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rejecting Hilgartner's exact argument and instead holding that "the settlement of a claim does not change the nature of the underlying debt"
Summary of this case from Hilgartner v. Yasuko YagiOpinion
Case No. 19-10283 Adversary Case No. 19-1031
03-20-2020
In re: JOSHUA RAYMOND GRAHAM, Debtor. Michael Robert Adams, Plaintiff, v. Joshua Raymond Graham, Defendant.
Copies to: Robert Gregory Kelly, Counsel for Plaintiff (electronically) Gregory M. Wetherall, Counsel for Defendant (electronically)
Chapter 7
ORDER TREATING MOTION TO DISMISS AS ONE FOR SUMMARY JUDGMENT AND DENYING MOTION (DOC. 13)
This adversary proceeding arises out of the alleged assault and battery committed by Joshua Raymond Graham, the debtor in the underlying bankruptcy case and defendant here (the "Defendant"), against Michael Robert Adams (the "Plaintiff"). The Plaintiff seeks a judgment that the debt owed to him on account of this assault should, once liquidated, be deemed nondischargeable under § 523(a)(6) of the Bankruptcy Code as a "willful and malicious injury." The Defendant has filed a motion to dismiss the Plaintiff's complaint (the "Motion") (Doc. 13) under Federal Rule of Civil Procedure 12(b)(6), arguing that it fails to state a claim upon which relief can be granted. According to the Defendant, the parties entered into a prepetition settlement agreement that transformed the Plaintiff's potentially nondischargeable tort claim into a clearly dischargeable breach of contract claim. As the Court explains below, however, the settlement of a claim does not change the nature of the underlying debt, and the Plaintiff is entitled to an opportunity not only to liquidate the debt but also to demonstrate its nature.
Unless otherwise indicated, docket entry citations refer to the docket of Adv. Pro. No. 19-1031.
Federal Rule of Civil Procedure 12(b)-(i) is made applicable to these proceedings by Federal Rule of Bankruptcy Procedure 7012(b).
For the reasons that follow, the Motion, which the Court will treat as one for summary judgment under Federal Rule of Civil Procedure 12(d), will be DENIED.
I. Jurisdiction
The Court has jurisdiction over this action pursuant to 28 U.S.C. §§ 1334(a) and (b). This proceeding arises in a case referred to this Court by the Standing Order of Reference entered in this District. Under 28 U.S.C. § 157(b)(2)(I), the determination of the dischargeability of the debt is a core proceeding in which the Court is authorized to enter final judgment. The liquidation of the underlying debt is a related proceeding over which this Court possesses jurisdiction, see Longo v. McLaren (In re McLaren), 3 F.3d 958, 965-66 (6th Cir. 1993) (bankruptcy courts possess jurisdiction to liquidate underlying debt in dischargeability action), and in which the Court is authorized to enter final judgment, see 28 U.S.C. § 157(c)(2).
II. Background
Although it is unclear what precipitated the altercation, the Plaintiff alleges that the Defendant assaulted him in March 2017. Doc. 1, ¶¶ 7-8. As a result of that attack, the Plaintiff states he suffered a broken jaw, temporary and permanent disability, mental anguish, and psychological injuries. Doc. 1, ¶ 10. The Defendant pleaded guilty to misdemeanor assault. Doc. 1, ¶ 14; see State of Ohio v. Graham, Case No. 2017 CR 000214.
A few months later, the Plaintiff filed a lawsuit in state court. Doc. 1, ¶ 12; see Adams v. Graham, et al., Case No. A 1706781 (the "State Court Action"). In his complaint (the "State Court Complaint"), the Plaintiff sought to recover monetary damages for his injuries and to enforce an alleged settlement agreement. Doc. 1, ¶ 12; Doc. 13, ¶ 3 & Ex. A. That settlement agreement, an unsigned copy of which was attached to the State Court Complaint, provided for the Defendant to pay the Plaintiff $150,000 over time and grant the Plaintiff a mortgage on his real estate. The agreement also appears to have provided for a recommendation by the Plaintiff to reduce the criminal charges to the misdemeanor assault to which the Defendant ultimately pleaded guilty.
The State Court Complaint contains five counts. Count One is for personal injury for the alleged assault and battery. Counts Two through Four sound in breach of contract and misrepresentation related to the Defendant's refusal to carry out the terms of a settlement agreement. Count Five seeks corporate dissolution related to the two entities jointly owned by the Plaintiff and the Defendant's grandfather.
The State Court Action was stayed, however, when the Defendant filed this bankruptcy case. In the bankruptcy court, the Plaintiff filed a timely complaint (the "Adversary Complaint") (Doc. 1) requesting that the debt arising from the assault be liquidated and declared nondischargeable as a willful and malicious injury under § 523(a)(6). With this Motion, the Defendant seeks to dismiss the adversary proceeding, arguing that the Adversary Complaint mischaracterizes the debt allegedly owed to the Plaintiff as a tort rather than a contract claim. He attached to the Motion a copy of the State Court Complaint, itself accompanied by the unsigned settlement agreement and emailed settlement negotiations between the parties' state-court attorneys. The Defendant contends that "the Plaintiff acknowledges that the [assault] claim was settled and [instead] asserts a breach of contract claim." Doc. 13, ¶ 3. According to the Defendant, because of the purported settlement, the sole claim before this Court is one for breach of contract, which by its nature is not excepted from discharge under § 523(a)(6). Id. ¶ 5.
