Eden v. Eden (In re Eden)Eden v. Eden (In re Eden)
Before the Court is the Motion to Dismiss filеd by Rhonda T. Eden ("Defendant") on August 15, 2017 (the "Motion"). (Docket No. 4). Chris Eden ("Plaintiff") filed Plaintiff's Opposition to Debtor's Motion to Dismiss on August 28, 2017 (the "Response"). (Docket No. 6). Plaintiff filed a complaint (Docket No. 1) (the "Complaint"), objecting to Defendant's discharge and the dischargeability of "certain debts" owed to Plaintiff. The Complaint has six counts: (I) removing or concealing property which otherwise would have been available to pay debts, pursuant to
Briefly, this Court concludes that although Plaintiff did not properly serve Defendant, Plaintiff is permitted the opportunity to re-serve Defendant. Therefore, the Motion to Dismiss on the grounds of insufficient service of process is denied. This Court also concludes that while Plaintiff has met the pleading burden for Counts II and III, Plaintiff has failed to meet the pleading burden for Counts I, IV, V, and VI. The Court therefore dismisses without prejudice Counts I, IV, V, and VI pursuant to F.R.C.P. 12(b)(6).
Plaintiff and Defendant are former spouses and former business partners. Complaint at *2 ¶ 6. Plaintiff alleges that he and the Defendant each hold a 50% interest in K & M Hardware, Inc. and Eden Oak Properties, LLC, (collectively, the "Shared Entities") and he is the sole member of Tarene Farms, LLC. Complaint at *2 ¶ 7. Plaintiff alleges that Defendant breached her fiduciary duties with regard to the Shared Entities. Complaint at *2 ¶ 6. Plaintiff filed a state court action against Defendant for Accounting, Breach of Fiduciary Duty, and Fraud in Cherokee County Superior Cоurt. Complaint at *2 ¶ 7. Plaintiff claims that Defendant was "skimming hundreds of thousands of dollars off of K & M Hardware ...." Complaint at *2 ¶ 8. Plaintiff also contends that Defendant's Amended Schedules falsely show that Defendant owns 100% of K & M Hardware, despite Defendant's alleged admission to the contrary at the § 341 meeting of creditors, and that Defendant destroyed documents stating that Plaintiff owns 50% of Eden Oak Properties. Complaint at *2-3 ¶ 11-12. Defendant denies all of these allegations. Defendant's Answer (Docket No. 5), passim . Defendant filed a motion to dismiss the complaint pursuant to F.R.C.P. 12(b)(5) and (6), applicable in this adversary proceeding through F.R.B.P. 7012. Motion at *1. First, this Order will address the Motion to Dismiss for insufficient service of process under F.R.C.P. 12(b)(5). It will then address which of Plaintiff's claims satisfy their respective pleading requirements and state a claim for which relief can be granted under F.R.C.P. 12(b)(6).
I. Insufficient Service of Process
Defendant first moved for dismissal for insufficient service of process, pursuant to F.R.B.P. 7004 and 7012(b)(5), because Plaintiff failed to serve both Defendant and Defendant's counsel. Motion at *2. There is no Certificate of Service attached to the Complaint or filed on the Docket. See Docket (passim ). Plaintiff asserts in the Response that "Debtor was mailed a copy of the Complaint and co-counsel of record, as noted in Debtor's lead bankruptcy case, was noticed by Plaintiff of the attempt to commence this action." Response at *3.
A plaintiff may serve a defendant "by mailing a copy of the summons and complaint ...." FED. R. BANKR. P 7004(b)(9). Plaintiff claims to have mailed a copy of the complaint to Defendant. Response at *3. A summons was also issued on Defendant. (Docket No. 3). F.R.B.P. 7004(g), however, requires that "[i]f the debtor is represented by an attorney, whenever service is made upon the debtor under this Rule, service shall also be made upon the debtor's attorney by any means authorized under [F.R.C.P.] 5(b)." FED. R. BANKR. P 7004(g). Plaintiff claims that he "noticеd" Defendant's "co-counsel" of record, but nothing in the record shows that Defendant's attorney was served with a copy of the complaint and summons. See Docket, passim .
