Paul Baisier, U.S. Bankruptcy Court Judge.
This matter is before the Court on the Defendant's Response to Complaint and Motion to Dismiss filed by Defendant-Debtor (the "
Under Rule 12(b)(6) of the Federal Rules of Civil Procedure, applicable herein through Federal Rule of Bankruptcy Procedure 7012(b), a dismissal is appropriate if a complaint fails "to state a claim upon which relief can be granted." This Rule is construed with Federal Rule of Civil Procedure 8(a), which requires that a pleading contain a "short and plain statement of the claim showing that the pleader is entitled to relief." See Fed.R.Civ.P. 8(a)(2), and Fed.R.Bankr.P. 7008. Under this standard, "to survive a motion to dismiss, a complaint must now contain factual allegations that are `enough to raise a right to relief above the speculative level.'"
In the Complaint, the Plaintiff appears to assert that the Debtor should be denied a discharge pursuant to 11 U.S.C. § 727(a)(2) through (5) based on allegations that the Debtor "intentionally failed to fully disclose funds and assets by making false oaths and omissions." See Complaint, p. 1 & pp. 5-6, ¶ 10. In addition, the Plaintiff seeks a determination that the indebtedness of the Debtor to the Plaintiff should be excepted from discharge under 11 U.S.C. §§ 523(a)(4) and/or 523(a)(6), and perhaps, 11 U.S.C. § 523(a)(2). The objection is based on the fact that the Debtor is the "Guarantor and sole owner/member of Hair She Is Salon, LLC" (the "
With regard to the allegations under Section 727, the Plaintiff asserts that the Debtor has concealed assets by representing that the LLC was dissolved, although the Debtor has in fact "continually been in business" and reinstated the LLC ten (10) months prior to the filing of the Complaint without revealing this status to the Plaintiff. Based on the Debtor's claimed exemption in Schedule C, the Plaintiff maintains that the Debtor is denying the existence of any assets or funds related to this business except for the sum of $1,500.00. In addition, according to the Plaintiff, the Debtor has failed to explain any loss of assets to meet her obligations. The Debtor has also allegedly failed to disclose her one hundred percent (100%) ownership interest in the LLC in her bankruptcy schedules or account for the remaining balance of the loan proceeds.
Under Section 727(a)(2), the Plaintiff must prove the following by a preponderance of the evidence to support a denial of discharge: "(1) that the act complained of was engaged in within one (1) year prior to the date the petition was filed, (2) that the act was engaged in with actual intent to hinder, delay, or defraud a creditor, (3) that the act was that of the debtor, and (4) that the act consisted of transferring, removing, destroying, or concealing any of the debtor's property." Jennings v. Maxfield, 533 F.3d 1333, 1339 (11th Cir. 2008).
The Debtor maintains that at least two (2) of the needed elements under this provision are wanting. The LLC was dissolved in May of 2015, which is beyond one (1) year prior to the filing of this case.
Section 727(a)(3) provides that a discharge shall not be granted if "the debtor has concealed, destroyed, mutilated, falsified, or failed to keep or preserve any recorded information, including books, documents, records, and papers, from which the debtor's financial condition or business transactions might be ascertained, unless such act or failure to act was justified under all of the circumstances of the case[.]" 11 U.S.C. § 727(a)(3). This subsection does not require a showing of fraudulent intent. See Protos v. Silver (In re Protos), 322 Fed.Appx. 930, 935 (11th Cir. 2009)(per curiam). A debtor has "an affirmative
Next, although the Bankruptcy Code offers honest debtors the opportunity of a "fresh start" through the discharge of certain debts; in return, debtors must present themselves and their circumstances in a truthful and accurate manner. To this end, Section 727(a)(4)(A) provides that "[t]he court shall grant the debtor a discharge, unless ... the debtor knowingly and fraudulently, in or in connection with the case — made a false oath or account." The purpose of this provision is to make certain sufficient facts are available to all persons asserting an interest in the administration of a bankruptcy estate without having to undertake investigations or examinations to ascertain whether the information provided is true. Thus, "`[t]he entire thrust of an objection to discharge because of a false oath or account is to prevent knowing fraud or perjury in the bankruptcy case.'" Fogal Legware of Switzerland, Inc. v. Wills (In re Wills), 243 B.R. 58, 63 (9th Cir. BAP 1999), citing William L. Norton, Jr., NORTON BANKRUPTCY LAW AND PRACTICE 2D § 74.11 (1997). To insure veracity, intentional omissions from a debtor's schedules are also actionable under this provision. See Patriot Fire Protection, Inc. v. Fuller (In re Fuller), 560 B.R. 881, 890-91 (Bankr. N.D.Ga. 2016). A plaintiff objecting to discharge under this subsection bears the burden of proof and must make out his case by a preponderance of the evidence. See The Cadle Co. v. Taras (In re Taras), 2005 WL 6487202, *3 (Bankr. N.D.Ga. Aug. 19, 2005).