Alternatively, the Plaintiff requests to liquidate the claim in the already-pending State Court Action before coming back to this Court for a judgment of nondischargeability.
The Defendant also argues that the Plaintiff is required to join the Chapter 7 trustee as a necessary party to this action. The trustee is a necessary and indispensable party, the Defendant contends, because certain pre-petition settlement payments he made to the Plaintiff would qualify as a preference under § 547. Doc. 13, ¶¶ 3-4, 6-8. The Plaintiff does not oppose this plan, Doc. 15 at 4, but neither party has briefed the issue. The Court sees no reason why the trustee should be joined here, and in the absence of any legal argument or citation to authority, the Court declines to address it further.
In his response, the Plaintiff argues that because the Defendant attached the State Court Complaint and its exhibits, the Court should treat the Motion as one for summary judgment. Doc. 15 at 2-3. On the merits, the Plaintiff states that his allegations—which he is prepared to prove by a preponderance of the evidence at trial but which at this stage should be accepted as true—give rise to a nondischargeable debt under § 523(a)(6). Id. And the Defendant, he argues, cannot convert the state tort claims into a contract claim by simply attaching the unsigned agreement and email communications to the Motion. Id. at 3-4. The Plaintiff maintains that he has adequately alleged that the Defendant willfully and maliciously injured him and that the Motion should therefore be denied.
The Plaintiff references the Defendant's criminal assault charge several times and attaches a copy of the judgment entry. It is unclear why the Plaintiff does this, but attaching the judgment entry suggests that the Plaintiff intends to use the conviction to satisfy the elements of § 523(a)(6) under a theory of issue preclusion. The Court admonishes the Plaintiff that he will need more than a criminal conviction to support his case. "Ohio courts generally frown upon the use of criminal proceedings to estop parties in subsequent civil proceedings." Boone v. Spurgess, 385 F.3d 923, 928 n.4 (6th Cir. 2004); In re Humphrey, 362 B.R. 860, 864 (Bankr. N.D. Ohio 2006). The Court will also warn the Defendant, though: Should the Plaintiff make his case for assault and battery—whether in this Court or in state court—the Defendant may face an uphill battle with respect to dischargeability. The Plaintiff has the burden to prove that the Defendant desired to cause the injury or believed that the injury was substantially certain to result and that he acted in conscious disregard of his duties or without just cause or excuse. Markowitz v. Campbell (In re Markowitz), 190 F.3d 455, 463 (6th Cir. 1999); Wheeler v. Luadani, 783 F.2d 615. But courts have regularly held that debts arising from assault and battery "fall[] squarely within § 523(a)(6)'s willful-and-malicious-injury exception to discharge." Wagner v. Schulte (In re Schulte), 385 B.R. 181, 188 (Bankr. S.D. Ohio 2008); see also Caruso v. Harmon (In re Harmon), 404 B.R. 521, 528 (Bankr. W.D. Mo. 2009) ("Debts that are based upon traditional intentional torts such as assault and battery are generally regarded by bankruptcy courts as being non-dischargeable." (quoting Thompson v. Kelly (In re Kelly), 238 B.R. 156, 160 (Bankr. E.D. Mo. 1999))); Murray v. Wilcox (In re Wilcox), 229 B.R. 411, 416 (Bankr. N.D. Ohio 1998) ("Under Ohio law a willful act is a prerequisite to establish liability for assault and/or battery.").
III. Analysis
A. The Motion Must Be Treated as One for Summary Judgment.
A motion to dismiss for failure to state a claim under Rule 12(b)(6) contests the sufficiency of the complaint on its face. But if "matters outside the pleadings are presented to and not excluded by the court, the motion must be treated as one for summary judgment under Rule 56." Fed. R. Civ. P. 12(d). Indeed, a court "may look outside the four corners of the complaint and consider materials attached to a motion to dismiss" without converting it to a summary judgment motion only if those materials are "referred to in the complaint and central to the claim." Berry v. United States Dept. of Labor, 832 F.3d 627, 637 (6th Cir. 2016); Armengau v. Cline, 7 F. App'x 336, 344 (6th Cir. 2001) ("[I]f extrinsic materials merely 'fill in the contours and details' of a complaint, they add nothing new and may be considered without converting the motion to one for summary judgment." (quoting Yeary v. Goodwill Indus.-Knoxville, Inc., 107 F.3d 443, 445 (6th Cir. 1997))). In other words, if the Court considers materials attached to the motion to dismiss that are not (1) referred to in the complaint or (2) central to the plaintiff's claim, the motion must be converted to one for summary judgment.
