Kapitus Servicing, Inc. v. FrierdichKapitus Servicing, Inc. v. Frierdich
Before the Court is the Defendant’s Motion to Dismiss Plaintiff’s Complaint to Determine Dischargeability of Debt and for Other Relief. For the reasons set forth herein, the Motion to Dismiss will be granted, in part.
I. Factual Background
Eric J. Frierdich (“Debtor”) filed his voluntary Chapter 7 petition on July 23, 2025. Donald Samson was appointed the case trustee and conducted several creditors meetings with the final meeting occurring on October 15, 2025. The Debtor received his discharge on December 4, 2025. The trustee has filed a report of no distribution stating that he has found no property available for distribution to creditors.
In its complaint, Kapitus alleges in Count I false representations, fraudulent transfers, and actual fraud, relying on the breaches of loan covenants by Midwest and the Debtor. Kapitus says that the Debtor made false representations in the loan documents and never intended to have Midwest repay the loan. Count II of the complaint alleges the making of false statements in writing about the Debtor’s and Midwest’s financial condition. Again, Kapitus relies on the loan covenants and says that the Debtor never intended for the loan
The Debtor responded to the complaint by filing a Motion to Dismiss and accompanying memorandum of law (collectively “Motion to Dismiss”) asserting that Kapitus had failed to state claims upon which relief can be granted. The Motion to Dismiss asserts that the money judgment obtained in Virginia can have no collateral estoppel effect in this case because it was a default judgment and Illinois law, which he says is controlling, would limit its use. Further, he says the judgment does not include the types of specific findings necessary to provide meaningful issue preclusion.
The Debtor’s Motion to Dismiss also addresses each count of the complaint. As to Count I, the Debtor says that Kapitus has pleaded no more than a breach of contract claim. Many of the representations made by the Debtor related to future conduct, and facts were not pleaded to support an inference
The Motion to Dismiss has now been fully briefed by the parties. This Court has reviewed and considered the parties’ arguments and relevant case law, and the matter is ready for decision.
II. Jurisdiction
This Court has jurisdiction over proceedings “arising under title 11, or arising in or related to cases under title 11” pursuant to
III. Legal Analysis
To survive a motion to dismiss for failure to state a claim upon which relief can be granted, a complaint need only allege enough factual allegations to plausibly suggest a claim for relief. Bell Atl. Corp. v. Twombly, 550 U.S. 544, 570 (2007);
“A claim has facial plausibility ‘when the plaintiff pleads factual content that allows the court to draw the reasonable inference that the defendant is liable for the misconduct alleged.’” Bissessur v. Indiana Univ. Bd. of Trs., 581 F.3d 599, 602 (7th Cir. 2009) (quoting Iqbal, 556 U.S. at 678). When ruling on a motion to dismiss, a court must accept all well-pleaded factual allegations as true and draw all reasonable inferences in favor of the non-moving party. Iqbal, 556 U.S. at 678; McReynolds v. Merrill Lynch & Co., 694 F.3d 873, 879 (7th Cir. 2012). Those well-pleaded facts, however, must “permit the court to infer more than the mere possibility of misconduct[.]” Iqbal, 556 U.S. at 679.
In discussing the pleading standards, the Debtor raised the issue of whether collateral estoppel would apply here. The Debtor claimed that it would not because the Virginia judgment that Kapitus obtained against him was entered by default and Illinois law, which he claims should apply, does not give collateral estoppel effect to default judgments. Kapitus responded by asserting that, under Virginia law that it claims should apply, default judgments may support collateral estoppel. At this point, the discussion of collateral estoppel is largely premature. Kapitus may not rely on collateral estoppel to avoid pleading all required elements of each asserted claim. Nothing in the standards set forth above provides for a deviation from the requirements because the Debtor might be precluded from relitigating an issue here. A key element of collateral estoppel is that the issues decided in the prior case must be identical to issues presented
Each of the four counts will be analyzed under the pleading standards set forth above.
