Opinion
Case No. 8:15-bk-11942-RCT Adversary No. 8:16-ap-00195-RCT
08-04-2016
In re: Andrew Nolan and Robin Nolan, dba McDavid Public Relations, Debtors. Frank N. Darras, Natasha Marie Darras, and The Darras Law Firm, Inc. dba DarrasLaw, Plaintiffs, v. Robin Nolan, Defendant.
Chapter 13 MEMORANDUM DECISION AND ORDER GRANTING IN PART AND DENYING IN PART DEFENDANT'S MOTION TO DISMISS , AND SETTING A HEARING TO CONSIDER ABATING FURTHER PROCEEDINGS
In this adversary proceeding, Plaintiffs seek a declaration that certain unliquidated statutory and tort claims are nondischargeable pursuant to 11 U.S.C. §§ 1328(a)(2) and 523(a)(2), and/or § 1328(a)(4). Defendant, Robin Nolan, moves to dismiss this case for failure to state a claim (the "Motion to Dismiss") [Doc. No. 20]. After consideration of the arguments and papers presented, the Motion to Dismiss is granted in part and denied in part.
Unless otherwise indicated, all sectional references are to Title 11 of the United States Code, §§ 101-1532.
In addition, the Court will conduct a hearing on September 27, 2016, at 9:30 a.m. to consider whether this adversary proceeding should be abated pending determination of the underlying statutory and tort claims in a proper forum.
JURISDICTION
The Court has jurisdiction over this matter pursuant to 28 U.S.C. § 1334(b) and §§ 157(a), (b)(2)(I), and the standing order of reference entered by the United States District Court for the Middle District of Florida.
BACKGROUND
Robin and Andrew Nolan filed a Chapter 13 bankruptcy petition on November 28, 2015. The bankruptcy was precipitated, in large part, by a lawsuit filed against Robin Nolan by The Darras Firm, Inc. dba DarrasLaw ("DarrasLaw"), Frank N. Darras and Natasha Marie Darras (collectively the "Darras Parties") in the United States District Court for the Central District of California (the "California Action").
The Darras Parties sued Ms. Nolan for (i) violation of the Computer Fraud and Abuse Act (18 U.S.C. § 1030); (ii) violation of the California Computer Data Access and Fraud Act (Cal. Penal Code § 502); (iii) violation of the California Penal Code § 528.5; (iv) defamation; (v) trade libel; (vi) invasion of privacy-false light; (vii) intentional infliction of emotional distress; (viii) violation of the California Business & Professions Code § 17200; and (ix) an accounting. The California Action was in its early stages when the Nolans filed their bankruptcy case.
After the Nolans filed their Chapter 13 case, the Darras Parties filed this adversary proceeding against Robin Nolan seeking a declaration that the first seven claims asserted in the California Action, if ultimately proven, would be nondischargeable pursuant to §§ 1328(a)(2) and 523(a)(2) and/or § 1328(a)(4) (the "Adversary Complaint"). A copy of the complaint filed in the California Action is attached as Exhibit A to the Adversary Complaint.
It is not disputed that the underlying claims alleged by the Darras Parties against Robin Nolan are unliquidated personal injury claims.
STANDARD OF REVIEW
Federal Rule of Civil Procedure 12(b)(6), as made applicable to this proceeding by Federal Rule of Bankruptcy Procedure 7012, provides that a complaint may be dismissed, upon motion, for the failure to state a claim upon which relief may be granted. To survive a motion to dismiss, "a complaint must contain sufficient factual matter, accepted as true, to 'state a claim to relief that is plausible on its face.' " Ashcroft v. Iqbal, 556 U.S. 662, 678 (2009) (quoting Bell Atl. Corp. v. Twombly, 550 U.S. 544, 570 (2007)). The court must accept the allegations of the complaint as true and view the complaint in the light most favorable to the plaintiff. The allegations must permit the court "to draw the reasonable inference that the defendant is liable for the conduct alleged." Iqbal, 556 U.S. at 678.
STATEMENT OF ASSUMED FACTS
Robin Nolan was hired by Frank Darras to serve as an internet public relations consultant for Darras' California-based law firm, DarrasLaw. Mr. Darras and Ms. Nolan had a normal business relationship for several years, but near the end of 2014, the relationship soured. [Doc. No. 1, ¶¶ 5, 10].
