Opinion
Case No. 20-54012 Adv. Pro. No. 20-2120
11-09-2021
IN RE: Marc C. MOLDOVAN, Debtor. The Strait & Lamp Group, Plaintiff, v. Marc C. Moldovan, Defendant.
Jeffrey B. Sams, Pickerington, OH, for Plaintiff. James A. Coutinho, Allen Stovall Neuman & Ashton LLP, Matthew M. Zofchak, Kegler Brown Hill & Ritter, Columbus, OH, for Defendant.
Jeffrey B. Sams, Pickerington, OH, for Plaintiff.
James A. Coutinho, Allen Stovall Neuman & Ashton LLP, Matthew M. Zofchak, Kegler Brown Hill & Ritter, Columbus, OH, for Defendant.
MEMORANDUM OPINION AND ORDER ON DEFENDANT'S MOTION TO DISMISS IN PART PLAINTIFF'S FIRST AMENDED COMPLAINT (Doc. #17)
This matter came on for consideration of Defendant's Motion to Dismiss in Part Plaintiff's First Amended Complaint (Doc. #17) (the "Motion") filed on May 7, 2021 by Debtor Marc C. Moldovan ("Defendant"). The Strait & Lamp Group ("Plaintiff") filed its Memorandum in Opposition to Debtor's Motion to Dismiss in Part Plaintiff's First Amended Complaint (Doc. #19) (the "Response") on May 28, 2021. Defendant filed his Reply to Plaintiff's Memorandum in Opposition to Debtor's Motion to Dismiss in Part Plaintiff's First Amended Complaint (Doc. #20) on June 4, 2021.
I. JURISDICTION
The Court has jurisdiction over this matter pursuant to 28 U.S.C. § 1334 and General Order 05-02 entered by the United States District Court for the Southern District of Ohio, referring all bankruptcy matters to this Court. This is a core proceeding on which this Court may render a final judgment pursuant to 28 U.S.C. § 157(B)(2)(A) and (O). Venue is proper in this Court pursuant to 28 U.S.C. §§ 1408 and 1409.
II. BACKGROUND
Plaintiff filed its First Amended Complaint to Determine Dischargeability of Particular Indebtedness (Doc. #16) (the "Amended Complaint") on April 16, 2021. The Amended Complaint alleges the following facts: Plaintiff is in the business of supplying materials for home construction. In the construction process there are typically five draws : foundation, framing, rough-ins, trim, and final. Plaintiff provides materials that are to be used in construction. Defendant is the sole owner of MCM Home Builders, LLC ("MCM"), which is in the business of constructing custom and production-built homes. On or about March 14, 2011, MCM submitted a Credit Application to Plaintiff with a personal guaranty of payment from Defendant for any credit extended by Plaintiff. Pursuant to the terms of the Credit Application, Plaintiff extended credit to MCM for purchase of materials; Plaintiff retained a security interest in any materials purchased for construction projects until the purchase price is paid in full. The Amended Complaint alleges that Defendant falsely or recklessly represented to Plaintiff that Plaintiff would be paid for the materials either from Defendant's own funds or out of draw proceeds on the projects. Plaintiff also asserts that Defendant and MCM breached the "Joint Payment Terms" of the Credit Application, which required MCM to cause construction draws and other construction funds to be paid directly to Plaintiff until Plaintiff is paid in full for any materials. Plaintiff alleges that, in order to obtain construction draws during the construction of several homes, Defendant made false representations in lien waiver affidavits, representing to lenders and/or homeowners that suppliers and subcontractors, including Plaintiff, had been or would be paid in full. Once MCM received funds from the lender or homeowner, Defendant and MCM failed to pay Plaintiff for materials provided.
"Draws" or "construction draws" are periodic payments to the contractor by the homeowner or a lender during construction of a home. The payments are related to the process of construction and are sometimes called "progress payments."
In January 2019, Plaintiff filed a complaint against Defendant and MCM in the Franklin County Common Pleas Court (the "State Court Complaint"). The State Court Complaint brought causes of action for accounting, breach of contract, unjust enrichment, quantum meruit, personal guaranty, and attorney fees. On June 8, 2020, the state court entered judgment in favor of Plaintiff against MCM and Defendant in the amount of $332,144.19. On August 24, 2020, Defendant filed a voluntary petition for relief under Chapter 7 of the Bankruptcy Code.