Two (2) elements must be established to deny a debtor's discharge under Section 727(a)(4)(A):
Finally, under Section 727(a)(5), a debtor's discharge may be denied when a debtor fails to offer a satisfactory explanation for a loss of assets. To make out a claim under Section 727(a)(5), the objecting creditor must first show a discrepancy between the property listed in the schedules and the assets shown in other financial documents, often ones in existence before the bankruptcy filing. At that point, the burden shifts to the debtor to explain what happened to the property in question and why it is not reflected in the schedules, subject to the Court's review of credibility and whether such explanation is convincing. See Hawley v. Cement Indus., Inc. (In re Hawley), 51 F.3d 246 (11th Cir. 1995); Chalik v. Moorefield (In re Chalik), 748 F.2d 616 (11th Cir. 1984).
It appears that the Plaintiff bases its claim under this section on the Debtor's alleged failure to provide requested financial information. The Debtor responds that the Plaintiff has made no request for financial information since this case was filed, and fails to specify what records it requested and when such requests were made.
Turning to the Plaintiff's contentions that the debt is subject to several exceptions to dischargeability, Section 523(a)(2)(A) provides that a debt is excepted from discharge when it arises in relation to the commission of "positive or actual fraud involving moral turpitude or intentional wrongdoing." Washington v. Robinson-Vinegar (In re Robinson-Vinegar), 561 B.R. 562, 566 (Bankr. N.D.Ga. 2016), quoting Bracciodieta v. Raccuglia (In re Raccuglia), 464 B.R. 477, 485 (Bankr. N.D.Ga. 2011). Section 523(a)(2)(A) provides in pertinent part as follows:
11 U.S.C. § 523(a)(2)(A). The standard of proof is a preponderance of the evidence.
To support a claim for relief under Section 523(a)(2)(A), the Plaintiff must demonstrate that the Debtor "obtained money, property or credit from the Plaintiff: (1) by false representation, pretense, or fraud; (2) knowingly made or committed; (3) with the intent to deceive or to induce acting on same; (4) upon which the Plaintiff actually and justifiably relied; and (5) from which the Plaintiff suffered damages, injury or loss as a proximate result." Washington, supra, 561 B.R. at 566.
A proper claim under Section 523(a)(2)(A) for false representation must contain more than an alleged representation by a debtor of an intent to perform a certain action in the future. See Washington, supra, 561 B.R. at 567, citing Wells Fargo Bank, N.A. v. Farmery (In re Farmery), 2014 WL 2986630, *2, 2014 Bankr. LEXIS 2865, *5 (Bankr. N.D.Ga. Apr. 11, 2014), citing Bucciarelli, supra, 429 B.R. at 375. Instead, the Plaintiff must establish that at the time when the Debtor entered into the loan agreement at issue, the Debtor either knew that she lacked the ability to repay the Loan or that she had no intent to repay it. See Bropson v. Thomas (In re Thomas), 217 B.R. 650, 653 (Bankr. M.D.Fla. 1998); American Surety & Cas. Co. v. Hutchinson (In re Hutchinson), 193 B.R. 61, 65 (Bankr. M.D. Fla. 1996). Moreover, an inability to pay in and of itself does not support an inference that the Debtor never intended to repay the Loan. Farmery, 2014 WL 2986630 at *2, 2014Bankr. LEXIS 2865 at *5-*6 (citation omitted).
