Chowdary v. OzcelebiChowdary v. Ozcelebi
MEMORANDUM OPINION
Fatih Ozcelebi, M.D. seeks a more definite statement pursuant to Rule 12(e), and, in the alternative, dismissal pursuant to Rule 12(b)(6). K.V. Chowdary, M.D., individually and doing business as and Valley Gastroenterology Clinic, P.A., however, responded by filing a motion pursuant to Rule 12(g)(2) seeking to preclude Fatih Ozcelebi, M.D.‘s Rule 12(e) motion in addition to seeking, yet again, leave to amend their complaint.
For the reasons stated herein, K.V. Chowdary, M.D., individually and doing business as and Valley Gastroenterology Clinic, P.A.‘s Rule 12(g)(2) motion is granted and Fatih Ozcelebi, M.D.‘s Rule 12(e) motion is denied. Additionally, K.V. Chowdary, M.D., individually and doing business as and Valley Gastroenterology Clinic, P.A.‘s leave to amend is granted for Counts A, B, D, and H. Fatih Ozcelebi, M.D.‘s Rule 12(b)(6) motion is granted as to Counts C, E, F, I, and J and are dismissed with prejudice. Counts G and K are not dismissed and will proceed to discovery.
I. BACKGROUND
On January 11, 2021, K.V. Chowdary, M.D., (“Chowdary“), individually and doing business as and Valley Gastroenterology Clinic, P.A. (“VGC“) (collectively “Plaintiffs“) filed a Complaint asserting that Plaintiffs’ non-appealable judgement, award of attorney‘s fees, and award of sanctions against Fatih Ozcelebi (“Defendant” or “Debtor“) should be excepted from discharge in Defendant‘s chapter 11 bankruptcy case under
On August 16, 2021, Plaintiffs filed their “First Amended Complaint to Deny Discharge of Debt” (“First Amended Complaint“).4 On December 29, 2021, the Court sua sponte ordered Plaintiffs to file a more definite statement pursuant to
fraud or defalcation in a fiduciary capacity, embezzlement, and/or larceny - fraudulent transfers; (Count F)
On February 1, 2022, Defendant filed “Defendant Fatih Ozcelebi‘s Motion for a More Definite Statement, and in the Alternative, Motion to Dismiss Plaintiffs’ Corrected Second Amended Complaint to Deny Discharge of Debt” (“Motion“).8 Plaintiffs filed a response (“Response“) to the Motion on February 22, 2022.9 In the Response, inter alia, Plaintiffs moved under Rule 12(g)(2) and sought leave to amend the Corrected Second Amended Complaint. A hearing on the Motion, Plaintiffs’ Rule 12(g)(2) motion, and Plaintiffs’ request for leave to amend was held on May 26, 2022.10 The Court now issues the instant memorandum opinion.
II. JURISDICTION AND VENUE
This Court holds jurisdiction pursuant to
jurisdiction if the “outcome of that proceeding could conceivably have any effect on the estate being administered in bankruptcy.”11 Section 157 allows a district court to “refer” all bankruptcy and related cases to the bankruptcy court, wherein the latter court will appropriately preside over the matter.12 This Court determines that pursuant to
Furthermore, this Court may only hear a case in which venue is proper.14 Pursuant to
III. ANALYSIS
A. Rule 12(g) Motion
As a preliminary matter, the Court addresses Plaintiffs’
to present by motion defenses that were available but were not asserted in timely fashion prior to the amendment of the pleading.”17 Notably, this includes
Here, Defendant filed motions to dismiss pursuant to
The Court agrees that the technical requirements of Rule 12(g) clearly bar Defendant‘s subsequently filed Rule 12(e) motion. In the Rule 12(g) context, the Southern District of Texas has echoed “[w]hen the Federal Rules govern, it is neither up to the parties nor up to this Court to determine what makes the best procedural sense.”23 Rather, this Court must follow the Federal Rules and deny the Rule 12(e) portion of Defendant‘s Motion as improper.
Accordingly, Defendant‘s Rule 12(e) motion is denied.
