Opinion
Case Number 17-54781 Adversary Case Number 18-04049
05-08-2018
In re: LaDonna Terrell, Debtor. Fung Ling Siu Reis, Plaintiff. v. LaDonna Terrell, Defendant.
Chapter 7 OPINION AND ORDER GRANTING IN PART AND DENYING IN PART DEBTOR'S MOTION TO DISMISS
I. INTRODUCTION
From, literally, the other side of the world, Fung Ling Siu Reis of Labrador, Queensland, Australia, ("Plaintiff") hoped to profit-remotely-from depressed real estate prices in Detroit, Michigan. To that end, Plaintiff engaged Detroit-based real estate broker, LaDonna Terrell ("Debtor"), a professed overseas property investor specialist, able to successfully identify, acquire, repair, rent, and manage Detroit residential properties. It didn't work out.
Plaintiff says she lost every penny of the $108,084.77 advanced to Debtor for promised renovations, repairs, property taxes, and insurance on her properties-most of which Debtor misappropriated. She sued Debtor in state court for breach of contract, breach of fiduciary duty, and an accounting; Debtor filed Chapter 7 bankruptcy several months later.
Plaintiff challenges the dischargeability of the debt. Debtor's motion to dismiss is pending. In response, Plaintiff voluntarily dismissed three counts: (1) breach of contract; (2) accounting; and (3) section 727(a)(3) denial of discharge. She seeks leave to amend under 11 U.S.C. §§ 523(a)(4), 523(a)(2)(A), and 523(a)(6).
Because Plaintiff's attempt to amend under section 523(a)(4) would be futile, Debtor's motion is GRANTED as to this count. However, even though garden-variety breach of contract causes of action are dischargeable in bankruptcy, at this juncture, Debtor's motion is DENIED as to the sections 523(a)(2)(A) and 523(a)(6) counts; Plaintiff may file an amended complaint to further address these causes of action.
II. FACTS
The Court assumes these facts from Plaintiff's Complaint are true.
Plaintiff contracted with Debtor to acquire and manage investment properties in Detroit. Under the agreement, Debtor was to locate, vet, and secure residential properties. She also agreed to lease them to qualified tenants, collect rent money, and maintain the properties. With Debtor as her real estate agent, Plaintiff purchased 12 residential properties. She then advanced Debtor a total of $108,084.77 for renovations, repairs, taxes, and insurance.
The parties' business relationship soured when Plaintiff inquired about the lack of rent money. Debtor provided false or forged leases for several of the properties, but claimed every tenant was in default-none was paying rent. Plaintiff believes Debtor actually collected approximately $9,650.00 in rent, which was never accounted for or turned over.
Hoping to salvage her investment, Plaintiff turned her focus to renting the remaining properties. But Debtor gave her more bad news: those properties had been vandalized and could not be rented. At Plaintiff's direction, Debtor filed police reports and insurance claims for the vandalism. The claims were denied, because the insurance company determined the properties were vacant and showed no signs of rehabilitation.
After Plaintiff terminated Debtor as her agent, Debtor admitted to owing $41,000.00 and offered to repay Plaintiff over three months. When Debtor failed to do as promised, Plaintiff filed suit in Wayne County Circuit Court.
Debtor filed bankruptcy while the state-court lawsuit was pending. Plaintiff seeks a determination that the debt is nondischargeable; Debtor makes three arguments in support of her contention that Plaintiff's Complaint should be dismissed. First, the section 523(a)(4) count fails because it does not allege the existence of a trust. Second, the section 523(a)(2)(A) count fails because Plaintiff does not allege fraud with any degree of particularity. Finally, the Complaint fails to address the willful and malicious injury standard required under section 523(a)(6).
