FRANK J. BAILEY, Bankruptcy Judge.
By her amended complaint in this adversary proceeding, Leilani Zutrau, sister of debtor and defendant Eric Zutrau, seeks a determination that the balance he owes her on five promissory notes, totaling $427,522.90, is excepted from discharge under 11 U.S.C. § 523(a)(2)(A) as debt arising from fraud or false representations and under 11 U.S.C. § 523(a)(6) as debt for willful and malicious injury. The amended complaint also purports to assert objections to discharge under 11 U.S.C. § 727(a)(2), (3), and (4). Eric has now moved to dismiss the § 523 counts for failure to state a claim on which relief can be granted; and Leilani has moved for leave to amend her complaint to add facts that she contends would support her objections to discharge.
On March 3, 2011, Eric filed a petition for relief under chapter 7 of the Bankruptcy Code. The first date set for the first meeting of creditors was April 5, 2011, and accordingly the deadline for filing complaints to object to discharge or to determine the dischargeability of a debt was June 6, 2011. On that day, Leilani, acting pro se, filed the complaint commencing this adversary proceeding. The original complaint sought a determination of nondischargeability under § 523(a)(2)(A) and (a)(6). It did not purport to constitute an objection to discharge, did not request a denial of discharge, and made no reference to § 727(a). Eric filed an answer on June 22, 2011. Thirteen days later, on July 5, 2011, Leilani filed an amended complaint ("Amended Complaint") in which, for the first time, she purported to object to Eric's discharge under § 727(a)(2), (3), and (4). The Amended Complaint included new allegations of fact but failed to specify which of the alleged facts constituted the factual basis for each objection to discharge.
Eric then filed a Rule 12(b)(6) motion to dismiss the complaint for failure to state a basis for excepting the debt from discharge under § 523(a)(2)(A) or (a)(6). The motion is directed at the original complaint, but, with respect to nondischargeability under § 523(a)(2)(A) and (a)(6), the original and amended complaints are the same.
No objection to discharge having been filed by the deadline for doing so, the Court entered a discharge in favor of Eric on August 16, 2011.
On February 29, 2012, Leilani filed a second amended complaint and a motion for leave to file the same. The stated purpose of the second amendment is to cite facts and information in support of Leilani's objections to discharge under § 727(a)(2), (3), and (4). Eric opposes the motion to amend, arguing that any objection to discharge that it amends is untimely
The matters before the court concern a complaint to determine the dischargeability of a debt under 11 U.S.C. § 523(a) and to deny the debtor a discharge under 11 U.S.C. § 727(a). In both parts, the complaint concerns a discharge in bankruptcy, arises under the Bankruptcy Code and in a bankruptcy case, and therefore falls within the jurisdiction given the district court in 28 U.S.C. § 1334(b) and, by standing order of reference,
When presented with a motion to dismiss under Fed.R.Civ.P. 12(b)(6), the Court must "accept as true all well-pleaded facts set forth in the complaint and draw all reasonable inferences therefrom in the pleader's favor." Artuso v. Vertex Pharmaceuticals, Inc., 637 F.3d 1, 5 (1st Cir. 2011). Subject to certain exceptions, a complaint need only contain "a short and plain statement of the claim showing that the pleader is entitled to relief." Id., citing Fed.R.Civ.P. 8(a)(2).
Artuso, 637 F.3d at 5.
The Amended Complaint makes the following allegations of fact.
1. Leilani is Eric's sister. By a deed recorded in 2003, they are the co-owners, as tenants in common, of property in Oak Bluffs, Massachusetts (the "Oak Bluffs Property"). They agreed to improve the property, a single family home, for personal and investment purposes and to share equally the costs of developing and carrying the property.
2. In 2006, Eric identified real property in Brookline, Massachusetts ("the Brookline Property") that he believed would be a profitable condominium conversion venture. He approached Leilani for financing and told her that if she assisted
3. On December 13, 2006, Eric requested an additional short-term loan of $30,000 to avoid lapses in work on the Brookline Property. On December 18, 2006, he executed a promissory note in Leilani's favor in the amount of $30,000, with interest at the rate of 7.75% per annum and principal and interest due on February 18, 2007 ("Note B"). By payments of $20,000 on February 21 and $10,000 on March 19, 2007, Eric paid the principal amount of this note, but he has paid no interest on the note.
