Opinion
Case No. 16-26371-B-7 Adversary No. 17-2004
03-20-2017
In re: JAMES E. BROWN, Debtor(s). DAVID GLASS, Trustee of Reiswig Revocable Trust (Creditor), Plaintiff(s), v. JAMES E. BROWN, Defendant(s).
DC No. GSJ-1
ORDER (1) GRANTING MOTION TO DISMISS; AND (2) GRANTING IN PART AND DENYING IN PART REQUEST FOR JUDICIAL NOTICE
Presently before the court is a motion to dismiss and a request for judicial notice filed by defendant James E. Brown. Defendant's motion to dismiss and request for judicial notice are opposed by plaintiff Dr. David Glass, trustee of the Reiswig Revocable Trust Dated February 24, 1998, as Restated January 4, 2012 ("Reiswig Trust"). Defendant did not reply to plaintiff's opposition.
This matter was heard on March 14, 2017. Appearances were noted on the record. This order modifies the court's tentative decision stated on the record in open court. It also takes into consideration the parties' arguments and plaintiff's request for leave to amend. To the extent there are any differences between the court's tentative decision stated orally on the record and this written decision, this written decision governs. Playmakers LLC v. ESPN, Inc., 376 F.3d 894, 896 (9th Cir. 2004) (citation omitted). Introduction
The complaint initiating this adversary proceeding was filed on January 13, 2017. It purports to allege three claims for relief under 11 U.S.C. § 523(a): a § 523(a)(2)(A) claim in the first claim for relief; a § 523(a)(2)(B) claim in the second claim for relief; and a § 523(a)(4) claim in the third claim for relief. Defendant moves pursuant to Federal Rule of Civil Procedure 12(b)(6) (applicable by Federal Rule of Bankruptcy Procedure 7012(b)) to dismiss all three claims for relief. Defendant also requests that the court take judicial notice of exhibits consisting of documents filed in the underlying chapter 7 case, a related state court proceeding, certified copies of recorded public documents, and other documents.
The court initially notes that the defendant's motion raises a significant number of factual questions which are inappropriate for determination on a motion to dismiss. For example, questions regarding the defendant's intent and the truth or accuracy of representations by the defendant are factual issues more appropriate for summary judgment or trial. This is a motion to dismiss and that means the court must take as true the factual allegations in the complaint. If the complaint alleges that the defendant's representations were false then, for purposes of this motion, the court must assume the defendant's representations are false. The same is true with respect to defendant's argument that he lacked an intent to deceive. Again, intent is a factual matter and typically not appropriate for resolution on a motion to dismiss.
Nevertheless, the complaint is deficient. As explained below, when considered in the context of matters subject to judicial notice, the allegations in the complaint are not sufficient to state actionable claims under §§ 523(a)(2)(A), 523(A)(2)(B), or 523(a)(4). Therefore, for the reasons and to the extent explained below, defendant's motion to dismiss will be granted and defendant's request for judicial notice will be granted in part and denied in part. Background
Defendant is the former successor trustee of the Reiswig Trust. Following the commencement of an action by the plaintiff in the San Joaquin County Superior Court captioned Reiswig Revocable Trust, No. 39-2014-315733-PR-TR-STK, on March 20, 2015, the state court suspended defendant as the successor trustee of the trust. The state court appointed plaintiff as temporary successor trustee on or about April 24, 2015. The state court permanently removed defendant and appointed plaintiff as successor trustee following a trial held on or about June 10, 2015.
The state court appointed the plaintiff as the successor trustee because defendant obtained a $262,000 loan secured by real property located at 600 Windsor Drive, Lodi, California ("Lodi Property"), a trust asset, and because the defendant failed to adequately account for payments from trust assets (deposit accounts) to himself or for his personal benefit. The complaint alleges that the defendant obtained the $262,000 with a loan application in which he misrepresented that he had fee title to the Lodi Property and authority to obtain financing on it when he had only a life estate and had no such authority. Without providing any additional detail, the complaint merely refers to the payments the defendant made to himself or for his benefit from trust funds in deposit accounts and for which he did not adequately account as a misappropriation of trust funds by the defendant.