III. STANDARD OF REVIEW
A. Federal Rule of Civil Procedure 12(b)(6)
Federal Rule of Civil Procedure 12(b)(6), made applicable to this proceeding by Federal Rule of Bankruptcy Procedure 7012, provides for the dismissal of a case where the complaint fails to state a claim upon which relief can be granted. When reviewing a motion to dismiss under Rule 12(b)(6), a court must "construe the complaint in the light most favorable to the plaintiff, accept its allegations as true, and draw all reasonable inferences in favor of the plaintiff." DirecTV, Inc., v. Treesh, 487 F.3d 471, 476 (6th Cir. 2007). But the court "need not accept as true legal conclusions or unwarranted factual inferences." Id. (quoting Gregory v. Shelby County, 220 F.3d 433, 446 (6th Cir. 2000)). "[L]egal conclusions masquerading as factual allegations will not suffice." Eidson v. State of Tenn. Dep't of Children's Services, 510 F.3d 631, 634 (6th Cir. 2007). Dismissal is appropriate if the plaintiff failed to offer sufficient factual allegations that make the asserted claim plausible on its face. Bell Atlantic Corp. v. Twombly, 550 U.S. 544, 570 (2007).
B. Federal Rule of Civil Procedure 15(a)(2)
Federal Rule of Civil Procedure 15(a)(2) provides that leave to amend a complaint shall be freely granted "when justice so requires." In interpreting this standard, the Sixth Circuit has concluded that "[a] motion to amend a complaint should be denied if the amendment is sought in bad faith, for dilatory purposes, results in undue delay or prejudice to the opposing party, or would be futile." Colvin v. Caruso, 605 F.3d 282, 294 (6th Cir. 2010). An amendment is "futile" if "the proposed amendment would not permit the complaint to survive a motion to dismiss." Miller v. Calhoun Cnty., 408 F.3d 803, 817 (6th Cir. 2005).
IV. ANALYSIS
A. 11 U.S.C. § 523(a)(4)
Section 523(a)(4) provides an exception to discharge for "fraud or defalcation while acting in a fiduciary capacity[.]" Plaintiff says the debt is nondischargeable under this section because Debtor-acting in a fiduciary capacity as a licensed real estate broker-used her funds for unauthorized purposes and failed to provide an accounting. See Bd. of Trustees of the Ohio Carpenters' Pension Fund v. Bucci (In re Bucci), 493 F.3d 635, 639 (6th Cir. 2007) ("[a] 'defalcation' encompasses not only embezzlement and misappropriation by a fiduciary, but also the 'failure to properly account for such funds'") (citation omitted).
"With respect to defalcation while acting in a fiduciary capacity, the Sixth Circuit has provided that the preponderance of the evidence must establish: (1) a pre-existing fiduciary relationship, (2) a breach of that relationship, and (3) resulting loss." Cameron, Jr. v. Thomas (In re Thomas), No. 13-1100, 2014 WL 509327, at *6 (Bankr. E.D. Tenn. Feb. 7, 2014) (quoting Patel v. Shamrock Floorcovering Services, Inc. (In re Patel), 565 F.3d 963, 968 (6th Cir. 2009)) (internal quotations omitted). "Fiduciary capacity"-for section 523(a)(4) purposes-is narrowly defined: "[i]t does not apply to someone who merely fails to meet an obligation under a common law fiduciary relationship. [T]he defalcation provision applies to only those situations involving an express or technical trust relationship arising from placement of a specific res in the hands of the debtor." In re Bucci, 493 F.3d at 639. To establish an express trust, Plaintiff must prove: (1) an intent to create a trust; (2) a trustee; (3) a trust res; and (4) a definite beneficiary. Patel v. Shamrock Floorcovering Services, Inc. (In re Patel), 565 F.3d 963, 968 (6th Cir. 2009). "[T]he debtor must hold funds in trust for a third party to satisfy the fiduciary relationship element of the defalcation provision of § 523(a)(4)." R.E. Am., Inc. v. Garver (In re Garver), 116 F.3d 176, 179 (6th Cir. 1997).
Under Michigan law, a real estate broker has a fiduciary relationship with his principal. Mackey v. Baker, 41 N.W.2d 331, 335 (Mich. 1950). However, federal law dictates whether a fiduciary relationship exists between a real estate broker and her principal for section 523(a)(4) purposes. Abdel-Hak v. Saad (In re Saad), 319 B.R. 147, 155 (Bankr. E.D. Mich. 2004) ("[t]he mere fact that state law places two parties in a relationship that may have some of the characteristics of a fiduciary relationship does not necessarily mean that the relationship is a fiduciary relationship under § 523(a)(4))." Because a trust was not created, no fiduciary relationship can exist for purposes of section 523(a)(4), and any amendment would be futile. The motion is granted as to this cause of action.
