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concluding that, despite Rule 9(b), "the plaintiff still must plead facts about the defendant's mental state, which, accepted as true, make the state-of-mind allegation plausible on its face"
Summary of this case from Bailey v. Amaro (In re Amaro)Opinion
Case No. 17-11585 Adv. No. 17-1037
09-04-2018
In re: BRYAN METZGER Debtor GUARDIAN FINANCE COMPANY Plaintiff v. BRYAN METZGER Defendant
Chapter 7
DECISION GRANTING, IN PART, AND DENYING, IN PART, DEFENDANT-DEBTOR'S MOTION TO DISMISS [Docket Number 5]
This matter is before this Court on the Motion to Dismiss Complaint [Docket Number 5] ("Motion to Dismiss") filed by Defendant-Debtor Bryan E. Metzger, the Memorandum in Opposition to Debtor's Motion to Dismiss Complaint [Docket Number 9] ("Response") filed by Plaintiff Guardian Finance Company ("Guardian"), and Defendant's Reply [Docket Number 10].
I. JURISDICTION
This Court has subject matter jurisdiction over this adversary proceeding pursuant to 28 U.S.C. §§ 157 and 1334 and the general order of reference entered in this district. This is a core proceeding pursuant to 28 U.S.C. § 157(b)(2)(I).
II. BACKGROUND
Guardian filed a complaint in this adversary proceeding requesting that this Court determine that a debt owed to it is nondischargeable pursuant to 11 U.S.C. §§ 523(a)(2)(A), (4) and (6) ("Complaint") [Docket Number 1]. The Debtor filed his Motion to Dismiss asserting that the Complaint fails to state a claim against the Debtor and fails to plead the fraud allegations with specificity.
For purposes of determining the issues raised in the Motion to Dismiss, this Court considers the following facts in Guardian's Complaint as true:
Debtor is either the President or Vice-President and a member of CarZooom Auto Credit LLC ("CarZooom") [Docket Number 1, ¶ 6; Ex. A, Signature Line]. On November 9, 2011, CarZooom and Guardian entered into an agreement through which CarZooom could assign retail installment contracts arising from the sale of motor vehicles on credit to Guardian ("Agreement") [Id. at ¶ 7; Ex. A]. The Agreement was signed on behalf of CarZooom by Aaron Muth, as President, and the Debtor as Vice-President [Id. at Ex. A]. Debtor also executed and delivered an unconditional guaranty to Guardian which guaranteed CarZooom's performance of its obligations under the Agreement ("Guaranty") [Id. at ¶ 8; Ex. B].
The Agreement required CarZooom to collect all payments for the contracts assigned to Guardian and to remit those collected payments to Guardian [Id. at ¶ 10]. Paragraph D of the Agreement, entitled "Collection of Account Payments," provides in relevant part that:
It shall be Dealer [CarZooom]'s responsibility to collect all payments for the Accounts sold to Guardian as required by the Account documents unless Guardian, in its sole and absolute discretion, indicates otherwise to Dealer in writing. Dealer shall remit all said payments to Guardian on a weekly basis, until such time as total payments exceed Two Thousand Dollars ($2,000.00), at which point Guardian shall determine the frequency of remittance. Under no circumstances shall Dealer make payments on behalf of any Accounts. The failure by Dealer to collect payments required by the Account documents (except where the person and/or persons obligated under the Account documents defaults in payment notwithstanding Dealer's collection efforts) or, alternatively, Dealer's failure to remit payments collected on a weekly basis, shall constitute an item of default entitling Guardian to an immediate repurchase of the Account at issue or, at Guardian's sole option, the repurchase by Dealer of all Accounts purchased under this Agreement.[Id. at Ex. A]. Guardian asserts that it became the owner of all payments collected on those contracts after the assignment of the contracts to Guardian [Id. at ¶ 10].
In addition, the Agreement required CarZooom to repurchase contracts that CarZooom had assigned to Guardian upon the happening of certain events set forth in the Agreement [Id. at ¶ 9].