4. On January 9, 2007, Eric requested a second short-term loan of $30,000. On February 18, 2007, he executed a promissory note in Leilani's favor in the amount of $30,000, with interest at the rate of 7.75% per annum and principal and interest again due on February 18, 2007 ("Note C").
5. On April 23, 2007, Eric requested a third short-term loan of $30,000. On a date not specified, he executed a promissory note in Leilani's favor in the amount of $30,000, with interest at the rate of 7.75% per annum and principal and interest due on June 14, 2007 ("Note D").
6. On June 14, 2007, Eric told Leilani that he needed yet another short term loan to keep the Brookline project moving forward. On another date not specified, he executed a promissory note in Leilani's favor in the amount of $20,000, with interest at the rate of 7.75% per annum and principal and interest due on July 15, 2007 ("Note E").
7. Each of Notes B, C, D, and E contains a security clause pledging the Brookline Property as collateral for the loans.
8. In late June 2007, Leilani, having recently lost her job, told Eric he needed to repay his debts to her. Around the same time, Eric advised Leilani that he would need additional funds to finish the Brookline Project and that his debt repayment to her remained at risk unless she made additional funds available to him. From June through November 2007, Leilani advanced an additional $150,296.41 to Eric. As a condition of this further loan, Eric agreed to pay Leilani an additional $15,000 upon repayment of the principal.
9. On November 30, 2007, Eric sold the first of three condominium units from the Brookline project for $550,000. Despite a promise to keep her apprised of any sale of the Brookline Property,
10. On April 30, 2008, Eric sold a second condominium unit from the Brookline project for $369,000. From the proceeds of this sale, Eric paid Leilani $250,000. This payment satisfied (i) the $150,296.41 extension of credit identified in ¶ 8 above, (ii) the $15,000 payment that Eric agreed to in connection with that extension of credit, and (iii) repayment of $84,703.59 toward Eric's obligation for maintenance and repairs of the Oak Bluffs Property. It did not satisfy any of Eric's obligations on Notes A through E.
11. On June 17, 2008, Eric sold the third condominium from the Brookline project for the sum of $365,000. He did not apprise Leilani of this sale.
12. When, pursuant to the Loan Acceleration clause in Note A, Leilani later asked Eric to convey his interest in the Oak Bluffs Property to her, he refused. He said that he had plans to apply for financing and to liquidate other assets, including a parcel of land that he co-owned with his other sister ("the Dukes County Property"), the proceeds of which he said he would use to repay Leilani. On September 25, 2009, however, he conveyed his interest in the Dukes County Property to his and Leilani's mother for $100.
13. On June 17, 2008, Leilani asked Eric to reserve one half of any proceeds he received from the estate of the parties' great aunt ("the Waingrow Estate") to repay her. Eric agreed. Between June 18, 2009 and May 2, 2010, Eric received distributions from the Waingrow Estate totaling $78,434, but he made no payments to Leilani from the proceeds.
14. In January 2009, a company known as Yellow Book of New York, Inc. ("Yellow Book"), which had obtained a judgment against Eric, levied on the Oak Bluffs Property by recording an execution in the amount of $22,243.84 against the property. The execution encumbers the only remaining equity in the Oak Bluffs Property, which belongs to Leilani. Later, Eric sued the attorney who had represented him against Yellow Book for legal malpractice and settled the action for proceeds of $12,000, but Eric made no effort to use the proceeds to pay down the Yellow Book lien.
