Habash, Basem E. v. Zedan, Najib ( 2008 )

In the
United States Court of Appeals
For the Seventh Circuit
____________
No. 07-1286
N AJIB Z EDAN,
Plaintiff-Appellant,
v.
B ASEM E. H ABASH and S USAN H ABASH,
Defendants-Appellees.
____________
Appeal from the United States District Court
for the Northern District of Illinois, Eastern Division.
No. 06 C 4047—Elaine E. Bucklo, Judge.
____________
A RGUED N OVEMBER 8, 2007—D ECIDED JUNE 16, 2008
____________
Before E ASTERBROOK, Chief Judge, and F LAUM and
K ANNE, Circuit Judges.
K ANNE, Circuit Judge. Basem Habash filed a voluntary
bankruptcy petition in August 2004. Nearly 20 months
later, Najib Zedan, a judgment creditor of Habash,
initiated an adversary proceeding that objected to the
discharge of Habash’s debts because of alleged fraud
by Habash in representing his income and assets to the
bankruptcy trustee. See 11 U.S.C. §§ 523(a)(4); 727(d)(1). At
the time Zedan filed the adversary complaint, the dead-
line for creditors to object to a discharge had long passed,
2 No. 07-1286
and the bankruptcy court had yet to grant a discharge to
Habash. The bankruptcy court dismissed Zedan’s com-
plaint, and Zedan immediately appealed the decision to
the district court, which affirmed the dismissal. See Zedan
v. Habash (In re Habash), 360 B.R. 775 (N.D. Ill. 2007). We
also affirm the dismissal of Zedan’s complaint.
I. H ISTORY
Habash filed for bankruptcy in the Northern District of
Illinois in late August 2004. The bankruptcy court sched-
uled the first meeting of creditors for late October 2004,
and set a deadline of December 20, 2004, for creditors to
file objections to the discharge of Habash’s debts. See Fed.
R. Bankr. P. 4004(a). Before the creditors’ meeting, the
appointed bankruptcy trustee resigned; consequently, the
creditors’ meeting was rescheduled for early December
2004. In late November 2004, Zedan, a judgment creditor,
filed a motion to extend the time for creditors to object
to the discharge. The bankruptcy court granted Zedan’s
motion and extended the creditors’ deadline until Feb-
ruary 4, 2005. In January 2005, the newly appointed
bankruptcy trustee, Deborah Ebner, filed a motion to
extend her own deadline to object to Habash’s dis-
charge. This motion, and a subsequent motion to extend,
were both granted, and the trustee was ultimately given
a September 2005 deadline to object to the discharge.
Zedan did not file any objection to Habash’s discharge
before February 4, 2005 (nor did any other creditor). For
the next ten months, Habash cooperated with the
trustee—he participated in discovery conducted by the
trustee’s attorney in September 2005, see Fed. R. Bankr. P.
2004, and negotiated a resolution of his case that would
include an auction of his assets and the eventual dis-
No. 07-1286 3
charge of his debts. The trustee did not object to the
discharge, and in December 2005, the bankruptcy court
entered an order approving the agreed-upon procedure
for dividing Habash’s non-exempt assets, and scheduled
a sale for February 2006.
In January 2006, Zedan hired new counsel, who im-
mediately filed a motion to postpone the scheduled sale.
This eleventh-hour motion argued that the sale of Habash’s
assets should be postponed because, Zedan alleged,
Habash had fraudulently represented his income and the
value of his assets to the bankruptcy trustee. The bank-
ruptcy trustee did not join in Zedan’s objection. On Febru-
ary 8, 2006, the bankruptcy court denied Zedan’s motion,
and on February 15, 2006, the auction sale of Habash’s non-
exempt assets took place. The bankruptcy court approved
the sale a few days later.
In April 2006, Zedan filed an adversary complaint in the
bankruptcy court under 11 U.S.C. §§ 523(a)(4) and
727(d)(1), and also under Illinois law governing fraud-
ulent transfer and misappropriation of corporate assets.
The adversary complaint sought a judgment that Habash’s
debts were non-dischargeable, and reiterated most of the
arguments that Zedan had raised in his motion to postpone
the sale—the adversary complaint alleged fraud by Habash
when disclosing his income, property value, and inventory
to the trustee. See Habash, 360 B.R. at 777. In July 2006,
without issuing an opinion, the bankruptcy court dis-
missed Zedan’s adversary proceeding with prejudice—
ostensibly because the bankruptcy court regarded the
complaint as untimely.1
1
Specifically, the bankruptcy court stated: “The time limits
expired in February of ‘05 and there’s no reason that they
(continued...)