Plaintiff asserts that the Motion to Dismiss should be denied for insufficient service
While Graham has not been overturned, it is no longer technically applicable because the court relied on F.R.B.P. 704(h), which does not exist in the current rules. Then-F.R.B.P. 704(h) stated that "[s]ervice оf process under this rule shall be effective notwithstanding an error in the papers served or the manner or proof of service if no material prejudice resulted therefrom to the substantial rights of the party against whom the process issued." Graham,
While Plaintiff did not properly serve Defendant because he did not mail Defendant's attorney a copy of the complaint and summons, he did provide Defendant with "actual notice" of the pending adversary proceeding. Response at *3. See Hechinger Liquidation Trust v. Porter-Cable Corp . (In re Hechinger Inv. Co. of Del., Inc. ),
Like the defendant in Hechinger , Defendant in this case received actual notice of this adversary proceeding and was able to file a response; the Motion to Dismiss was filed on August 15, 2017, less than one month after the Complaint was filed. As a result, while the concept of "material prejudice" may be inapplicable, the fact that Defendant had actual notice of the pending suit suggests that dismissal is unwarranted. See Teitelbaum v. Equitable Handbag Co. (In re Outlet Dep't Stores, Inc.),
Defendant may still be prоperly served. A court may "ordinarily exercise its discretion to deny a motion to dismiss for lack of proper service and permit a plaintiff the opportunity to effectuate proper service, especially when the [ninety-day] period provided by Rule 4(m) for service of a complaint and summons has not yet expired." Houchins v. Wells Fargo Bank, N.A. (In re Houchins ), Case No. 14-11928-WHD, Adv. Proc. No. 14-1053-WHD,
Courts have the discretiоn to extend the time to perfect service, regardless of whether there is good cause. Florida Outdoor Equipment v. Deresinski (In re Deresinski ),
In summary, Plaintiff did not properly serve Defendant, and the time limit to properly do so under F.R.C.P. 4(m) has expired. However, this Court has been reluctant to elevate technicalities over merits, and dismiss a case on a procedural deficiency that may yet be remedied. In this case, Defendant received actual notice
II. Dismissal for Failure to State a Claim Upon Which Relief Can Be Granted
Defendant next asserts that this proceeding should be dismissed because Plaintiff has failed to state a claim upon which relief can be granted. Motion at *4. Defendant asserts that for each of Plaintiff's six counts, Plaintiff "can prove no set of facts in support of the claims which would give them[sic] relief." Motion at *5. There are two general categories of pleading standards: the "normal" standard that applies to most claims and the "heightened" standard thаt applies to claims such as fraud, as set forth in F.R.C.P. Rule 9(b). As will be set forth below, Counts II, IV and VI are measured by the normal pleading standard, while Count V is subject to the heightened pleading standard. Counts I and III must satisfy standards modified to fit the practicalities of their respective claims. Only Counts II and III meet their respective standards.
A. Normal and Heightened Pleading Standards
The Supreme Court outlined the "normal" pleading standard a plaintiff must meet to satisfy F.R.C.P. 8(a)(2) in Bell Atlantic Corporation v. Twombly and Ashcroft v. Iqbal. In the latter case, the court held that "[t]o survive a motion to dismiss, a complaint must contain sufficient factual matter, accepted as true, to 'state a claim for relief that is plausible on its face.' " Ashcroft v. Iqbal ,
The "heightened" pleading standard, found at F.R.C.P. Rule 9(b) and incorporated by F.R.B.P. Rule 7009, requires a party alleging fraud to "state with particularity the circumstances constituting fraud or mistake." FED. R. CIV. P. 9(b) ; FED. R. BANKR. P. 7009. Rule 9(b) also holds that "[m]alicе, intent, knowledge, and other conditions of a person's mind may be alleged generally."
(1) precisely what statements were made in what documents or oral representations or what omissions were made, and (2) the time and place of each such statement and the person responsible for making (or, in the case of omissions, not making) same, and (3) the content ofsuch statements and the manner in which they misled the plaintiff, and (4) what the defendants obtained as a consequence of the fraud.