The Reiswig Trust documents grant defendant a life estate in the Lodi Property. The remainder interest is held by the First Baptist Church of Lodi and the American Cancer Society. Plaintiff is a principal member of the First Baptist Church of Lodi. The First Baptist Church of Lodi has paid plaintiff's attorney's fees in the underlying chapter 7 case. Plaintiff seeks to have the defendant's debt excepted from discharge, and previously sought relief from the automatic stay, so that he can terminate the defendant's life estate in the Lodi Property which would be a substantial financial benefit to the First Baptist Church of Lodi.
The complaint alleges the defendant owes the Reiswig Trust at least $105,303.91. The state court made that determination on October 2, 2015, and allocated the defendant's repayment obligation as follows: (i) the balance owed on the $262,000 loan after it was repaid; plus, (ii) $59,769 in payments the defendant made to himself or for his benefit from trust funds in deposit accounts which were not adequately accounted for. A judgment in that amount was entered against the defendant on June 29, 2016. Legal Standard
Plaintiff secured a release of the deed of trust that encumbered the Lodi Property on or about September 16, 2016. The Lodi Property is now free and clear of all liens and interests except the defendant's life estate and the remainder interests of the First Baptist Church of Lodi and the American Cancer Society.
A motion to dismiss under Rule 12(b)(6) tests the legal sufficiency of the claims alleged in the complaint. Ileto v. Glock, Inc., 349 F.3d 1191, 1199-1200 (9th Cir. 2003). "Dismissal can be based on the lack of a cognizable legal theory or the absence of sufficient facts alleged under a cognizable legal theory." Balistreri v. Pacifica Police Dep't, 901 F.2d 696, 699 (9th Cir. 1990).
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)). All allegations of material fact are taken as true and construed in the light most favorable to the plaintiff. Johnson v. Lucent Techs., Inc., 653 F.3d 1000, 1010 (9th Cir. 2011). Additionally, the court may take judicial notice of court records and certified recorded documents on a motion to dismiss. C.B. v. Sonora Sch. Dist., 691 F. Supp. 2d 1123, 1138 (E.D. Cal. 2009) (stating that the court "may take judicial notice of matters of public record, including duly recorded documents, and court records available to the public through the PACER system via the internet"); U.S. v. Ritchie, 342 F.3d 903, 908 (9th Cir. 2003) (court may consider matters properly subject to judicial notice on a motion to dismiss). Defendant's Request for Judicial Notice
To the extent judicially-noticed facts are included in the court's presentation of facts, plaintiff's objection to the defendant's request for judicial notice is overruled. For the avoidance of doubt, the court will take judicial notice of defendant's Exhibits A, B, C, D, E, F, and I.
Exhibits A and B are court documents filed in related judicial proceedings. Exhibit A is a document filed in the aforementioned state court proceeding which is related to this adversary proceeding. Exhibit B is a document filed in the underlying chapter 7 case in support of plaintiff's earlier motion for relief from the automatic stay. Exhibits C, D, E, F, and I are certified copies of public records.
Plaintiff's objection to judicial notice of Exhibit A is somewhat disingenuous. In the underlying chapter 7 case, the court granted plaintiff's request for judicial notice of three documents from the same state court proceeding, including Exhibit A. See Dkt. 12, Case No. 16-26371. --------
It is not necessary for the court to take judicial notice of defendant's Exhibits G, H, or J, or to draw any inferences from those documents in order to dispose of defendant's motion to dismiss. Therefore, as to those and any other documents, defendant's request for judicial notice will be denied. Discussion
The § 523(a)(2)(B) Claim Alleged in the Second Claim for Relief.
The second claim for relief purports to allege a claim under § 523(a)(2)(B). Section 523(a)(2)(B) states as follows:
(a) A discharge under section 727 . . . 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—
[ . . .]
11 U.S.C. § 523(a)(2)(B).(B) use of a statement in writing—
(i) that is materially false;
(ii) respecting the debtor's or an insider's financial condition;
(iii) on which the creditor to whom the debtor is liable for such money, property, services, or credit reasonably relied; and
(iv) that the debtor caused to be made or published with intent to deceive[.]