4 No. 07-1286
Zedan immediately appealed the bankruptcy court’s
dismissal to the district court, asserting that the bank-
ruptcy court failed to apply the proper legal standard
when dismissing the adversary complaint and improp-
erly dismissed the complaint as untimely. As for timeli-
ness, Zedan argued that the adversary complaint was
based on fraud that was not discovered until after the
deadline to file objections had lapsed. As such, Zedan
contended that his adversary complaint asserted a
claim based on “newly discovered fraud” under 11 U.S.C.
§ 727(d)(1), and he argued that the timing requirement of
11 U.S.C. § 727(e)—which permits a creditor to pursue
revocation of a discharge within one year of an actual
discharge—should apply instead of the bankruptcy court’s
deadline for creditors to object to the discharge. The
bankruptcy court still had not granted a discharge to
Habash, and Zedan argued that “if one can file an adver-
sary complaint based on fraud one year after discharge,
then surely one can file it after a deadline has passed, but
before a discharge.”
In January 2007, the district court affirmed the bank-
ruptcy court’s dismissal of Zedan’s adversary com-
plaint “on different grounds.” Habash, 360 B.R. at 778. In
the district court’s view, the bankruptcy court had erred
as a matter of law because the February 2005 date to file
objections did not bar Zedan from pursuing relief under
11 U.S.C. § 727(d)(1). See id. The district court held that
because no discharge had ever been entered, Zedan had
acted within the time limits set by 11 U.S.C. § 727(e). See id.
1
(...continued)
should be extended, changing attorneys doesn’t mean you get
to start over again. So the motion to dismiss is granted.” Id.
No. 07-1286 5
However, the district court adopted a different timeliness
limitation: it stated that Zedan was required to file his
adversary complaint within one year of discharge or with-
in one year after the “cut-off date to file objections.” See
id. (citing Citibank N.A. v. Emery (In re Emery), 132 F.3d
892, 895-96 (2d Cir. 1998)). The district court then held
that Zedan’s adversary complaint was still untimely
because he failed to file within one year of the cut-off date.
See id. In addition to untimeliness, the district court also
noted that Zedan’s adversary complaint was legally
insufficient because Zedan failed to plead his claim
with particularity as required by Fed. R. Bank. P. 7009,
and because he had failed to investigate and diligently
pursue his claim despite being on notice of the alleged
fraud. Habash, 360 B.R. at 778-80. Zedan filed a notice of
appeal in this court on February 8, 2007.
II. A NALYSIS
Before we can consider the merits of Zedan’s appeal,
we must first address a question of appellate jurisdic-
tion noticed by the panel. In re Salem, 465 F.3d 767, 771 (7th
Cir. 2006); see also Chiplease, Inc. v. Steinberg (In re Res. Tech.
Corp.), No. 07-1879, slip op. at 13 (7th Cir. May 15, 2008)
(“Our first task is to confirm that we have jurisdiction
to hear this appeal.”). At the time Zedan filed his notice
of appeal, the bankruptcy court had still not decided
whether to grant a discharge to Habash. Shockingly,
neither side’s brief contained this fact—or any facts
regarding the status of the bankruptcy case—as required
by Circuit Rule 28(a)(3). See Fifth Third Bank, Ind. v. Edgar
County Bank & Trust, 482 F.3d 904, 905 (7th Cir. 2007)
(“Circuit Rule 28(a)(3) . . . requires details on how the
matters appealed in a bankruptcy case relate to any part
6 No. 07-1286
of the litigation still under way in the bankruptcy court or
the district court.”). Nor could the parties definitively
answer our questions about the status of the bankruptcy
at oral argument.
Frustrated by this noncompliance with our circuit rules,
Chief Judge Easterbrook, on behalf of the panel, issued an
order from the bench requiring the parties “to file sup-
plemental memoranda addressing whether rejecting a
single potential objection to discharge is a final order
immediately reviewable by the Court of Appeals even
though the bankruptcy judge has yet to decide whether
the debtor will be discharged.” That order also requested
that the parties brief the status of the ongoing bankruptcy
proceedings. The parties complied with the order, and
both supplemental memoranda concluded that we have
jurisdiction over this appeal.