Tello v. Dean Witter Reynolds, Inc.,
B. Count I-Plaintiff Has Not Sufficiently Pled a Claim Under §§ 727(a)(2)(A) and (B)
In Count I, Plaintiff seeks to deny discharge under §§ 727(a)(2)(A) and (B) for removing or concealing property otherwise available to pay debts. Doc 1, at *3. Plaintiff alleges that "[Defendant], with intent to hinder, delay or defraud a creditor removed, destroyed or concealed or permitted the transfer, removal, destruction or concealment of his property, property which otherwise would have been available to pay Debtor's indebtedness ...."
A claim under § 727(a)(2) requires two elements to be met: "(1) a transfer or concealment of property of the [debtor] or the estate and (2) an improper intent (i.e., a subjective intent to hinder, delay, or defraud a creditor)." Peach State Bank & Trust v. Riddle (In re Riddle ), Case No. 14-53381-BEM, Adv. Proc. No. 14-5174-BEM,
Here, Plaintiff asserts that Defendant used her control over shared business entities to "divert assets ... and enlarge [Defendant's] equity in various properties and assets." Complaint at *3 ¶ 15. Plaintiff has not alleged that Defendant has removed, destroyed, mutilated, or concealеd her assets or assets of the estate , but rather the opposite; that Defendant has enlarged her assets (which are now assets of the estate). If the allegations set forth in the complaint are taken as true, then Defendant may have misrepresented that she had a larger share of ownership in the Shared Entities, but Plaintiff has not alleged that Defendant concealed her own or the estate's interests in the entities. Section 727(a)(2) is clear in that it requires a debtor to hinder, delay, or defraud a creditor by removing, destroying, mutilating, or concealing "property of the debtor" or
C. Count II-Plaintiff Sufficiently Pled a Claim Under § 727(A)(3)
In Count II, Plaintiff alleges that Defendant "failed to keep or preserve books and records from which her financial condition might be ascertained in violation of
"To establish a prima facie action under § 727(a)(3), a plaintiff must show by a preponderance of evidence that: (1) the debtor failed to keep or preserve adequate records, and (2) that such failure makes it impossible to ascertain the debtor's financial condition." Seligman ,
In Seligman , the plaintiff's only allegation in reference to its § 727(a)(3) claim was that plaintiff was unable "to ascertain the whereabouts of a significant amount of wages." Seligman ,
Similarly, Plaintiff here alleges, inter alia , that Defendant made transactions to her benefit, and did not keep records documenting them. Complaint at *2 ¶ 8, *4 ¶ 22. As a result her financial condition cannot be ascertained. Complaint at *2 ¶ 8, *4 ¶ 22. Plaintiff specifically refers to a lack of records related to "the proceeds received from, inter alia , the [Shared Entities] Transactions." Complaint at *4 ¶ 22. Taken as true, these allegations satisfy both elements of § 727(a)(3) because they allow a reasonable inference that Defendant failed to keep records and that it is not possible to discern Defendant's financial condition. Count II therefore satisfies the pleading standard outlined by Twombly and Iqbal. Accordingly, the Motion to Dismiss is denied as to Count II on the grounds of failure to state a claim.
D. Count III-Plaintiff Sufficiently Pled a Claim Under § 727(a)(4)
In Count III, Plaintiff alleges that Defendant "knowingly and fraudulently made false oaths in connection with [her] bankruptcy case in violation of
"To justify denial of a discharge under § 727(a)(4)(A) the false oath alleged must be (1) fraudulent, and (2) material." Riddle ,
In Smith , the plaintiff alleged that the debtor made a misrepresentation as to the percentage of ownership in real property in the debtor's schedules (statements under oath), in which the debtor asserted a 10% ownership when his interest was at least 50%. Smith ,
Under this standard, Plaintiff has pled with sufficient particularity to allow Defendant to meaningfully respond to the complaint as to Count III. Like the plaintiff in Smith , Plaintiff here, at a minimum, has sufficiently alleged false oaths in a "specific place on a tangible item," either on Defendant's Schedules or at the § 341 meeting. Complaint at *2 ¶ 11. See Smith ,
E. Count IV-Plaintiff has not Sufficiently Plead a Claim Under § 727(a)(5)
In Count IV, Plaintiff alleges that Defendant "failed to explain satisfactorily a
To deny a discharge under § 727(a)(5), the plaintiff must prove that:
(1) debtor at one time, not too remote from the bankruptcy petition date, owned identifiable assets; (2) on the date the bankruptcy petition was filed or order of relief granted, the debtor no longer owned the assets; and (3) the bankruptcy pleadings or statement of affairs do not reflect an adequate explanation for the disposition of the assets.