Although the complaint alleges the entire debt is non-dischargeable under § 523(a)(2)(B), allegations in support of the second claim for relief only refer to the defendant's written misrepresentations associated with that portion of the debt the state court allocated to the $262,000 loan. The complaint refers to a misappropriation of trust funds by the defendant. Construed liberally and in the plaintiff's favor, that could refer to the defendant's personal use of and failure to account for trust funds from deposit accounts. And it may be that there were written misrepresentations associated with that portion of the debt as allocated by the state court which, if made, may meet the requirements of § 523(a)(2)(B). Therefore, as to that portion of the debt the state court allocated to the defendant's personal use of and failure to adequately account for trust funds from deposit accounts, the § 523(a)(2)(B) claim alleged in the second claim for relief will be dismissed without prejudice and with leave to amend. However, as to the portion of the debt the state court allocated to the $262,000 loan, the § 523(a)(2)(B) claim will be dismissed with prejudice consistent with the court's tentative decision stated on the record.
Section 523(a)(2)(B)(iii) requires reliance on the debtor's written misrepresentations by the creditor to whom the debtor is liable. The creditor to whom the defendant is liable here is the plaintiff (or the trust). However, with respect to the portion of the debt that the state court allocated to the $262,000 loan, the complaint does not allege that the defendant made any written misrepresentations to the plaintiff (or the trust) which, correspondingly, means the complaint does not allege that the plaintiff (or the trust) relied on any written misrepresentations that were made by the defendant. The complaint alleges only that, as to the $262,000 loan, the defendant made written misrepresentations in an application submitted to a lender and the lender relied on those misrepresentation to make the $262,000 loan. Thus, on its face, the complaint fails to satisfy § 523(a)(2)(B)(iii) as to the portion of the debt the state court allocated to the $262,000 loan.
It is true that in some circumstances a plaintiff who is not the originally-defrauded creditor, and thus who did not rely on the debtor's written misrepresentations, can satisfy § 523(a)(2)(B)(iii) and state an actionable § 523(a)(2)(B) claim. But that typically is when the plaintiff is the assignee of the original creditor who was defrauded and who initially relied on the debtor's written misrepresentations. Boyajian v. New Falls Corp. (In re Boyajian), 564 F.3d 1088, 1092-93 (9th Cir. 2009); see also In re Barlaam, 2012 WL 3288725, *5 (Bankr. C.D. Cal. 2012). The complaint here does not allege that the plaintiff is the lender's assignee. In fact, inasmuch as it was the plaintiff who personally secured a release of the deed of trust on the Lodi Property it necessarily follows that the plaintiff would know if the lender assigned him any claim it had against the defendant arising out of the $262,000 loan and plaintiff would have at least mentioned any such assignment. However, there is no mention of any assignment in the complaint or in any of the other matters subject to judicial notice. Moreover, since the lender released its lien on the Lodi Property the court can infer that no claim to assign remains or exists. Therefore, as to that portion of the debt the state court allocated to the $262,000 loan, the § 523(a)(2)(B) claim alleged in the second claim for relief will be dismissed with prejudice because that part of the debt as allocated by the state court is not based on written misrepresentations by the defendant to the plaintiff on which the plaintiff relied and the plaintiff is not the assignee of the entity who relied on the defendant's written misrepresentations.
The § 523(a)(2)(A) Claim Alleged in the First Claim for Relief.
The first claim for relief purports to allege a § 523(a)(2)(A) claim. Section 523(a)(2)(A) states as follows:
(a) A discharge under section 727 . . . 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—
11 U.S.C. § 523(a)(2)(A).(A) false pretenses, a false representation, or actual fraud, other than a statement respecting the debtor's or an insider's financial condition[.]
