Opinion
Case No. 14-33094 Adv. No. 15-3014
06-24-2015
In re: LINDEN WAYNE CURTIS, JR., Debtor PETERSON TRANSPORT, Plaintiff v. LINDEN WAYNE CURTIS, JR., Defendant
Chapter 7
DECISION OF THE COURT: 1) DENYING MOTION TO DISMISS [Adv. Doc. 4]; BUT 2) REQUIRING PLAINTIFF TO AMEND THE COMPLAINT
The court has jurisdiction over this matter pursuant to 28 U.S.C. §§ 157(a) and 1334, and the standing General Order of Reference in this District. This matter is before the court on the Motion to Dismiss Complaint Pursuant to Federal Rule of Civil Procedure 12(b)(6) filed by Defendant-Debtor Linden Wayne Curtis, Jr. [Adv. Doc. 4] and the Plaintiff's Response to Defendant's Motion to Dismiss Complaint Pursuant to Federal Rule of Civil Procedure 12(b)(6) [Adv. Doc. 5].
In the motion to dismiss, Defendant-Debtor, Linden Wayne Curtis, Jr. ("Curtis") asserts that the Complaint [Adv. Doc. 1, ("Complaint")] filed by Plaintiff Peterson Transport objecting to Curtis's discharge should be dismissed for Peterson Transport's failure to provide proof that it has a claim against the estate and for failure to plead fraud with particularity. After research and review of the parties' filings, the court concludes the following. Because Peterson Transport's claim is substantiated by Curtis's schedules, Peterson Transport has standing to prosecute its objection to Curtis's discharge unless and until its claim is disallowed. Second, Peterson Transport's Complaint Count I, sounding in fraud, lacks sufficient detail to comply with the heightened pleading standard of Fed. R. Civ. P. 9(b) requiring the pleading of fraud with particularity. Rather than dismiss Count I outright, however, the court will give Peterson Transport twenty-one (21) days to amend the Complaint to comply with Fed. R. Civ. P. 9(b) requirements. The remainder of Curtis's motion to dismiss is denied.
FACTUAL AND PROCEDURAL BACKGROUND
Curtis filed a Chapter 7 bankruptcy petition on August 28, 2014 listing $2,412.61 in assets and $322,524.72 in liabilities [Case No. 14-33094, Doc. 1]. One liability scheduled by the Debtor was listed as an unsecured "Lawsuit - BUSINESS DEBT," owed to Peterson Transport in the amount of $52,121.65 [Id., schedule F]. Curtis scheduled the debt as undisputed, non-contingent, and liquidated [Id.].
On February 27, 2015, Peterson Transport filed its Complaint to deny Curtis's discharge pursuant to 11 U.S.C. § 727(a)(3) and (a)(4)(A). In Count I of the Complaint, Peterson Transport asserts that Curtis knowingly made false oaths in his petition, schedules, and statement of financial affairs identified as follows in the Complaint:
a) That the Defendant [Curtis] in Schedule I Number 13 failed to accurately describe the nature of increases or decreases in income;[Adv. Doc. 1, ¶¶ 10-13]. For these alleged inaccuracies, Peterson Transport asserts Curtis's discharge should be denied under 11 U.S.C. § 727(a)(4)(A) [Id., ¶¶ 14-15].
b) That the Defendant in Schedule I Number 8(c) failed to disclose additional income that is received on a monthly basis in excess of $350.00 a month;
c) That the Defendant made a misleading a false statement (sic.) in Schedule B(1) as to the status of one of his past business ventures, Curtis Gang, Inc.; and
d) That the Defendant has failed to accurately characterize his past employment and income as it pertains to Peterson Transport as set forth in his Statement of Financial Affairs Number 1.
In Count II, Peterson Transport alleges other errors in Curtis's schedules described as follows:
a) That Defendant [Curtis] has failed to disclose in his schedules income received from child support for his listed dependents in Schedule I Number 8(c) in excess of $350.00 a month;[Id., ¶¶ 17-19]. Peterson Transport alleges that these omissions in the schedules and/or the failure to keep records should result in the denial of Curtis's discharge pursuant to 11 U.S.C. § 727(a)(3) [Id., ¶¶ 20-21].
b) That Defendant has failed to accurately disclose in Schedule J(21) his "over the road expenses"; and
c) That Defendant has failed to keep recorded information as it pertains to his expenses set forth in Schedule J(21) as to his "over the road expenses."