A. Count I – 11 U.S.C. §523(a)(2)(A)
Kapitus asserts in Count I that the debt owed to it by the Debtor should be excepted from discharge because the debt was obtained by “false pretenses, a false representation, or actual fraud” relating to statements respecting matters other than the Debtor’s financial condition.
To state a claim for false representations, a plaintiff must allege (1) a false representation or omission made by the debtor; (2) that the debtor knew was false or made with reckless disregard for the truth; (3) that the debtor made with the intent to deceive; (4) and upon which the creditor justifiably relied. Ojeda v. Goldberg, 599 F.3d 712, 716-17 (7th Cir. 2010); accord Iqbal, 556 U.S. at 678-79, and Olson, 784 F.3d at 1098-99 (plaintiff must allege some facts to support each element of cause of action). Generally, allegations of mere breaches of
False representations involve fraud, and, as set forth above, fraud must be pleaded with particularity.
Kapitus’ allegations regarding false representations are made principally in the general allegations section of the complaint and at paragraph 55 of Count I. Kapitus says that the Debtor misrepresented Midwest’s financial condition and misrepresented that Midwest would not enter into additional financing agreements, would deposit all receipts into a designated account, and would ensure that sufficient funds remained in the designated account so that Kapitus could withdraw its payments as they became due. Throughout Count I, Kapitus
Kapitus’ claim that the Debtor misrepresented Midwest’s financial condition cannot be considered in analyzing Count I. Misrepresentations regarding Midwest’s financial condition are not actionable under
The other misrepresentations alleged to have been made by the Debtor all relate to promises of future conduct. Allegations that promises were not kept, without more, do not support a fraud or misrepresentation claim; they support no more than a dischargeable breach of contract claim. Davis, 638 F.3d at 554. Generally, false representations must “relate to a ‘present or past fact,’ not future facts or future conduct.” Potter, 616 B.R. at 752 (quoting Groom v. Krook (In re Krook), 615 B.R. 479, 485 (Bankr. N.D. Ill. 2020)) (internal quotation marks omitted). But Kapitus asserts that the close proximity in time from when the promises were made to when the defaults began adds enough to the allegations to state a plausible false representation claim. Kapitus’ allegations against the Debtor are bare bones, made largely on “information and belief,” and are supported only by limited facts. However, the allegations are enough—just barely enough—to get past the pleading stage. To be clear, the allegations will have to be supplemented by more evidence to meet Kapitus’ burden of proof at trial. The Debtor’s stated defense regarding the number of payments made on the debt
Kapitus also attempts to state a claim for actual fraud in Count I. Actual fraud encompasses “any deceit, artifice, trick, or design involving direct and active operation of the mind, used to circumvent and cheat another[.]” McClellan v. Cantrell, 217 F.3d 890, 893 (7th Cir. 2000) (citations omitted). To state a claim for actual fraud, Kapitus must plead facts to plausibly allege (1) that a fraud occurred; (2) that the debtor intended to defraud, and (3) that the fraud created the debt at issue. Id. Actual fraud must be pleaded with
In attempting to state a claim for actual fraud, Kapitus relies on two different theories. First, Kapitus makes a claim in the nature of fraudulent inducement. This theory adds little to the complaint as it relies on the same allegations and, ultimately, will rely on the same proofs already discussed. But, as with the false representation claim, it presents just enough to state a plausible claim and will not be dismissed. Second, Kapitus presents an actual fraud claim relying on allegations of fraudulent transfers. Kapitus falls well short on that theory.
Kapitus labeled Count I as brought, in part, as a fraudulent transfer claim and, at paragraph 57, alleges that the transfers made from the account designated for payment of Kapitus were fraudulent. Kapitus says that the Debtor transferred funds to “other accounts” but does not describe those other
As used here, the term “transfer” means “each mode, direct or indirect, absolute or conditional, voluntary or involuntary, of disposing of or parting with—(i) property; or (ii) an interest in property.”
