Opinion
23-11665 Proc. 24-1018
08-30-2024
TRENT DOUGLAS PROUGH Debtor(s) v. TRENT DOUGLAS PROUGH Defendant(s) COLETON JONES CRYSTAL JONES Plaintiff(s)
DECISION AND ORDER GRANTING MOTION TO DISMISS
Robert E. Grant, United States Bankruptcy Court Judge
In bankruptcy, claims for breach of contract are dischargeable debts. See e.g., In re Davis, 638 F.3d 549, 554 (7th Cir. 2011); In re Whiters, 337 B.R. 326, 339 (Bankr. N.D. Ind. 2006); In re Barr, 194 B.R. 1009, 1017-18 (Bankr. N.D.Ill. 1996); In re Guy, 101 B.R. 961, 978-979 (Bankr. N.D. Ind. 1988). Even an intentional breach of contract will not create a non-dischargeable debt, unless the breach is accompanied by conduct that is also tortious. In re Williams, 337 F.3d 504, 509-10 (5th Cir. 2003); Petralia v. Jerich, 238 F.3d 1202, 1205-06 (9th Cir. 2001); In re Riso, 978 F.2d 1151, 1154 (9th Cir. 1992). See also, In re Lazzara, 287 B.R. 714, 722 (Bankr. N.D.Ill. 2002) (applying § 523(a)(6)). Debts for fraud and other intentional torts are, however, non-dischargeable. See, 11 U.S.C. § 523(a)(2), (4), (6). As a result, when an individual files bankruptcy, there is a very real incentive for creditors to attempt to recharacterize what would otherwise be a dischargeable contract claim into some kind of non-dischargeable tort claim.
The plaintiffs entered into a construction contract with Prough Design Builders, Inc. which was not performed to their satisfaction. The debtor/defendant, one of the owners and officers of that corporation, has filed a petition for relief under Chapter 7. The plaintiffs filed this adversary proceeding contending that the debtor is personally liable to them in connection with the construction contract and that his debt is non-dischargeable pursuant to §§ 523(a)(2), (a)(4), and/or (a)(6). The matter is before the court on defendant's motion to dismiss the complaint pursuant to Rule 12(b)(6) of the Federal Rules of Civil Procedure and the plaintiffs' response thereto.
The complaint is the proverbial "bucket of mud" from which the reader is expected "to fish a gold coin." U.S, ex rel. Garst v. Lockheed-Martin Corp., 328 F.3d 374, 378 (7th Cir. 2003). After the preliminary allegations identifying the parties and the basis for the court's jurisdiction, it begins with more than fifty allegations, not counting sub-parts, "common to all counts." It then continues with count I (false representation and fraud) which alleges that the debtor "knowingly made false representations of past or existing facts" "which induced Plaintiffs into entering into the contract to their detriment" and that they "justifiably relied on Debtor's representations." As a result of the "false representations and fraudulent conduct" the debtor's obligation is nondischargeable pursuant to § 523(a)(2). Count II alleges that a contractor is a fiduciary; so there has been a breach of fiduciary duty or larceny making things non-dischargeable pursuant to § 523(a)(4). Finally, there is count III which alleges the debtor's actions were willful and malicious, so the injury inflicted is non-dischargeable under § 523(a)(6). The question before the court is whether the complaint sufficiently alleges any claims that there is a debt owed to the plaintiffs which is nondischargeable.
We can begin with the proposition that a complaint is to allege facts, not necessarily legal theories. Ashcroft v. Iqbal, 556 U.S. 662, 678, 129 S.Ct. 1937, 1949-50 (2009). Nonetheless, there needs to be some kind of legal theory behind the facts alleged in order to give them meaning and significance. Ultimately, however, it is the facts themselves that go into making that determination: labels, legal conclusions and formulaic recitations do not count. Iqbal, 556 U.S. at 678, 129 S.Ct. at 1949-50 ("A pleading that offers 'labels and conclusions' or 'a formulaic recitation of the elements of a cause of action will not do.' Nor does a complaint suffice if it tenders 'naked assertion[s]' devoid of 'further factual enhancement'").