In the Amended Complaint, Plaintiff asserts that Defendant should be held personally liable for the debts of MCM and that the corporate veil shielding Defendant from liability should be pierced. Plaintiff requests the Court to determine that the debt Defendant owes Plaintiff is nondischargeable under 11 U.S.C. § 523(a)(2), (a)(4) and (a)(6). Plaintiff alleges that the debt owed by Defendant is nondischargeable because: (1) Defendant obtained funds intended for Plaintiff by false pretenses, false representation and/or fraud under § 523(a)(2) ("Count One"); (2) Defendant obtained funds intended for Plaintiff by fraud or defalcation while acting in a fiduciary capacity under § 523(a)(4) ("Count Two"); (3) Defendant's actions constitute embezzlement under § 523(a)(4) because he fraudulently converted funds that Plaintiff entrusted to Defendant ("Count Three"); (4) Defendant committed larceny under § 523(a)(4) by knowingly obtaining or executing control over funds without Plaintiff's consent, exceeding the scope of consent granted by Plaintiff, and using deception in the signing of false lien waiver affidavits ("Count Four"); and (5) Defendant willfully and maliciously converted funds received as draws that were intended to be paid to Plaintiff under § 523(a)(6). In his Motion, Defendant urges the Court to dismiss Counts One through Four of the Amended Complaint under Rule 12(b)(6) of the Federal Rules of Civil Procedure. The Motion argues that the Amended Complaint fails to state any claim for dischargeability of debt under 11 U.S.C. § 523(a)(2)(A) or (a)(4).
Fed. R. Civ. P. 12 is applicable to adversary proceedings in bankruptcy court pursuant to Fed. R. Bankr. P. 7012.
III. STANDARD OF REVIEW
When considering a motion to dismiss under Federal Rule of Civil Procedure 12(b)(6), the facts articulated in the complaint must be taken in a light most favorable to the plaintiff and accepted as true. Bovee v. Coopers & Lybrand CPA , 272 F.3d 356, 360-61 (6th Cir. 2001). "To survive a motion to dismiss, the plaintiff must allege facts that if accepted as true, are sufficient to state a claim to relief that is plausible on its face." Majestic Bldg. Maint., Inc. v. Huntington Bancshares, Inc ., 864 F.3d 455, 458 (6th Cir. 2017) (citing Bell Atlantic Corp. v. Twombly , 550 U.S. 544, 555, 127 S.Ct. 1955, 167 L.Ed.2d 929 (2007) ). "A claim has facial plausibility when the plaintiff pleads factual content that allows the court to draw the reasonable inference that the defendant is liable for the misconduct alleged." Ashcroft v. Iqbal , 556 U.S. 662, 678, 129 S.Ct. 1937, 173 L.Ed.2d 868 (2009). However, "[t]hreadbare recitals of the elements of a cause of action, supported by mere conclusory statements, do not suffice." Id. "While a complaint attacked by a Rule 12(b)(6) motion to dismiss does not need detailed factual allegations, a plaintiff's obligations to provide the ‘grounds’ of his ‘entitlement to relief’ requires more than labels and conclusions, and a formulaic recitation of the elements of a cause of action will not do." Bell Atlantic Corp. at 1964-65 ; see FED. R. CIV. P. 8(a)(2) (applicable by FED. R. BANKR. P. 7008, which requires "a short and plain statement of the claim showing that the pleader is entitled to relief[.]"). The Court need not accept as true legal conclusions or unwarranted factual inferences. Bovee , 272 F.3d at 361.
When a complaint alleges fraud, Rule 9(b) requires that "a party must state with particularity the circumstances constituting fraud or mistake." FED. R. CIV. P. 9(b). However, "[m]alice, intent, knowledge, and other conditions of a person's mind may be alleged generally." Id.
When deciding a Rule 12(b)(6) motion, the court "may consider the Complaint and any exhibits attached thereto, public records, items appearing in the record of the case and exhibits attached to defendant's motion to dismiss so long as they are referred to in the Complaint and are central to the claims contained therein." Bassett v. NCAA , 528 F.3d 426, 430 (6th Cir. 2008) (citation omitted) (emphasis added).
IV. DISCUSSION
In the Motion, Defendant argues that the Amended Complaint contains only a formulaic recitation of the elements of claims, that the Amended Complaint is deficient because it fails to allege facts that support Plaintiff's claims, and that any factual allegations are insufficient to show plausible grounds for nondischargeability under 11 U.S.C. § 523(a)(2)(A) or (a)(4). The Court agrees with Defendant.
A. Piercing the Corporate Veil
In the Amended Complaint, Plaintiff alleges that Defendant made false representations in his individual capacity, not as an officer or representative of MCM, and, therefore, the corporate veil should be pierced and Defendant held personally responsible for his conduct while in control of MCM. Pl.’s Am. Compl. ¶ 59.