In re White ,
Despite not requiring a heightened pleading standard, Plaintiff has nonetheless failed to sufficiently plead the first two elements of § 727(a)(5). Plaintiff has alleged that the Defendant "skimmed" money off of the Shared Entities, and that the Defendant has failed to explain satisfactorily the "loss" of those assets. Complaint at *6 ¶ 36. Plaintiff's argument fails because he has not adequately identified the assets in question, nor that they have been lost. Notably, no specific dollar amounts besides "hundreds of thousands of dollars" appear in the Complaint. Complaint at *2 ¶ 8, and passim . Plaintiff's argument is that Defendant "skimmed" money off of the Shared Entities. Complaint at *2 ¶ 8. Beyond asserting that Defendant "skimmed" the money, Plaintiff has not set forth any specific allegations as to where that money is now, or on what it was spent. See Complaint; Response, passim. Taken as true, Plaintiff's allegations standing alone cannot satisfy any of the elements of § 727(a)(5) because Plaintiff does not identify which assets were lost, nor that Defendant no longer owned the assets at the time she filed for bankruptcy. Without "identifiable assets," to trace or that she no longer owned those assets, as requirеd by elements 1 and 2, Plaintiff cannot show that that the bankruptcy pleadings or statement of affairs do not reflect an adequate explanation for the disposition of the assets (element 3). Accordingly, the Motion to Dismiss is granted as to Count IV on the grounds of failure to state a claim.
F. Count V-Plaintiff did not Sufficiently Plead a Complaint to Determine Non-Dischargeability of Debt Pursuant to § 523(a)(2)(A) or (B)
In Count V, Plaintiff claims that Defendant "obtained money, renewal, and extensions of credit by false pretenses, by false representations and/or by actual fraud within the definition of non-dischargeability of debts contained in
This Court held in Old Republic Nat. Title Ins. Co. v. Presley (In re Presley ) that:
[t]he elements of [ § 523(a)(2)(A) ] are the same as required for common law fraud. They are as follows: "(1) the debtor made a false representation with the intention of deceiving the creditor; (2) the creditor relied on the false representation; (3) the reliance was justified; and (4) the creditor sustained a loss as a result of the false representation."
In Presley , the plaintiff had "satisfy[ied] the heightened pleading standard of Rule 9(b) [by] detail[ing] various transactions [and] identifying the specific misrepresentations made by Defendants ...."
In addition to not meeting the pleading requirements for a claim under § 523(a)(2)(A), Plaintiff has not pled any facts to establish a claim рursuant to § 523(a)(2)(B) at all. To plead a claim pursuant to § 523(a)(2)(B), a party must show that:
[T]he debtor owes the creditor a debt for money, property, or the extension of credit that was obtained by the debtor through the use of: (1) a written statement; (2) the written statement was materially false; (3) the written statement concerns the debtor's financial condition; (4) the plaintiff reasonably relied on the statement; and (5) the debtor published the writing with the intent to deceive the plaintiff.
Hurston v. Anzo (In re Anzo ),
In Field v. Mans , the Supreme Court held that § 523(a)(2)(A) and (B) are distinct causes of action, and noted the "historically persistent textual difference between the substantive terms in §§ 523(a)(2)(A) and (B) : the former refer to common-law torts, and the lattеr do not." Field v. Mans ,
As discussed above, Plaintiff's allegations as to what Defendant specifically did are threadbare. The allegations, if taken as true, do not give rise to a claim under either § 523(a)(2)(A) or (B) because Plaintiff has not identified a statement in writing, reliance, that such reliance was justified, or an intent to deceive. See Complaint, passim. The claim has therefore not been pled with sufficient particularity. Accordingly, the Motion to Dismiss is granted as to Count V on the grounds of failure to state a claim.