Plaintiff's complaint advances both fraud-based and non-fraud based claims, each of which is subject to a different pleading standard. As for the non-fraud based claims, the general standard for a complaint requires that:
the complaint must describe the claim in sufficient detail to give the defendant
"fair notice of what the . . . claim is and the grounds upon which it rests" . . . Second, its allegations must plausibly suggest that the plaintiff has a right to relief raising the possibility above a "speculative level"; if they do not, the plaintiff pleads itself out of court. E.E.O.C. v. Concentra Health Services, Inc., 496 F.3d 773, 776 (7th Cir. 2007) (quoting Bell Atlantic v. Twombly, 550 U.S. 544, 127 S.Ct. 1955, 1964 (2007))(internal citations omitted). See also, Iqbal 556 U.S. 662, 129 S.Ct. at 1949-51; In re Eisaman, 387 B.R. 219, 222 (Bankr. N.D. Ind. 2008); In re Schmucker, 376 B.R. 256, 258 (Bankr. N.D. Ind. 2007).
To the extent Plaintiffs' claims rest upon some type of fraud, there is a more rigorous pleading standard that must be satisfied. "In all averments of fraud or mistake, the circumstances constituting fraud or mistake shall be stated with particularity." Fed.R.Civ.P. Rule 9(b). This requires the complaint to state details. It needs to allege the who, what, when, where, why, and how of the supposed fraud. See e.g., Matter of Life Partners Holdings, Inc., 926 F.3d 103, 117 (5th Cir. 2019); WESI, LLC v. Compass Environmental, Inc., 509 F.Supp.2d 1353, 1358 (N.D.Ga. 2007); Traut v. AND Agency, LLC, 2024 WL 1300923 *5 (N.D. Ill. Mar. 27, 2024); Freund v. Deutsche Bank National Trust Company, 2014 WL 12658843 *3 (E.D. Mich. Oct. 22, 2014). This includes "the identity of the person making the misrepresentation, the time, place, and content of the misrepresentation, and the method by which the misrepresentation was communicated to the plaintiff." Bankers Trust Co. v. Old Republic Insurance Co., 959 F.2d 677, 683 (7th Cir. 1992) (quoting Sears v. Likens, 912 F.2d 889, 893 (7th Cir. 1990). See also, In re Rifkin, 142 B.R. 61, 67 (Bankr. E.D. N.Y. 1992). A complaint which fails to identify the fraudulent statements or the reasons why they are fraudulent does not satisfy the particularity requirement of Rule 9(b). Skycom Corp. v. Telstar Corp., 813 F.2d 810, 818 (7th Cir. 1987).
In defending the sufficiency of Count I of the complaint and the misrepresentations made to them, the plaintiffs point to paragraphs 29 and 30 of the complaint. They allege that on July 7, 2023, in response to the plaintiffs' statement that there was no synthetic felt with an ice or water shield on the roof, the defendant responded: "the felt is under the metal on the roof" (¶ 29). Then on July 10, in response to plaintiffs' further inquiries on the subject the defendant emailed the plaintiffs stating "you do not put felt down [on a roof like the Plaintiffs'] as there is nothing to put it down on." (¶30). The complaint next alleges that the contract called for felt paper and an ice shield (¶ 31) and that on July 11 Plaintiffs had a third party inspect the roof who reported that there was no felt or ice shield. (¶32). While this is sufficient to allege a breach of contract, the question is whether it is sufficient to allege fraud. It is not.
To begin with, it is difficult to see how a false statement (the felt is there) that is corrected three days later rises to the level of a material misrepresentation made with the intent to deceive. More importantly, there are no allegations as to how the Plaintiffs may have relied on the statement of July 7 or may have been deceived by it. The complaint's only allegations concerning reliance are at paragraph 60, where they allege the debtor's false representations are what induced them to enter into the contract with Prough Design. But that occurred on October 5, 2022, months before the alleged misrepresentations of July 2023. Without allegations of reliance, Count I of the complaint does not satisfy the particularity for pleading fraud under Rule 9. Woods v. Wells Fargo Bank, N.A., 733 F.3d 349 (1st Cir. 2013); Learning Works v. The Learning Annex, Inc., 830 F.2d 541, 546 (4th Cir. 1987).
Count II is based upon § 523(a)(4), but which part of that portion of the Bankruptcy Code is not entirely clear. It covers "fraud or defalcation while acting in a fiduciary capacity, embezzlement or larceny." 11 U.S.C. § 523(a)(4). Initially Count II it seems to be based on fiduciary fraud because the complaint alleges that there is a "special relationship . . . between a contractor and a home owner" and that "a contractor may act as a fiduciary for a homeowner," (¶¶ 64, 65), but it then proceeds to characterize the debtor's actions as larceny, (¶70), before concluding with a prayer that the Plaintiffs' "claims for fraud, constructive fraud, conversion and/or claims under the Indiana Crime Victims Relief Act for conversion are non-dischargeable." These allegations also fail to state a claim.