After Ms. Nolan submitted a questionable invoice, hostile communications ensued. Mr. Darras terminated Ms. Nolan's employment on December 3, 2014. Within a few weeks, Ms. Nolan allegedly responded to her termination with an electronic and internet campaign to defame and discredit Mr. Darras, his law firm, and his daughter Natasha Darras. When viewed as the Court must, the postings and emails detailed and described in the Adversary Complaint appear to be defamatory and egregious. [Doc. No. 1, ¶¶ 11-35].
Through her work for Mr. Darras and his law firm, Ms. Nolan created extensive social media profiles and online accounts for the law firm. Following her termination, Ms. Nolan allegedly refused to turnover login information and improperly accessed, tampered with, and posted to the DarrasLaw twitter account. [Doc. No. 1, ¶¶ 37-42].
The Adversary Complaint alleges that Ms. Nolan's conduct was fraudulent, willful, and malicious, and that the Darras Parties were damaged by her misconduct. [Doc. No. 1, ¶¶ 48-103]. However, the Adversary Complaint does not assert that Ms. Nolan profited from the alleged misconduct, other than to extract a measure of revenge for her terminated employment or, alternatively, to attempt to extort payment for the disputed invoice.
DISCUSSION
In a Chapter 13 debt adjustment case, if the debtor completes all payments due under the confirmed plan, most debts are discharged pursuant to § 1328(a). This includes some debts that would not be discharged in a Chapter 7 liquidation case. Compare § 1328(a), with § 523(a). Debts that may not be discharged in a Chapter 13 case include any debt:
"of the kind specified in paragraph...(2)... of section 523(a)." § 1328(a)(2);
and
"for restitution or damages, awarded in a civil action against the debtor as a result of willful or malicious injury by the debtor that caused personal injury to an individual...." § 1328(a)(4).
Non-dischargeability based upon "Actual Fraud"
Section 523(a)(2)(A) of the Bankruptcy Code, made applicable in Chapter 13 through § 1328(a)(2), excepts from a Chapter 13 discharge:
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, other than a statement respecting the debtor's or an insider's financial condition.
Defendant attacks the Adversary Complaint, asserting that § 523(a)(2)(A) does not apply to the claims in the California Action because Plaintiffs have not alleged that Ms. Nolan obtained any benefit from her alleged misconduct or that Ms. Nolan's actions were fraudulent. The Darras Parties respond that the Supreme Court's recent decision in Husky Int'l Elecs., Inc. v. Ritz, 136 S. Ct. 1581 (2016), expands § 523(a)(2)(A) to include claims for defamation resulting from false statements. They argue further that, post-Husky, a claim under § 523(a)(2)(A) no longer requires that the debtor actually obtain "money, property, services, or an extension, renewal or refinancing of credit...." § 523(a)(2).
The Court does not agree that Husky goes as far as the Darras Parties argue. Husky holds that "actual fraud" is separate and distinct from "false pretenses" or "false representation" as a matter of statutory construction. 136 S. Ct. at 1590. Husky also recognizes that, historically, "actual fraud" did not always impose the requirements of misrepresentation and reliance, and that "actual fraud" includes fraudulent transfers made with actual intent to defraud creditors. Id. at 1586-88. In essence, the Supreme Court ruled that § 523(a)(2)(A) expressly recognizes three distinct ways to fraudulently obtain a debt for "money, property, services, or an extension, renewal or refinancing of credit" and, in so doing, render that debt nondischargeable. Id.
Husky did not eviscerate the "money, property, services, or an extension, renewal or refinancing of credit, to the extent obtained by" clause of § 523(a)(2)(A). Indeed, the Court not only remanded the case for further evaluation in light of its ruling, 136 S. Ct. at 1589 n.3, but also went to great lengths to describe how assets can be "obtained" in a fraudulent transfer:
It is of course true that the transferor does not "obtain[n]" debts in a fraudulent conveyance. But the recipient of the transfer—who, with the requisite intent, also commits fraud—can "obtain[n]" assets "by" his or her participation in the fraud. If that recipient later files for bankruptcy, and debts "traceable to" the fraudulent conveyance...will be nondischargeable under § 523(a)(2)(A). Thus, at least sometimes a debt "obtained by" a fraudulent conveyance scheme could be nondischargeable under § 523(a)(2)(A). Such circumstances may be rare because a person who receives fraudulently conveyed assets is not necessarily (or even likely to be a debtor on the verge of bankruptcy, but they make clear that fraudulent conveyances are not wholly incompatible with the "obtained by" requirement.Id. at 1589 (citations omitted).
