Groom v. Krook
Case Information
*1 UNITED STATES BANKRUPTCY COURT NORTHERN DISTRICT OF ILLINOIS EASTERN DIVISION
In re: ) Chapter 7
)
PATRICK L. KROOK, ) No. 19 B 2216 )
Debtor. )
______________________________________ )
)
CHAD A. GROOM, )
)
Plaintiff, )
)
v. ) No. 19 A 982 )
PATRICK L. KROOK, )
)
Defendant. ) Judge Goldgar MEMORANDUM OPINION
Before the court for ruling is the motion of defendant Patrick Krook to dismiss the three- count adversary complaint of plaintiff Chad Groom. The complaint alleges that Krook, through his company, Show Your Auto, LLC, agreed to act as broker for Groom’s purchase of a classic 1970s “muscle car.” Groom paid Krook for the car. But Krook had never contacted the seller and so never delivered the car. He also never returned Groom’s money. Groom objects to the dischargeability of Krook’s debt.
For the reasons below, Krook’s motion to dismiss the complaint will be denied. 1. Jurisdiction
The court has subject matter jurisdiction under 28 U.S.C. § 1334(b) and the district court’s Internal Operating Procedure 15(a). This is a core proceeding under 28 U.S.C. § 157(b)(2)(I).
2. Background
On a Rule 12(b)(6) motion, all well-pleaded allegations in the complaint are taken as
true, and all reasonable inferences are drawn in favor of the non-movant.
Viamedia, Inc. v.
Comcast Corp.
,
The complaint and exhibits allege the following facts. Groom is a resident of Missouri. Krook lives in Lake Villa, Illinois, and is an automobile sales broker. Krook did business through an Illinois limited liability company, Show Your Auto, LLC. He was Show Your Auto’s sole member as well as its manager. 1/
In August 2018, Groom found a 1970 Dodge Challenger listed for sale on the website classiccars.com. The price was $99,950. Groom asked about the car through the website and received a call from Krook that same day. Krook told Groom he was the broker for the car’s owner and had authority to act as the owner’s agent.
After negotiations, Groom and Krook reached an agreement for the sale of the car. The seller would make several cosmetic repairs, and Groom would pay $96,750. 2/
In December 2018, Krook sent Groom an email telling him to wire $86,750 (the purchase
1/
The complaint describes Krook as Show Your Auto’s “sole owner” – or
“member.”
See
805 ILCS 180/1-5 (2018). The Illinois Secretary of State’s website shows that
Krook was also its manager. The court can take judicial notice of information on government
websites.
Denius v. Dunlap
,
agreement and the sale price. Groom alleges that he reached an agreement with Krook after “months of negotiating.” (Compl. ¶ 11-1). (After paragraph 12, the complaint’s numbering starts over with paragraph 9.) But Groom first contacted Krook on August 28, 2018, and Krook’s invoice to Groom is dated September 18, 2018, only two weeks later. (Compl. Ex. A). The invoice also lists the sale price as $86,750 ( id. ), and Groom alleges that sum as the debt he wants declared nondischargeable, not the $96,750 he says he paid Krook.
price minus Groom’s initial $10,000 deposit) to Show Your Auto. Once the seller made the repairs, Krook would release the funds to him, and the seller would release the car for transport. Krook added that he would obtain the title from the seller.
Groom wired the money, but Krook never delivered the car because he never paid the seller. In fact, the seller knew nothing of the proposed sale until later when Groom contacted him.
In January 2019, Krook filed a chapter 7 bankruptcy case. Groom then began this adversary proceeding, filing a three-count complaint alleging that Krook’s debt to him is nondischargeable. Count I is a claim under section 523(a)(2)(A) of the Bankruptcy Code, 11 U.S.C. § 523(a)(2)(A), that the debt is one for money obtained by fraud. Count II is a claim under section 523(a)(4), 11 U.S.C. § 523(a)(4), that the debt resulted from embezzlement. Count III is a claim under section 523(a)(6), 11 U.S.C. § 523(a)(6), that the debt is for a willful and malicious injury.
Krook has moved to dismiss all three counts for failure to state a claim. Groom opposes the motion.
3. Discussion
Krook’s motion will be denied. All three counts of the complaint state plausible nondischargeability claims.
a. Rule 12(b)(6) Standards
To survive a motion to dismiss under Rule 12(b)(6), a complaint must clear “two
easy-to-clear hurdles.”
EEOC v. Concentra Health Servs., Inc.
