Appellant Fo-Farmers Outlet, Inc. ("FFO") appeals the order of the bankruptcy court dismissing its exception to discharge complaint under Civil Rule 12(b)(6),
FFO is a vegetable merchant wholesale supplier which provides packaging materials for produce. Debtor Derrick Clinton Daniell ("Daniell")
On September 28, 2010, Daniell sent a memorandum to FFO outlining Daniell's anticipated packaging material requirements for October 2010 ("Projection Memorandum"). The parties agree that they communicated regarding Daniell's produce contracts in Mexico, after FFO received the Projection Memorandum, but before the materials were shipped to him. Between October 10, 2010, and November 16, 2010, FFO shipped a large quantity of packaging materials to Daniell.
On December 23, 2010, Daniell visited Mr. Angulo, FFO's representative, and informed him that Daniell's Mexican contracts were not meeting projections. Then, in January 2011, Daniell sent several emails to FFO. A January 8, 2011 email reads:
FFO alleges that in April 2011, it learned that Daniell's representations concerning his alleged contracts in Mexico were false; that any contracts Daniell previously had in Mexico were permanently disrupted or terminated; and that Daniell would not be getting any proceeds from the sale of Mexican crops to pay for the packaging materials. Sometime in April 2011, FFO inspected Daniell's remaining packaging inventory that had not been shipped to Mexico at the Garayzar Yard in Nogales, Arizona. FFO attempted to recover that inventory but was unsuccessful.
FFO filed a state court lawsuit against Daniell on April 21, 2011, alleging breach of contract, common counts, and breach of oral guaranty against Daniell.
Thereafter, FFO collected $7,728.00 and $14,988.00 through levy before Daniell filed a petition for relief under chapter 7 on November 30, 2011. Daniell's Schedule F listed an undisputed, liquidated, noncontingent claim in favor of FFO for $247,200.00, and the Statement of Financial Affairs listed the state court action and judgment in the amount of $238,000.00. FFO alleges that the current balance due on the state court judgment is $224,650.62.
FFO commenced an adversary proceeding against Daniell on March 7, 2012, seeking an exception to discharge of the debt owed to it by Daniell under § 523(a)(2) and (a)(6).
The bankruptcy court conducted a status conference on May 11, 2012. During the conference, the court sua sponte dismissed FFO's fraud claims under § 523(a)(2), with leave to amend, because they had not been pled with particularity.
FFO filed a first Amended Complaint on May 24, 2012 ("FAC"). The first claim of the FAC reasserted and provided additional factual support for FFO's claim against Daniell for actual fraud under § 523(a)(2)(A). The FAC added a second fraud claim under § 523(a)(2)(B), alleging that Daniell had made misrepresentations to FFO about its finances in written documents (i.e., the emails) on which FFO had relied to its detriment. A third claim was asserted under § 523(a)(6).
Daniell filed a motion to dismiss the FAC under Civil Rule 12(b)(6), incorporated by Rule 7012, on June 11, 2012. Daniell argued that neither of the § 523(a)(2) fraud claims had been pled with the requisite particularity, and that the § 523(a)(6) was also pled in conclusory statements.
At the hearing on the motion to dismiss on July 11, 2012, the bankruptcy court dismissed with prejudice FFO's second claim for relief under § 523(a)(2)(B) and dismissed the claims under § 523(a)(2)(A) and (a)(6) with leave to amend. We do not have access to a transcript of that hearing in the record or docket and cannot determine why the bankruptcy court made its decisions.
FFO filed a Second Amended Complaint ("SAC"), the complaint which is the focus of this appeal, on August 1, 2012. The SAC appears to offer the same factual allegations and arguments regarding § 523(a)(2)(A) and (a)(6) as in the original complaint and FAC. However, the second claim was now presented as an additional actual fraud claim under § 523(a)(2)(A).
On August 14, 2012, Daniell filed another motion to dismiss the SAC under Civil Rules 12(b)(6). Daniell's argument was that, though FFO had three opportunities to do so, the SAC still failed to allege its fraud claims with particularity as required by Rule 9(b), as incorporated by Rule 7009, and that it failed to adequately allege a claim for conversion, and thus, failed to state a claim for relief under § 523(a)(6).
