Opinion
Case No. 13-11049-TPA Adv. No. 14-1038-TPA
08-06-2014
IN RE: KAREN NIMELLI, Debtor CONSTANCE M. MCDONALD, Plaintiff v. KAREN NIMELLI, Defendant
Case administrator to serve; Laura Steehler, Esq. Tina Fryling, Esq. Debtor
Chapter 13 Related to Doc. No. 8 MEMORANDUM ORDER
The Plaintiff, Constance McDonald ("McDonald"), is a creditor of the Debtor, Karen Nimelli ("Nimelli"). In this adversary proceeding, McDonald is seeking to have Nimelli's debt to her found to be excepted from discharge pursuant to 11 U.S.C. §523(a)(2). Presently before the court for consideration is the Defendant's Motion to Dismiss the Complaint Filed by Constance M. McDonald ("Motion") filed by Nimelli at Doc. No. 8. The Motion asks that the case be dismissed pursuant to Fed.R.Bankr.P. 7012, incorporating Fed.R.Civ.P. 12(b)(6), on the basis that the complaint fails to state a claim upon which relief can be granted.
After reviewing the materials submitted by the Parties and hearing oral argument, the Court agrees with Nimelli that the Complaint fails to set forth a claim upon which relief may be granted, and therefore the Motion must be granted. However, rather than outright dismiss the case at this time, McDonald will be given leave to file an amended complaint that does state a claim in light of the discussion that follows, if she believes that she can do so.
LEGAL STANDARD
When reviewing a motion to dismiss filed pursuant to Rule 12(b)(6), the complaint must be viewed in the light most favorable to the plaintiff and all of its well-pleaded allegations must be accepted as true. Erickson v. Pardus, 551 U.S. 89, 93-94 (2007). A complaint must be dismissed if it does not allege sufficient factual matter, accepted as true, to state a claim to relief that is plausible on its face. Ashcroft v. Iqbal, 556 U.S. 662, 668 (2009).
Following Iqbal, the Third Circuit has instructed that in considering a Rule 12(b)(6) motion the Court must conduct a two-part analysis. First, the factual and legal elements of a claim should be separated, and while the well-pleaded factual allegations in the complaint must be accepted as true, any legal conclusions may be disregarded. Second, the Court must determine whether the facts alleged are sufficient to show that the plaintiff has a plausible claim for relief (i.e., more than the mere possibility), with such plausibility determination being a "context-specific task that requires the reviewing court to draw on its judicial experience and common sense." Fowler v. UPMC Shadyside, 578 F.3d 203, 210-11 (3d Cir. 2009).
FACTS
The following facts may be gleaned from the Complaint, including Exhibit A, a series of e-mails going back and forth between Nimelli and McDonald on January 6, 2012. McDonald was the owner of a residence located at 2310 Rice Avenue in Lake City, Pennsylvania ("the Property"). Nimelli began leasing and residing in the Property on January 15, 2010. In around November 2011 McDonald concluded that she could no longer afford to keep the Property and she decided to sell it. She approached Nimelli to give her the first chance to buy the Property. Nimelli was interested and on January 5, 2012 she agreed to a sales price of $110,000. Nimelli, however, could only secure financing for $70,000 through the Pennsylvania Housing Finance Agency ("PHFA"), which would be given a first mortgage on the Property. Nimelli asked McDonald if she would be willing to provide seller financing for the $40,000 balance under a Promissory Note and McDonald indicated she would.
The Parties intended to both use the services of Attorney James Steadman to complete the transaction. They started negotiating the terms of the Promissory Note for the seller financing, but they ran into a snag when it was learned that PHFA would not provide any financing to Nimelli if there was also seller financing involved. Nimelli proposed that the parties could conceal the seller financing from PHFA and McDonald agreed. The Parties spoke with someone from Attorney Steadman's office about the situation and were told that he would not represent them unless the seller financing was disclosed to the PHFA.