In the Complaint, the Plaintiff fails to set forth the specific statements and/or actions it maintains constitute misrepresentations and deception, the facts that support its justifiable reliance thereon in making the Loan, and the way in which all of that lead to Plaintiff's economic loss. Instead of offering sufficient allegations regarding Debtor's intent to act in a fraudulent manner, the Plaintiff only offers conclusory statements that the Debtor did not intend to repay the Loan based on the fact that she did not do so.
In terms of actual fraud, the Complaint similarly fails to offer facts supporting the conclusory statement that the Debtor did not intend, or knew she lacked the ability, to repay the Loan when made. As currently pled, the Complaint simply does not present a sufficient basis to make a plausible claim under Section 523(a)(2)(A) and support the inference that the misconduct alleged, if proven, supports a finding of nondischargeability. Cf. Farmery, supra, 2014 WL 2986630 at *1, 2014 Bankr. LEXIS 2865 at *2-*3.
Next, Section 523(a)(4) excepts from discharge those obligations "for fraud or defalcation while acting in a fiduciary capacity, embezzlement, or larceny...." A fiduciary relationship under Section 523(a)(4) is a question of federal law. NesSmith Elec. Co. v. Kelley (In re Kelley), 84 B.R. 225, 229 (Bankr.M.D.Fla. 1988). Here, the fiduciary relationship required to except a debt from discharge is more narrowly construed than the general fiduciary relationship and requires either an express or technical trust. Id.; see also Quaif v. Johnson (In re Quaif), 4 F.3d 950, 953 (11th Cir. 1993). The fiduciary capacity under this provision must arise in connection with a technical trust, as opposed to a constructive or resulting trust, with a definitive trust res and identified management duties and obligations, which exist apart from any wrongdoing. In re Watford, 374 B.R. 184, 189-91 (Bankr. M.D.N.C. 2007). In other words, the trust relationship must exist prior to the act that creates the debt at issue as opposed to being created through that act itself as a type of remedy. See Guerra v. Fernandez-Rocha (In re Fernandez-Rocha), 451 F.3d 813, 816 (11th Cir. 2006).
Even if a proper fiduciary relationship is established, it must be shown that a defalcation occurred. Under this provision, defalcation requires a showing that the conduct at issue involves "bad faith, moral turpitude, or other immoral conduct" and in the absence of such, a showing of "an intentional wrong" that the fiduciary knows is improper or is sufficiently reckless in that the fiduciary "`consciously disregards' (or is willfully blind to) `a substantial and unjustifiable risk' that his conduct will violate a fiduciary duty." Bullock v. BankChampaign, N.A., 569 U.S. 267, 273-74, 133 S.Ct. 1754, 185
In the Complaint, the Plaintiff appears to base its allegations of defalcation on the Debtor's failure as sole owner and guarantor of the LLC to provide financial records and an accounting of assets under the loan agreement. As noted by the Debtor, the Plaintiff does not allege that the Debtor used the Loan proceeds for purposes other than buying equipment for the LLC. The Plaintiff also failed to provide specific facts regarding what requests for information were made by the Plaintiff and what the Debtor failed to provide. Finally, the Plaintiff has not alleged the existence of a fiduciary relationship between the Debtor and the Plaintiff prior to the acts or failures challenged in the Complaint.