The court initially notes that plaintiff's opposition references the Supreme Court's recent opinion in Husky Int'l Elec., Inc. v. Ritz, 136 S. Ct. 1581 (2016). In Husky, the Supreme Court cited its earlier opinion in Field v. Mans, 516 U.S. 59 (1995), to highlight the distinction between a § 523(a)(2)(A) claim pled on a misrepresentation and reliance theory, as was the case in Mans, and a § 523(a)(2)(A) actual fraud claim that requires no misrepresentations or reliance, as was the case in the matter then before it. The court notes this distinction here because plaintiff appears to argue in the opposition that the complaint alleges a Husky actual fraud claim. The court disagrees.
The complaint does not allege a Husky actual fraud § 523(a)(2)(A) claim. Rather, it is apparent from paragraphs 9, 12, 14, and 20 of the complaint that the § 523(a)(2)(A) claim alleged in the first claim for relief is based on a misrepresentations theory, i.e., the defendant misrepresented his interest in the Lodi Property and his authority to borrow on it in a loan application submitted to a lender and the lender relied on the misrepresentations in the application to make the $262,000 loan. Thus, the § 523(a)(2)(A) claim as it is alleged in the complaint is more akin to a Mans misrepresentation theory § 523(a)(2)(A) claim and not a Husky actual fraud § 523(a)(2)(A) claim. It is also limited to the $262,000 loan insofar as the complaint appears to lack allegations regarding any misrepresentations concerning the defendant's personal use of and failure to adequately account for trust funds from deposit accounts.
In order to prevail on the § 523(a)(2)(A) misrepresentation theory claim as it is alleged in the complaint, the plaintiff must prove the following elements by a preponderance of the evidence: (1) a misrepresentation, fraudulent omission, or deceptive conduct by the debtor; (2) knowledge of the falsity or deceptiveness of the statement or conduct; (3) an 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. Ghomeshi v. Sabban (In re Sabban), 600 F.3d 1219, 1222 (9th Cir. 2010); Cardenas v. Shannon (In re Shannon), 553 B.R. 380, 388 (9th Cir. BAP 2016). The complaint lacks factual allegations sufficient to establish the first and fourth elements.
As noted above, the complaint does not allege that defendant made misrepresentations to the plaintiff which also means it does not allege that the plaintiff justifiably relied on misrepresentations by the defendant. The only misrepresentations alleged in the complaint are to a lender and the only reliance on those representations alleged in the complaint is the lender's reliance on the misrepresentations in the loan application in making the $262,000 loan. Since the plaintiff is not an assignee of the lender, In re Ashai, — F. Supp. 3d —, 2016 WL 7155837, *18 (C.D. Cal. 2016) (§ 523(a)(2)(B) analysis applies to § 523(a)(2)(A)), "plaintiffs have failed to establish they can maintain a § 523(a)(2) claim based on alleged misrepresentations made not to them but to a third party." In re Cox, 462 B.R. 746, 757 (Bankr. D. Idaho 2011).
Nevertheless, even if the absence of allegations regarding misrepresentation and reliance renders the § 523(a)(2)(A) claim that pertains to the defendant's personal use of trust funds from deposit accounts deficient, and even if the allegations regarding misrepresentations to a third-party and the third-party's reliance render the § 523(a)(2)(A) claim as it pertains to the $262,000 loan defective, Husky holds that a § 523(a)(2)(A) claim may exist in the absence of misrepresentations and reliance. That means the deficiency as it pertains to the alleged misappropriation and the defect as it pertains to the $262,000 loan are not fatal to the § 523(a)(2)(A) claim alleged in the first claim for relief. Therefore, although the § 523(a)(2)(A) claim alleged in the first claim for relief will be dismissed, dismissal will be without prejudice and with leave to amend as to the debt in its entirety.
The § 523(a)(4) Claim Alleged in the Third Claim for Relief.
The third claim for relief purports to allege a claim under § 523(a)(4) which excepts from discharge debts for "for fraud or defalcation while acting in a fiduciary capacity." 11 U.S.C. § 523(a)(4). To except a debt from discharge under § 523(a)(4), a creditor must prove by a preponderance of the evidence, see Lovell v. Stanifer (In re Stanifer), 236 B.R. 709, 713 (9th Cir. BAP 1999), "1) an express trust existed, 2) the debt was caused by fraud or defalcation, and 3) the debtor acted as a fiduciary to the creditor at the time the debt was created." Otto v. Niles (In re Niles), 106 F.3d 1456, 1459 (9th Cir. 1997) (emphasis added, internal quotes, quotations and citations omitted). The focus here is the third element.