The gist of the California Action against Ms. Nolan is defamation by improper use of the internet and social media. Defamation is a false statement about a person that injures that person's reputation. Shively v. Bozanich, 80 P.3d 676, 682 (Cal. 2003); see Price v. Stossel, 620 F.3d 992, 998 (9th Cir. 2010) (applying California law). Defamatory statements are by definition false; but, a claim for defamation does not require that the defendant obtain anything of substance. Instead, the operative element of a defamation claim is injury to the plaintiff's reputation and emotional distress. This is the injury alleged in the California Action. (E.g., Doc. No. 1, ¶¶ 80, 83, 102).
Because of the nature of the damages, defamation claims generally are considered to be nondischargeable, if at all, pursuant to the willful and/or malicious exception to a discharge. E.g., Gozalez v. Anthony (In re Anthony), 538 B.R. 145, 151 (Bankr. M.D. Fla. 2015); Zaretsky v. Berlin (In re Berlin), 513 B.R. 430, 435 (Bankr. E.D.N.Y. 2014); Adams v. Adams (In re Adams), 478 B.R. 476, 491 (Bankr. N.D. Ga. 2012); Kalmanson v. Nofziger (In re Nofziger), 361 B.R. 236, 245 (Bankr. M.D. Fla. 2006). Indeed, the Supreme Court has suggested that the willful and/or malicious exception also applies to fraud claims when the claimant is not able to satisfy the "obtained by" requirement of § 523(a)(2)(A). See Grogan v. Garner, 498 U.S. 279, 282 n.2 (1991) ("Arguably, fraud judgments in cases in which the defendant did not obtain money, property, or services from the plaintiffs and those judgments that include punitive damages awards are more appropriately governed by § 523(a)(6).").
Technically, in Chapter 13 cases, the standard is "willful or malicious" injury. § 1328(a)(4) (emphasis added). While in a Chapter 7 case, the standard is "willful and malicious" injury. § 523(a)(6) (emphasis added).
In contrast to the claims asserted by the Darras Parties, the fraudulent transfer scheme in Husky involved assets transferred by Daniel Ritz from an insolvent company to "other entities Ritz controlled." Husky Int'l Elecs., 136 S. Ct. at 1585. Under Texas law, Ritz's fraudulent acts rendered him personally liable for the debt owed to the vendors, Id. (citing Tex. Bus. Orgs. Code § 21.223(b)), and he arguably obtained the benefit of the fraudulent transfers by way of his holdings in the transferee companies.
Because the Darras Parties do not allege that Ms. Nolan obtained anything as a result of the alleged online rants and social media hacks, other than a measure of revenge, the Adversary Complaint fails to state a claim under § 523(a)(2)(A), made applicable by § 1328(a)(2).
Non-dischargeability based upon Willful or Malicious Personal Injury
The facts alleged in the Adversary Complaint do state a claim for nondischargeable willful or malicious injury under § 1328(a)(4). Adams v. Adams (In re Adams), 478 B.R. 476 (Bankr. N.D. Ga. 2012); see Sanchez v. Bailey (In re Bailey), Adv. Proc. 14-01085, No. 14-13318, 2016 WL 3865921, at *3-6 (Bankr. N.D. Miss. March 3, 2016); Seubert v. Deluty (In re Deluty), 540 B.R. 41, 46-48 (Bankr. E.D.N.Y. 2015). Traditional personal injury torts resulting in emotional and reputational harm fall within the exception to discharge in § 1328(a)(4) if proven to be willful or malicious. Adams, 478 B.R. at 487. "Section 1328(a)(4) should thus be construed as preventing the discharge of all liability arising from willful or malicious personal injury, including any award of punitive damages." Id. at 489.
On the other hand, injuries to real or personal property may be discharged in a Chapter 13 case, even if the injuries are the result of willful and malicious conduct. Personal injury within the meaning of § 1328(a)(4) "should be defined in contradistinction to injury to property; the emphasis in § 1328(a)(4) is on injury to an individual." Id. at 486.
Applying this analysis, the traditional tort claims in the Adversary Complaint (defamation, invasion of privacy, and intentional infliction emotion distress) all state a claim for nondischargeablity to the extent that emotional and reputational damages are asserted to be the result of willful or malicious conduct. With respect to the statutory claims asserted for computer fraud and illegal use of computers and social media, those counts of the Adversary Complaint state a claim under § 1328(a)(4) only to the extent that they assert damages for willful or malicious personal injury, and not to the extent that any injury to property may fall within the scope of the damages claimed in the California Action. The Darras Parties' claim for trade libel, which under California law is "an intentional disparagement of the quality of property, which results in pecuniary damage," does not survive this analysis and, thus, must be dismissed. Films of Distinction, Inc. v. Allegro Film Prods., Inc., 12 F. Supp. 2d 1068, 1081 (C.D. Cal. 1998); see Piping Rock Partners, Inc. v. David Lerner Assocs., Inc., 946 F. Supp. 2d 957, 980 (N.D. Cal. 2013), aff'd, 609 F. App'x 497 (9th Cir. 2015).