The Complaint alleges that CarZooom failed to comply with its obligations under the Agreement to remit payments and to repurchase the contracts assigned to Guardian [Id. at ¶ 11]. Further, it is alleged that the Debtor failed to comply with his obligations under the Guaranty [Id.].
More specifically, Guardian alleges that CarZooom, under the direction and control of the Debtor, collected payments made on contracts assigned to Guardian, but CarZooom and Debtor failed to remit the collected payments to Guardian despite having no right, title, or interest in those payments [Id. at ¶ 12]. Upon demand by Guardian, CarZooom and the Debtor refused to remit the collected payments [Id. at ¶¶ 13-14]. Guardian alleges that CarZooom and the Debtor have had "possession, occupancy, control and enjoyment of the payments, without making payment or accounting to [Guardian] and without [Guardian's] consent." [Id. at ¶ 15.] As a result, Guardian asserts that it suffered loss in an amount not less than $56,777.92, together with interest at the contract rate, including pre-judgment interest, costs, and attorney fees [Id. at ¶ 21].
III. LEGAL ANALSYIS
A. Legal Standard for Determining Motions to Dismiss
The Debtor requests dismissal of Guardian's Complaint for failure to state a claim upon which relief can be granted pursuant to Rule 12(b)(6) of the Federal Rules of Civil Procedure ("Civil Rules"), made applicable to adversary proceedings by Rule 7012 of the Federal Rules of Bankruptcy Procedure ("Bankruptcy Rules"). When considering a Civil Rule 12(b)(6) motion to dismiss, "the [c]ourt must construe the complaint in the light most favorable to the plaintiff, accept all factual allegations as true, and determine whether the complaint contains 'enough facts to state a claim to relief that is plausible on its face.'" United States ex rel. Bledsoe v. Cmty. Health Sys., Inc., 501 F.3d 493, 502 (6th Cir. 2007) (quoting Bell Atlantic Corp. v. Twombly, 550 U.S. 544, 570, 127 S. Ct. 1955, 167 L. Ed. 2d 929 (2007)). "A claim has facial plausibility when the plaintiff pleads factual content that allows the court to draw the reasonable inference the defendant is liable for the misconduct alleged." Ashcroft v. Iqbal, 556 U.S. 662, 678, 129 S. Ct. 1937, 1949, 173 L.Ed.2d 868 (2009) (citing Twombly, 550 U.S. at 556). "Determining whether a complaint states a plausible claim for relief will . . . be a context-specific task that requires the reviewing court to draw on its judicial experience and common sense." Id. at 679. In considering a motion to dismiss under Civil Rule 12(b)(6), a court must keep in mind that "[t]he purpose of a motion under Rule 12(b)(6) is to test the legal sufficiency of the complaint, not the probability of success on the merits." Kennedy v. R.W.C., Inc., 359 F. Supp. 2d 636, 639 (E.D. Mich. 2005).
When a complaint alleges fraud, it must meet the heightened pleading requirements of Civil Rule 9(b), made applicable to adversary proceedings by Bankruptcy Rule 7009. Civil Rule 9(b) provides that "[i]n alleging fraud or mistake, a party must state with particularity the circumstances constituting fraud or mistake. Malice, intent, knowledge, and other conditions of a person's mind may be alleged generally." Fed. R. Civ. P. 9(b). The purpose of Civil Rule 9(b) is to provide the defendant with fair notice of the alleged fraudulent conduct so the defendant may prepare an informed response, to protect the defendant's reputation from allegations of fraud, to narrow discovery, and to prevent "fishing expeditions." Chesbrough v. VPA, P.C., 655 F.3d 461, 466-67 (6th Cir. 2011).
Civil Rule 9(b), however, "is not to be read in isolation, but is to be interpreted in conjunction with Federal Rule of Civil Procedure 8," Bledsoe, 501 F.3d at 503, which requires "a short and plain statement of the claim showing that the pleader is entitled to relief." Fed. R. Civ. P. 8(a)(2). "When read against the backdrop of Rule 8, it is clear that the purpose of Rule 9 is not to reintroduce formalities to pleading, but is instead to provide defendants with a more specific form of notice as to the particulars of their alleged misconduct." Bledsoe, 501 F.3d at 503.