Under Ohio law, the corporate veil may be pierced and individual shareholders held liable for corporate misconduct when: (1) control over the corporation by those to be held liable was so complete that the corporation has no separate mind, will, or existence of its own; (2) control over the corporation by those to be held liable was exercised in such a manner as to commit fraud, an illegal act, or a similarly unlawful act against the person seeking to disregard the corporate entity; and (3) injury or unjust loss resulted to the plaintiff from such control and wrong. Belvedere Condo. Unit Owners' Ass'n v. R.E. Roark Cos. , 67 Ohio St. 3d 274, 289, 617 N.E.2d 1075 (Ohio 1993) ; Dombroski v. WellPoint, Inc. , 119 Ohio St. 3d 506, 513, 895 N.E.2d 538 (Ohio 2008). The Motion argues that Plaintiff's veil piercing theory rests on unsupported conclusory allegations.
The Amended Complaint alleges sufficient facts that on its face satisfy the first and third prongs of the veil piercing test. First, the Amended Complaint states that Defendant has total control over MCM on the basis that Defendant is the sole owner of MCM; he has no employees; he controls all decisions, operations, spending, contracts and document execution; the same attorneys represent the legal matters of Defendant and MCM; MCM's office was located at Defendant's residence on almost all occasions; and Defendant diverted MCM assets to himself to the detriment of creditors, homeowners, and others. Pl.’s Am. Compl. ¶¶ 12-21. Moreover, Plaintiff alleges that Defendant represented to Plaintiff that it would be paid for materials either from Defendant's own funds or from draw proceeds on the construction projects. Id. ¶ 29. This suggests that Defendant personally assumed the business obligations of MCM. Second, the Amended Complaint states that Defendant used MCM to commit the wrongful conduct, illegal activity, and fraud alleged in support of the nondischargeability claims discussed below. Third, the Amended Complaint states that Plaintiff suffered injury and unjust loss as a result of Defendant's control and wrongful conduct; Plaintiff suffered damages from Defendant's failure to pay for materials purchased on credit under the terms of the Credit Application.
Whether the corporate veil may be pierced depends on whether Plaintiff satisfies the second prong of the veil piercing test by demonstrating that Defendant exercised control over MCM in such a manner to commit fraud, an illegal act, or similarly unlawful act against Plaintiff. As discussed below, Plaintiff has not alleged sufficient facts to support a claim of fraud, fraud as a fiduciary, embezzlement, or larceny.
Defendant also argues in the Motion that Plaintiff cannot pierce the corporate veil because Plaintiff could have but failed to bring actions of fraud and criminal wrongdoing against Defendant in its State Court Complaint, and, therefore, such claims are barred by res judicata . The Supreme Court rejected a similar argument where a debtor argued that res judicata barred the creditor from litigating a nondischargeability claim on the basis of fraud because the prior state court proceeding did not result in a finding of fraud. Brown v. Felsen , 442 U.S. 127, 132, 99 S.Ct. 2205, 60 L.Ed.2d 767 (1979). Bankruptcy courts are "not confined to a review of the judgment and record in the prior state-court proceedings when considering the dischargeability of ... debt." Id. at 138-39, 99 S.Ct. 2205.
B. Nondischargeability Under 11 U.S.C. § 523(a)(2)(A)
In Count One of the Amended Complaint, Plaintiff asserts that its debt should be declared nondischargeable pursuant to 11 U.S.C. § 523(a)(2)(A) on the basis that Defendant engaged in false representations, false pretenses and fraud. Specifically, in the section of the Amended Complaint titled "Count One," Plaintiff alleges that Defendant executed and delivered affidavits and lien waivers, thereby obtaining funds from lenders or homeowners which were intended to be paid to Plaintiff. Although not specifically discussed or mentioned in Count One, the factual recitation in the Amended Complaint (preceding the section of the Amended Complaint titled Count One) includes an allegation that Defendant represented to Plaintiff, "at the inception of the business relationship and/or upon the purchase of materials for the projects, and by their course of performance, either that [Plaintiff] would be paid for the goods by [Defendant's] own funds or that [Plaintiff] would be paid out of draw proceeds on the [construction] projects. [Defendant] knew that this representation was false, or made the representations with gross recklessness as for its truth." Pl.'s Am. Compl. ¶ 29. Defendant posits that Plaintiff has not pleaded facts to support any elements of the cause of action.
Section 523(a)(2)(A) states, in pertinent part:
(a) A discharge under section 727 ... of this title does not discharge an individual debtor from any debt—
...
(2) for money, property, services, or any 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.