On March 20, 2015, Curtis filed a motion to dismiss both counts of Peterson Transport's Complaint. As a preliminary matter, Curtis asserts that Peterson Transport lacks standing by failing to provide a basis for its alleged claim against the estate and failing to attach such evidence to the Complaint. Alternatively, Curtis asserts that Peterson Transport's allegations against him sound in fraud and, consequently, the two counts of the Complaint must be dismissed for Peterson Transport's failure to plead fraud with particularity. Peterson Transport filed a response asserting that the Complaint allegations were sufficiently pleaded. No reply was filed by Curtis and the matter is now ready for a determination.
LEGAL ANALSYIS
A. Legal Standard for Determining a Motion to Dismiss
Curtis requests dismissal of the Complaint under Federal Rule of Civil Procedure ("Rule") 12(b)(6), incorporated in bankruptcy adversary proceedings by Federal Rule of Bankruptcy Procedure 7012. He argues that Peterson Transport has failed to state any claim upon which relief can be granted.
To survive the motion, the Complaint "must contain either direct or inferential allegations respecting all the material elements to sustain a recovery under some viable legal theory." Varljen v. Cleveland Gear Co., Inc., 250 F.3d 426, 429 (6th Cir. 2001). See also Bell Atlantic Corp. v. Twombly, 550 U.S. 544, 563 (2007) (noting that the accepted pleading standard is that "once a claim has been stated adequately, it may be supported by showing any set of facts consistent with the allegations in the complaint"). "[A] plaintiff's obligation to provide the 'grounds' of his 'entitlement to relief' requires more than labels and conclusions, and a formulaic recitation of the elements of a cause of action will not do . . . ." Twombly, 550 U.S. at 555 (further citations omitted) (holding that the factual allegations must be enough to raise a right to relief above the speculative level).
While the material elements must be asserted, the Federal Rules of Civil Procedure generally do not require a plaintiff to set out in detail the facts in support of each cause of action. Limor v. Buerger (In re Del-Met Corp.), 322 B.R. 781, 793 (Bankr. M.D. Tenn. 2005). Rather, the Rules require a short and plain statement of the claim "that will give the defendant fair notice of what the plaintiff's claim is and the grounds upon which it rests." Id. However, more is required when a claim sounds in fraud. Rule 9(b) requires a party to plead the circumstances constituting fraud with sufficient particularity to give the answering party notice of the misconduct that is being challenged and allow him or her to prepare an informed pleading responsive to the specific allegations of fraud. Fed. R. Civ. P. 9(b) (incorporated into bankruptcy adversary proceedings via Fed. R. Bankr. P. 7009); Coffey v. Foamex L.P., 2 F.3d 157, 161-62 (6th Cir. 1993); Equal Justice Foundation v. Deutsche Bank Trust Co., 412 F.Supp.2d 790, 797 (S.D. Ohio 2005). At a minimum, Rule 9(b) requires a plaintiff: 1) to specify the allegedly fraudulent statements; 2) to identify the speaker; 3) to plead when and where the statements were made; and 4) to explain what made the statements fraudulent. Republic Bank & Trust Co. v. Bear Stearns & Co., Inc., 683 F.3d 239, 247 (6th Cir. 2012); Burton Food Services, Inc. v. Aseireh (In re Aseireh), 526 B.R. 246, 249 (Bankr. N.D. Ohio 2015). However, "[m]alice, intent, knowledge, and other conditions of a person's mind may be alleged generally." Fed. R. Civ. P. 9(b).
B. Peterson Transport's Standing as a Creditor of the Estate
Curtis initially argues that the Complaint should be dismissed because Peterson Transport failed to substantiate allegations in paragraph 5 regarding Peterson Transport's status as a creditor of the estate with a provable balance of $52,121.65. Curtis asserts that Peterson Transport failed to attach evidence, such as a contract or a judgment, documenting its claim against the estate.