While conditions of mind under Civil Rule 9(b) "are not subject to the heightened pleading requirements imposed on claims for fraud or mistake, . . . pleadings regarding the conditions of a person's mind, including malice and intent, remain bound by the plausibility requirement of Rule 8." Mourad v. Marathon Petro. Co. LP, 654 F. App'x 792, 798 (6th Cir. June 30, 2016) (citing Republic Bank & Trust Co. v. Bear Stearns & Co., 683 F.3d 239, 247 (6th Cir. 2012)). As such, "'the plaintiff still must plead facts about the defendant's mental state, which, accepted as true, make the state-of-mind allegation plausible on its face.'" Id. (further citations omitted). B. The Complaint Fails to State a Claim for Relief Under 11 U.S.C. § 523(a)(2)(A).
In its Complaint, Guardian asserts that "[t]he debt owed by Defendant to Plaintiff as a result of CarZooom's and Defendant's false pretenses, false representation or actual fraud" creates a nondischargeable debt under § 523(a)(2)(A). This provision of § 523(a) provides that a debt is nondischargeable:
Use of the terms "Bankruptcy Code," "Section" or "§" are references to provisions of Title 11 of the United States Code.
(2) for money, property services, or an extension, renewal, or refinancing of credit, to the extent obtained by-
11 U.S.C. § 523(a)(2)(A). The creditor must establish the required elements of its nondischargeability claim by a preponderance of the evidence. Grogan v. Garner, 498 U.S. 279, 291, 111 S. Ct. 654, 112 L. Ed. 2d 755 (1991).(A) false pretenses, a false representation, or actual fraud[.]
It is unclear from the Complaint whether Guardian asserts nondischargeability of debt based on false pretenses, false representation, actual fraud or some combination thereof. In construing the Complaint in the light most favorable to Guardian, this Court will consider all three.
1. False Pretenses; False Representation
To except a debt from discharge under § 523(a)(2)(A) as a false pretense or false representation, a creditor must prove that (1) the debtor obtained money through a material misrepresentation that, at the time, the debtor knew was false or made with gross recklessness as to its truth; (2) the debtor intended to deceive the creditor; (3) the creditor justifiably relied on the false representation; and (4) its reliance was the proximate cause of loss. Rembert v. AT&T Universal Card Servs., Inc. (In re Rembert), 141 F.3d 277, 280-81 (6th Cir. 1998). A false representation involves "an expressed misrepresentation," Wings & Rings, Inc. v. Hoover (In re Hoover), 232 B.R. 695, 700 (Bankr. S.D. Ohio 1999), while a false pretense is "an implied representation or conduct intended to create and foster a false impression." Id. (citations omitted).
To comply with Civil Rule 9(b), when pleading false pretenses or false representation a plaintiff must allege the "'time, place, and content of the alleged misrepresentation on which he or she relied; the fraudulent scheme; the fraudulent intent of the defendants; and the injury resulting from the fraud.'" Bledsoe, 501 F.3d at 503 (citing Coffey v. Foamex L.P., 2 F.3d 157, 161-62 (6th Cir.1993)); see also, Landis v. Baker (In re Baker), 2015 Bankr. LEXIS 1038, at *23-24, 2015 WL 1568377, at *7 (Bankr. N.D. Ohio, April 1, 2015) ("Plaintiff must at least identify the claimed misrepresentation by the who, what, where, and when and state facts from which reliance and intent may at least reasonably be inferred by the court.").
The Debtor argues that the Complaint lacks any allegation of a material misrepresentation by the Debtor that he knew was false or allegations that the Debtor sought to deceive Guardian in obtaining funds. Guardian points to the following allegations in the Complaint, which Guardian asserts satisfy the heightened pleading requirements of Civil Rule 9(b): a. "The Guaranty sets out date of the fraud as November 9, 2011, and the place of the fraud as 3398 Dixie Highway, Franklin, Ohio." [Response, p. 5].