11 U.S.C. § 523(a)(2)(A) (emphasis added).
1. False Representation
To except a debt from discharge under 11 U.S.C. § 523(a)(2)(A) for false representation, a creditor must prove each of the following elements by a preponderance of the evidence: (1) the debtor obtained money[, property, services, or any extension, renewal, or refinancing of credit] 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 Serv. (In re Rembert) , 141 F.3d 277, 280-81 (6th Cir. 1997).
a. The Line of Credit and Purchase of Materials
The allegation that Defendant committed to pay for the product purchased from Plaintiff cannot be the basis for a judgment of nondischargeability, whether at the inception of the relationship and when purchasing materials. A breach of contract or a breach of a promise to pay alone is not sufficient to demonstrate a false representation under § 523(a)(2)(A). Bartson v. Marroquin (In re Marroquin) , 441 B.R. 586, 593 (Bankr. N.D. Ohio 2010) ("For purposes of § 523(a)(2)(A), the mere breach of a promise to pay does not establish the existence of an intent to defraud. Otherwise, any breach of contract would be a nondischargeable debt."); Giansante & Cobb, LLC v. Singh (In re Singh) , 433 B.R. 139, 163 (Bankr. E.D. Pa. 2010) ("It is well established that ‘a broken promise to repay a debt, without more, will not sustain a cause of action under § 523(a)(2)(A).’ "). "[T]o warrant a finding of nondischargeability, a representation must be one of existing fact and not merely an expression of opinion, expectation, or declaration of intention." Lawson v. Conley (In re Conley) , 482 B.R. 191, 209 (Bankr. S.D. Ohio 2012) (citations omitted). Any representations made to Plaintiff related to Defendant's future intentions to pay Plaintiff cannot be the basis for a determination of nondischargeability.
Even if Plaintiff's allegation that Defendant knew this representation was false or made it with gross recklessness provided the additional factor to sustain a cause of action, the Amended Complaint has not alleged sufficient facts to satisfy the second or third elements of intent and reliance. The Amended Complaint merely recites those elements without providing supporting facts. Intent and other conditions of a person's mind may be alleged generally. FED. R. CIV. P. 9(b). But a plaintiff must still plead enough facts to make out a plausible claim. 1 MOORE'S FEDERAL PRACTICE § 9.03[3], at 9-43 (Matthew Bender 3d ed. 2021). "While Rule 9(b) clearly dictates that allegations regarding a defendant's mental state are not subject to the heightened pleading requirements imposed on claims for fraud or mistake, ... pleadings regarding the conditions of a person's mind, including ... intent, remain bound by the plausibility requirement of Rule 8." Mourad v. Marathon Petro. Co. LP, 654 Fed. App'x 792, 798 (6th Cir. 2016). See also Whiteside v. Hover-Davis, Inc. , 995 F.3d 315, 323 (2d Cir. 2021) ( FED. R. CIV. P. 9(b) does not allow a party to avoid FED. R. CIV. P. 8 plausibility standard); Krys v. Pigott , 749 F.3d 117, 129 (2d Cir. 2014) (noting that "generally" is not the equivalent of "conclusorily").
Plaintiff's Amended Complaint fails to articulate a cause of action for nondischargeability based on false representations allegedly made at the inception of the business relationship between the parties or when Defendant purchased materials from Plaintiff.
b. Execution and Delivery of Lien Waiver Affidavits
Plaintiff alleges that Defendant made false representations on multiple occasions to lenders in the form of lien waiver affidavits stating that Plaintiff had been or would be paid in order to obtain funds from the lenders. Plaintiff additionally alleges that Defendant knew MCM would not use the funds to pay Plaintiff. Id. ¶ 57, 58. Defendant argues in the Motion—and the Court agrees—that Plaintiff's argument is insufficient to state a cause of action for nondischargeability of a debt based on false representations.
To except a debt from discharge for false representation under § 523(a)(2)(A), Plaintiff must have relied on the representations, Plaintiff must have parted with money (or property, services or credit) as a result of the reliance, and Defendant must have intended to deceive Plaintiff. Recall that the affidavits were not provided to Plaintiff, nor were they intended for Plaintiff's benefit. They were delivered to lenders or homeowners in order to obtain construction draws and to assure the lender or homeowner that charges for labor and materials had been paid. How can these elements of the cause of action (reliance by Plaintiff and intent to deceive Plaintiff) be satisfied by representations made to someone other than the Plaintiff? Even if Plaintiff knew of the affidavits, how could any reliance be justifiable when the affidavits were delivered to another entity for that entity's use? And why would Defendant attempt to deceive Plaintiff with an affidavit delivered to a third party? And for what purpose? The affidavits were delivered to a third party for that third party to rely on, not for Plaintiff to rely on. Plaintiff was not the person or entity parting with money, property, services, or credit, as a result of and in reliance upon the affidavits. The affidavits and resulting construction draws exchanged between Defendant and the third parties occurred after Plaintiff extended credit to Defendant and after Plaintiff provided Defendant with materials. Although Plaintiff baldly stated in the Amended Complaint that it relied on the representations by Defendant in the affidavits and that Defendant intended to deceive Plaintiff, Plaintiff failed to allege facts to support these allegations. No inferences pertaining to these points can be made from the facts articulated in the Amended Complaint. And as explained above, although intent and reliance and other conditions of a person's mind may be alleged generally, a plaintiff must still plead enough facts to make out a plausible claim. 1 MOORE'S FEDERAL PRACTICE § 9.03[3], at 9-43 (Matthew Bender 3d ed. 2021). Thus, the Amended Complaint fails to state a cause of action for false representations.