From conducting our own review of the bankruptcy
court’s docket, we learned that Habash’s assets had been
distributed from the estate prior to oral argument in this
appeal, and on November 21, 2007, the bankruptcy court
finally granted a discharge to Habash. On November 27,
2007, Zedan filed a new notice of appeal to the district
court in the bankruptcy proceeding: in that action, pres-
ently before the Northern District of Illinois (No. 08 C
0120), Zedan appealed both the bankruptcy court’s Novem-
ber 21, 2007 discharge order and its July 2006 order dis-
missing his adversary complaint—the order at issue
before us. Habash filed a motion to dismiss that case based
on lack of jurisdiction; that motion is still pending.
This court has jurisdiction over “appeals from all final
decisions, judgments, orders, and decrees entered” by a
district court pursuant to its review of final decisions of a
bankruptcy court. 28 U.S.C. § 158(d)(1). Therefore, we
No. 07-1286 7
only have jurisdiction over a bankruptcy appeal if both
the bankruptcy court’s order and the district court’s
order reviewing that original order are final decisions.
Salem, 465 F.3d at 771 (citing In re Rimsat Ltd., 212 F.3d
1039, 1044 (7th Cir. 2000)). We have observed that
finality in a bankruptcy appeal under 28 U.S.C. § 158(d)
is “considerably more flexible than in an ordinary civil
appeal taken under 28 U.S.C. § 1291.” In re Gould, 977
F.2d 1038, 1040-41 & n.2 (7th Cir. 1992); see also Chiplease,
No. 07-1879, slip op. at 14; In re Forty-Eight Insulations, Inc.,
115 F.3d 1294, 1299 (7th Cir. 1997). In the bankruptcy
context, finality does not require the termination of the
entire bankruptcy proceeding. See In re UAL Corp., 411
F.3d 818, 821 (7th Cir. 2005) (“ ‘[T]he fact that the bank-
ruptcy proceeding continues before the bankruptcy judge
does not preclude treating an interlocutory order by
him—interlocutory in the sense that it does not terminate
the entire proceeding—as final for purposes of appellate
review.’ ” (quoting In re Szekely, 936 F.2d 897, 899 (7th Cir.
1991))). Rather, the test we have utilized to determine
finality under § 158(d) is whether an order resolves a
discrete dispute that, but for the continuing bankruptcy,
would have been a stand-alone suit by or against the
trustee. See Bank of Am. v. Moglia, 330 F.3d 942, 944 (7th
Cir. 2003) (citing Golant v. Levy (In re Golant), 239 F.3d
931, 934 (7th Cir. 2001) and Rimsat, 212 F.3d at 1044).
We have consistently explained that the final disposi-
tion of any adversary proceeding falls within our juris-
diction. See In re Teknek, LLC, 512 F.3d 342, 345 (7th Cir.
2008) (“For the purpose of appellate jurisdiction we treat
adversary proceedings as if they were separate suits.”);
Fifth Third Bank, 482 F.3d at 905 (“A final resolution of any
adversary proceeding is appealable, as it is equivalent to
8 No. 07-1286
a stand alone lawsuit.” (citing Forty-Eight Insulations,
115 F.3d 1294; In re Morse Elec. Co., 805 F.2d 262 (7th
Cir. 1986)) (emphasis added)); Mellon Bank, N.A. v. Dick
Corp., 351 F.3d 290, 292 (7th Cir. 2003) (“We have juris-
diction of the creditors’ appeal, because the order under
review is the final decision in an adversary proceeding.”);