FFO submitted an opposition to the dismissal motion on August 29, 2012. FFO asserted that it had pled sufficient facts to establish fraud in its first two claims. As to § 523(a)(6), FFO argued that the claim asserted all necessary elements to establish the tort of conversion under California law.
The bankruptcy court hearing on Daniell's motion to dismiss the SAC took place on September 13, 2012. As to the § 523(a)(6) claim, the court ruled that the SAC's allegations did not establish a conversion because it did not demonstrate that FFO had a right to possession or ownership of the packaging materials it alleged were converted by Daniell.
As to the first § 523(a)(2)(A) claim, the court found that the pleadings "strongly suggested" that at the time the alleged misrepresentations were made by Daniell, he did in fact have contracts for the sale of the inventory in Mexico. And as to the second § 523(a)(2)(A) claim, the court found that FFO's assertion that it was fraudulently induced not to enforce its remedies was not correct, in that FFO did in fact effect repossession of what inventory was still available. As to both fraud claims, the court and counsel for FFO engaged in the following colloquy:
Hr'g Tr. 9:13-10:22, September 13, 2012.
The bankruptcy court entered an order dismissing the SAC with prejudice on September 14, 2012. FFO filed a timely appeal on September 28, 2012.
The bankruptcy court had jurisdiction under 28 U.S.C. §§ 1334 and 157(b)(2)(I). We have jurisdiction under 28 U.S.C. § 158.
Whether the bankruptcy court erred in dismissing FFO's complaint seeking exceptions to discharge under § 523(a)(2)(A) and (a)(6) for its claim against Daniell.
Whether the bankruptcy court abused its discretion in refusing to allow FFO to file a third amended complaint.
The bankruptcy court's dismissal of an adversary proceeding under Civil Rule 12(b)(6) is reviewed de novo.
We review the bankruptcy court's decision not to grant leave to amend a complaint for abuse of discretion.
A bankruptcy court abuses its discretion if it applies an incorrect legal standard, or misapplies the correct legal standard, or if its factual findings are illogical, implausible or without support from evidence in the record.
Under Civil Rule 12(b)(6), made applicable in adversary proceedings via Rule 7012, a bankruptcy court may dismiss a complaint if it fails to "state a claim upon which relief can be granted." In reviewing a Civil Rule 12(b)(6) motion, the trial court must accept as true all facts alleged in the complaint and draw all reasonable inferences in favor of the plaintiff.
To avoid dismissal under Civil Rule 12(b)(6), a plaintiff must aver in the complaint "sufficient factual matter, accepted as true, to `state a claim to relief that is plausible on its face.'"
Section 523(a)(2)(A) provides that: "A discharge . . . does not discharge an individual debtor from any debt . . . (2) for money, property, services, or an extension, renewal, or refinancing of credit, to the extent obtained, by — (A) false pretenses, a false representation, or actual fraud[.]" To demonstrate that a debt should be excepted from discharge under § 523(a)(2)(A), a creditor must prove five elements: (1) a misrepresentation, fraudulent omission or deceptive conduct by the debtor; (2) debtor's knowledge of the falsity or deceptiveness of the statement or conduct at the time it occurred; (3) debtor's intent to deceive; (4) justifiable reliance by the creditor on the debtor's statement or conduct; and (5) damage to the creditor proximately caused by its reliance on the debtor's statement or conduct.
In FFO's first claim in the SAC, it asserts that Daniell made fraudulent representations to FFO in connection with his purchase of the packaging materials and the delivery of those materials to Daniell. The SAC alleges that those fraudulent representations were, generally, that Daniell had contracted with various Mexican farmers to sell him a very large quantity of watermelons and honeydew melons, and that those contracts would continue into 2011. Daniell allegedly made these false representations in the Projections Memorandum, and in his conversations with FFO representatives thereafter.
Within the first claim, FFO alleged that "Debtor further represented in the winter of 2010-2011, both orally and in writing, that he had contracted to sell the Mexico Crops through the middle of 2011 from specific regions in Mexico" and that "[i]n reliance on these representations, FFO shipped packaging materials, on credit, between 10/14/10-11/19/10. At the time Debtor made these representations, they were false. During this time period, Debtor in fact ceased to have active operations in Mexico and no ability to pay for the packaging materials he ordered."