In its Response, Plaintiff incorrectly asserts that Defendant obtained money "rightfully belonging to Plaintiff," suggesting that Plaintiff had some sort of ownership interest in the funds provided to Defendant by third parties. Pl.'s Resp. 8. Although Plaintiff alleges in the Amended Complaint that it retained a security interest in funds that Defendant and MCM received in draw requests, the security interest does not grant an ownership interest in property given to Defendant by a third party. Clearly, compensation (ie., construction draws) paid to MCM pursuant to its construction contract with homeowners, whether paid by the homeowner or the homeowner's lender, is property of MCM, not Plaintiff, unless Plaintiff has an absolute assignment of the contract and/or its proceeds. Plaintiff has not alleged such.
Plaintiff also alleged that Defendant intended to deceive homeowners, banks, and other creditors. Any such intention of Defendant is irrelevant in this adversary proceeding, inasmuch as a charge of false representation or false pretenses must include the intention to deceive the Plaintiff. An intention to deceive other persons or entities does not avail this Plaintiff.
2. False Pretenses
Plaintiff argues that the actions and conduct of Defendant constitute false pretenses, and Defendant obtained funds intended for Plaintiff by false pretenses. Pl.'s Am. Compl. ¶ 64. "False pretenses are distinguishable from false representations in that 'a false pretense involves an implied misrepresentation or conduct that is intended to create and foster a false impression while a false representation involves an express representation.’ " Coughlin Chevrolet, Inc. v. Thompson (In re Thompson) , 458 B.R. 409, 421 (Bankr. S.D. Ohio 2011) (quoting Goldberg Sec., Inc. v. Scarlata (In re Scarlata) , 127 B.R. 1004, 1009 (N.D. Ill. 1991) ). Plaintiff must still illustrate Defendant's intent to deceive the Plaintiff, Plaintiff's reliance on the false pretense(s), and that the false pretense was the cause of Plaintiff's loss.
Plaintiff has not alleged what implied misrepresentations Defendant made nor how Defendant's conduct toward Plaintiff created and fostered a false impression in Plaintiff causing Plaintiff's losses. The misrepresentations or conduct must be made towards Plaintiff. Therefore, the Amended Complaint fails to allege sufficient facts to establish false pretenses under § 523(a)(2)(A).
3. Actual Fraud
In the Amended Complaint, Plaintiff asserts that Defendant's actions and conduct constitute fraud and that his fraudulent conduct resulted in Defendant receiving funds that were intended by third parties to be paid to Plaintiff. Pl.’s Am. Compl. ¶¶ 66-67. "A finding that a debt is non-dischargeable under § 523(a)(2)(A) requires a showing of actual or positive fraud, not merely fraud implied by law ...." Rembert , 141 F.3d at 281. It is a "category of debtor misconduct that is separate and distinct from fraudulent representation, and ... a creditor alleging actual fraud need not demonstrate justifiable reliance on an actual misrepresentation by the debtor in order to obtain a judgment of nondischargeability under § 523(a)(2)(A)." Schafer v. Rapp (In re Rapp) , 375 B.R. 421, 435 (Bankr. S.D. Ohio 2007). For purposes of § 523(a)(2)(A), actual fraud is defined broadly – "any deceit, artifice, trick or design involving a direct and active operation of the mind, used to circumvent and cheat another—something said, done or omitted with the design of perpetrating a cheat or deception." 4 COLLIER ON BANKRUPTCY ¶ 523.08[1][e] (Alan N. Resnick & Henry J. Sommer, eds., 16th ed. 2021). See also McClellan v. Cantrell , 217 F.3d 890, 893 (7th Cir. 2000) ("[B]y distinguishing between ‘a false representation’ and ‘actual fraud,’ the statute makes clear that actual fraud is broader than misrepresentation."). "When a debtor intentionally engages in a scheme to deprive or cheat another of property or a legal right, that debtor has engaged in actual fraud and is not entitled to the fresh start provided by the Bankruptcy Code." Mellon Bank, N.A. v. Vitanovich (In re Vitanovich) , 259 B.R. 873, 877 (6th Cir. B.A.P. 2001).