In re Lopez, 116 F.3d 1191, 1193 (7th Cir. 1997) (“A bank-
ruptcy case is often a congeries of functionally distinct
cases. The clearest example is that of the adversary
action . . . . Once the action is finally decided in the bank-
ruptcy and district courts, the fact that the bankruptcy
proceeding may be continuing is no reason to delay the
appeal from the decision in the action, so the decision
is deemed ‘final,’ and appeal allowed.”); see also In re UAL
Corp., 408 F.3d 847, 850 (7th Cir. 2005); In re Marchiando,
13 F.3d 1111, 1113-14 (7th Cir. 1994).
This sweeping language is harmonious with the fact that
adversary proceedings frequently resolve legal issues that
appear logically separate from the ordinary measures
determined in the main bankruptcy proceeding. See Teknek,
512 F.3d at 345 (“Adversary proceedings (for example, tort
actions against a debtor, or attempts by the debtor to
recover preferential transfers) are conceptually distinct
from core matters such as locating the debtor’s existing
assets and approving plans of reorganization.”). But here
the conceptual gap between the subject matter resolved
in the adversary proceeding and “core matters” has been
somewhat narrowed because Zedan has filed an adversary
complaint to revoke a discharge, which is more closely
related to the main proceedings. See Kontrick v. Ryan, 540
U.S. 443, 453 (2004) (noting that Congress has classified an
objection to a debtor’s discharge as a core proceeding); see
also 28 U.S.C. § 157(b)(2)(J). Nevertheless, we have ac-
No. 07-1286 9
knowledged that the dismissal of an adversary com-
plaint objecting to a debtor’s discharge is a final decision
that falls within our jurisdiction. See Marchiando, 13 F.3d at
1113-14; Suburban Bank of Cary Grove v. Riggsby (In re
Riggsby), 745 F.2d 1153, 1154 (7th Cir. 1984) (“[W]e think
it reasonably clear that the dismissal by the bankruptcy
judge of a complaint objecting to the discharge of the
bankrupt is final.”). This is because the adversary pro-
ceeding will finally determine the rights of the creditor
seeking to object to or revoke the discharge, even if it does
not finally determine the rights of the debtor. And that
sort of “discrete” finality is sufficient to confer jurisdic-
tion under the relaxed approach to finality applied in
bankruptcy cases. See, e.g., Chiplease, No. 07-1879, slip op.
at 14; Moglia, 330 F.3d at 944; Forty-Eight Insulations, Inc.,
115 at 1299.
Zedan filed his claim as an adversary proceeding be-
cause the Bankruptcy Rules required him to do so—a
creditor who seeks to object to or revoke the discharge of a
debtor must initiate a separate adversary proceeding. See
Fed. R. Bankr. P. 4004(d), 7001(4). The adversary pro-
ceeding was finally resolved by the bankruptcy court in
July 2006 when it dismissed the adversary complaint
with prejudice. See Fed. R. Bankr. P. 7041 (incorporating
Fed. R. Civ. P. 41 into adversary proceedings in bank-
ruptcy); Fed. R. Civ. P. 41(b) (stating that an involuntary
dismissal “operates as an adjudication on the merits”).
Once the bankruptcy court entered the order of dismissal,
the court was left with nothing further to do with respect
to the adversary complaint. See Marchiando, 13 F.3d at 1113.
Similarly, the district court’s order affirming that dis-
missal also constituted a final judgment. Therefore, we
have jurisdiction over this appeal.
10 No. 07-1286
Turning to the merits, we review the dismissal of an
adversary complaint in bankruptcy de novo. Enodis Corp. v.
Employers Ins. of Wausau (In re Consol. Indus.), 360 F.3d 712,
716 (7th Cir. 2004). We may affirm the district court’s
decision on any basis supported by the record. Dye v.
United States (In re Dye), 360 F.3d 744, 750 (7th Cir. 2004);
Goldberg Sec. Inc. v. Scarlata (In re Scarlata), 979 F.2d 521,
526 n.5 (7th Cir. 1992).
Zedan claims that the bankruptcy court and district
court both erred in dismissing his adversary complaint for
its untimeliness. Zedan argues that his adversary com-
plaint alleged evidence of fraud that was undiscovered
until September 2005. Zedan claims that because of the
“newly discovered fraud,” and because the bankruptcy
court had yet to grant a discharge, his complaint was
timely under 11 U.S.C. § 727(e). Zedan also contends that
the district court erred by applying the improper legal
standard when it determined that Zedan had not pled
the fraud with particularity as required by Fed. R. Bankr.
P. 7009.
Zedan’s adversary complaint requested a declaration that
Habash’s debts were not dischargeable because of the
alleged fraud. At the time of the complaint, the bank-
ruptcy court had not yet ordered a discharge; in the
ordinary course, Zedan’s claim would have been filed as
an objection to a yet-to-issue discharge. See 11 U.S.C.
§ 727(c). But because the deadline to file objections had
lapsed, Zedan’s adversary complaint invoked 11 U.S.C.
§ 727(d)(1), which entitles a debtor to different relief—
revocation of an already-issued discharge.