B. Leave to Amend
Plaintiffs’ Response also included a motion seeking, yet again, leave to amend the Corrected Second Amended Complaint.24 In the Motion, Defendant undermines
In their Response, Plaintiffs admit that “[the Employment Agreement] was signed on September 19, 1995, and Plaintiffs agree that the Defendant started work in 1996 as the Court of Appeals opinion found.”27 Notably, this date error occurs numerous times throughout the Corrected Second Amended Complaint and infects Counts A, B, D, and H.28 Plaintiffs seek leave to amend and request permission to correct the Corrected Second Amended Complaint to assert the correct date of the employment agreement, and also to redraft any portions of their Corrected Second Amended Complaint that address issues arising from the proximity in time between the date of the employment agreement and certain conduct by the Defendant.29
Although the Court believes that this mistake to be much more than a “typographical error” as described in Plaintiffs’ Response,30 the Court will nevertheless grant a very limited leave to
amend the Corrected Second Amended Complaint in order to rectify the date problems and also to redraft any portions of their Corrected Second Amended Complaint that address issues arising from the proximity in time between the date of the employment agreement and certain conduct by the Defendant.
Accordingly, Plaintiffs are granted leave to amend Counts A, B, D, and H as well as Paragraphs 9 through 25 of their Corrected Second Amended Complaint.
Since Counts C, E, F, G, I, J, and K are unimpacted by the leave to amend, the Court will next evaluate Defendant‘s
B. Standard of Review for Motions to Dismiss Under Federal Rule of Civil Procedure 12(b)(6)
To survive a motion to dismiss under
defendant is liable for the misconduct alleged.”38 “The plausibility standard is not akin to a ‘probability requirement,’ but it asks for more than a sheer possibility that a defendant has acted unlawfully.”39
Motions to dismiss are disfavored and thus, rarely granted.40 When considering a motion to dismiss under
Fraud claims must, in addition, meet
fraud.47 “To
Normally, in ruling on a
C. Defendant‘s Motion to Dismiss
In their Corrected Second Amended Complaint, Plaintiffs raise three separate statutory basis in which their claim against Defendant could be found nondischargeable, to wit: (1)
only Counts C, E, F, G, I, J, and K are unimpacted by the Court‘s granting of Plaintiffs’ leave to amend. Thus, the Court will evaluate Defendant‘s
1. 11 U.S.C. § 523(a)(2)(A)
Section 523(a)(2)(A) excepts from discharge debts “for money, property, services, or an extension, renewal, or refinancing of credit, to the extent obtained by false pretenses, a false representation, or actual fraud, other than a statement respecting the debtor‘s or an insider‘s financial condition.”55 The United States Supreme Court has distinguished between “false pretenses and representations” and “actual fraud,” and recognized two distinct paths for nondischargeability under
“In Husky, the Supreme Court specifically decided not to adopt a definition of the ‘fraud’ component of ‘actual fraud’ for all times and all circumstances but did give some guidance.”59 The Supreme Court stated that actual fraud does not require that the debtor make any misrepresentations.60 Further, for fraud to be “actual,” there must be wrongful intent.61 A debtor‘s subjective intent may be
inferred by examining the totality of the circumstances because it most commonly cannot be established by direct evidence.62
In the Corrected Second Amended Complaint, Plaintiffs bring three counts alleging that their 2016 state court judgment in excess of $2,000,000 (“Judgment“)63 against Defendant should be deemed non-dischargeable under
Count C - 11 U.S.C. § 523(a)(2)(A) property obtained by actual fraud - fraudulent transfer scheme
In the Motion, Defendant contends that Plaintiffs’ Count C should be dismissed because it fails to state a claim and does not comply with Rule 9(b).65 The basis of Plaintiffs’ Count C is that Defendant executed a series of fraudulent transfers to various trusts in which he or his family members were beneficiaries in order to avoid paying Plaintiffs.66 Specifically, Plaintiffs assert that “[Defendant] transferred his ownership interests in his two medical practices (his own medical practice and his approximately 49.5% ownership of the Endoscopy Center at Ridge Plaza, LP), along with the real estate where both practices are located, and substantial earned income, to various trusts, or entities purportedly owned by the trusts, for which trusts the [Defendant] and his spouse are the sole present beneficiaries.”67 Plaintiffs contend that these were fraudulent transfers