Federal Rule of Civil Procedure 56 is made applicable to these proceedings by Federal Rule of Bankruptcy Procedure 7056. --------
The State Court Complaint is referenced in the Adversary Complaint, Doc. 1, ¶ 12, but it is not central to the Adversary Complaint. The Plaintiff does not rely on the State Court Complaint or its exhibits for his claims in this adversary proceeding; rather, both complaints rely on the same underlying facts, and the State Court Complaint merely represents another instance in which the Plaintiff has alleged that the Defendant assaulted him. And the State Court Complaint and its exhibits do more than "merely 'fill in the contours and details'" of the Adversary Complaint. Amengau, F. App'x at 344. Instead, they add something new: the purported existence of a settlement agreement, which forms the basis for the Defendant's Motion. The State Court Complaint and its exhibits thus constitute "matters outside the pleadings," and the Court will treat the Motion as one for summary judgment under Rule 56.
B. The Defendant Is Not Entitled to Summary Judgment Because a Settlement Agreement Does Not Transform the Nature of a Debt for Dischargeability Purposes.
"The court shall grant summary judgment if the movant shows that there is no genuine dispute as to any material fact and the movant is entitled to judgment as a matter of law." Fed. R. Civ. P. 56(a). The moving party bears the initial burden of showing that there is no genuine issue of material fact. Celotex Corp. v. Catrett, 477 U.S. 317, 330-31 (1986). When reviewing the record on summary judgment, the evidence of the non-movant is to be taken as true and all justifiable inferences are to be drawn in favor of the non-movant. Anderson v. Liberty Lobby, Inc., 477 U.S. 242, 255 (1986).
The Defendant argues that the Plaintiff's tort claim was extinguished when the parties entered into a settlement agreement, leaving the Plaintiff with the sole remedy of breach of that contract. Because a mere breach of contract claim cannot, according to the Defendant, form the basis of a nondischargeable debt under § 532(a)(6), the Plaintiff's complaint should be dismissed. His reliance on the existence of an alleged settlement agreement is, however, misplaced. Even if the parties had entered into a binding settlement agreement—a point apparently disputed by the parties and highlighted by the fact that one of the counts in the State Court Complaint was to enforce the unsigned agreement—the Defendant would not be entitled to summary judgment.
It has long been the rule that a settlement agreement does not change the nature of the debt for dischargeability purposes. See Archer v. Warner, 538 U.S. 314, 323 (2003). The Supreme Court in Archer held that "[a] debt embodied in the settlement of a fraud case" still arises from the underlying fraud. Archer, 538 U.S. at 321. That the claim has been reduced to a settlement does not prevent a court "from looking beyond" the settlement "in order to decide whether the debt at issue . . . was a debt for money obtained by fraud." Id. at 320 (citing Brown v. Felsen, 442 U.S. 127, 138-39 (1979)); Burrell-Richardson v. Mass. Bd. of Higher Educ. (In re Burrell-Richardson), 356 B.R. 797, 802 (B.A.P. 1st Cir. 2006) ("[C]reditors are free to look beyond a settlement to determine the character of the debt."). Because Archer's reasoning applies to other types of nondischargeable debts—not just fraud—courts have routinely expanded its holding. See, e.g., Musich v. Graham (In re Graham), 455 B.R. 227, 233 (Bankr. D. Colo. 2011) (debts for willful and malicious injuries under § 523(a)(6)); Bauer v. Colokathis (In re Colokathis), 417 B.R. 150, 158 (Bankr. D. Mass. 2009) (same); Ramey v. Barton (In re Barton), 321 B.R. 869, 874 (Bankr. N.D. Ohio 2004) (obligations arising from divorce and separation agreements under § 523(a)(15)); see also Burrell-Richardson, 356 B.R. at 804 (noting that "the rationale of Brown and Archer and their progeny are not limited to dischargeability proceedings over which bankruptcy courts have exclusive jurisdiction").
The Plaintiff is therefore entitled to an opportunity to demonstrate the true character of the facts and circumstances underlying his claims in the Adversary Complaint, even if the debt was in fact reduced to a settlement. If the Plaintiff can show that he is owed a debt that arose out of a willful and malicious injury within the meaning of § 523(a)(6), that debt will be nondischargeable.
IV. Conclusion
Based on the foregoing, the Motion, which has been converted to one for summary judgment, is DENIED. The Defendant has twenty-one (21) days from the date of entry of this order to file an answer to the Adversary Complaint.
IT IS SO ORDERED.
This document has been electronically entered in the records of the United States Bankruptcy Court for the Southern District of Ohio.
IT IS SO ORDERED.
/s/ _________
Jeffery P. Hopkins
United States Bankruptcy Judge Dated: March 20, 2020 Copies to: Robert Gregory Kelly, Counsel for Plaintiff (electronically)
Gregory M. Wetherall, Counsel for Defendant (electronically)