At first blush, Zedan’s adversary complaint seems
nonsensical—Zedan filed a complaint to “revoke” a non-
existent discharge. But Zedan’s creative pleading arises
No. 07-1286 11
from a deeper quandary created by the juxtaposition of
the Bankruptcy Code with the Federal Rules of Bank-
ruptcy Procedure. Under the Code, a creditor may object
to the granting of a discharge to a debtor. 11 U.S.C. § 727(c).
The Federal Rules of Bankruptcy Procedure require a
creditor who seeks to object to or revoke the discharge of
a debtor to initiate a separate adversary proceeding. See
Fed. R. Bankr. P. 4004(d); Fed R. Bankr. P. 7001(4). In turn,
Fed. R. Bankr. P. 4004(a), which governs adversary pro-
ceedings filed in objection to a debtor’s discharge, re-
quires a complaint objecting to the discharge to be filed no
later than 60 days following the first set meeting of the
creditors. Once this time expires, and if no objection has
been lodged, the Bankruptcy Rules state that “the court
shall forthwith grant the discharge.” Fed. R. Bankr. P.
4004(c); see also Emery, 132 F.3d at 895.
So the Bankruptcy Rules clearly contemplate that a
discharge will follow almost immediately after the 60-
day period to file an objection expires. Yet, as this case
demonstrates, the 60-day window under the Bankruptcy
Rules may close well before any discharge is granted.
When that happens, the expiration creates a “gap period”
between the deadline for creditors to object to a dis-
charge, and the date the discharge is actually granted. See
Emery, 132 F.3d at 895; England v. Stevens (In re Stevens), 107
B.R. 702 (9th Cir. BAP 1989). In this case, the gap period
resulted because the bankruptcy court bifurcated the
deadline for the creditors to object to the discharge (Febru-
ary 2005) and the deadline for the trustee to object to the
discharge (September 2005).
The gap period creates a predicament for creditors
who discover a debtor’s fraud during the gap period (i.e.,
the creditor who discovers the debtor’s fraud after the
12 No. 07-1286
deadline to file objections has elapsed but before a dis-
charge has been entered) because the Bankruptcy Code
requires a creditor to be ignorant of the debtor’s fraud until
after the discharge date in order to avail himself of
the process for revoking the discharge. See 11 U.S.C.
§ 727(d)(1). But under the Bankruptcy Rules, a bank-
ruptcy court will likely dismiss a creditor’s objection as
untimely if it comes after the deadline to file objections
has passed—as was the case for Zedan here. Thus, a
creditor who learns of fraud during the gap period is
whipsawed and left no remedy under either the Bank-
ruptcy Code or the Bankruptcy Rules: he cannot file a
timely objection under the Rules, and the language of the
Code prevents him from revoking the discharge once it
is issued.
Other federal courts have noticed this tension between
the Bankruptcy Code and the Rules. In In re Emery, the
Second Circuit resolved the dilemma, stating that “we
do not believe that Congress intentionally drafted a stat-
ute to punish fraudulent conduct by debtors that at the
same time provides a period of immunity for such debt-
ors.” 132 F.3d at 896. As a result, the Second Circuit
eschewed a literal interpretation of § 727(d)(1): it ignored
the clear statutory limitation that a creditor must learn of
the debtor’s fraud after the discharge, and allowed a
creditor who learned of fraud during the gap period to
bring a claim for revocation. See id. at 895-97. This was
the approach the district court modeled its decision on
in this case. See Habash, 360 B.R. at 778.
The Ninth Circuit has also allowed an adversary com-
plaint to proceed even though it was filed pursuant to
§ 727(d)(1) before a formal order of discharge was en-
tered. See Dietz v. Mitchell (In re Dietz), 914 F.2d 161 (9th
No. 07-1286 13
Cir. 1990). In contrast, several district and bankruptcy
courts have elected to enforce the literal language of the
Bankruptcy Code, and have barred claims filed based
upon fraud learned during the gap period. See Santa Fe
Private Equity Fund II, LP v. Silver (In re Silver), 367 B.R. 795,
821-22 (D. N.M. 2007); Powell v. First Nat’l Bank (In re
Powell), 113 B.R. 512, 513 (W.D. Ark. 1990); Employers Mut.
Cas. Co. v. Lazenby (In re Lazenby), 253 B.R. 536 (Bankr. E.D.