When raising allegations of fraud, "a party must state with particularity the circumstances constituting fraud or mistake." FED. R. CIV. P. 9(b). Consequently, Plaintiff is required to plead actual fraud with specificity. A general statement that Defendant's conduct constitutes fraud is insufficient. The specificity required of a plaintiff mandates that a plaintiff set forth in its complaint "the who, what, when, where and how of the alleged actual fraud" to meet the requirements of Civil Rule 9(b). Guardian Fin. Co. v. Metzger ( In re Metzger) , No. 17-11585, 2018 WL 6985674, at *5, 2018 Bankr. LEXIS 3335, at *1, *14 (Bankr. S.D. Ohio Sept. 4, 2018) (citation omitted); see also Culy Constr. & Excavating, Inc. v. Laney Directional Drilling Co., No. 2:12-cv-4, 2012 WL 2071804, at *7, 2012 U.S. Dist. LEXIS 79575, at *1, *18 (S.D. Ohio June 8, 2012) ("The Sixth Circuit has explained that a fraud claim must set forth the who, what, when, where, and how of the purported fraud.") (citing Sanderson v. HCA-The Healthcare Co., 447 F.3d 873, 877 (6th Cir. 2006) ). While reliance is not a required element in fraud for purposes of § 523(a)(2)(A), intent to defraud the creditor is required. Metzger, 2018 WL 6985674, at *5–6, 2018 Bankr. LEXIS 3335, at *14.
In the Amended Complaint, Plaintiff explained that MCM was indebted to Plaintiff in connection with eight subaccounts:
1. Stagg
2. Search
3. Torres
4. Gliatta
5. Wolcot
6. Taft
7. Bissell
8. MCM99S
Pl.’s Am. Compl. ¶ 39. The Amended Complaint states nothing else specifically regarding the Torres and MCM99S accounts, falling far short of the specificity requirement for an allegation of fraud. Count One must be dismissed to the extent it seeks nondischargeability of amounts due for those accounts.
After listing the accounts, with respect to the Stagg, Search, Wolcot, Taft and Bissell accounts, the Amended Complaint states generally that, in a deposition, Defendant admitted that he had submitted affidavits, that they were not accurate, that Plaintiff had provided materials for the projects, that these customers (or their lenders) paid construction draws that included payment for the materials provided, and that he did not pay Plaintiff. Pl.’s Am. Compl. ¶¶ 46-51. The Amended Complaint goes on with more general allegations, but it fails to make any allegations revealing the who, what, when, and where of the alleged fraud that Defendant committed with the affidavits regarding these accounts. Defendant's deposition testimony does not supplant the "who, what, when, and where" requirements of Civil Rule 9(b). Nor does the Amended Complaint describe the who, what, when, where and how Defendant committed any other allegedly fraudulent conduct regarding these accounts. Count One must be dismissed to the extent it seeks nondischargeability of amounts due on the Stagg, Search, Wolcot, Taft and Bissell accounts.
Finally, regarding the Gliatta account, the Amended Complaint alleges the use of affidavits and, together with the exhibits attached, illustrates the who, what, when, and how of the alleged fraud. Pl.’s Am. Compl. ¶¶ 42-45. And taking the allegations of the Amended Complaint as true, it alleges a "deceit, artifice, trick or design involving a direct and active operation of the mind, used to circumvent and cheat another—something said, done or omitted with the design of perpetrating a cheat or deception." 4 COLLIER ON BANKRUPTCY ¶ 523.08[1][e] (Alan N. Resnick & Henry J. Sommer, eds., 16th ed. 2021). Therefore, Count One states a cause of action for fraud regarding the Gliatta account and, to that extent, survives this aspect of the Motion.
Now, the question is what money or property was obtained by any fraud perpetrated by Defendant in connection with the affidavits and whether that avails Plaintiff.
