JIM D. PAPPAS, Bankruptcy Judge
The defendants in this adversary proceeding, chapter 7
Plaintiff Welstad is the majority owner of Plaintiff TFS, an employment agency in Twin Falls, together with four other Idaho agencies, all operating under the name of Gem State Staffing ("GSS").
In 2003, Stanley hired Defendant to work at TFS; in 2004, Defendant was promoted to manage TFS. When hired, Defendant, like all GSS employees, signed the companies' standard employment agreement, which included non-compete and confidentiality provisions. In late 2008, Stanley amended GSS's employment agreement to eliminate the non-compete and confidentiality provisions, and had fourteen GSS employees, including Defendant and three other TFS employees, sign the amended contract.
In October 2009, Defendant opened a competing employment agency in Twin Falls, Magic Valley Staffing, LLC ("Magic Valley"). Several former TFS employees, including the three who had signed the amended employment agreement, joined Defendant at Magic Valley. Magic Valley secured contracts with many of TFS's clients and temporary employees.
TFS sued Defendant
Defendant filed a chapter 7 petition on August 12, 2011, thereby staying the state court proceedings before any trial on his liability could occur.
Plaintiffs commenced this adversary proceeding against Defendant on November 3, 2011, asserting Defendant's unliquidated debts to them are excepted from discharge under § 523(a)(6). Plaintiffs' Complaint includes two claims for relief. The first is Plaintiffs' claim for an exception from discharge pursuant to § 523(a)(6). The second claim is to recover attorneys' fees.
In the § 523(a)(6) claim, Plaintiffs allege that Defendant willfully and maliciously injured them by (1) establishing a competing business to TFS while employed at TFS; (2) misappropriating TFS's proprietary information, including its client list, employee list, and business forms; (3) making material misrepresentations to certain of TFS's key clients; (4) recruiting TFS's key employees; and (5) generally attempting to put TFS out of business. Among the specific actions Plaintiffs attribute to Defendant are that:
Dkt. No. 13 at 15 (numbering as in original).
The State Court Findings attached to Plaintiffs' Complaint recite that Defendant began recruiting TFS's temporary employees around the last week of September 2009, and told such employees TFS was going out of business. Dkt. No. 13-2 at 18-19. These findings were based on the testimony of an individual identified only as Christina League. Id. at 19 n.57. The State Court Findings also identify at least two business clients solicited by Defendant, and recite that Defendant solicited one of them on November 1, 2009. Id. at 23.
Defendant's motion to dismiss this adversary proceeding, filed on January 20, 2012, argues that, because Plaintiffs' allegations in the complaint "sound in fraud," Plaintiffs should be held to the more exacting pleading standards of Civil Rule 9(b), made applicable by Rule 7009, and that Plaintiffs's complaint does not meet those standards. Dkt. No. 16. Plaintiffs assert their § 523(a)(6) claim for relief is not based on fraud, and as a result, their complaint must only satisfy the more liberal pleading requirements of Rule 7008 and Civil Rule 8.
Civil Rule 8, made applicable in adversary proceedings via Rule 7008, identifies the basic pleading requirements for a complaint:
Civil Rule 8(a). For certain types of claims, however, Civil Rule 9, through Rule 7009, imposes a more exacting pleading standard. As relevant here, Civil Rule 9 provides:
Civil Rule 9(b).
The Civil Rule 9(b) pleading requirements apply whether fraud is alleged specifically, or through allegations of facts that necessarily constitute fraud, even without using the word "fraud." See Kearns v. Ford Motor Co., 567 F.3d 1120, 1124 (9th Cir. 2009) (quoting Vess v. Ciba-Geigy Corp. USA, 317 F.3d 1097, 1105 (9th Cir. 2003)). To plead with particularity, a plaintiff must set forth "`the who, what, when, where, and how' of the misconduct charged." Id. Where a plaintiff asserts a defendant has engaged in fraud, the plaintiff must assert more than "neutral facts," and specific dates, names, and other information is required to satisfy the Civil Rule 9(b) standard. See, e.g., id. at 1125-26 ("[Plaintiff] fails to allege in any of his complaints the particular circumstances surrounding [the allegedly fraudulent] representations. Nowhere [in his complaint] does [plaintiff] specify what the [material he alleges was fraudulent] specifically stated. Nor did [plaintiff] specify when he was exposed to [the material] . . . [Plaintiff does not] specify who made [the] statement [he relied on] or when [the] statement was made.").