G. Count VI-Plaintiff's Claim for Denial of Discharge Cannot Proceed Under § 523(a)(6) because Debts Caused by Fraud are Covered by Section 523(a)(2)
In Count VI, Plaintiff alleges that Defendant "engaged in fraudulent transfers, fraudulent conveyances and false representations which inflicted willful and malicious injury on Plaintiff ...." Complaint at *7 ¶ 45. Defendant moves for dismissal for three reasons: (1) § 523(a)(6) does not apply to a debt arising from fraud, citing IndyMac Bank, F.S.B. v. Mitchell (In re Mitchell ), Case No. 04-92943, Adv. Proc. No. 04-6555,
Section 523(a)(6) excepts debts from discharge if the debt is "for willful and malicious injury by the debtor to another entity or to the property of another entity."
Absent a showing that Defendant not just committed fraud willfully and maliciously, but that the resulting injury was intentionally willful and malicious, Defendant is correct that § 523(a)(6)"does not pertain to debts for general financial injury caused by fraud because such debts are covered by § 523(a)(2)." Mitchell ,
H. The Court May Dismiss with Leave to Amend
Federal Rule of Civil Procedure 15(a)(1) provides that
A party may amend its pleading once as a matter of course within: (A) 21 days after serving it, or (B) if the pleading is one to which a responsive pleading is required, 21 days after service of a responsive pleading or 21 days after service of a motion under Rule 12(b), (e), or (f), whiсhever is earlier.
F.R.C.P. 15(a)(1). Courts have discretion whether to allow an amendment if the pleading is not amended within such time as a matter of course. F.R.C.P. 15(a)(2) ; Bernstein v. Gailey (In re Gailey, Inc.) ,
The Eleventh Circuit did limit this principle, holding that a court "is not required to grant a plaintiff leave to amend his complaint sua sponte when the plaintiff, who is represented by counsel, never filed a motion to amend nor requested leave to amend before the district court." Wagner v. Daewoo Heavy Indus. Am. Corp.,
Here, there is no justifying reason. None of these factors apply to the claims at issue. There has been no delay, bad faith, dilatory motive, or repeated failure to cure deficiеncies; Plaintiff has only filed the Complaint and the Response, the latter of which was filed less than two weeks after Defendant filed the Motion to Dismiss. See Docket, passim . Further, it is not certain that any amendment would cause undue prejudice to Defendant. Defendant has been made aware of the general nature of Plaintiff's allegations, and at this early stage of litigation, will have ample time to respond to them. Finally, it is not certain that amendments would be futile because either newly discovered evidence or a more carefully drafted and specific complaint may satisfy the pleading standards for Counts I, IV, V, and VI.
Accordingly, it is
ORDERED that the Motion is DENIED on the grounds of insufficient service of process; and it is further
ORDERED that the Motion is DENIED on the grounds of failure to state a claim as to Counts II and III; and it is further
ORDERED that the Motion is GRANTED on the grounds of failure to state a claim as to Counts I, IV, V, and VI; and it is further
ORDERED that Plaintiff shall perfect service of process of the Complaint and/or any amended complaint no later than fourteen (14) days after entry of this Order ; and it is further
ORDERED that because discovery commenced on September 5, 2017 and completed on November 13, 2017 pursuant to Bankruptcy Local Rule ("BLR") 7016-1(a)(1) & (b)(2)(C), while the Motion was under consideration, discovery shall commence again on the date of entry of this Order and must be completed no later than ninety (90) days thereafter .
The Clerk is directed to serve a copy of this Order upon Plaintiff, counsel for Plaintiff, Defendant, Counsel for Defendant, аnd the United States Trustee.
IT IS ORDERED
Notes
Unless otherwise specified, all code references are to 11 U.S.C.
In the Response, as quoted above, Plaintiff referred to Debtor's "co-counsel of record as noted in Debtor's lead bankruptcy case" but according to the records the Court is viewing, Debtor only ever had one counsel of record in this case, Brian Limbocker, so it is not clear who the "co-counsel" is that Plaintiff is referring to here. See 17-40811 Docket, passim.
The true end of the 90-day period, October 15, 2017, was a Sunday. F.R.C.P. 6(a)(1)(C) states that if the end of a statutory period falls on a Sunday, the deadline period continues to run until the end of the next business day.
"RLBB" does not appear to be defined anywhere in the Complaint.