With regard to the Plaintiff's allegations of willful malicious injury, Section 523(a)(6) addresses injuries caused by acts, such as intentional torts, made with the intent to cause that injury, as opposed to intentional acts that lead to injury. See Kawaauhau v. Geiger, 523 U.S. 57, 118 S.Ct. 974, 140 L.Ed.2d 90 (1998); see also Hope v. Walker (In re Walker), 48 F.3d 1161 (11th Cir. 1995). Section 523(a)(6) applies when a debtor desires the injury resulting from his conduct and does not extend to the failure of a debtor to comply with a duty of care that results in injury. See Washington, supra, 561 B.R. at 568, citing Boggus, supra, 479 B.R. at 157, citing Herndon v. Brock (In re Brock), 186 B.R. 293 (Bankr. N.D.Ga. 1995); Myrick v. Ballard (In re Ballard), 186 B.R. 297, 299-301 (Bankr. N.D.Ga. 1994).
In Henderson v. Woolley (In re Woolley), 288 B.R. 294, 301-02 (Bankr. S.D.Ga. 2001), the court observed that, whereas Geiger may be construed as narrowing the scope of this subsection to "trespassory intentional torts," the state of mind standard has been further discussed in the case law. Reviewing the decision in Walker, supra, for instance, the court in Woolley concluded that evidence of a "debtor's personal substantial certainty" in connection with an injury caused by the debtor still remains determinative under Section 523(a)(6), as compared to a purely objective or reasonable person test that could lead to the "previously rejected `reckless disregard standard.'" 288 B.R. at 302; quoted in Boggus, supra, 479 B.R. at 157; as quoted in Washington, supra, 561 B.R. at 568; accord Miller v. J.D. Abrams, Inc. (In re Miller), 156 F.3d 598 (5th Cir. 1998) (allowing either an objective or a subjective finding to satisfy willful and malicious injury).
In Paragraph 12 of the Complaint, the Plaintiff appears to allege that the Debtor is in violation of Section 523(a)(6) by "willfully and maliciously injuring the property" of the LLC. This allegation seems to be based upon the further allegation that the Debtor either has not or cannot account for the existence of the loan proceeds. On the one hand, as stated in Section 523(a)(6), this exception addresses injuries "to the property of another entity," (here the Plaintiff) as opposed to injuring a debtor's own property (here the interest in the LLC held by the Debtor). The Plaintiff has not alleged it held an interest in the LLC. On the other hand, however, there is authority that breach of a contract, in the proper circumstances, could be the type of debt contemplated by this subsection, if the debt resulted from "an intentional or substantially certain injury." Whitcomb v. Smith (In re Smith),
The imprecise assertions offered by the Plaintiff, however, show why courts cannot simply equate a breach of contract, even if the breach is intentional, with the type of conduct that meets the standard for willful and malicious injury. As correctly noted by the Debtor, the Plaintiff does not contend that the Debtor intended the injury sustained by the Plaintiff. Even if the Debtor should have known her failure to repay the loan or account for the proceeds would harm the Plaintiff, such intent would not establish the type of injury required under Section 523(a)(6). Further, the debt itself must arise from the willful and malicious conduct. When such conduct only occurs after the debt is created, it does not support a finding of nondischargeability under this exception. See Washington, supra, 561 B.R. at 569, citing Modi v. Virani (In re Virani), 2016 WL 429787 (Bankr. N.D.Ga. Jan. 29. 2016). Given the relevant legal standard of Section 523(a)(6), Plaintiff's allegations do not contain sufficient facts to support a claim under this section.
Assuming the veracity of the allegations made by the Plaintiff herein, the Court concludes that they do not "`plausibly give rise to an entitlement to relief.'" See generally American Dental, 605 F.3d at 1290, quoting Iqbal, 556 U.S. at 679, 129 S.Ct. at 1950. However, it may be that the complaints made by the Plaintiff, if properly pled, might state a cause of action. The Plaintiff should be given one (1) additional chance to do so.
Accordingly, based upon the above discussion, it is
The Clerk is directed to serve a copy of this Order upon counsel for the Plaintiff, counsel for the Defendant-Debtor, the Chapter 7 Trustee, and the United States Trustee.