November 9, 2011 is the date that the Debtor signed and delivered the Guaranty to Guardian. [Docket Number 1, ¶ 8]. As such, it would appear that Guardian is suggesting that the Debtor made a representation of payment at the time the Guaranty was executed with no intent of repayment or that the Debtor acted with the intent to defraud Guardian at the time the Guaranty was executed.
"[A] promise to pay is actionable 'if a complainant could prove that [the] debtor made knowingly false promises of future performance with the intent to defraud.'" Auto. Fin. Corp. v. Leonard (In re Leonard), 2012 Bankr. LEXIS 1930, at *18, 2012 WL 1565120, at *6 (Bankr. E.D. Tenn. May 2, 2012) (quoting Bohannon v. Horton (In re Horton), 372 B.R. 349, 357 n.8 (Bankr. W.D. Ky. 2007). However, there are no allegations in the Complaint to suggest that Carzooom was in default under the Agreement from its inception, thereby immediately triggering the Debtor's requirement to perform under the Guaranty. To the contrary, it would appear from the Complaint that the parties continued to perform under the Agreement until sometime around July of 2013. [Docket Number 1, ¶ 11]. "A promise to pay a debt in the future is not a misrepresentation merely because the debtor fails to do so; the creditor must prove the debtor, when he said he would pay the debt, had no intention of doing so." Davis v. Olson (In re Olson), 454 B.R. 466, 472 (Bankr. W.D. Mo. 2011). Accordingly, the date of the Guaranty and the place where it was executed and delivered does not satisfy the Civil Rule 9(b) time and place requirements for fraud. b. "The content of Debtor's misrepresentations is set out in the Complaint in paragraph 10 where it provides The Agreement, among other things, required Carzooom to repurchase contracts ("Contracts") that CarZooom assigned to Plaintiff upon the happening of certain events set forth in the Agreement." [Response, p. 5-6].
This assertion is actually in paragraph 9 of the Complaint.
Guardian does not seem to contend that the $319,586.38 asserted balance due on the Contracts that Carzooom allegedly were required to repurchase from Guardian under the terms of the Agreement and Guaranty is a nondischargeable debt. Rather, Guardian only claims that the $56,777.92 in collected but unremitted payments is nondischargeable. Therefore, the reference to any alleged misrepresentation or fraudulent scheme relating to the repurchase of Contracts is not relevant to whether the Complaint states a basis for relief under § 523(a)(2)(A). Moreover, as previously discussed, the Complaint does not allege facts that would support the Debtor's intent to defraud Guardian at the time CarZooom and Guardian entered into the Agreement. c. "The Agreement also required CarZooom to collect all payments for the Contracts assigned to Plaintiff (unless Guardian indicated otherwise) and to remit all such payments collected to Plaintiff, thereby identifying Debtor's fraudulent intent and scheme." [Response, p. 6].
While this assertion may support a claim for breach of contract by CarZooom, thereby triggering the Debtor's obligation under the Guaranty, failure to perform in and of itself, does not establish the Debtor's intent or a scheme to defraud Guardian. See Bartson v. Marroquin (In re Marroquin), 441 B.R. 586, 593 (Bankr. N.D. Ohio 2010) ("For purposes of § 523(a)(2)(A), the mere breach of a promise to pay does not establish the existence of an intent to defraud. Otherwise, any breach of contract would be a nondischargeable debt. Instead, an intent to defraud will not exist unless the maker of the promise knew his statement to be false at the time the statement was made." (internal citations omitted)). d. "Debtor's fraudulent scheme and intent is also stated in Plaintiff's Complaint "CarZooom and Defendant have refused to remit the payments collected on the Contracts to Plaintiff. CarZooom and Defendant have had possession, occupancy, control and enjoyment of the payments without making payment or accounting to Plaintiff and without Plaintiff's consent. (Complaint ¶'s 14 and 15). Further the Complaint alleges that Debtor collected payments and failed to remit those monies to Plaintiff." [Response, p. 6].