Peterson Transport's status as a creditor of the bankruptcy estate is necessary for standing to object to Curtis's discharge. See 11 U.S.C. § 727(c)(1); CM Temporary Services, Inc. v. Bailey (In re Bailey), 375 B.R. 410, 414 (Bankr. S.D. Ohio 2007); 8400 N.W. Expressway, LLC v. Morgan (In re Morgan), 360 B.R. 507, 514 (Bankr. N.D. Tex. 2007). However, Peterson Transport's status as a creditor is substantiated by Curtis's own bankruptcy schedules. In schedule F, Curtis lists a $52,121.65 debt that he owes to Peterson Transport as an undisputed, noncontingent, liquidated debt [Case No. 14-33094, Doc. 1, schedule F]. Even if Curtis listed the debt as "disputed," this alone would not divest Peterson Transport of standing to pursue an objection to Curtis's discharge unless and until its claim was disallowed. Bailey, 375 B.R. at 415 (the debtor's scheduling of a debt as "disputed" does not bar the plaintiff from standing to pursue a denial of the debtor's discharge); Morgan, 360 B.R. at 515-16 (a "disputed" creditor has standing to pursue a discharge objection until its claim has been finally adjudicated and disallowed). Consequently, Curtis's argument regarding Peterson Transport's lack of standing is without merit.
C. Count I: 11 U.S.C. § 727(a)(4)(A)
Moving on to Count I of the Complaint, Curtis argues that it should be dismissed for failure of Peterson Transport to plead fraud allegations with particularity. In Count I, Peterson Transport alleges various misstatements in the petition, schedules, and statement of financial affairs. Peterson Transport asserts that these are "false oaths" made by the Debtor "knowingly and fraudulently" and, consequently, should result in the denial of Curtis's discharge pursuant to 11 U.S.C. § 727(a)(4)(A).
Under this Bankruptcy Code provision, a debtor's discharge may be denied if the debtor "knowingly and fraudulently, in or in connection with the case . . . made a false oath or account[.]" 11 U.S.C. § 727(a)(4)(A). For purposes of § 727(a)(4)(A), a debtor's petition, schedules, and statement of financial affairs constitute statements made under oath. New Century Bank v. Carmell (In re Carmell), 424 B.R. 401, 418 (Bankr. N.D. Ill. 2010). Because denial of a discharge under § 727(a)(4)(A) requires proof that the debtor acted fraudulently, the pleading of this claim is subject to the Rule 9(b) requirement that allegations of fraud be pleaded with particularity. Id.; Aseireh, 526 B.R. at 250. Consequently, the allegations in Count I of the Complaint must: a) specify the allegedly fraudulent statements; 2) identify the speaker; 3) plead when and where the statements were made; and 4) explain what made the statements fraudulent. Republic Bank, 683 F.3d at 247; Aseireh, 526 B.R. at 249.
In the Complaint, Peterson Transport asserts that Curtis inaccurately represented his income on Schedule I [Adv. Doc. 1, ¶¶ 10-11]. More specifically, Peterson Transport asserts that Curtis "failed to disclose additional income . . . on a monthly basis in excess of $350" on schedule I, line 8(c) and "failed to accurately describe the nature of increases or decreases in income" on schedule I, line 13 [Id.]. In the motion to dismiss, Curtis asserts that these facts are not pleaded with sufficient particularity in accordance with Rule 9(b) requirements. The court agrees. While Peterson Transport identifies the statements and who made them, it is not clear from the Complaint what makes the statements fraudulent. What income did Curtis fail to disclose on line 8(c)? What is inaccurate about how Curtis described his increases / decreases in income on line 13? The Complaint lacks sufficient detail to answer these questions.
Curtis then turns to alleged deficiencies in paragraph 12 of the Complaint in which Peterson Transport asserted that Curtis "made a . . . false statement in Schedule B(1) as to the status of one of his past business ventures, Curtis Gang, Inc." [Adv. Doc. 1, ¶ 12]. In his motion to dismiss, Curtis notes that schedule B, line 1 is where a debtor lists his "cash on hand" and not business ventures. Curtis does list his ownership interest in Curtis Gang, Inc. on line 13 of Schedule B, further noting that the business is closed and owns nothing [Case No. 14-33094, Doc. 1, schedule B]. Assuming that Peterson Transport intended to refer to Curtis's statements on line 13, it is still unclear from the Complaint what makes those statements allegedly false. Again, paragraph 12 of the Complaint fails to comply with Rule 9(b) requirements.