Subsection 523(a)(2)(A) of the Bankruptcy Code excepts from discharge any debt "for money, property, services, or an extension, renewal, or refinancing of credit to the extent obtained by false pretenses, a false representation, or actual fraud." 11 U.S.C. § 523(a)(2)(A). Where an exception from discharge under § 523(a)(2)(A) is based on a false representation, the plaintiff must show that the debtor (1) made a false representation (2) with fraudulent intent ("scienter") and (3) intent to induce reliance on the representation, and that the misrepresentation (4) did induce reliance, (5) which was justifiable and (6) caused damage, pecuniary loss. Palmacci v. Umpierrez, 121 F.3d 781, 786 (1st Cir.1997); In re Burgess, 955 F.2d 134, 139 (1st Cir.1992) (as to elements other than reasonableness or justifiability of reliance). This basis of nondischargeability sounds in fraud and therefore must be pleaded with particularity. Fed. R.Civ.P. 9(b) (in alleging fraud, a party must state with particularity the circumstances constituting fraud), made applicable by Fed. R. Bankr.P. 7009.
In her response to the motion and in her oral argument at the hearing on the motion to dismiss, Leilani explained that the complaint imperfectly stated the following bases for excepting the debt (or portions of it) from discharge. First, when she lent Eric money and Eric gave her promissory notes evidencing the resulting indebtedness, Eric made promises, memorialized in each of four promissory notes he gave her (Notes B through E), that he would execute mortgages on the Brookline Property to secure his obligations to her, but he did not execute any such mortgage, or (if he executed them) at least did not record mortgages that he did execute.
Leilani first states that the complaint states the following basis for nondischargeability under § 523(a)(2)(A): she made the loans evidenced by Notes B through E in reliance on promises by Eric, memorialized in each of four promissory notes, that he would execute mortgages on the Brookline Property to secure his obligations to her, but he did not execute any such mortgage, or (if he executed them) at least did not record mortgages that he did execute, and he made the promises without intent to honor them. At least implicitly, she alleges that she justifiably relied on this representation and was injured by that reliance in that she extended credit that has not been repaid. The basis alleged here is a false representation of intent, a promise made without intent to honor it.
Leilani has moved for leave to further amend the complaint to correct any pleading deficiency the Court may find. At this point in the proceeding, amendment requires either the other party's written assent or leave of court. Fed.R.Civ.P. 15(a)(2). Eric has not assented to amendment, so Leilani may amend only with leave of court. "The court should freely give leave when justice so requires." Id. Here I find that justice does so require, and, as to amendments of the § 523 counts, I have not heard Eric to contend otherwise. The Court therefore grants leave to amend, and the Amended Complaint shall be deemed amended as articulated above. As so amended, the complaint states a claim on which relief can be granted under § 523(a)(2)(A) for statements of intent to execute and record mortgages on the Brookline Property.
Second, Leilani contends that the complaint states, as a further basis for nondischargeability under § 523(a)(2)(A), that Eric knowingly made a false representation that she relied on when, in an email of September 11, 2006, he assured her that she would be repaid upon sale of the Brookline Properties and immediately after certain bank mortgages on those properties were satisfied, and that this promise was a false statement of intent because Eric made it without intent to honor it. Again, she has at least implicitly alleged that she justifiably relied on this representation and was injured by that reliance in that she extended credit that has not been repaid. The basis alleged here is again a false representation of intent.
This allegation is not in the Amended Complaint, which makes no reference to an email of September 11, 2006, or of the representation it allegedly contains. Still, the proposed amendment would state a basis on which relief could be granted under § 523(a)(2)(A), and leave to amend is appropriate. The Court therefore grants leave to amend, and the Amended Complaint shall be deemed amended as articulated above. As so amended, the complaint states a claim on which relief can be granted under § 523(a)(2)(A) for a false statement in the email of September 11, 2006, statements of intent to execute and record mortgages on the Brookline Property.
Third, Leilani contends that the complaint states, as further grounds for nondischargeability under § 523(a)(2)(A), that Eric committed fraud (i) by failing to record the promised mortgages and (ii) by cheating her out of repayment after other mortgages on the properties were satisfied. Neither allegation would constitute a basis for nondischargeability under § 523(a)(2)(A). Neither alleges a misrepresentation or trickery of any kind. Both are simple allegations of nonperformance, failure to keep a promise; and use of the word "cheat," by itself, adds nothing to the simple fact of nonperformance. Even if
Fourth, Leilani contends that the complaint states, as further grounds for nondischargeability under § 523(a)(2)(A), that Eric deceived her by using his promised repayment as leverage, telling her that he would be unable to repay her unless she first lent him further amounts. This allegation does not state a basis for nondischargeability under § 523(a)(2)(A) because Leilani has not alleged that the representation — that Eric would be unable to repay her unless she first lent him further amounts — was false and known by Eric to be false when he made it.