B. 11 U.S.C. § 523(a)(2)(A)
Section 523(a)(2)(A) excepts from discharge "debt[s] 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[.]" To except a debt from discharge under section 523(a)(2)(A) due to a false representation, Plaintiff must prove:
(1) the debtor obtained money through a material misrepresentation that, at the time, the debtor knew was false or made with gross recklessness as to its truth; (2) the debtor intended to deceive the creditor; (3) the creditor justifiably relied on the false representation; and (4) its reliance was the proximate cause of loss.Rembert v. AT&T Universal Card Services (In re Rembert), 141 F.3d 277, 280-81 (6th Cir. 1998). Garden-variety contract claims are dischargeable in bankruptcy. Brian Plushanski Constr. Co. v. Aaroe (In re Aaroe), No. 11-1180 (RTL), 2011 WL 2886312, at *7 (Bankr. D.N.J. July 14, 2011). "[I]n properly pleading a plausible cause of action under § 523(a), a plaintiff must at least identify a claimed misrepresentation by the what, where, and when and state facts from which reliance and intent may at least reasonably be inferred by the court." Vogt v. Hastings (In re Hastings), No. 14-03022, 2015 WL 1598055, at *4 (Bankr. N.D. Ohio April 6, 2015); see also Frank v. Dana Corp., 547 F.3d 564, 569-70 (6th Cir. 2008) (any fraud cause of action must satisfy the requirements of Federal Rule of Civil Procedure 9(b)).
Rule 9(b) provides that "[i]n alleging fraud or mistake, a party must state with particularity the circumstances constituting fraud or mistake." --------
Because Plaintiff has alleged the majority of the section 523(a)(2)(A) elements, Plaintiff may amend her complaint to specify the alleged fraud.
C. 11 U.S.C. § 523(a)(6)
Section 523(a)(6) provides that debts for "willful and malicious injury by the debtor to another entity" are nondischargeable. To succeed on this cause of action, Plaintiff must clear a high hurdle: she must prove Debtor intended to cause her injuries. Kawaauhau v. Geiger, 523 U.S. 57, 61 (1998); Awad v. Sakalla (In re Sakalla), No. 09-3069, 2010 WL 711115, at *2 (Bankr. E.D. Tenn. Feb. 24, 2010) (plaintiff has to prove a "deliberate or intentional injury, not merely a deliberate or intentional act that leads to injury"). A simple breach of contract will not suffice. Morganroth & Morganroth, PLLC v. Stollman (In re Stollman), 404 B.R. 244, 266 (Bankr. E.D. Mich. 2009). The breach must be intentional and accompanied by tortious conduct which results in willful and malicious injury. Barnett v. Rich (In re Rich), 401 B.R. 281, 288 (Bankr. S.D. Ohio 2009).
As pled, the facts in Plaintiff's Complaint do not rise to the level of an intentional injury. However, Plaintiff asserts that "she . . . has a claim for the non-dischargeability of [the] debt under Section 523(a)(6) [that she] will allege in a separate count if the Court grants [her] request to file an amended complaint." Because the Court is allowing Plaintiff to file an amended complaint regarding the section 523(a)(2)(A) cause of action, Plaintiff may also add a section 523(a)(6) count, if she determines that hurdle can be cleared.
V. CONCLUSION
Because Plaintiff's attempt to amend under section 523(a)(4) would be futile, Debtor's motion is GRANTED as to this count. However, at this juncture, Debtor's motion is DENIED as to the sections 523(a)(2)(A) and 523(a)(6) counts. On or before May 22 , 2018 , Plaintiff may file an amended complaint to further address these causes of action. If Plaintiff does so, Debtor will have until June 12 , 2018 , to either file an answer or a motion to dismiss the amended complaint.
IT IS ORDERED. Signed on May 08, 2018
/s/ Mark A. Randon
Mark A. Randon
United States Bankruptcy Judge