Given the expressed legislative intent of the California Computer Data Access and Fraud Act, Cal. Penal Code § 502(a), for example, the Court suspects that emotional and reputational damages are not recoverable. See Cal. Penal Code § 502(a):
It is the intent of the Legislature in enacting this section to expand the degree of protection afforded to individuals, businesses, and governmental agencies from tampering, interference, damage, and unauthorized access to lawfully created computer data and computer systems. . . . The Legislature further finds and declares that protection of the integrity of all types and forms of lawfully created computers, computer systems, and computer data is vital to the protection of the privacy of individuals as well as to the well-being of financial institutions, business concerns, governmental agencies, and others within this state that lawfully utilize those computers, computer systems, and data.
In her Motion to Dismiss and at oral argument, Ms. Nolan did not dispute that the alleged claims of the Darras Parties are personal injury claims, or that the alleged conduct was willful or malicious. Rather, she argues that the allegations in the Adversary Complaint are insufficient as a matter of law to link her to the alleged egregious conduct. The Court disagrees, and finds that the allegations pled by the Darras Parties are both plausible and sufficient to state nondischargeable claims under § 1328(a)(4). [Doc. No. 1, ¶¶ 9, 12, 16, 18, 22, 32, 37, 38, 39, 43]. See generally Iqbal, 556 U.S. at 678.
In a Chapter 13 case, however, the willful or malicious exception to discharge is limited to debts arising from personal injury claims of "individuals." § 1328(a)(4). Although the Adversary Complaint states cognizable claims in favor of Frank and Natasha Darras, the claims of DarrasLaw, a corporation, do not satisfy the requirements of § 1328(a)(4). Accordingly, the claims of The Darras Law Firm, Inc. dba DarrasLaw asserted under § 1328(a)(4) fail to state a claim upon which relief may be granted and are dismissed.
HEARING TO CONSIDER ABATEMENT OF PROCEEDINGS
Although this Court has "core" jurisdiction to adjudicate the dischargeability of the Darras Parties' claims, 28 U.S.C. § 157(b)(2)(I), it lacks the authority to determine liability or liquidate damages for the underlying claims. 28 U.S.C. § 157(b)(2)(O). Personal injury and tort claims must be tried in the district court where the bankruptcy is pending or the district court in the district in which the claims arose, as determined by the district in which the bankruptcy is pending. 28 U.S.C. § 157(b)(5). The statute directs the district court for Middle District of Florida to determine where these claims are to be tried.
The Court finds, therefore, that it is appropriate to set a hearing to discuss whether to abate this adversary proceeding until the underlying claims are adjudicated in a proper forum.
CONCLUSION
Based on the foregoing, it is ORDERED:
1. Defendant's Motion to Dismiss is GRANTED in part and DENIED in part, as set forth herein.
2. Counts I-VII of the Adversary Complaint fail to state claims pursuant to 11 U.S.C. §§ 1328(a)(2) and 523(a)(2).
3. Counts I-IV, VI, and VII of the Adversary Complaint state claims in favor of Frank N. Darras, pursuant to 11 U.S.C. § 1328(a)(4) for willful or malicious personal injury claims.
4. Counts IV, VI and VII of the Adversary Complaint state claims in favor of Natasha Marie Darras, pursuant to 11 U.S.C. § 1328(a)(4) for willful or malicious personal injury claims.
5. Count V of the Adversary Complaint asserting a claim pursuant to 11 U.S.C. § 1328(a)(4) for alleged Trade Libel is dismissed.
6. The claims of The Darras Law Firm, Inc. dba DarrasLaw pursuant to 11 U.S.C. § 1328(a)(4) are dismissed.
7. The Court will conduct a hearing on September 27, 2016, at 9:30 a.m. to consider whether this adversary proceeding should be abated.
ORDERED.
Dated: August 04, 2016
/s/_________
Roberta A. Colton
United States Bankruptcy Judge
The Clerk is directed to serve a copy of this order on interested parties who are non-CM/ECF users.
Nevertheless, the Court will defer that question to a court of proper jurisdiction over those claims.