Additionally, Kapitus overlooks the fact that
No other allegations in Count I expound on the fraudulent transfer theory in any meaningful way. The allegations are mainly just labels and conclusions that controlling case law warns is not enough. Twombly, 550 U.S. at 555. Kapitus makes no plausible claim that any “transfer” occurred—fraudulent or
B. Count II – 11 U.S.C. §523(a)(2)(B)
In Count II, Kapitus seeks to except its debt from the Debtor’s discharge because it claims that debt was incurred by the use of a statement in writing regarding the Debtor’s or an insider’s financial condition that was materially false.
One threshold issue in analyzing
A second, related threshold issue is whether the writing in question is sufficiently substantive to be considered a “statement respecting financial condition” as required by the statute. “A financial statement is materially false if it paints a substantially untruthful picture by misrepresenting information that would ordinarily affect the decision to grant credit, or if the lender would not have made the loan ‘but for’ the debtor’s misrepresentations.” Bank of Rantoul v. Adcock (In re Adcock), 618 B.R. 260, 264-65 (Bankr. C.D. Ill. 2020) (Perkins, J.) (citing In re Morris, 230 B.R. 352 (Bankr. N.D. Ill. 1999), aff‘d, 223 F.3d 548 (7th Cir. 2000)). Some courts have held that actual financial statements and documents such as balance sheets, income statements, tax returns, and bank statements are distinguishable from boilerplate transactional warranties that recite legal conclusions but provide or contain no underlying financial information. See, e.g., BBI Architectural Servs. v. Janney (In re Janney), 557 B.R. 476, 482 (Bankr. M.D. La. 2016) (“transactional documents that merely imply some financial status” not “statements regarding the debtor’s financial condition”); Caruso v. Segal (In re Segal), 195 B.R. 325, 332 (Bankr. E.D. Pa. 1996) (lease and note documents “not, by any stretch of the imagination, classifiable as financial statements”). Because Appling expanded the definition of what statements are now included as “respecting” a debtor’s “financial condition,” the range of documents that might be relied on by a creditor to judge a debtor’s financial condition has likely also expanded. Individual pay stubs, bills or invoices, and similar documents that provide information about only one aspect of a debtor’s financial condition can now be considered. Nevertheless, the concern about boilerplate language being relied on without any underlying financial information being provided or reviewed remains valid.
In Count II, Kapitus repeats some of the same alleged misrepresentations set forth in Count I, including the Debtor’s promise to use only the designated account for depositing receipts and to not enter into further loan transactions without Kapitus’ permission. Those promises are not respecting the Debtor’s or Midwest’s financial condition; they are simply statements of intent and are not actionable under
Kapitus also alleges in Count II that the Debtor made material misrepresentations about the financial condition of Midwest and himself by stating that both he and Midwest were solvent and were not planning to file bankruptcy. Further, Kapitus alleges that the Debtor provided false financial information and failed to disclose that Midwest was “low on funds” at the time of the loan transaction. None of the allegations are supported by sufficient facts to state plausible claims, but each will be briefly discussed.
Likewise, Kapitus has failed to plead sufficient facts to state a plausible claim related to the representation that neither the Debtor nor Midwest intended to file bankruptcy. The representation is likely not one respecting their financial condition but rather just a statement of intent. To the extent, however, that it was a representation of financial condition, no facts were pleaded to support a claim that it was a misrepresentation. Midwest has not filed bankruptcy; the representation that it was not going to file bankruptcy was therefore apparently
Finally, Kapitus says that the Debtor provided false financial information. In the general allegations rather than in Count II, Kapitus says that the Debtor submitted financial documents to it but only specifically identifies bank statements as having been provided. Kapitus does not allege that the bank statements it received were altered in any way and makes no claim that the bank statements contained false financial information. Instead, Kapitus alleges in Count II that Midwest was “low on funds” at the time the loan was made and that the Debtor failed to notify Kapitus of that fact.
“Low on funds” is a vague statement that does not plead falsity and fraud with the specificity required. Kapitus says that it would not have made the loan if it knew that Midwest was low on funds. But that makes little sense.
More importantly, Kapitus points to no written statement where the omission of the “low on funds” information was made. Misrepresentations by omission brought under
C. Count III - 11 U.S.C. §523(a)(4)
Debts for “fraud or defalcation in a fiduciary capacity, embezzlement or larceny” may be excepted from a debtor’s discharge.