Bare allegations in the Complaint that Guardian demanded turnover of the payments collected by CarZooom on the Contracts and that CarZooom and the Debtor refused to remit the payments do not meet the particularity requirements of Civil Rule 9(b) to establish that the Debtor obtained money by false pretenses or false representation. There are no particulars in the Complaint that set forth a scheme by the Debtor to defraud Guardian. The Complaint merely alleges a demand for payment that was not met. The Complaint is devoid of factual allegations from which this Court can infer fraud by the Debtor. e. "Lastly, Plaintiff identifies its injury resulting from Debtor's fraud as $56,777.92." [Response, p. 6].
In light of the other deficiencies in the Complaint, injury alone is not sufficient to establish a cause of action under § 523(a)(2)(A).
In summary, the Complaint does not allege that the Debtor obtained the money at issue by making an express or implied misrepresentation to Guardian under the heightened pleading requirements of Civil Rule 9(b).
2. Actual Fraud
Actual fraud is a broad concept that includes "any deceit, artifice, trick or design involving a direct and active operation of mind, used to circumvent and cheat another—something said, done or omitted with the design of perpetrating a cheat or deception." Coughlin Chevrolet, Inc. v. Thompson (In re Thompson), 458 B.R. 409, 421 (Bankr. S.D. Ohio 2011) (internal quotation marks and citations omitted).
In contrast to false pretenses or false representation, actual fraud does not require a misrepresentation or reliance by a creditor on an action taken by a debtor. Husky Int'l Elecs., Inc. v. Ritz, ___ U.S. ___, 136 S. Ct. 1581, 1587, 1589-90, 194 L. Ed. 2d 655 (2016); see also, Mellon Bank, N.A. v. Vitanovich (In re Vitanovich), 359 B.R. 873, 877 (B.A.P. 6th Cir. 2001) (adopting McClellan v. Cantrell, 217 F.3d 890, 894 (7th Cir. 2000)). Where non-representational "actual fraud" is alleged a "creditor must prove that (1) the debtor perpetrated a fraud against the creditor; (2) the debtor acted with an intent to defraud; and (3) the creditor sustained loss or damage as a proximate cause of the fraud." Taylor v. Demopoulos (In re Demopoulos), 2008 Bankr. LEXIS 2860, at *25, 2008 WL 4489153, at *8 (Bankr. N.D. Ill., Sept. 23, 2008) (citing McClellan, 217 F.3d at 893-94).
Similar to fraudulent representation, a plaintiff must allege the "who, what, when, where, and how" of the alleged actual fraud to comply with Civil Rule 9(b). Chi. Materials Corp. v. Hildebrandt (In re Hildebrandt), 2008 Bankr. LEXIS 3864, at *12, 2008 WL 5644893, at *4 (Bankr. N.D. Ill., Dec. 18, 2008) (citing DiLeo v. Ernst & Young, 901 F.2d 624, 627 (7th Cir. 1990)).
Guardian's Complaint fails to meet the heightened standard for pleading actual fraud. All the Complaint says is that CarZooom collected $56,777.92 from the accounts assigned to Guardian, CarZooom failed to remit the funds to Guardian per the terms of the Agreement, Guardian sought payment from CarZooom and the Debtor but it has not been paid. Beyond the asserted facts that the Debtor was the President of CarZooom and had some ownership interest in the entity and the conclusory statement that CarZooom acted under the Debtor's direction and control, there is very little detail tying the Debtor to the alleged fraudulent taking of the funds at issue.
This Court notes that the Debtor signed the Agreement as Vice President, not President. In any event, from the facts asserted in the Complaint, the Debtor at least appears to have been an officer of CarZooom.
As a general proposition, a company's fraudulent acts cannot imputed to a debtor based solely on his membership in the company and guarantee of a company debt. Automotive Fin. Corp. v. Leonard (In re Leonard), 2012 Bankr. LEXIS 1930, at *13, 2012 WL 1565120, at *4 (Bankr. E.D. Tenn. May 2, 2012). While, a debtor may be held personally liable for a company's tort to the extent of his own participation in the tortious acts, id., the Complaint fails to give any details of the alleged plot by the Debtor to defraud Guardian of its funds. For example, the Complaint lacks details about which accounts are at issue; the approximate date or dates when Guardian demanded payment from CarZooom and the Debtor; whether the demand or demands were made orally or in writing; what, if any response there was from CarZooom or the Debtor; and whether CarZooom continued to collect payments on the accounts after demand for payment was made. The factual allegations in the Complaint are insufficient to support the reasonable inference that the Debtor obtained the funds as part of a scheme to defraud Guardian.