4. Money or Property Obtained
Section 523(a)(2) of the Bankruptcy Code provides that the debt for money or property (or services, or extension of credit - not applicable here), is nondischargeable only to the extent obtained by the alleged fraud. Defendant posits that Count One of the Amended Complaint is deficient because it fails to allege that Plaintiff provided money, property, services or credit to Defendant. It is true that Count One does not make such an allegation, but this is not fatal to the cause of action on which Count One is based. Money or property obtained by fraud does not necessarily have to fall directly into a defendant's hands, so long as the defendant realizes some kind of benefit from the asset obtained. Brady v. McAllister (In re Brady) , 101 F.3d 1165, 1172 (6th Cir. 1996). Of course, the defendant's fraud must result in a loss of money or property to the plaintiff. 4 COLLIER ON BANKRUPTCY ¶ 523.08[1][a] (Richard Levin & Henry J. Sommer, eds., 16th ed. 2021); see also Rembert v. AT&T Universal Card Serv. (In re Rembert) , 141 F.3d 277, 280-81 (6th Cir. 1997).
The Amended Complaint suggests that Defendant submitted affidavits to obtain money in the form of construction draws, not from Plaintiff, but from those to which he submitted the affidavits. So the question becomes, did Plaintiff have sufficient interest in those funds that Plaintiff suffered a loss by virtue of Defendant's conduct?
Clearly, Plaintiff did not have an ownership interest in the funds remitted by third parties to MCM (or Defendant, if he in fact received any of the funds) pursuant to contracts between MCM and homeowners. Plaintiff may have had a security interest in the funds, as alleged in the Amended Complaint, but that interest does not equate to an ownership interest. A grantor of a security interest remains the owner of collateral and its proceeds, even if both are subject to a security interest. Kraus Anderson Capital, Inc. v. Bradley (In re Bradley) , 507 B.R. 192, 200 (B.A.P. 6th Cir. 2014) (citing Deere & Co. v. Contella (In re Contella) , 166 B.R. 26, 30 (Bankr. W.D.N.Y. 1994) ). And Plaintiff's interest in the draws was not compromised by Defendant's use of affidavits to obtain payment from homeowners pursuant to the construction contracts. Any compromise of or injury to Plaintiff's interest (if any) in the funds occurred when MCM or Defendant expended the funds without payment to Plaintiff. This being the case, even accepting Plaintiff's allegations as true, Count One of the Amended Complaint did not allege facts illustrating that Defendant obtained money or property of Plaintiff through fraud, and, therefore, fails to state a plausible claim for nondischargeability of debt pursuant to 11 U.S.C. § 523(a)(2)(A).
C. Nondischargeability Under 11 U.S.C. § 523(a)(4)
Plaintiff next asserts in the Amended Complaint that it is entitled to a determination that Defendant's debts are nondischargeable under 11 U.S.C. § 523(a)(4). Section 523(a)(4) states, in pertinent part:
(a) A discharge under section 727 ... of this title does not discharge an individual debtor from any debt—
...
(4) for fraud or defalcation while acting in a fiduciary capacity, embezzlement, or larceny ....
1. Fraud or Defalcation While Acting in a Fiduciary Capacity
In Count Two of the Amended Complaint, Plaintiff posits that Defendant's debt should be deemed nondischargeable pursuant to 11 U.S.C. § 523(a)(4) for fraud or defalcation while acting in a fiduciary capacity. Plaintiff alleges that the funds Defendant received as a result of construction draws were intended for Plaintiff, and were acquired by defalcation, and that Defendant breached a trust resulting in damages to Plaintiff.
The Sixth Circuit Court of Appeals "has defined ‘defalcation’ to encompass embezzlement and misappropriation by a fiduciary, as well as the ‘failure to properly account for such funds.’ " Commonwealth Land Title Co. v. Blaszak (In re Blaszak) , 397 F.3d 386, 390 (6th Cir. 2005) (quoting Capitol Indem. Corp. v. Interstate Agency, Inc. (In re Interstate Agency, Inc.) , 760 F.2d 121, 125 (6th Cir. 1985) ). In order to fall within the contours of § 523(a)(4), "the debtor must hold funds in trust for a third party to satisfy the fiduciary relationship element of the defalcation provision of § 523(a)(4)." Id. at 391. The Sixth Circuit limits the scope of § 523(a)(4) solely to "trustees who misappropriate funds held in trust, and not to those who fail to meet an obligation under a common law fiduciary relationship." Id. To establish that a debt is nondischargeable due to fraud or defalcation under § 523(a)(4), a creditor must show by a preponderance of the evidence: "(1) a pre-existing fiduciary relationship; (2) breach of that fiduciary relationship; and (3) a resulting loss." Id. at 390.
The fiduciary relationship must turn on the existence of a pre-existing express or technical trust arising from placement of a specific res in the hands of the debtor. Id. at 391. Accordingly, the party claiming the existence of an express or a technical trust must demonstrate: "(1) an intent to create a trust; (2) a trustee; (3) a trust res; and (4) a definite beneficiary." Id. (citing Graffice v. Grim (In re Grim) , 293 B.R. 156, 166 (Bankr. N.D. Ohio 2003) ).