Nimelli and McDonald then decided to find another attorney to do the transaction, though the identity of the attorney is not set forth in the Complaint. On January 10, 2012 the Parties entered into an Agreement of Promissory Note ("Agreement") to memorialize the terms of the seller financing. It called for a loan of $40,000 at 3.75% interest, with Nimelli to pay 36 monthly installments of $150, after which she would apply for a home equity loan or refinance to pay McDonald the remaining balance. The Agreement was not recorded. The closing on the Property occurred on March 14, 2012 and the existence of the seller financing was concealed from the PHFA. (It is unclear from the Complaint whether the seller financing was also concealed from the new attorney). Nimelli filed her Chapter 13 bankruptcy petition on August 26, 2013, listing McDonald as an unsecured creditor with a $40,000 claim. McDonald has not filed a proof of claim.
The Complaint states in Paragraph 10 that a copy of the Agreement is attached as Exhibit B, but there is in fact no Exhibit B attached, so the actual Agreement is not part of the record.
LEGAL DISCUSSION
McDonald is seeking to have her claim excepted from discharge pursuant to 11 U.S.C. §523(a)(2). The Complaint does not specify what particular part of this statute is alleged to apply. However, the most relevant paragraphs of the Complaint as to McDonald's theory of the case state:
20. Defendant obtained credit through the Promissory Note with Plaintiff under false pretenses, false representations, and/or committed actual fraud.This indicates that McDonald is proceeding under Section 523(a)(2)(A), which provides:
21. Plaintiff reasonably relied on the representations made by Defendant and entered into the Promissory Note on January 10, 2012, and later transferred the property to Defendant on March 14, 2012.
(a) A discharge under section 727, 1141, 1228(a), 1228(b), or 1328(b) of this title does not discharge an individual debtor from any debt-11 U.S.C. §523(a)(2)(A). Nimelli argues in the Motion that the Complaint fails to state a claim upon which relief can be granted.
...
(2) for money, property, services, or an extension, renewal, or refinancing of credit, to the extent obtained by-
(A) false pretenses, a false representation, or actual fraud, other than a statement respecting the debtor's or an insider's financial condition;
The following five (5) elements are necessary to state a claim under Section 523(a)(2)(A):
(1) The debtor made a false representation.See, e.g., Corso v. Walker, 449 B.R. 838, 845 (W.D. Pa. 2011). The creditor, i.e. McDonald, bears the burden of proof to show all of these elements exist.
(2) The debtor knew it was false at the time of the representation
(3) The false representation was made with the intent and purpose of deceiving the creditor.
(4) The creditor justifiably relied on the representation.
(5) The creditor was damaged as a proximate result of the misrepresentation.
Nimelli argues that McDonald has alleged none of these elements, except for the damage claim, which she says is "basically a complaint that the Defendant can discharge a debt in bankruptcy proceedings." Nimelli says that even assuming she acted fraudulently toward PHFA, that does not give McDonald standing to claim an exception to discharge with respect to the debt that Nimelli owes to her.
For purposes of deciding the Motion, the Court will assume that an omission, i.e. the failure to inform the PHFA about the Agreement that Nimelli had with McDonald, can constitute a "false representation" for purposes of Section 523(a)(2)(A). Even with that assumption being made, the Complaint fails to set forth factual allegations sufficient to meet the plausibility requirement with respect to at least several of the necessary elements listed above.
The documents for the loan between Nimelli and PFHA are not part of the record, so the Court does not know whether anything therein might be construed as a positive misrepresentation by Nimelli, as opposed to simply an omission.
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While the Complaint does allege the making of a false representation on the part of Nimelli with respect to the real estate transaction, that false representation was directed to PHFA, not McDonald. It has been held that the "obtained by" language found in Section 523(a)(2) is causation language, such that mere "fraud in the air" will not suffice to state a claim. In re Nelson, 383 F.3d 922 (9th Cir. 2004). This is nicely illustrated in In re Glen, 427 B.R. 488 (8th Cir. BAP 2010) where the court held that the debtors' concealment from a bank of unrecorded mortgages held by creditors on certain lots when the debtors obtained additional financing from the bank did not constitute a misrepresentation as to the creditors for purposes of the Section 523(a)(2) discharge exception, the court finding that such concealment only constituted a misrepresentation as to the bank. Given that the Complaint does not allege that Nimelli directed any false representation (or false pretenses or actual fraud) toward McDonald, it does not set forth sufficient factual allegations with respect to the first and third required elements.