"[T]he particularity required by Rule 9(b) is intended to enable the defendant to respond specifically and quickly to the potentially damaging allegations." U.S. ex rel. Costner v. United States, 317 F.3d 883, 888 (8th Cir. 2003). The Complaint fails to meet this requirement. Moreover, under the heightened pleading requirements of Civil Rule 9(b), the "facts alleged in the Complaint are so general that [Guardian's claim fails] to cross the line from conceivable to plausible." First Assembly of God v. Ping (In re Ping), 506 B.R. 486, 493 (Bankr. S.D. Ohio 2014). Accordingly, Guardian has failed to state a claim based on false pretenses, false representation or actual fraud under § 523(a)(2)(A). C. The Complaint Fails to State a Claim Under 11 U.S.C. § 523(a)(4) for Fraud or Defalcation While Acting in a Fiduciary Capacity , Embezzlement or Larceny.
Guardian further claims that CarZooom and the Debtor's "conversion, embezzlement, defalcation, theft and larceny" causes the debt owed to Guardian to be nondischargeable under § 523(a)(4). Section 532(a)(4) provides for the nondischargeability of a debt "for fraud or defalcation while acting in a fiduciary capacity, embezzlement, or larceny[.]" 11 U.S.C. § 523(a)(4). The Debtor argues that Guardian's § 523(a)(4) claim for fraud or defalcation while acting in a fiduciary capacity should be dismissed because the facts alleged in the Complaint do not support such a claim. In addition, the Debtor argues that claims of embezzlement and larceny have a fraud element that Guardian fails to plead with particularity and, consequently, those claims must be dismissed. This Court will address each of these § 523(a)(4) claims in turn.
1. Fraud or Defalcation While Acting In A Fiduciary Capacity
The Debtor asserts that Guardian's § 523(a)(4) cause of action for defalcation while acting in a fiduciary capacity should be dismissed because the Complaint fails to allege facts demonstrating that the Debtor acted in a fiduciary capacity. Specifically, the Debtor argues that the exception to discharge based on fraud or defalcation while acting in a fiduciary capacity applies only to express or technical trusts based on Sixth Circuit precedent and that the Complaint fails to allege that an express or technical trust was created between the parties. In its Response, Guardian focusses exclusively on its § 523(a)(4) embezzlement and larceny causes of action stating that "embezzlement and larceny do not require an express trust or actions in a fiduciary capacity and have been sufficiently plead in [the] Complaint." [Docket Number 9, p. 6]. It appears from Guardian's Response that it does not contest the Debtor's request to dismiss the § 523(a)(4) claim for fraud or defalcation while acting in a fiduciary capacity. Accordingly, to the extent that the Complaint asserts such a cause of action, it is dismissed.
2. Embezzlement
Neither larceny nor embezzlement is defined within the Bankruptcy Code; rather, the appropriate definitions of embezzlement and larceny for § 523(a)(4) purposes are determined by reference to federal common law. See Brady v. McAllister (In re Brady), 101 F.3d 1165, 1172-73 (6th Cir. 1996); Williams v. Noblit (In re Noblit), 327 B.R. 307, 311 (Bankr. E.D. Mich. 2005); Davis v. Kindrick (In re Kindrick), 213 B.R. 504, 509 (Bankr. N.D. Ohio 1997).
Federal law defines "embezzlement" under section 523(a)(4) as the fraudulent appropriation of property by a person to whom such property has been entrusted or into whose hands it has lawfully come. A creditor proves embezzlement by showing that he entrusted his property to the debtor, the debtor appropriated the property for a use other than that for which it was entrusted, and the circumstances indicate fraud.Brady, 101 F.3d at 1172-73 (internal quotation marks and citations omitted). The "fraud" required for embezzlement is "fraud in fact, involving moral turpitude or intentional wrongdoing, for the purpose of permanently depriving another of his property." Gen. Motors Acceptance Corp. v. Cline (In re Cline), 431 B.R. 307 (Table), 2010 WL 22334, at *7 (B.A.P. 6th Cir. Jan. 6, 2010).