that constituted actual fraud under
As outlined above,
After establishing that a representation was not required for an actual fraud theory, the Supreme Court in Husky did not ultimately rule on dischargeability under
discharge “from any debt for money, property, services, or an extension, renewal, or refinancing of credit, to the extent obtained by . . . actual fraud.”75 The court then noted that, in Cohen, the Supreme Court declared that the phrase “to the extent obtained by” modifies “money,” not “any debt.”76
Applying the facts, the bankruptcy court determined that the debtor obtained money through actual fraud and, as a result of these circumstances, a personal debt of the debtor was created.77 First, the bankruptcy court found that the debtor, a director of a corporation, obtained a debt by fraudulently
Next, the bankruptcy court determined that the fraudulent transfers executed by the debtor constituted actual fraud.82 In making this finding, the court relied on the Supreme Court‘s guidance that a representation is not necessary in order for actual fraud to occur.83 Finally, the bankruptcy
court held that the actual fraud was what created debtor‘s debt to the creditor.84 In other words, but for executing the fraudulent transfers, debtor would have had no personal liability.85 Thus, the debtor‘s obligation to the creditor was nondischargeable under
In this case, Plaintiffs have failed to state a claim upon which relief can be granted in Count C because they do not properly allege that Defendant‘s debt to Plaintiffs was obtained by the fraudulent transfer scheme. As Husky made clear, the mere existence of a fraudulent conveyance scheme in itself is insufficient for a finding of nondischargeability.87 The moving party must also show that the debt in question was obtained by the fraudulent conveyance scheme.88
In Count C, Plaintiffs allege that “[Defendant] obtained the vast majority of his wealth - his interest in the trusts - which include millions of dollars in bank and brokerage accounts, and which pay most of his living expenses, by engaging in fraudulent transfers to the trusts for his own benefit.”89 However, the use of “obtained” in this pleading does not satisfy
had already incurred a debt to Plaintiffs.91 Therefore, despite Plaintiffs flat assertion that Defendant attained the majority of his wealth by engaging in fraudulent transfers to various trusts for his own benefit, the fraudulent transfers really only served as a means of preserving his wealth and to avoid paying his existing debt to Plaintiffs.
Additionally, Plaintiffs further alleged that “Debtor obtained his rights to receive distributions under the trust agreements by actual fraudulent transfers that he intended to defeat Chowdary‘s [sic] judgment.”92 This statement also misconstrues the “obtained by” requirement of
Furthermore, this situation is factually distinct from Husky. In Husky, the debtor never owed an obligation to the creditor until he executed the fraudulent transfers.93 Here, Defendant, himself, had already incurred the debt to Plaintiffs prior to the alleged transfer scheme. A situation similar to the case at hand did occur in In re Robertson.94 The bankruptcy court in In re Robertson held that where a debtor already personally owed money to creditor and the alleged fraudulent transfer scheme occurred after the debt was incurred, summary judgment of plaintiff‘s
transfers gave rise to a debt. Therefore, Plaintiffs’ Count C fails to state a claim upon which relief can be granted.
Accordingly, Plaintiffs’ Count C is dismissed with prejudice.
2. 11 U.S.C. § 523(a)(4)
Section 523(a)(4) excepts from discharge any debt for fraud or defalcation while acting in a fiduciary capacity, embezzlement, or larceny.96 The concept of fiduciary as that term is used in
Count E - 11 U.S.C. § 523(a)(4) fraud or defalcation in a fiduciary capacity, embezzlement, and/or larceny - fraudulent transfers
Confusingly, in the Motion, Defendant fails to separate his arguments to each of the distinct counts under
defalcation under a fiduciary capacity theory, embezzlement theory, or a larceny theory.102 However, this Court already granted Plaintiffs leave to amend Count D, leaving only Counts E and F.