For the reasons set forth above, I conclude that the Amended Complaint, as Leilani has proposed to further amend it, states grounds to except some or all of the debt from discharge under § 523(a)(2)(A), but only as specified in subsections (i) and (ii) above. The Amended Complaint does not otherwise state a basis on which relief can be granted under § 523(a)(2)(A).
Section 523(a)(6) excepts from discharge any 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). It requires injury to another "entity," a defined term that includes a person,
Burke v. Neronha (In re Neronha), 344 B.R. 229, 231-32 (Bankr.D.Mass.2006). Eric argues that Leilani has alleged no willful and malicious injury within the meaning of this subsection, only a simple breach of contract.
Though the Amended Complaint purports to state a basis for excepting some or all of Eric's debt from discharge under § 523(a)(6), it nowhere specifies which of its alleged facts constitute the basis for this relief. In her response to the motion to dismiss and in her oral argument at the hearing on the motion, Leilani indicated that the Amended Complaint included three sets of operative facts. She states that Eric willfully and maliciously injured her (i) when he failed to pay her the proceeds he received from the sale of the Brookline Property after the mortgages were satisfied, (ii) when he conveyed his
The complaint recites that Eric pledged the Brookline Property to Leilani as collateral to secure his obligation on Notes B, C, D, and E. This pledge would have given her a property interest, a mortgage, on the Brookline Property and the proceeds of its sale. If Eric received proceeds in excess of what was needed to satisfy senior encumbrances, those proceeds belonged in the first instance to Leilani, and Eric's use of them for his own purposes without her permission would constitute an injury to Leilani's property within the meaning of § 523(a)(6). Eric does not argue that the Amended Complaint does not sufficiently allege that this injury was willful and malicious. I conclude that the first cause of action states a basis on which a portion of the debt, the portion attributable to conversion or misappropriation or her collateral, may be excepted from discharge.
The second and third causes of action do not state a basis for excepting the debt from discharge under § 523(a)(6). Each alleges only that Eric failed to use assets available to him to pay down his debt to her or to reduce an encumbrance on her interest in the Oak Bluffs Property. Neither alleges an injury to her property, only a failure to use his own property to improve her position. The funds he failed to use for her purposes are, unlike the proceeds of the Brookline Property, not funds in which she claims to have had a property interest. For these reasons, I conclude that the complaint states a claim under § 523(a)(6) only insofar as it alleges misappropriation of proceeds from the Brookline Property in which Leilani claims an interest.
On February 29, 2012, Leilani filed a second amended complaint and a motion for leave to file the same. The stated purpose of the second amendment is to cite facts and information in support of Leilani's objections to discharge under § 727(a)(2), (3), and (4) and, with the same facts, to support a newly added request to revoke Eric's discharge under § 727(e). Although Leilani nowhere indicates how the second amendment would alter the Amended Complaint, it appears from the Second Amended Complaint that it would simply (i) add five paragraphs concerning Eric's alleged control over and postpetition disposition of certain land located on the Caribbean island of St. Vincent in the Grenadines ("the Saint Vincent Property") and (ii) add a demand in the Wherefore clause that the Court "reverse the Bankruptcy Petition and subsequent Discharge of the Debtor if appropriate." Eric opposes the motion on various grounds, including that any objection to discharge that may be stated in the proposed amendment is untimely and therefore futile, the deadline for objecting to discharge having passed on June 6, 2011, and discharge having already entered. Leilani filed a reply memorandum in which she argued that the Court, in its discretion, may revoke a discharge pursuant to 11 U.S.C. § 727(d) and (e). Eric filed a surreply, reiterating his argument that the objections to discharge are untimely. Leilani filed a response to the surreply, arguing that her proposed amendments would relate
Except in the limited circumstances described in Fed.R.Civ.P. 15(a)(1), "a party may amend its pleading only with the opposing party's written consent or the court's leave." Fed.R.Civ.P. 15(a)(2). Eric has not assented to the proposed amendment, so Leilani needs and has moved for leave to amend. "The court should freely give leave when justice so requires." Id. When amendment is futile, however, a court is within its discretion in denying leave to amend. Foman v. Davis, 371 U.S. 178, 182, 83 S.Ct. 227, 230, 9 L.Ed.2d 222 (1962); Ruffolo v. Oppenheimer & Co., 987 F.2d 129, 131 (2d Cir. 1993).