,
Second, the claim must be “plausible on its face,”
id.
, at 570, meaning the plaintiff’s right
to relief must rise above a “speculative level,”
id.
at 555;
see also Cornielsen
,
b. Personal Liability
Before the substance of Groom’s claims can be discussed, a threshold issue must be addressed. Krook contends that the funds Groom wired to Show Your Auto were “the funds of Show Your Auto,” not Krook. (Mot. at 6). In Krook’s view, then, any debt to Groom is not Krook’s but “that of the corporation, Show Your Auto, LLC.” ( at 2).
Krook is mistaken. Although he did business through his limited liability company, he
can be held personally liable to Groom. It is well established in Illinois that a business
corporation’s officer who participates actively in the corporation’s torts is subject to personal
liability.
See Bank of Commerce & Trust Co. v. Strauss (In re Strauss)
,
Groom alleges that Krook participated in Show Your Auto’s tortious conduct. That is enough to make Krook personally liable to Groom and the debt potentially nondischargeable in Krook’s bankruptcy case.
c. Count I – False Representation
So to the claims themselves. Count I alleges a plausible claim under section 523(a)(2)(A) that Krook fraudulently induced Groom to pay him $97,650 for a car Krook had no intention of delivering.
Section 523(a)(2)(A) of the Code excepts from discharge “any debt . . . for money . . . to
the extent obtained by false pretenses, a false representation, or actual fraud.” 11 U.S.C. §
523(a)(2)(A). Although some courts suggest there is a single test for determining
nondischargeability under section 523(a)(2)(A), that section in fact describes three separate
grounds: false pretenses, false representation, and actual fraud.
City of Chi. v. Spielman (In re
Spielman)
,
The amendment was meant to overturn
Dass v. Yale
,
Count I is a claim for representational fraud. To state a representational fraud claim
under section 523(a)(2)(A), a creditor must allege that (1) the debtor made a false representation
he either knew was false or made with reckless disregard for its truth; (2) the debtor made the
false representation with an intent to deceive or defraud; and (3) the creditor justifiably relied on
the false representation.
In re Davis
,
Groom alleges each element. According to Groom, Krook represented that he was the
seller’s broker and could act as his agent. Krook also represented that if Groom would wire his
company the remaining $86,750, he would obtain the car title from the seller, would have the
seller make the agreed repairs, would release the payment to the seller, and would have the seller
release the car for transport. Not one of these representations was true – and Krook knew it,
because he never told the seller any of this. Instead, Krook fabricated the entire transaction to
induce Groom to part with his money. That Krook never spoke to the seller suggests both that
he knew his representations were false and that he intended to deceive Groom. And Groom
justifiably relied on the representations, taken in by Krook’s phone call in response to his
website inquiry. No “cursory examination or investigation” would have revealed that Krook was
making the whole thing up.
Field v. Mans
,
Apart from his contention that the debt is purely corporate, Krook’s only basis for urging dismissal is that Count I alleges false promises – false representations of future conduct – and those are not actionable. 4/
Krook makes a passing reference to Rule 9(b), Fed. R. Civ. P. 9(b) (made
applicable by Fed. R. Bankr. P. 7009), apparently intending to argue that Groom has not pled
fraud with particularity. (Mot. at 2). But Krook never develops the argument. It is not the
court’s job to make parties’ arguments for them.
Furry v. United States
,
Not so. Krook is right that a false representation must ordinarily relate to a “present or
past fact.”
Landmark Credit Union v. Sharp (In re Sharp
),
Because Count I alleges a plausible claim under section 523(a)(2)(A), Krook’s motion to dismiss that count will be denied.
d. Count II – Embezzlement
Krook’s motion to dismiss Count II will also be denied. Count II alleges a plausible embezzlement claim under section 523(a)(4).
Section 523(a)(4) excepts from discharge debts for, among other things, “embezzlement.”
Embezzlement under section 523(a)(4) means the “fraudulent appropriation of property by a
person to whom such property was entrusted or into whose hands it has lawfully come.”
In re
Weber
,
Count II pleads both elements. Groom alleges that he entrusted Krook with $96,750 on
the belief that Krook was acting as broker for the seller of the car. Rather than forward the
money to the seller, Krook made off with it, knowing he had no right to do so. “Using access
that has been granted to funds to misappropriate those funds constitutes embezzlement.”
Manevska
,
Krook argues that Count II should be dismissed because “no specific facts are alleged.”