Focusing first on the fraud or defalcation in a fiduciary capacity argument, Defendant argues that Plaintiffs have not stated a claim because they failed to plead a knowing and fraudulent falsehood while acting in a fiduciary capacity.103 The only refence to a fiduciary relationship in Count E is in Paragraph 28 which states “The final judgment includes an express finding that Defendant breached fiduciary duties to [Plaintiffs].”104 The final judgment referenced by Plaintiffs is a Thirteenth Court of Appeals decision attached to the Corrected Second Amended Complaint as Exhibit E. Included in Exhibit E is a finding that states “[Defendant] breached fiduciary duties owed to VGC as his employer.”105
The problem with Plaintiffs’ fiduciary capacity allegations in relation to Count E is that this finding expressly relates to Defendant‘s employment at VGC. In Count E, Plaintiffs allege that “[Defendant‘s] creation of so-called “spendthrift” trusts in 2007, 2010, and earlier, and his transferring and receiving as a trust beneficiary the [Defendant‘s] assets and most of his future earning capacity during the state court litigation, and his transfers to the trusts of a substantial part of his earned income over many years was fraud, defalcation, embezzlement, and/or larceny as against [Plaintiffs].”106 Unlike the finding in Exhibit E, the allegations in Count E relate solely to events that took place after Defendant‘s employment at VGC. This distinction is meaningful because
if the fraud or defalcation took place after the purported fiduciary relationship ended,
Aside from Paragraph 28, there is no mention of what fiduciary relationship existed, how it was formed, or how it would satisfy the trust requirement of
Additionally, although not specifically cited in Count E, several other paragraphs in the Corrected Second Amended Complaint seem to suggest that the finding of fiduciary relationship by the Thirteenth Court of Appeals opinion in Exhibit E somehow produces a res judicata effect on this Court in establishing a fiduciary relationship under
Next, in the Motion, Defendant argues that Plaintiffs have not stated a claim under a larceny theory because there is no allegation that Defendant unlawfully appropriated any property of Plaintiffs at the “outset.”113 Under federal common law, larceny is the “felonious taking of another‘s personal property with intent to convert it or deprive the owner of same.”114 The elements of larceny are: (1) the fraudulent and wrongful taking away of the property of another with (2) the intent to convert it to the taker‘s use and with intent to permanently deprive that
In Count E, Plaintiffs fail to allege that an unlawful taking took place at all, let alone at the “outset.” Plaintiffs allege that Defendant created a series of spendthrift trusts and transferred assets to these trusts in order to avoid paying Plaintiffs while lawsuits against Defendant were pending.117 This does not represent an additional taking of Plaintiffs’ property. Since, in relevant part,
Finally, Defendant asserts that Plaintiffs’ Count E fails to state a claim for embezzlement for two reasons. First, Defendant argues that since Plaintiffs brought a breach of contract claim in the state court, it is improper to relitigate this issue as embezzlement in this Court.119 Defendant‘s argument shows a fundamental misunderstanding of dischargeability claims brought under
As this Court recently stated in O‘Connor, there are two distinct matters to consider in the dischargeability analysis: (1) the establishment of the debt itself, under relevant state or non-bankruptcy federal law; and (2) a determination as to the nature of the debt - i.e., whether it is dischargeable or nondischargeable.120 Plaintiffs’ contention that Defendant committed embezzlement goes solely to the nature of the debt. Whereas, if Defendant had disputed liability, state or non-bankruptcy law would have been the focus. Since the nature of the debt is before the Court, the Court is not precluded from finding embezzlement even though it was not a part of the state court arguments or findings.
Second, Defendant argues that Plaintiffs failed to state a claim under
In Count E, Plaintiffs fail to allege that Defendant appropriated funds. Similar to the larceny analysis, Plaintiffs Count E simply fails to allege a debt for embezzlement. The allegations
in Count E relate solely to Defendant‘s actions after the debt was acquired. Thus, Plaintiffs have failed to state a claim upon which relief can be granted based on an embezzlement theory under
Accordingly, Plaintiffs’ Count E is dismissed with prejudice.
Count F - 11 U.S.C. § 523(a)(4) fraud or defalcation in a fiduciary capacity - conspiracy to defraud
In Count F, Plaintiffs plead that “[Defendant] conspired with others to transfer essentially all his non-exempt assets and most of his income to trusts under which he is a beneficiary.”125 Plaintiffs further plead that “[a]ll the damages encompassed by [Plaintiffs‘] judgment and the sanctions award flowed from the [Defendant‘s] conspiracy with other to defraud [Plaintiff], and [Plaintiff‘s] entire judgment and the sanctions award should therefore be held non dischargeable.”126
The analysis of Count F is very similar to Count E. Once again, Defendant contends that Plaintiffs did not state a claim under
Next, just as in Count E, Count F fails state a claim for a larceny theory under
Accordingly, Plaintiffs’ Count F is dismissed with prejudice.