Finally, Curtis points to a failure to plead fraud with particularity in paragraph 13 of the Complaint. In this paragraph, Peterson Transport alleges that Curtis "failed to accurately characterize his past employment and income as it pertains to Peterson Transport as set forth in his Statement of Financial Affairs Number 1" [Adv. Doc. 1, ¶ 13]. In this section of the statement of financial affairs, Curtis lists his yearly business and employment gross income for the years 2012-2014 [Case No. 14-33094, Doc. 1, statement of financial affairs]. Again, the Complaint fails to explain what about the income amounts reported and/or Curtis's past employment with Peterson Transport is mischaracterized making Curtis's statements fraudulent. As such, the allegations in paragraph 13 are not pleaded with sufficient particularity.
Based on these deficiencies, Curtis requests dismissal of Count I of the Complaint. However, in light of the federal judicial policy to liberally allow plaintiffs to amend complaints, and the failure of Curtis to request a more definite statement, dismissal would be inappropriate. Coffey, 2 F.3d at 162; Equal Justice, 412 F.Supp.2d at 797-798 (noting that leave to amend the complaint should be granted freely "when justice so requires" to allow a plaintiff to amend its complaint to bring its fraud claims into compliance with Rule 9(b)). Instead, the court grants Peterson Transport twenty-one (21) days from the date the order on this decision is entered to bring its fraud allegations into compliance with Rule 9(b). If the Complaint is not amended by the deadline, Count I of the Complaint will be dismissed.
D. Count II: 11 U.S.C. § 727(a)(3)
Next, Curtis takes issue with the sufficiency of the allegations in Count II in the Complaint. In Count II, Peterson Transport requests denial of the discharge pursuant to 11 U.S.C. § 727(a)(3) for Curtis's alleged failure to disclose child support income in excess of $350.00 per month and failure to accurately disclose "over the road expenses" and preserve records of those expenses [Adv. Doc. 1, ¶¶ 17-19].
Pursuant to 11 U.S.C. § 727(a)(3), a debtor's discharge may be denied when:
the debtor has concealed, destroyed, mutilated, falsified, or failed to keep or preserve any recorded information, including books, documents, records, and papers, from which the debtor's financial condition or business transactions might be ascertained, unless such act or failure to act was justified under all of the circumstances of the case[.]11 U.S.C.A. § 727(a)(3). This Bankruptcy Code provision requires that the debtor provide creditors with "'enough information to ascertain the debtor's financial condition and track his financial dealings with substantial completeness and accuracy for a reasonable period past to present.'" Turoczy Bonding Co. v. Strbac (In re Strbac), 235 B.R. 880, 882 (B.A.P. 6th Cir. 1999) (further citation omitted). The adequacy of a debtor's records must be determined on a case by case basis considering the debtor's occupation, financial structure, experience, education, sophistication, and any other circumstances that should be considered in the interest of justice. Id.
The party seeking denial of the discharge carries the burden of proving the inadequacy of the records. Strbac, 235 B.R. at 882. Once the burden of proving the inadequacy of the records is met, the burden switches to the debtor to establish any justification therefor. Id. at 883.
Unlike a § 727(a)(4) claim, a claim for denial of discharge pursuant to § 727(a)(3) does not require proof that the debtor acted fraudulently. Aseireh, 526 B.R. at 250; Rieser v. Humphrey (In re Humphrey), 146 B.R. 202, 204 (Bankr. S.D. Ohio 1992). Thus, a § 727(a)(3) claim is not subject to the heightened pleading requirements of Rule 9(b). Aseireh, 526 B.R. at 250; Humphrey, 146 B.R. at 204-05. Nonetheless, a § 727(a)(3) claim must still comply with Federal Rule of Civil Procedure 8(a)(2) requiring "a short and plain statement of the claim showing that the pleader is entitled to relief." Fed. R. Civ. P. 8(a)(2) (incorporated into bankruptcy adversary proceedings via Fed. R. Bankr. P. 7008); Aseireh, 526 B.R. at 251.