In order to determine if the defendant was a fiduciary to the plaintiff at the time the debt arose, the court must first identify the debt and then ascertain when it arose. Nahman v. Jacks (In re Jacks), 266 B.R. 728, 735 (9th Cir. BAP 2001) (noting that the creditor must establish that the debtor was a fiduciary to the creditor at the time the debt was created); In re Danzi, 2010 WL 3811843 (Bankr. E.D. N.Y. 2010) ("Under section 523(a)(4) a creditor must establish that the debtor was acting in a fiduciary capacity to the creditor at the time the debt arose, and that the debtor committed the fraud or defalcation in that capacity"). That is a question of federal law. Cal-Micro, Inc. v. Cantrell (In re Cantrell), 329 F.3d 1119, 1125 (9th Cir. 2003); In re Florimonte, 558 B.R. 703, 708 (Bankr. M.D. Pa. 2016) (non-dischargeability determined as a matter of federal law).
The Bankruptcy Code defines a "debt" as a "liability on a claim." 11 U.S.C. § 101(12). A "claim" is defined as a "right to payment, whether or not such right is reduced to judgment, liquidated, unliquidated, contingent, matured, unmatured, disputed, undisputed, secured, or unsecured." 11 U.S.C. § 101(5)(A). Applying those definitions here, plaintiff (or the trust) had a claim against the defendant when the defendant used the Lodi Property to obtain a loan and used and failed to adequately account for trust funds in deposit accounts. That claim, however, did not become a debt until the defendant became liable to the plaintiff (or trust) on it which, at the earliest, occurred on October 2, 2015, when the state court ordered the defendant to repay the trust. Since the defendant was suspended as trustee in March 2015 and removed in June of 2015, the debt that plaintiff seeks to except from discharge under § 523(a)(4) arose several months after any fiduciary relationship between the plaintiff (or trust) and the defendant ended. Put another way, there was not and there could not be any fiduciary relationship between the plaintiff (or trust) and the defendant at the time the debt at issue in this adversary proceeding arose on October 2, 2015. That means plaintiff is unable to satisfy the third element of an actionable § 524(a)(4) claim. That also means the § 523(a)(4) claim alleged in the third claim for relief will be dismissed with prejudice. Conclusion
For all the foregoing reasons,
IT IS ORDERED that the following are DISMISSED WITHOUT PREJUDICE AND WITH LEAVE TO AMEND:
(1) as to the entire debt, the § 523(a)(2)(A) claim alleged in the first claim for relief; and
(2) as to that portion of the debt the state court allocated to the defendant's personal use of trust funds in deposit accounts and for which the defendant failed to adequately account, the § 523(a)(2)(B) claim alleged in the second claim for relief.
IT IS FURTHER ORDERED that the following are DISMISSED WITH PREJUDICE:
(1) as to that portion of the debt the state court allocated to the $262,000 loan, the § 523(a)(2)(B) claim alleged in the second claim for relief; and
(2) as to the entire debt, the § 523(a)(4) claim alleged in the third claim for relief.
IT IS FURTHER ORDERED that any amended complaint shall be filed and served by April 28, 2017. If an amended complaint is not timely filed and served, then dismissal without prejudice will become a dismissal with prejudice.
IT IS FURTHER ORDERED that defendant's request for attorney's fees is DENIED WITHOUT PREJUDICE.
Dated: March 20, 2017.
/s/_________
UNITED STATES BANKRUPTCY JUDGE
INSTRUCTIONS TO CLERK OF COURT
SERVICE LIST
The Clerk of Court is instructed to send the attached document, via the BNC, to the following parties: Mark Charles Bowman
1820 W Kettleman Ln #F
Lodi CA 95242 Grace S. Johnson
115 W Walnut #3
Lodi CA 95240