Harrison Beverage Co. v. Dribeck Importers, Inc., 133 F.R.D. 463, 468-69 (D.N.J. 1990).
Eric argues that amendment here would be futile because Leilani did not timely object to entry of discharge in this case. She first objected to discharge only in the Amended Complaint, which was filed after the time for objecting to discharge had expired. Eric contends that even if this proposed amendment related back to the date of the Amended Complaint, it would be time-barred. Leilani responds with three arguments: that her amendment would relate back to the date of the original complaint; that on the record at a hearing on June 21, 2011, she placed Eric on notice that she was asserting objections to discharge, and therefore he is not now prejudiced by amendment of the complaint; and that even if the time has passed to object to discharge under § 727(a), she may nonetheless seek revocation of the discharge under § 727(d) and (e).
I begin with the limitations period for objecting to discharge. "In a chapter 7 case a complaint ... objecting to the debtor's discharge shall be filed no later than 60 days after the first date set for the meeting of creditors under § 341(a)." Fed. R. Bankr.P. 4004(a). There is no dispute here that the operative deadline was Monday, June 6, 2011. On motion of a party in interest, the court may for cause extend the time to file a complaint objecting to discharge, but "[t]he motion shall be filed before the time has expired," Fed. R. Bankr.P. 4004(b); and "[t]he court may enlarge the time for taking action under Rule[] ... 4004(a) ... only to the extent and under the conditions stated in [that] rule." Fed. R. Bankr.P. 9006(b)(3). Leilani has filed no motion to extend the time to object to discharge, the time has expired, and, by virtue of Rules 4004(b) and 9006(b)(3), it may no longer be extended.
Only the original complaint was filed before the June 6, 2011 filing deadline. In that complaint, Leilani did not, in form or in substance, voice or articulate an objection to discharge or even purport to do so. Only in her Amended Complaint, filed on July 5, 2011, did Leilani first indicate that she was objecting to entry of discharge, cite § 727(a), or set forth the facts on which her objection to discharge is predicated. The objection to discharge that she set forth at that time was therefore time-barred.
Leilani's last argument for salvaging the objection to discharge is the doctrine of relation back. Relation back is governed by Rule 15(c)(1).
In the alternative, Leilani argues that even if objection to discharge is time-barred, revocation of discharge is not, and the proposed amendment would not be futile to support a count to revoke Eric's
For the reasons set forth above, the Court hereby ORDERS as follows:
1. With respect to the claims under § 523(a)(2)(A), the Second Amended Complaint is deemed amended to allege as follows:
2. Eric's Motion to Dismiss [doc. # 9] is granted in part and denied in part as follows: the Motion is denied as to the counts under § 523(a)(2)(A) that are articulated by virtue of the amendments set forth in paragraph 1 above and as to the count under § 523(a)(6) for Eric's failure to pay Leilani the proceeds he received from the sale of the Brookline Property after the mortgages were satisfied; and as to all other counts that Leilani has articulated, the Motion to Dismiss is granted.
3. Plaintiff's Motion for Leave to File a Second Amended Complaint is granted in part and denied in part as follows: leave to file the Second Amended Complaint is granted, but the amendments are permitted only for purposes of a count for revocation of discharge under § 727(d), not for purposes of any objection to discharge under § 727(a).
4. The objections to discharge under § 727(a) that Leilani has purported to state in the Amended Complaint and the Second Amended Complaint are dismissed as untimely.