Turning to Count II allegations and whether they meet Rule 8 notice requirements, Curtis first points to paragraph 17 in which Peterson Transport alleges that Curtis "failed to [d]isclose in his schedules income received from child support for his listed dependents in Schedule I Number 8(c) in excess of $350 a month" [Adv. Doc. 1, ¶ 17]. In the motion to dismiss, Curtis asserts that these allegations are deficient because they are incorrect. Curtis asserts that the missing income is actually from Aid to Dependent Children, is currently less than $350.00 per month, is exempt, and that the error has been corrected [Adv. Doc. 4, pp. 7-8]. Significantly, Curtis's factual allegations in the motion to dismiss are not found within the Complaint making them inappropriate for consideration at this stage of the litigation. Fed. R. Civ. P. 12(d); Kostrzewa v. City of Troy, 247 F.3d 633, 643-44 (6th Cir. 2001) (noting that facts outside the pleadings must be excluded when deciding a case on Rule 12(b)(6) grounds unless the court converts the motion to dismiss to one for summary judgment and gives the parties an opportunity to produce evidence). Furthermore, even if Curtis's allegations were proven true, they do not necessarily negate the elements of Peterson Transport's claim. They leave unanswered whether the initial omission of the income created an inaccurate picture of Curtis's financial condition to the trustee and creditors and whether the omission was justified under the circumstances. The court concludes that the allegations in paragraph 17 of the Complaint are sufficiently pleaded to withstand dismissal.
Next, Curtis points to alleged deficiencies in paragraphs 18 - 20 of the Complaint. In those paragraphs, Peterson Transport alleges that Curtis failed to accurately disclose his "over the road expenses" in schedule J, line 21 and failed to keep and preserve accurate records of those expenses [Adv. Doc. 1, ¶¶ 18-20]. In his motion to dismiss, Curtis again raises allegations of fact outside the complaint which must be excluded from consideration. Fed. R. Civ. P. 12(d); Kostrzewa v. City of Troy, 247 F.3d 633, 643-44 (6th Cir. 2001). For example, Curtis asserts that the over the road expenses do not appear in schedule J because Curtis already deducted the expenses from income in schedule I, line 8(a) [Adv. Doc. 4, p. 8]. While that may or may not be true, it is not subject to independent verification by a simple review of Curtis's schedule I and is a fact outside the Complaint that cannot be considered on a motion to dismiss. Furthermore, Curtis's assertions in the motion to dismiss that the records are in existence and have been made available to the trustee and Peterson Transport are unsupported factual allegations outside the Complaint that cannot be considered. The court concludes that Complaint paragraphs 18-20 are sufficiently pleaded to withstand dismissal.
While Curtis asserts in the motion to dismiss that his over the road expenses have been deducted from income on schedule I rather than being listed as expenses on schedule J, over the road expenses do appear on Curtis's schedule J totaling $1,677.54 a month on average [Case No. 14-33094, Doc. 1, schedule J, line 21]. These expenses are then deducted from income on schedule J, line 23. Curtis does not explain this discrepancy in his motion to dismiss.
On schedule I, line 8(a), a debtor is to list net income from operating a business, but is also to "attach a statement for each property and business showing . . . ordinary and necessary business expenses . . . ." [Case No. 14-33094, Doc. 1, schedule I]. While Curtis asserts that the business expenses were deducted on line 8(a), he does not refer to or provide an itemized statement detailing the expenses that would allow the court or Peterson Transport to determine their amount and whether they were fully and accurately deducted.
CONCLUSION
Count I of Peterson Transport's Complaint is not sufficiently pleaded to meet the heightened pleading requirements of Fed. R. Civ. P. 9(b). Peterson Transport has twenty-one (21) days from the date that the order on this decision is entered to amend Count I to bring it into compliance with Rule 9 or it will be dismissed. The remainder of Curtis's motion to dismiss [Adv. Doc. 4] is DENIED.
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/ _________
Lawrence S. Walter
United States Bankruptcy Judge
Dated: June 24, 2015
cc: Alan C Hochheiser
Buckley King LPA
1400 Fifth Third Center, 600 Superior Ave
Cleveland, OH 44114
Email: hochheiser@buckleyking.com Scott A Kramer
130 W. Second Street Suite 310
Dayton, OH 45402
Email: kramerbankruptcy@yahoo.com Linden Wayne Curtis, Jr.
2209 Gipsy Drive
Dayton, OH 45414