Guardian's § 523(a)(4) embezzlement claim fails for the same reason that its § 523(a)(2)(A) claims failed—the Complaint fails to plead fraud with particularity as required by Civil Rule 9(b).
3. Larceny
Federal common law defines larceny as "the fraudulent and wrongful taking and carrying away of the property of another with intent to convert such property to the taker's use without the consent of the owner." Noblit, 327 B.R. at 311; Graffice v. Grim (In re Grim), 293 B.R. 156, 166 n.3 (Bankr. N.D. Ohio 2003). Significantly, larceny requires that the original taking of the property be unlawful. Custom Kilns, Inc. v. Pierron (In re Pierron), 448 B.R. 228, 240 (Bankr. S.D. Ohio 2011) (noting that "[l]arceny requires that felonious intent must have existed at the time of the taking); Noblit, 327 B.R. at 311.
In this case, the facts in the Complaint support that the Debtor came into lawful possession of the collected payments subject to the alleged assigned ownership of Guardian and, consequently, the original taking was not wrongful. Accordingly, Guardian's Complaint fails to state a claim for larceny pursuant to § 523(a)(4). D. The Complaint States a Claim Under 11 U.S.C. § 523(A)(6) for Willful and Malicious Injury.
This Court notes that Civil Rule 8(d) permits alternative statements of claim if properly pleaded.
Guardian's Complaint also asserts a claim for nondischargeability under § 523(a)(6). Section 523(a)(6) excepts from discharge any debt "for willful and malicious injury by the debtor to another entity or to the property of another entity." 11 U.S.C. § 523(a)(6). The Debtor contends that Guardian's Complaint fails to state a claim under § 523(a)(6) because there is no proof that the Debtor willfully and maliciously intended to harm Guardian by his failure to remit the payments. Rather, the Debtor maintains, that Guardian's factual allegations only prove a breach of contract.
The Debtor correctly notes that Guardian must meet a stringent standard of proof under § 523(a)(6) given the Supreme Court's decision in the case of Kawaauhau v. Geiger, 523 U.S. 57 (1998). In Geiger, the Supreme Court defined what actions rise to the level of those causing a "willful" injury. The Supreme Court determined that the debtor's acts must not only be intentional, but must be committed with the intent or desire to cause injury. Geiger, 523 U.S. at 61-62. The Sixth Circuit further defined the standard by holding that the debtor must be found to have subjectively desired to intend the harm or had knowledge that the harm was substantially certain to result from the debtor's actions. Markowitz v. Campbell (In re Markowitz), 190 F.3d 455, 464 (6th Cir. 1999). The standard as set forth in these cases is intended to limit nondischargeable debts to those arising from intentional torts as opposed to debts arising from mere negligence or recklessness. Monsanto Co. v. Trantham (In re Trantham), 304 B.R. 298, 306 (6th Cir. B.A.P. 2004).
Further, the term "malicious" is construed in the context of § 523(a)(6) to mean actions taken "in conscious disregard of one's duties or without just cause or excuse; it does not require ill-will or specific intent." Id. at 308 (quoting Wheeler v. Laudani, 783 F.2d 610, 615 (6th Cir. 1986) (internal quotation marks omitted)). While "in [the] great majority of cases, the same factual events that give rise to a finding of 'willful' conduct, will likewise be indicative as to whether the debtor acted with malice . . . . the definition of malice requires a heightened level of culpability transcending mere willfulness." Superior Metal Prods. v. Martin (In re Martin), 321 B.R. 437, 442 (Bankr. N.D. Ohio 2004).