Ark. 2000).
The district court explained that Zedan’s complaint
failed to state a claim under either approach. Zedan
clearly was not ignorant of the alleged fraud before the
discharge—in fact, the discharge had not been entered
when he filed his adversary complaint, or even when he
appealed its dismissal to the district court. Thus, Zedan’s
claim failed under the literal language of the statute. The
district court also reasoned that Zedan’s claim failed under
the more lenient approach because he filed his adversary
complaint in April 2006, more than one year after the
deadline to file objections imposed by the bankruptcy
court.
But we do not think the district court needed to go so
far—this case is far simpler. Unlike the creditor in Emery,
Zedan filed his complaint to “revoke” the discharge be-
fore the discharge had ever been entered. Our initial
instinct—that Zedan has advanced a nonsensical claim—
holds true because Zedan’s complaint sought relief that
the bankruptcy court could not possibly grant. A bank-
ruptcy court cannot revoke an order that it has never
issued. Therefore, Zedan’s adversary complaint failed to
state a claim upon which relief could be granted, see Fed. R.
Civ. P. 12(b)(6); Fed. R. Bankr. P. 7012, and both lower
courts properly dismissed the complaint, see Vill. of
14 No. 07-1286
Rosemont v. Jaffe, 482 F.3d 926, 936 (7th Cir. 2007). We
need not decide on the proper approach to a gap-period
creditor’s dilemma here.
Still, it seems to us that a literal reading of § 727(d)(1) is
the better solution. The clear, unambiguous language of
the statute requires that “the requesting party . . . not
know of the fraud until after the granting of the discharge.”
11 U.S.C. § 727(d)(1). And “as long as the statutory
scheme is coherent and consistent, there generally is no
need for a court to inquire beyond the plain language of
the statute.” United States v. Ron Pair Enters., 489 U.S. 235,
240-41 (1989); see also Lamie v. United States Trustee, 540
U.S. 526, 534 (2004). We believe the language of the Bank-
ruptcy Code is coherent and consistent: while Congress
undoubtedly has provided for the revocation of a dis-
charge in cases of fraud, it has clearly limited the stat-
utory remedy in unambiguous terms.
Fed. R. Bankr. P. 4004(a), which sets an earlier deadline
for objecting to the discharge, is one of the Federal Rules
of Bankruptcy Procedure promulgated by the Supreme
Court, and as such cannot “abridge, enlarge, or modify any
substantive right.” See 28 U.S.C. § 2075; see also Term Loan
Holder Comm. v. Ozer Group (In re Caldor Group), 303 F.3d
161, 170 (2d Cir. 2002) (“[F]orsaking the plain meaning of
a provision of the Bankruptcy Code solely because that
meaning conflicts with a bankruptcy rule would run afoul
of 28 U.S.C. § 2075.”). The Bankruptcy Rules’ requirement
that objections be lodged within 60 days, see Fed. R. Bankr.
P. 4004(a), combined with its promise that a discharge be
granted “forthwith,” see Fed. R. Bankr. P. 4004(c), makes it
unlikely that a gap period will occur. However, when the
Bankruptcy Rules fail to operate as expected and produce
a conflict with the Code, the Code must prevail. If Con-
No. 07-1286 15
gress wants to address this conflict, it is its prerogative
to do so. Silver, 367 B.R. 795, 822 n.57. Likewise, the Su-
preme Court might take initiative and amend the Bank-
ruptcy Rules to avoid clashing with the Code.
A literal reading of the Bankruptcy Code also makes
sense in light of our recognition that provisions of the
Code should be construed liberally in favor of the debtor.
See, e.g., Vill. of San Jose v. McWilliams, 284 F.3d 785,
790 (7th Cir. 2002). Section 727(d)(1) explicitly limits the
rights of a creditor to revoke a discharge; this limitation
obviously inures to the benefit of the debtor. And a cred-
itor who fears that he might discover fraud during the
gap period and thus lose his § 727(d)(1) action for revo-
cation still has other remedies: he may either petition the
bankruptcy court to extend the deadline to file objections,
see Fed. R. Bankr. P. 9006(b), or request more time to
conduct a sufficient investigation of the debtor, see Fed. R.
Bankr. P. 4004(b); see also Mid-Tech Consulting, Inc. v.