Kapitus bases its claim of embezzlement on allegations that the Debtor moved funds from a Midwest account designated for payments to Kapitus to other accounts that Kapitus could not access. Kapitus also alleges that the Debtor failed to deposit receipts into the designated account in violation of the loan agreement. The Debtor says that the allegations of Count III are insufficient because nothing is pleaded to support the claim that the Debtor appropriated the funds for his own use. In his reply brief, the Debtor also raises the issue of whether Kapitus had an ownership interest in the funds.
That the Debtor misappropriated the funds for his own use is, without question, an element of the cause of action sought to be pleaded; Kapitus admits as much in its response. Kapitus says, however, that it need not allege how the funds were used by the Debtor and that the general allegation of misappropriation is sufficient. Kapitus relies on Krook for its argument that it does not need to plead specifics of what happened to the funds. Krook, 615 B.R.
The Debtor says in his reply brief that Count III fails because Kapitus has no ownership interest in the loaned funds. Rather, the loan funds and the ongoing receipts of Midwest were owned by Midwest. Although Kapitus has not had an opportunity to respond to this argument, it will be addressed. The dismissal of Count III will be without prejudice, and discussing this issue now may assist Kapitus if it chooses to replead.
As this Court has previously held, “[o]ne cannot embezzle one’s own property.” Cripe v. Mathis (In re Mathis), 360 B.R. 662, 668 (Bankr. C.D. Ill. 2006) (quoting Gadtke v. Bren (In re Bren), 284 B.R. 681, 698 (Bankr. D. Minn. 2002)). Because collateral is generally owned by the borrower and the lender has only a security interest or lien on the collateral, the lender’s interest “does not rise to a
A minority line of cases exists, allowing creditors to enforce their interest in collateral through embezzlement claims. See, e.g., Jones v. Hall (In re Hall), 295 B.R. 877, 882 (Bankr. W.D. Ark. 2003) (collecting cases). This Court finds the minority position unpersuasive. But as stated above, Kapitus will be granted
D. Count IV – 11 U.S.C. §523(a)(6)
Count IV seeks to have the debt owed to Kapitus by the Debtor excepted from discharge because it claims the debt arose from willful and malicious injury to its property.
Allegations of ordinary breaches of contract generally are not sufficient to support a claim under
In the complaint, and in Count IV in particular, Kapitus pleads little more than breach of contract. As set forth above, the allegations about the proximity of the signing of the loan documents and the initial defaults is enough—but, again, barely enough—to allow Count I to proceed as to false representations and fraudulent inducement. Both theories state claims for intentional torts, but neither, standing alone, is sufficient to state a claim for willful or malicious conduct. A false representation can be made without any intent to harm a lender; it can be made only with the intent to benefit the maker of the representation. See Farm Credit Servs. of Am., PCA v. Woodrum (In re Woodrum), 2025 WL 601718, at *17, *20 (Bankr. C.D. Ill. Feb. 24, 2025) (Where debtor made some payments and intended to use all loan proceeds in his farming operation, debt excepted from discharge under
IV. Conclusion
The Debtor’s Motion to Dismiss will be granted, in part, and denied, in part, as to Count I and granted as to all of Counts II, III, and IV. The dismissals are without prejudice; Kapitus will be given leave to file an amended complaint. Although it seems unlikely that Kapitus can successfully plead plausible claims for all the causes of action it attempted to set forth in its original complaint, parties should be given at least one opportunity to replead. Runnion ex rel. Runnion v. Girl Scouts of Greater Chicago, 786 F.3d 510, 519 (7th Cir. 2015). In constructing its amended complaint, Kapitus must pay close attention to the required elements of each cause of action and determine if it can plead the facts necessary to support its claims. It cannot continue to plead mere labels and conclusions and to rely on “information and belief” allegations.
This Opinion is to serve as Findings of Fact and Conclusions of Law pursuant to
ENTERED: July 21, 2026
/s/ Mary P. Gorman
UNITED STATES BANKRUPTCY JUDGE