Where fraud is alleged to have occurred between a defendant and a third party, however, a less stringent pleading requirement is imposed as compared to when a plaintiff alleges fraud against itself. See Abels v. Farmers Commodities Corp., 259 F.3d 910, 921 (8th Cir. 2001) ("Where a plaintiff is not a party to a communication, particularity in pleading may become impracticable."); Smith ex. rel. Estates of Boston Chicken, Inc. v. Arthur Anderson L.L.P., 175 F.Supp.2d 1180, 1201-02 (D. Ariz. 2001) ("[L]ess particularity is required where plaintiff is not asserting that the fraud was against himself personally, but rather it was committed against a third party."); Kaliner v. Load Rite Trailers, Inc. (In re Sverica Acquisition Corp., Inc.), 179 B.R. 457, 462-63 (Bankr. E.D. Pa. 1995) (indicating that, where there is an "inevitable lack of knowledge concerning acts of fraud" because a plaintiff was not a party to the fraud, courts have relaxed the Civil Rule 9(b) particularity requirement). In such cases, a complaint may be sufficient though it does not include specific names, dates, or other factual information, as long as the plaintiff's allegations identify the circumstances of the alleged fraud sufficiently to allow the defendant to prepare an adequate answer.
Civil Rule 9(b) serves three general purposes: (1) it provides a defendant adequate notice to defend charges against it and deters plaintiffs from filing complaints as a pretext to discover unknown wrongs; (2) it protects a defendant's reputation from harm from fraud charges; and (3) it prohibits plaintiffs from unilaterally imposing social and economic costs on the court, the parties, and society without factual basis. Kearns, 567 F.3d at 1125. Even where a relaxed Civil Rule 9(b) standard is imposed, fraudulent conduct must be pled with sufficient information and detail to satisfy those goals. See Cooper, 137 F.3d at 627 (indicating that, even if a complaint's allegations are not specific, the complaint must still provide a defendant adequate notice to answer and defend charges against him).
The particularity standards apply not only when a plaintiff explicitly alleges fraud, but also, in some cases, where fraud is not even an element of the claim pursued by a plaintiff. See Vess, 317 F.3d at 1103. Even if fraud is not an element of a claim, if a plaintiff alleges a defendant engaged in a "unified course of fraudulent conduct," and bases his claim entirely on that conduct, the claim is said to be "grounded in fraud" or to "sound in fraud." Id. at 1103-04. Where a claim is grounded in fraud, or sounds in fraud, the claim, as a whole, must be pled with particularity to satisfy Civil Rule 9(b). Id.
At the same time, a plaintiff may allege fraud in support of a claim without alleging a "unified course of fraudulent conduct," i.e., the plaintiff may allege both fraudulent and non-fraudulent conduct in support of a claim. Id. at 1104. In such cases, Civil Rule 9(b) does not require allegations of non-fraudulent conduct to be stated with particularity.
Fraud is not an element of a § 523(a)(6) claim for an exception to discharge. To prove such a claim, the creditor-plaintiff must establish (1) that the debtor's conduct injuring another was willful, and (2) that the debtor's infliction of the injury was malicious. Barboza v. New Form, Inc. (In re Barboza), 545 F.3d 702, 706 (9th Cir. 2008). To show that a debtor willfully injured another, a plaintiff must prove the infliction of the injury was deliberate or intentional. Kawaauhau v. Geiger, 523 U.S. 57, 61 (1998). Infliction of an injury is malicious if the debtor's actions involved an intentionally committed wrongful act that was done without just cause or excuse and necessarily caused injury. Carrillo v. Su (In re Su), 290 F.3d 1140, 1146-47 (9th Cir. 2002). Only a plaintiff that establishes the elements of both willfulness and maliciousness will be successful. See In re Barboza, 545 F.3d at 706; Molina v. Seror (In re Molina), 228 B.R. 248, 251 (9th Cir. BAP 1998).
Though fraud is not an element of a § 523(a)(6) claim, Defendant asserts Plaintiffs' Complaint, including the § 523(a)(6) claim, "sounds in fraud." As discussed above, in making this argument, Defendant inherently asserts that Plaintiffs' § 523(a)(6) claim relies on a "unified course of fraudulent conduct," and that the adversary proceeding should be dismissed because the claim is not, as a whole, pled with particularity. See Vess, 317 F.3d at 1103-04.
Plaintiffs' § 523(a)(6) claim, however, does not allege they were injured as the result of any "unified course of fraudulent conduct." Instead, Plaintiffs' complaint includes allegations of both fraudulent and non-fraudulent conduct. For example, Plaintiffs allege that:
Dkt. No. 13 at 15 (numbering as in original). These allegations describe non-fraudulent conduct and are not required to meet any heightened pleading standard. Having met the Civil Rule 8 pleading standards,
In arguing Plaintiffs' § 523(a)(6) claim is insufficiently pled, Defendant specifically identifies two of Plaintiffs' allegations he asserts make the entire claim sound in fraud. Motion to Dismiss, Dkt. No. 16 at 5-6. Defendant targets the allegations in Plaintiffs' Complaint that:
Dkt. No. 13 at 15 (numbering as in original). But both of those assertions contain sufficient information to satisfy the Civil Rule 9(b) standards, particularly when considering Plaintiffs' allegations are based on communications between Defendant and third parties.