3. 11 U.S.C. § 523(a)(6)
Plaintiffs next bring five separate counts under
The
that the debtor intended the actual injury that resulted.137 The objective standard recognizes “the evidentiary reality that defendants rarely admit malicious intent.”138 Thus, a court must analyze from a reasonable person‘s perspective “whether the defendant‘s actions were substantially certain to cause harm, [and] are such that the court ought to infer that the debtor‘s subjective intent was to inflict a willful and malicious injury on the plaintiff.”139
Here, Plaintiffs have already been granted leave to amend Count H. Thus, only Counts G, I, J, and K will be evaluated below.
Count G - 11 U.S.C. § 523(a)(6) willful and malicious injury by the debtor to another entity or to the property of another entity - abusive litigation
In the Motion, Defendant argues that Plaintiffs’ Corrected Second Amended Complaint still fails to provide factual allegations with sufficient particularity to support a claim against Defendant under
In Count G, Plaintiffs allege that “[Defendant‘s] years-long ‘intentional, egregious, and flagrant abuses’ in the state court lawsuit . . . was a willful and malicious injury by the [Defendant] to [Plaintiffs‘] property.”141 Plaintiffs further allege that “[t]he damages in [Plaintiffs‘] judgment for attorney‘s fees and for pre judgment interest were a result of [Defendant‘s] willful and malicious injury to Chowdary in connection with Debtor‘s bad
of the judgment for almost two decades, substantially increasing the lodestar amount of [Plaintiffs‘] attorneys’ fees incurred, and the pre-judgment interest.”143
Here, Plaintiffs have properly alleged that Defendant created a deliberate and intentional injury to Plaintiffs by using bad faith litigation tactics, ignoring and violating court orders, and “stonewalling” discovery.144 Plaintiffs also sufficiently plead that these actions resulted in an injury to Plaintiffs. Specifically, Plaintiffs plead that the willful and malicious injury in Count G resulted in increased attorney‘s fees and costs. Thus, Plaintiffs have stated a claim for which relief can be granted in Count G under
Accordingly, Count G is not dismissed and will proceed to discovery.
Count I - 11 U.S.C. § 523(a)(6) willful and malicious injury by the debtor to another entity or to the property of another entity - fraudulent transfers
Defendant again asserts that Plaintiffs’ Corrected Second Amended Complaint fails to provide factual allegations with sufficient particularity to support a claim against Defendant under
In Count I, Plaintiffs allege that “[Defendant‘s] creation of so-called ‘spendthrift’ trusts and his ongoing series of fraudulent transfers to the trusts of essentially all his non exempt assets and a substantial part of his earned income over many years, including on an ongoing basis during this bankruptcy case, was, and is, a willful and malicious injury by the [Defendant] to [Plaintiffs‘] property.”146 Plaintiffs then conclude that “[t]he judgment should therefore be held non dischargeable.”147
Count I fails to state a claim for which relief can be granted for multiple reasons. First, unlike Count G, Plaintiffs allege an injury solely to Plaintiffs’ property rather than to Plaintiffs themselves.148 While
Furthermore, even if Plaintiff had provided a short and plain statement, Count I does not state a claim. Plaintiffs do not properly allege that a debt to Plaintiffs was created from the creation of the spendthrift trusts or the fraudulent transfers. In support of Count I, Plaintiffs cite
Similar to the case at hand, in In re Best,151 the plaintiff sought to except from discharge under Bankruptcy Code
from discharge on these grounds because the alleged conduct occurred after the debt had been established.