In reviewing Daniell's motion to dismiss this claim, the bankruptcy court highlighted a fundamental problem with FFO's complaint:
Hr'g Tr. 8:21-9:21.
We understand why the bankruptcy court was perplexed by the inconsistences in the facts alleged by FFO regarding when Daniell made the allegedly false representation on which FFO relied.
At paragraph 14 of the SAC, FFO asserts:
In paragraph 14, FFO concedes that there were contracts in place between Daniell and the Mexican growers at some time. Neither in paragraph 14 nor at any point in the SAC does FFO state with specificity the date(s) when those contracts were "prematurely terminated."
Then, in paragraph 25 of the SAC, FFO recites:
And at paragraph 27, FFO concludes its argument on the first claim for relief:
Examining the complaint, with particular reference to paragraphs 14, 25, and 27, the bankruptcy court observed,
The bankruptcy court is correct that a representation made by Daniell in the "winter of 2011" could not have induced FFO to ship goods in September and October of 2010. We also agree with the court that the pleadings "strongly suggest" that there were contracts between Daniell and the Mexican growers. The only unsettled — but essential — question is if and when the contracts were "prematurely terminated."
As the bankruptcy court noted, the critical debtor misrepresentation must occur at or before the point where "the money [or goods] was obtained."
The bankruptcy court correctly applied this rule when it observed that, "What evolved later [after the goods were shipped] is irrelevant to the issue of fraud because the fraud has to have happened at the time of the transaction." Hr'g Tr. 3:15-18, September 13, 2012.
No facts are alleged in the complaint with any specificity to show that Daniell's allegedly fraudulent representations occurred before FFO relied on them and shipped him the packaging materials. Because FFO is alleging fraud, Civil Rule 9(b), as incorporated by Rule 7009, applies to his claim: "In alleging fraud or mistake, a party must state with particularity the circumstances constituting fraud or mistake." A pleading is sufficient under Civil Rule 9(b) if it "identifies the circumstances constituting fraud so a defendant can prepare an adequate answer from the allegations."
As discussed above, the time of the alleged representations is the most critical; that is, the precise point in time when Daniell made representations to FFO that he had contracted with various Mexican farmers to sell him a very large quantity of watermelons and honeydew melons, and that those contracts would continue into 2011. Further, it must be averred that, at that point in time, Daniell knew those representations to be false and made them to induce FFO to sell him the goods.
Simply stated, FFO did not allege in the complaint that precise point in time. At most, and viewing the complaint in the most favorable light to FFO, it alleges that at some time before December 2011 Daniell knew of the falsity of his representations. It asks the court and this Panel to infer that a misrepresentation took place before FFO shipped the goods. But as the Supreme Court has instructed us, where the complaint does "not permit the court to infer more than the mere possibility of misconduct, the complaint has alleged — but it has not `show[n]' — that the pleader is entitled to relief. Fed. R. Civ. Proc. 8(a)(2)."
In addition, at oral argument before the Panel, because it is not evident from the allegations in the SAC, counsel for FFO was also questioned regarding the dates when Daniell's contracts with the Mexican growers were supposedly terminated. After some hesitation, counsel conceded that FFO intended to rely upon discovery to determine the precise dates and, consequently, the point in time that Daniell would have made a false representation that the contracts were in place. However, the Ninth Circuit and other courts have cautioned that, when pleading fraud, Civil Rule 9(b) precludes the use of discovery to supply the facts necessary to state a basic claim for relief:
In short, FFO has not alleged the requisite facts in the SAC concerning the point in time at which Daniell allegedly made fraudulent representations, or when he was aware that the contracts with his growers in Mexico had been terminated. Without these dates, FFO cannot allege that Daniell made knowingly false representations on which FFO relied to sell goods to him on credit.
To avoid dismissal under Civil Rule 12(b)(6), a plaintiff must aver in his complaint "sufficient factual matter, accepted as true, to `state a claim to relief that is plausible on its face.'"
FFO's second claim for relief also does not clearly identify the time, place, and nature of Daniell's alleged misleading representations and therefore suffers from the same infirmities as the first claim. But of greater concern to us is that the second claim does not even plausibly state facts justifying relief under the rigors of § 523(a)(2)(A).