First, Plaintiffs identify "who" the parties to the allegedly fraudulent communications were, asserting that Defendant communicated with both TFS's temporary employees and business clients. This information, while not including employees' or clients' specific names, is sufficient to allow Defendant to prepare an adequate answer. Even if it were not, the State Court Findings identify two of the business clients solicited by Defendant, and indicate that Christina League has knowledge of Defendant's communications to temporary employees. The Court may consider the additional information in the attached State Court Findings in evaluating the adequacy of Plaintiffs' Complaint. See Durning v. First Boston Corp., 815 F.2d 1265, 1267 (9th Cir. 1987) ("If a complaint is accompanied by attached documents, the court is not limited by the allegations contained in the complaint. These documents are part of the complaint and may be considered in determining whether the plaintiff can prove any set of facts in support of the claim." (citing Amfac Mortg. Corp. v. Ariz. Mall of Tempe, Inc., 583 F.2d 426, 429 (9th Cir. 1978)).
Second, Plaintiffs' allegations also identify "what" Defendant told the temporary employees and clients. He allegedly told TFS's temporary employees that TFS was going out of business, and TFS's clients that he was not subject to a non-compete agreement.
Third, Plaintiffs' Complaint and the State Court Findings identify "when" the alleged communications were made. Defendant began soliciting temporary employees around the last week of September 2009, and was soliciting business clients in November 2009.
Fourth, the communications were verbal, with Defendant "solicit[ing]" the temporary employees and business clients and "telling" them information. This satisfies the "where" particularity standard, which requires a plaintiff to identify where allegedly fraudulent communication can be found, i.e., in a financial statement, verbal communication, or written document. See Cooper, 137 F.3d at 627.
Finally, Plaintiffs address "how" Defendant's communications were false. The complaint not only alleges the statements were "falsely" made, but also, through other facts alleged in Plaintiffs' Complaint and the State Court Findings, that the assertions were false because TFS was not going out of business, and Defendant was subject to a non-compete agreement.
Thus, Plaintiffs sufficiently pled the "who, what, when, where, and how" of Defendant's alleged misconduct, particularly considering the relaxed standards appropriate because Plaintiffs' allegations of fraudulent communications relate to communications between Defendant and third parties, not Plaintiffs. All five of the direct allegations against Defendant in Plaintiffs' Complaint in support of the § 523(a)(6) claim either satisfy the Civil Rule 9(b) particularity standard, or are not subject to the particularity requirement and satisfy the general Civil Rule 8 standard.
Plaintiffs' Complaint also alleges that a conspiracy existed between Defendant and Stanley to defraud Plaintiffs, and argues that certain actions taken by Stanley should be imputed to Defendant for the purposes of the § 523(a)(6) claim. While not ruling on whether Plaintiffs are correct in asserting that a non-debtor co-conspirator's actions may be imputed to a debtor for § 523(a)(6) purposes, the Court finds Plaintiffs sufficiently pled a fraudulent conspiracy for those allegations to remain in their complaint. For allegations of a fraudulent conspiracy to meet the Civil Rule 9(b) pleading standards, a complaint must include particulars of "when, where, [and] how the alleged conspiracy occurred." See Vess, 317 F.3d at 1106-07.
Plaintiffs' Complaint indicates:
Dkt. No. 13 at 5. The complaint and State Court Findings go on, in detail, to explain, among other things, how Defendant and Stanley conspired to alter Defendant's employment agreement to remove the non-compete provision; to solicit staff for Magic Valley; to secure a location, insurance, and other necessaries for Magic Valley; and to impede Plaintiffs' operation of TFS once Magic Valley was established. Dkt. No. 13 at 5-11; Dkt. No. 13-2 at 18-25. Plaintiffs' Complaint thus sufficiently pled the when, where, and how of the alleged conspiracy to allow Defendant to adequately prepare an answer to that allegation, and the conspiracy assertions may remain in support of Plaintiffs' § 523(a)(6) claim.
Plaintiffs' Complaint is not grounded in fraud and does not sound in fraud. The complaint's non-fraudulent allegations need not meet Civil Rule 9(b)'s heightened pleading standards, and are sufficiently pled. In addition, those of Plaintiffs' § 523(a)(6) allegations that do assert fraud by Defendant and others, including those alleging a fraudulent conspiracy, are sufficiently pled to meet the Civil Rule 9(b) particularity standards. Plaintiffs' Complaint contains sufficient well-pled allegations to support their § 523(a)(6) claim.
Defendant's motion to dismiss will be denied in a separate order. However, that order will provide for dismissal of this action as against April.
(emphasis added). Both pre- and post-amendment decisions accordingly seem to recognize no substantive difference in the terms "averment" and "allegation." Compare Vess, 317 F.3d at 1103-04 (pre-2007 amendments case), with Kearn, 567 F.3d at 1124-25 (post-2007 amendments case).