“[T]he evidence might support the conclusion that the Bests willfully disposed of their assets in a way they knew left no funds to repay Steier. But that does not render the Bests’ judgment debt nondischargeable under §523(a)(6). Even if the Bests disposed of or concealed assets in a way they knew would prevent Steier from collecting the judgment debt, it is of no avail to Steier because the concealment occurred after that debt arose. Thus the concealment could not have caused or given rise to the judgment debt, as required for nondischargeability under §523(a)(6).”152
Section 523(a)(6) provides debts are nondischargeable when they are debts for willful and malicious injury by the debtor to another entity or to the property of another entity.153 Count I does not properly allege that the debt arose from or was proximately caused by the fraudulent transfers. Furthermore, Count I does not allege that Plaintiffs had a security interest specifically tied to the funds transferred.154 Therefore, Count I does not state a claim upon which relief can be granted under
Accordingly, Count I is dismissed with prejudice.
Count J - 11 U.S.C. § 523(a)(6) willful and malicious injury by the debtor to another entity or to the property of another entity - conspiracy to defraud
For Count J, Defendant again asserts that Plaintiffs’ Corrected Second Amended
In Count J, Plaintiffs allege that “[Defendant‘s] conspiracy with Onder[sic] Ari, Cengiz[sic] Ozcelebi, Kaan[sic] Ozcelebi, and Julie Ozcelebi, and perhaps with others to create the so-called ‘spendthrift’ trusts and to fraudulently transfer to the trusts essentially all his non exempt assets and a substantial part of his earned income over many years was a willful and malicious injury by the [Defendant] to [Plaintiffs‘] property.”157 Thus, Plaintiffs conclude that “[t]he judgment should therefore be held non dischargeable.”158
For the same reasons as Count I, Count J fails to state a claim upon which relief can be granted. First, Plaintiffs fail to offer a short and plain statement in violation of Rule 8(a)(2) by not identifying which specific property was injured. Second, even if Plaintiffs had offered a short and plain statement, Count J does not state claim under
Accordingly, Count J is dismissed with prejudice.
Count K - 11 U.S.C. § 523(a)(6) willful and malicious injury by the debtor to another entity or to the property of another entity - sanctions award
Defendant again asserts that Plaintiffs’ Corrected Second Amended Complaint fails to provide factual allegations with sufficient particularity to support a claim against Defendant under
In Count K, Plaintiffs allege that “[Defendant] willfully and maliciously instructed his attorney not to appear at a court ordered mediation, resulting in the trial court ordering [Defendant] to personally pay $4,400 to [Plaintiffs] as a sanction for violating the Court‘s mediation order.”160 Therefore, “the sanction should be held non dischargeable.”161
The Court finds that Plaintiffs have stated a claim in Count K. Plaintiffs plead that Defendant created a deliberate and intentional injury to Plaintiffs by instructing his attorney not to appear before a court ordered mediation. Plaintiffs have plead that Defendant‘s actions caused an injury to Plaintiffs and that the state court ordered a $4,400 sanction. Therefore, in Count K, Plaintiffs have stated a claim for which relief can be granted under
Accordingly, Count K is not dismissed and will proceed to discovery.
D. Dismissal with prejudice
As stated above, Counts C, E, F, I, and J are dismissed with prejudice. Although
Ultimately, the decision whether to grant leave to amend lies within the Court‘s sound discretion.164
This case has been pending since January 11, 2021.165 First, the Court dismissed Plaintiffs’ initial complaint166 (“Initial Complaint“) for failure to state a claim and for failure to comply with
Plaintiffs have never sought leave to amend Counts C, E, F, I, and J. Plaintiffs failed to do so despite Defendant seeking to dismiss these counts in the Motion and otherwise seeking leave in relation Counts A, B, D, and H. Given that Plaintiffs’ counsel has exceptional experience and competence in bankruptcy litigation and is well aware of the relevant pleading requirements, Plaintiffs’ failure to seek leave to amend leads the court to determine that Plaintiffs’ Corrected Second Amended Complaint in essence represents Plaintiffs’ best case.175 This Court has already granted Plaintiffs leave to amend three times and will be granting limited leave to Counts A, B, D, and H. Thus, the court concludes that Plaintiffs have had ample
Accordingly, the Court finds that Plaintiffs have had a fair opportunity to make their case and holds that Counts C, E, F, I, and J‘s dismissal with prejudice is warranted.
IV. CONCLUSION
An order consistent with this Memorandum Opinion will be entered on the docket simultaneously herewith.
SIGNED June 28, 2022
Eduardo Rodriguez
United States Bankruptcy Judge