Furthermore, McDonald is in a position that is even worse than the creditors in Glen because, unlike them, she appears to have been actually aware of and a participant in the concealment by agreeing to go forward with the transaction while knowing that PHFA was not being told about the Agreement for the seller financing. Given this knowledge, the Court fails to see how McDonald can prove justifiable reliance, the fourth required element. See, e.g., In re Husco, Inc., 268 B.R. 441, 450 (Bankr. W.D. Pa. 2001) ("one who knows that a representation is false cannot claim that it was defrauded by the misrepresentation"), Dunkin' Donuts Franchised Restaurants, LLC v. Claudia I, LLC, 2014 WL 512998 (E.D. Pa. 2014) (person who believes a representation is false cannot seriously say they relied on the representation to support a claim of fraud), Walter v. Pallisades Collection, LLC 480 F. Supp. 2d 797 (E.D. Pa. 2007).
Although not expressly raised in the Motion as a grounds for dismissal, the Court itself will note that McDonald's seeming involvement in the misrepresentation scheme as revealed in the e-mails reproduced as Exhibit A could potentially implicate the equitable clean hands doctrine. For instance, in an e-mail sent to Nimelli at 8:59 AM on January 6, 2012 McDonald states:
Right now I am willing to go through with the sale. Yesterday I called Susan Robison [of Attorney Steadman's office] twice to talk to her about making up the contract. Her secretary said she has to talk to Attorney Steadman first before she can do anything. I know she is having a problem with not disclosing to the bank that you will have a 2nd mortgage. I personally don't think it needs to be disclosed because they will be 1st lien on the house.In an e-mail sent later that same day after being told by Nimelli that Attorney Steadman's office would not do the closing if the bank was not told about the seller financing, McDonald said:
Poo poo on Steadman's. Should we have them do the contract and someone else do the 2nd mortgage, without telling them? If so, can you call her back? Can we use the attorney that you know for the land contract?
Perhaps there is some contrary explanation, but on their face these e-mails certainly appear to show McDonald as an active and willing participant in the plan to conceal the seller financing from PHFA. That could constitute unclean hands and in itself be a sufficient basis to dismiss the Complaint and deny any relief. See, e.g., In re Sorbera, 483 B.R. 580 (Bankr. D.Mass.,2012) (where creditor's misconduct was directly related to the merits of the controversy between the parties, the doctrine of unclean hands barred his claim as to the nondischargeability of loan), Karpenko v. Leendertz, 619 F.3d 259 ( 3d Cir. 2010) ("it is our prerogative, and even our obligation, to shut this Federal Court's doors 'in limine' to a remedy-seeker who has committed 'some unconscionable act [with an] immediate and necessary relation to the equity that he seeks".) The Court is not at this time making a finding that the Complaint is barred by the unclean hands doctrine, but mentions it now to put McDonald on notice that it is something she may have to deal with later if she files an amended complaint.
Despite the Complaint's failure to state a claim, it is the Court's customary policy to give a plaintiff a chance to replead before dismissing a case unless it is very clear that the plaintiff will not be able to do so. The present case is a close call in that regard, but the Court will give McDonald the benefit of the doubt and allow her such a chance.
AND NOW, this 6th day of August, 2014, for the reasons stated above, it is ORDERED, ADJUDGED and DECREED that the Motion is GRANTED as follows,
(1) The Complaint will be dismissed and the case closed effective August 20, 2014 without further order of court, unless on or before that date the Plaintiff files an Amended Complaint.
(2) If the Plaintiff timely files an Amended Complaint, the Defendant shall answer or otherwise respond on or before September 3, 2014.
/s/_________
Thomas P. Agresti, Judge
United States Bankruptcy Court
Case administrator to serve;
Laura Steehler, Esq.
Tina Fryling, Esq.
Debtor