Turning to the Complaint, Guardian alleges that CarZooom's and the Debtor's "unauthorized possession, occupancy, control and enjoyment of the payments collected on the Contract without the consent of Plaintiff constitutes conversion" [Docket Number 1, ¶ 16]. Under appropriate circumstances, conversion may constitute willful and malicious injury under § 523(a)(6). See Leonard, 2012 Bankr. LEXIS 1930, at *34-35, 2012 WL 1565120, at *11. The Debtor correctly points out however that to establish an action for conversion of money under Ohio law, Guardian must show that "(1) there exists an obligation on the part of the defendant to deliver to the plaintiff specific money; and (2) the money is capable of identification." Howard v. McWeeney (In re McWeeney), 255 B.R. 3, 5 (Bankr. S.D. Ohio 2000). The Debtor asserts that the Complaint alleges that only a certain sum of money is due (e.g., "not less than $56,777.92") rather than specific identifiable money. Further, the Debtor maintains that nothing in the Complaint or the Agreement attached to the Complaint requires sequestration of the funds collected so the Complaint does not establish that the funds at issue are capable of identification.
Unlike the prior causes of action, this Court evaluates the sufficiency of the Complaint for purposes of this Motion to Dismiss Guardian's § 523(a)(6) claim under Civil Rule 8 standards. Pioneer Constr., Inc. v. May (In re May), 2013 Bankr. LEXIS 459, at *2-6, 2013 WL 441440, at *1-2 (Bankr. S.D. Ga., Feb. 5, 2013). While presenting a close question, this Court finds that the Complaint alleges a facially plausibility claim for relief under § 523(a)(6). The funds at issue relate to specific accounts assigned to Guardian such that Guardian may be able to trace and identify those funds. At this stage of litigation, this Court is unable to conclude that Guardian can prove no set of facts to support a conversion claim. Moore v. Caliber Home Loans, Inc., 2015 U.S. Dist. LEXIS 117737, at *29-30, 2015 WL 5162482, at *9 (S.D. Ohio, Sept. 3, 2015); see also, Rice v. Morse (In re Morse), 504 B.R. 462, 476 (Bankr. E.D. Tenn., 2014) (recognizing that there is a "strong policy in the Sixth Circuit that disputes should be resolved on the merits, rather than on procedural technicalities."). Moreover, under the more relaxed pleading requirements of Civil Rule 8, the facts alleged in the Complaint are sufficient for this Court to infer for purposes of this Motion to Dismiss that such conversion was willful and malicious. Accordingly, the Motion to Dismiss Guardian's § 523(a)(6) claim is denied. E. Leave to Amend Complaint
In both of the cases cited by the Debtor in his Motion to Dismiss, the funds at issue were deposited into the defendant's bank account and commingled with the defendant's other funds. NPV IV, Inc. v. Transitional Health Servs., 922 F. Supp. 77, 81-82 (S.D. Ohio 1996); In re McWeeney, 255 B.R. at 5. While fatal to the causes of action in those cases, those facts have yet to be determined in this case.
In its Response, Guardian requested leave to amend its Complaint if this Court found it to be deficient. Affording a plaintiff an opportunity to amend a complaint to satisfy pleading requirements is favored over an outright dismissal. Coffey, 2 F.3d at 162; State Bank and Trust Co. v. Spaeth (In re Motorwerks, Inc.), 371 B.R. 281, 294 (Bankr. S.D. Ohio 2007). For these reasons, this Court will allow Guardian time to amend its Complaint to satisfy the requirements outlined in this decision.
IV. CONCLUSION
For the foregoing reasons, this Court:
1. Conditionally grants the Motion to Dismiss Guardian's § 523(a)(2)(A) causes of action for false pretenses, false representation and actual fraud and its § 523(a)(4) causes of action for embezzlement or larceny. Guardian has twenty-one (21) days from the date of entry of the order entered in conjunction with this decision to file an amended complaint or these causes of action will be dismissed.
2. Grants the Motion to Dismiss Guardian's § 523(a)(4) causes of action for fraud or defalcation while acting in a fiduciary capacity as having been abandoned by Guardian.
3. Denies the Motion to Dismiss Guardian's § 523(a)(6) cause of action for willful and malicious injury.
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/_________
Beth A. Buchanan
United States Bankruptcy Judge
Dated: September 4, 2018
Distribution List:
John C. Ridge, Esq.
Paul J. Minnillo, Esq.