended that this Judge make
findings on the prejudice, if any, to the Defendants if relation
back is allowed. 	The Court finds none. 	Section 523 of the
Bankruptcy Code anticipates that Debtors will have to defend
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against challenges to the discharge of certain of their debts.
Therefore, the mere filing of a 523 complaint cannot be
prejudice. 	The initial “Notice”, although it failed as a
complaint, was filed by the deadline fixed by the Court. 	As the
District Court indicated, “the plain language of [Rule 15] does
not specify that the ‘original pleading’ be a complaint before
relation back principles apply.” 	Doc 27 at 4. 	Therefore, under
Rule 15 the Amended Complaint relates back to the initial Notice
and is deemed timely filed. 	Additionally, Defendants have not
argued that evidence spoiled or witnesses disappeared between the
Notice and Amended Complaint. 	In sum, the Court sees no
prejudice to Defendants in allowing the relation back.
Finally, the Magistrate Judge recommended, and the District
Judge specifically adopted, that the issue of lack of service of
process should be determined on remand. 	Bankruptcy Rule 7004
adopts Fed.R.Civ.P. 4(m), which provides in part:
Time Limit for Service. 	If service of the summons and
complaint is not made upon a defendant within 120 days
after the filing of the complaint, the court, upon
motion or on its own initiative after notice to the
plaintiff, shall dismiss the action without prejudice
as to that defendant or direct that service be effected
within a specified time; provided that if the plaintiff
shows good cause for the failure, the court shall
extend the time for service for an appropriate period.
The plain language of Rule 4(m) broadens the trial court's
discretion by allowing it to extend the time for service even
when the plaintiff has not shown good cause. 	See Espinoza v.
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United States, 52 F.3d 838, 840-41 (10th Cir. 1995). 	If good
cause is shown, relief is mandatory. 	Id. at 841. 	“Relief may be
justified, for example, if the applicable statute of limitations
would bar the refiled action, ...” 	Fed.R.Civ.P. 4, 1993 Advisory
Committee Notes.
In this case, the Notice was filed on November 27, 2005,
which triggered the 120-day period for Fed.R.Civ.P. 4(m). 	The
summons was issued December 6, 2005, but not placed in the mail
within 10 days as required by Bankruptcy Rule 7004(e). 	No alias
summons was ever issued. 	See docket; see also Bankruptcy Rule
7004(e) (“If a summons is not timely delivered or mailed, another
summons shall be issued and served.”). 	Plaintiff did, however,
mail a copy of the Amended Complaint to both the Debtors and
their attorney on December 30, 2005.
Rule 4(m) is implicated in this case. 	Service was not
accomplished within 120 days of the filing of the Notice. 	The
parties agreed that no evidentiary hearing would be required in
determining the issues on remand, so the Court cannot find as a
fact that Plaintiff had good cause for the failure. 	Therefore,
the Court must determine whether it should use its discretion to
extend the deadline.
“Factors to be considered in this regard are: (1)
whether the applicable statute of limitations would bar
the refiled action; (2) whether the defendant had
actual notice of the claims asserted in the complaint;
(3) whether the defendant had attempted to conceal the
defect in service; and (4) whether the defendant would
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Page -14-
be prejudiced by the granting of plaintiff's request
for relief from the provision.” 	Eastern Refractories
Co. v. Forty Eight Insulations, Inc., 187 F.R.D. 503,
506 (S.D. N.Y. 1999) (citation omitted).
Carroll v. Certified Moving & Storage, Co., LLC, Not Reported in
F.Supp.2d, 2005 WL 1711184, at *2 (E.D. N.Y. 2005). 	Considering
these factors, the Court finds that it should extend the
deadline. 	First, the statute of limitations has run. 	Second,
the Defendants had actual notice of the Notice and Amended
Complaint within the 120 days, as evidenced by the January 5,
2006 Motions to Dismiss, Strike Notice, and Quash Summons.
Third, the Court sees no prejudice to the Defendants by allowing
tardy service in this case. 	Finally, there is a general
principle that litigation should be resolved on the merits. 	Id.
at *3.
CONCLUSION
For the reasons set forth above, the Court finds that it
should enter an Order Denying the Motion to Dismiss or Strike
Creditor’s Notice of Objection to Dischargeability of Debt (doc
6), an Order Granting the Motion to Quash Summons and Notice of
Pretrial Conference (doc 7), and an Order Directing Plaintiff to
Request an Alias Summons and to Serve the Complaint and Summons
by a fixed date.
Honorable James S. Starzynski
United States Bankruptcy Judge
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copies to:
Jason Bowles
600 Central SW Ste 111
Albuquerque, NM 87102-3176
William F Davis
PO Box 6
Albuquerque, NM 87103-0006
Paul M Kienzle, III
PO Box 587
Albuquerque, NM 87103-0587
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