To the extent the plaintiffs are attempting to allege some kind of fiduciary fraud under § 523(a)(4), none of their allegations are sufficient to demonstrate a fiduciary relationship between them and the debtor. What allegations they do have are in the nature of labels, naked assertions, or legal conclusions. Furthermore, in response to the motion to dismiss they fail to cite any legal authority for the proposition that a contractor is a fiduciary for a homeowner or that a contractor has some kind of fiduciary duty to a homeowner. Whether or not a fiduciary relationship exists for the purposes of § 523(a)(4) is a question of federal law. In re Frain, 230 F.3d 1014, 1017 (7th Cir. 2000); Meyer v. Rigdon, 36 F.3d 1375, 1382-83 (7th Cir. 1994). In the absence of allegations that would support the existence of a relationship that carries fiduciary duties with it the complaint fails to state a claim for fiduciary fraud. See e.g., In re Morse, 504 B.R. 462, 471-72 (Bankr.E.D.Tenn. 2014); In re Martin, 419 B.R. 524, 530-31 (Bankr. D. N.H. 2009); In re Brown, 399 B.R. 44, 47 (Bankr. N.D. Ind. 2008). See also, Matter of Marchiando, 13 F.3d 1111, 1115-16 (7th Cir. 1994).
Perhaps recognizing that the claim for fiduciary fraud is a bit sketchy, the complaint and brief also try to characterize the debtor's actions as larceny. (¶ 70). "Larceny" is a label attached to a certain type of conduct and, while using a label may sometimes give greater meaning to underlining allegations, it is the allegations of fact that determine whether the label is warranted and whether the complaint states a claim. Simply calling something larceny is not enough. "Larceny" for the purposes of §523(a)(4) is synonymous with theft. Matter of Rose, 934 F.2d 901, 903 (7th Cir. 1991). See also, In re Santos, 2012 WL 2564366 (Bankr. E.D. Va. July 2, 2012) (collecting cases). It involves the misappropriation of property belonging to another. Rose, 934 F.2d at 903; Whiters, 337 B.R. at 331-33. So, in order to properly allege a claim for larceny under this portion of the Bankruptcy Code, the complaint must allege facts that plausibly suggest the debtor misappropriated property belonging to the plaintiffs. It does not. At best it may suggest that the debtor misused funds of the corporation, Prough Design, but that is a far cry from alleging that he misappropriated funds that belonged to them.
Count III is based upon § 523(a)(6) which excepts from discharge debts "for willful and malicious injury." 11 U.S.C. § 523(a)(6). Once again, the complaint substitutes labels, naked assertions, and formulaic recitations for allegations of fact. It does little more than characterize the debtor's actions as "willful and malicious" (¶¶ 73,74) and allege that the injury inflicted by the debtor's "fraud, constructive fraud, conversion was wrongful and without just cause" and so is not dischargeable. (¶75, 76). Section 523(a)(6) is designed to address intentional torts that are not covered by other parts of § 523. In re Gulevsky, 362 F.3d 961, 963 (7th Cir. 2004). It requires an intentional injury not just an intentional act that injures. Kawaauhau v. Geiger, 523 U.S. 57, 61-62, 118 S.Ct. 974 (1998). The complaint has no allegations concerning an intentional tort or an intentional injury the debtor may have inflicted upon the plaintiffs that are not subsumed in their unsuccessful efforts to allege fraud or larceny. Since they are not sufficient to allege claims under § 523(a)(2) or (4) restyling them as claims under § 523(a)(6) does not improve things.
Fraud, embezzlement and larceny are torts which are covered by § 523(a)(2) and (4) and if sufficiently alleged or proved do not need an assist from § 523(a)(6).
The debtor/defendant's motion is GRANTED, and the complaint is dismissed. Any amended complaint shall be filed within fourteen (14) days of this date. See, Zimmerman v. Bornick, 25 F.4th 491, 493-94 (7th Cir. 2022); Barry Aviation, Inc. v. Land O'Lakes Municipal Airport Commission, 377 F.3d 682, 687 (2004). The failure to do so will result in the dismissal of this adversary proceeding without further notice.
SO ORDERED.