American Asset Finance, LLC v. Feldman (In re Feldman)
500 B.R. 431
Bankr. E.D. Pa.2013Background
- Plaintiff American Asset Finance assigned fee interests from the debtor, attorney Lawrence Feldman, under a 2007 agreement; disputes over payment followed.
- Parties entered a 2009 agreement resolving prior disputes and assigning additional class-action fee interests (iPod Nano and Vioxx); plaintiff alleges Feldman failed to turn over fees when received.
- Plaintiff sued in bankruptcy court seeking (1) nondischargeability of its claim under 11 U.S.C. § 523(a)(2)(A) (actual fraud), § 523(a)(2)(B) (false written statement), and § 523(a)(4) (fiduciary fraud), and (2) denial of Feldman’s discharge under § 727(a)(3) (failure to keep records).
- Feldman moved to dismiss under Fed. R. Civ. P. 12(b)(6) (applicable via B.R. 7012) and for failure to join an indispensable party under Fed. R. Civ. P. 19 (B.R. 7019).
- The court applied Twombly/Iqbal pleading standards and dismissed all four counts without prejudice, granting leave to amend within 20 days.
Issues
| Issue | Plaintiff's Argument | Defendant's Argument | Held |
|---|---|---|---|
| Whether Count I (§523(a)(2)(A)) adequately pleads false pretenses/actual fraud | The 2009 agreement was procured by Feldman’s fraudulent inducement and lack of intent to perform | Complaint lacks specific factual representations (who/what/when/where/how) showing a false pretense and resulting reliance | Dismissed — no specific misrepresentation alleged; pleading insufficient for fraud-specificity |
| Whether Count II (§523(a)(2)(B)) alleges a materially false written statement "respecting the debtor’s financial condition" | Written warranties in the 2009 agreement about expected fee awards were materially false and induced reliance | The alleged statements concern particular receivables, not the debtor’s overall financial condition as required by the majority interpretation of §523(a)(2)(B) | Dismissed — statements do not reflect overall financial condition/net worth |
| Whether Count III (§523(a)(4)) pleads fiduciary fraud (fraud/defalcation in a fiduciary capacity) | Feldman acted in a fiduciary capacity and committed defalcation; a state-court judgment for conversion supports nondischargeability via preclusion | Federal law requires an express/technical trust that exists prior to the transaction; contractual label alone insufficient | Dismissed — no allegation of an express/technical trust; state-court judgment does not preclude bankruptcy nondischargeability adjudication |
| Whether Count IV (§727(a)(3)) shows failure to keep records such that debtor’s financial condition cannot be ascertained | Failure to preserve iPod and Vioxx litigation records (and fiduciary duty) prevents ascertainment of financial affairs | Plaintiff does not allege how missing files make it impossible to ascertain debtor’s overall financial condition; no prejudice shown | Dismissed — allegations do not show records are so inadequate as to prevent ascertainment of financial condition |
Key Cases Cited
- Ashcroft v. Iqbal, 556 U.S. 662 (2009) (pleading must contain sufficient factual matter to state a plausible claim)
- Bell Atlantic Corp. v. Twombly, 550 U.S. 544 (2007) (pleading standard for plausibility)
- In re Cohn, 54 F.3d 1108 (3d Cir. 1995) (elements of §523(a)(2)(B) claim)
- In re Joelson, 427 F.3d 700 (10th Cir. 2005) (adopts strict interpretation of "statement respecting the debtor’s financial condition")
- Field v. Mans, 516 U.S. 59 (1995) (discussion of "statement of financial condition" in discharge context)
- Brown v. Felsen, 442 U.S. 127 (1979) (state-court judgments do not preclude bankruptcy nondischargeability proceedings)
- Meridian Bank v. Alten, 958 F.2d 1226 (3d Cir. 1992) (standard for §727(a)(3) failure-to-keep-records claim)