(Mot. at 4). But facts are alleged. Those facts support the inference that Krook appropriated
Groom’s money for his own benefit and did so with fraudulent intent. The only facts Krook
asserts are missing are a “formal agreement . . . establishing an escrow” and a “statement as to
what happened to the money.” ( at 5). But Krook cites no authority for the proposition that
Groom suggests that Count II also states a claim under section 523(a)(4) for
“larceny.” (Resp. at 8);
see
11 U.S.C. § 523(a)(4). He is mistaken. Larceny is “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.”
Schaul v. Ludwig (In re Ludwig)
,
someone commits embezzlement only if he misappropriates money in escrow, and there is none.
Nor does he cite authority for the proposition that a creditor must allege with any specificity
“what happened to the money.” It was enough for Groom to allege that he entrusted Krook with
the money, and Krook failed to pay the seller. The reasonable inference is that Krook kept
Groom’s money, using it for his own purposes. On a motion to dismiss, reasonable inferences
are drawn in the plaintiff’s favor.
Viamedia
,
To support dismissal, Krook also relies on
Freer v. Beetler (In re Beetler)
,
The circumstances here are not the same. As Krook admits (Mot. at 5), Groom was the buyer of the car, not the seller. As buyer, Groom delivered money to Krook to pay the seller, not goods for Krook to sell. The distinction is critical. Because Groom was the buyer providing funds to pay for goods rather than the seller providing goods to be sold, section 2-401 did not apply to his portion of the transaction. ICC section 2-401 concerns the passing of title to “goods,” and the funds supplied as payment for goods are not themselves “goods.” See 810 ILCS 5/2-105(1) (stating that “goods” do not include “the money in which the price is to be *10 paid”). So the money Groom paid Krook belonged to Groom, not to Krook. Beetler might be relevant here had Groom been the seller of the car rather than the buyer. But as Krook concedes, he was not.
Because Count II alleges a plausible embezzlement claim under section 523(a)(4), Krook’s motion to dismiss that count will also be denied.
e. Count III – Willful and Malicious Injury
Finally, the motion will be denied as to Count III as well. Count III states a plausible claim under section 523(a)(6) of the Code.
Section 523(a)(6) excepts from discharge a 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). To state a
claim under section 523(a)(6), a creditor must allege that (1) the debtor owes a debt resulting
from an injury he caused to another entity or that entity’s property; (2) his actions were willful;
and (3) his actions were malicious.
Oakland Ridge Homeowners Ass’n v. Braverman (In re
Braverman)
,
As its language suggests, the statute excepts debts resulting from intentional torts.
Kawaauhau
,
Krook disagrees. According to Krook, conduct that would make out a claim under sections 523(a)(2)(A) and (4) cannot make out a claim under section 523(a)(6). Those statutes, he says, are “[mutually] exclusive.” (Mot. at 7).
Krook’s position once held sway. Because a specific statute (like section 523(a)(2)(A))
controls over a general one (like section 523(a)(6)), and because one statute will generally not be
read to render another superfluous, many decisions found the two Code sections “mutually
exclusive.”
Wachovia Secs., LLC v. Jahelka (In re Jahelka)
,
No longer. In
Husky Int’l Elecs., Inc. v. Ritz
, ___ U.S. ___,
Because Count III states a plausible section 523(a)(6) claim, the motion to dismiss that count will be denied.
4. Conclusion
The motion of defendant Patrick Krook to dismiss the adversary complaint of plaintiff Chad Groom is denied. A separate order will be entered consistent with this opinion.
Dated: June 1, 2020
________________________________________ ________________________________________________________________________________________________________________________________________________ ____________________________________________________________________________________________________________________________________________________ A. Benjamin Goldgar . Beneeeeeeeeee jamimimiiiiimimimimimiimiimiiimimiiimiiimimimiimimiimiiiiiimiiiiiiiiiiiiiiiiiiiiiiiiiiiiiiiiiiiiiiiiiiiiiiiiiin Goldgar United States Bankruptcy Judge nited Stattes Bankruptcy JJJJJJJJJJJJJJJJJJJJJJJJJJJJJJJJJJJJJJJJJJJJJJJJJJJJJJJJJJJJJJudge None of this means section 523(a)(6) is merely redundant. Section 523(a)(6) applies to some conduct that sections 523(a)(2)(A) and (4) do not. Had Krook punched Groom in the nose or burned down his house, for example, Groom would have a nondischargeability claim for Krook’s willful and malicious injury to Groom’s person or property but no nondischargeability claim for fraud or embezzlement.