Swendra, 938 F.2d 885, 887 (8th Cir. 1991) (“[T]he burden
is on the creditor to investigate diligently any possibly
fraudulent conduct before discharge.”).
In this case, Zedan elected to forego these rights and
wait for the trustee to investigate Habash. As a result,
Zedan bore the unfortunate consequence of learning
about the alleged fraud within the gap period. He there-
fore would have been disqualified from the relief pro-
vided by 11 U.S.C. § 727(d)(1) under the plain terms of the
statute even had he waited for the bankruptcy court to
enter a discharge. This result seems neither harsh, nor
unjust, considering that Zedan did not conduct his own
discovery but merely attempted to avail himself of fortu-
itous testimony elicited during the trustee’s investiga-
tion. This fact demonstrates why a literal interpretation
16 No. 07-1286
of the Bankruptcy Code ensures the better course—
creditors will have an incentive to actively investigate a
debtor for potential fraud before the period to object
closes, rather than wait until after discharge, which
forces the bankruptcy court to undo the fresh start that
equity grants to a debtor.
III. C ONCLUSION
We A FFIRM the dismissal of the adversary complaint.
E ASTERBROOK, Chief Judge, concurring. Although I
join the court’s opinion without reservation, a few addi-
tional observations about appellate jurisdiction are appro-
priate.
The terminating order of an adversary action in bank-
ruptcy is a “final decision” for the purpose of 28 U.S.C.
§158(d). Many decisions in this circuit, and elsewhere, so
hold. Any effort to sort the final decisions of adversary
proceedings into appealable and non-appealable bins
would lead to pointless grief and expense. A clear rule
on jurisdictional issues beats a fuzzy standard. See Budinich
v. Becton Dickinson & Co., 486 U.S. 196 (1988). So we
have appellate jurisdiction because Zedan filed an adver-
sary action, in which both the bankruptcy judge and the
district judge rendered final decisions.
But should this have happened? As the court’s opinion
observes, Fed. R. Bankr. P. 4004(d) and 7001(4) say that
No. 07-1286 17
creditors must initiate adversary actions if they want the
court to block or revoke a discharge. These rules appear
to be inconsistent with a statute that classifies objections
to discharge as core proceedings. 28 U.S.C. §157(b)(2)(J);
Kontrick v. Ryan, 540 U.S. 443, 453 (2004). Rule 7001(4),
which governs this subject (Rule 4004(d) is just a point-
er), was adopted before 1984, when §157(b)(2)(J) was en-
acted, and has not been revisited to ensure conformity
to the statute.
If Zedan’s objection had been presented as a core pro-
ceeding, as it should have been under the statute (but not
the rule), then we would lack appellate jurisdiction. A
decision rebuffing one objection to another litigant’s
request is not “final” in the sense that matters for appel-
late review. After the bankruptcy judge found Zedan’s
position wanting, the question whether Habash’s debts
would be discharged remained open; the judge did not
reach the ultimate decision until after Zedan’s appeal had
been argued in this court. One might as well appeal
from an order denying a motion for discovery or a grant of
summary judgment on some but not all of a litigant’s legal
theories. But because Zedan’s motion was handled as an
adversary action, the disposition is appealable. I do not
think that we can dismiss the appeal from the termi-
nating decision of the proceeding actually conducted,
just because the bankruptcy court should have conducted
a different kind of proceeding. Even if we were to hold
that §157(b)(2)(J) supersedes Rule 7001(4), the fact would
remain that this was an adversary action.
Only the Supreme Court (on the recommendation of the
Judicial Conference and its Committee on Rules of Practice
and Procedure) can bring the Bankruptcy Rules into
harmony with the statute. As this case shows, the choice
18 No. 07-1286
between core and adversary proceedings affects appellate
review as well as the style and service list of papers filed in
the bankruptcy court. I do not see any good reason why the
rules should employ a form that can produce appellate
review of one creditor’s arguments against a discharge,
before the bankruptcy court has decided whether the
debtor receives one. After Zedan filed his appeal, the
bankruptcy judge might have denied Habash a discharge
following an objection from the Trustee or a creditor who
filed within the deadline. Separating Zedan’s arguments
from those of other participants in the bankruptcy, and
dispatching them for immediate appeal while the bank-
ruptcy judge has yet to decide the main question, presents
abstract issues and squanders judicial resources. The
appropriate committees should take a look at this subject.
USCA-02-C-0072—6-16-08