The second claim alleges that Daniell engaged in a continuing pattern of fraudulent representations to FFO representatives, which caused FFO to forego or postpone the exercise of its collection rights. By not pursuing collection from him, FFO alleges that it effectively made a "further extension of credit" to Daniell. In this respect, FFO insists that "other courts have consistently held that debts are non-dischargeable under [§] 523 (a)(2)(A) when an `extension' of credit is fraudulently induced. No new money needs to be lent." FFO's Op. Br. at 19. However, we disagree with this argument and conclude that FFO's decision not to pursue its collection remedies against Daniell did not amount to an "extension of credit" as that term is understood, even in the cases cited by FFO.
For example, in
FFO argues that, in
FFO suggests that the facts in this case are similar to those in
Similarly in the other case cited by FFO,
We conclude that the bankruptcy court did not err in dismissing FFO's second claim for an exception to discharge under § 523(a)(2)(A) simply because FFO decided not to pursue collection remedies and to believe instead Daniell's continuing promises of payment.
FFO's third claim for relief sought an exception to discharge under § 523(a)(6). This Code provision excepts from discharge debts for willful and malicious injuries by the debtor to another entity.
In particular, a § 523(a)(6) "`willful' injury is a `deliberate or intentional injury, not merely a deliberate or intentional act that leads to injury.'"
None of the facts alleged in the SAC would show that Daniell inflicted a willful and malicious injury on FFO, and for that reason alone, the Panel would be justified in affirming the bankruptcy court's decision to dismiss FFO's claim under § 523(a)(6). However, we conclude FFO's SAC fails for another important reason.
Apparently, the bankruptcy court relied on case law deciding that if a debtor commits a conversion of property under California law, that conduct is sufficient to meet the willful and malicious requirements for an exception to discharge under § 523(a)(6).
However, this failure to deal with the separate prongs of § 523(a)(6) is of no moment in this appeal because FFO cannot establish under the pled facts that there was conversion under California law. In California, the tort of conversion requires "the wrongful exercise of dominion over the property of another. The elements of conversion are: (1) the plaintiff's ownership or right of possession of the property; (2) the defendant's conversion by wrongful act or disposition of property rights; and (3) damages."
In addition, as the bankruptcy court correctly observed, FFO has cited no authority or reasoned argument as to how it could take lawful possession of the packaging materials from Daniell. The mere fact that it was a creditor with a contractual right to payment from Daniell was insufficient to support a claim against him for conversion.
Based on the facts as alleged in the SAC, FFO has not shown how it was deprived of ownership or lawful possession of the packaging materials by Daniell. As a result, FFO cannot satisfy the elements for a conversion under California law. Since FFO's claim under § 523(a)(6) lacks support under applicable law, the bankruptcy court properly dismissed it under Civil Rule 12(b)(6).
Under Civil Rule 15(a)(2), incorporated by Rule 7015, FFO could amend its complaint only with Daniell's consent, or with leave of the bankruptcy court. However, the bankruptcy court "should freely give leave when justice so requires." Civil Rule 15(a)(2). The Ninth Circuit recently revisited the conditions under which trial courts should grant or deny leave to amend complaints:
In this case, FFO filed three complaints, failing twice to cure the bankruptcy court's recurring instructions that the relevant facts establishing FFO's fraud claims against Daniell be pled with particularity. At the last hearing, in response to the bankruptcy court's continuing concern for the adequacy of the SAC, counsel for FFO conceded that it "did not sufficiently articulate these two things." Hr'g Tr. 10:16-17. Counsel then asked the bankruptcy for yet another (i.e., a fourth) opportunity to do what should have been done months earlier. In addition to the burden placed on the bankruptcy court by FFO's approach to pleading, the bankruptcy court was obviously aware that Daniell would be prejudiced by subjecting him to yet another complaint/answer/possible dismissal motion scenario.
FFO was given ample opportunity to adequately plead its claims against Daniell. We conclude that, in exercising the "particularly broad" judgment granted trial courts in this context, the bankruptcy court did not abuse its discretion in concluding that, in effect, enough was enough, and dismissing FFO's SAC with prejudice.
We AFFIRM the order of the bankruptcy court.