The Amended Complaint alleges that: (1) the terms of the Credit Application attached to the Amended Complaint, including the grant of the security interest and the Joint Payment Terms, created a fiduciary relationship between Plaintiff, Defendant, and MCM, thereby creating a trust; (2) Defendant was the trustee entrusted with the funds; and (3) the trust res was the funds Defendant received from banks or homeowners. Pl.’s Am. Compl. ¶¶ 71-73. Defendant argues in the Motion that the Amended Complaint does not state that Plaintiff entrusted any of its property to Defendant nor does it allege that the parties intended to create a trust. The Court agrees. Nowhere in the Credit Application does it indicate an intent of the parties to create a trust, nor that a trust has been created, nor that the Defendant served as a fiduciary.
Plaintiff argues that it need not prove its case at this point - which is true - and that the Court cannot consider the Credit Agreement in determining the Motion - which is not true. As pointedly stated above, the Sixth Circuit Court of Appeals has specifically held that the Court may consider any exhibits attached to the complaint as long as they are referred to in the complaint and are central to Plaintiff's claims. See supra § III.
Further, as explained above, Plaintiff has no ownership interest in the funds that Defendant received from third parties , so there can be no trust res held for the benefit of Plaintiff. Count Two of the Amended Complaint must be dismissed inasmuch as Plaintiff failed to allege facts establishing a pre-existing fiduciary relationship and did not demonstrate that an express or technical trust exists for the purposes of § 523(a)(4).
See supra note 3.
2. Embezzlement
The Court now turns to Count Three of the Amended Complaint, which alleges that Plaintiff entrusted Defendant with funds with the express understanding that Defendant would remit those funds to Plaintiff, but Defendant, instead, fraudulently converted the funds for his own use. Pl.’s Am. Compl. ¶¶ 80-83. For dischargeability purposes under 11 U.S.C. § 523(a)(4), "embezzlement" is defined by federal common law as "the fraudulent appropriation of property by a person to whom such property has been entrusted or into whose hands it has lawfully come." Brady v. McAllister (In re Brady) , 101 F.3d 1165, 1172-73 (6th Cir. 1996) (quoting Gribble v. Carlton (In re Carlton) , 26 B.R. 202, 205 (Bankr. M.D. Tenn. 1982) ). Embezzlement is proven by showing that: (1) a creditor entrusted his property to a debtor, (2) the debtor appropriated the property for a use other than that for which it was entrusted, and (3) the circumstances indicate fraud. Id. at 1173 (citing Ball v. McDowell (In re McDowell) , 162 B.R. 136, 140 (Bankr. N.D. Ohio 1993) ).
The Amended Complaint alleges that because Plaintiff retained a security interest in the materials, that security interest transferred to the funds received by Defendant. The Amended Complaint further alleges that this security interest in conjunction with the Joint Payment Terms of the Credit Application meant that Plaintiff "entrusted" the funds to Defendant with the express understanding that Defendant would remit the funds to Plaintiff. Pl.’s Am. Compl. ¶ 81. In the Motion, Defendant points out that the unspecified funds were the payments made by lenders and homeowners to MCM pursuant to contracts between MCM and third parties; therefore, the funds did not belong to Plaintiff at any time. A debtor remains the owner of collateral and its proceeds, even if both are subject to a security interest. Kraus Anderson Capital, Inc. v. Bradley (In re Bradley) , 507 B.R. 192, 200 (B.A.P. 6th Cir. 2014) (citing Deere & Co. v. Contella (In re Contella) , 166 B.R. 26, 30 (Bankr. W.D.N.Y. 1994) ). And "No person can embezzle from himself." Id. Plaintiff having no ownership interest in the funds, Count Three must be dismissed for failure to allege facts supporting the elements of embezzlement under § 523(a)(4).
3. Larceny
Plaintiff brings Count Four of the Amended Complaint under 11 U.S.C. § 523(a)(4), asserting larceny. Count Four alleges that the actions and conduct of Defendant constitute aggravated theft under Ohio Revised Code § 2913.02, a crimes statute. The Amended Complaint states that Defendant, "with the purpose to deprive [Plaintiff] of property on which it had a security interest, knowingly obtained or executed control over the funds from banks and/or homeowners, without the consent of [Plaintiff], beyond the scope of consent granted by [Plaintiff], and by use of deception in the signing of false lien waiver [a]ffidavits." Pl.’s Am. Compl. ¶ 87.
Larceny, for the purposes of determining nondischargeability under § 523(a)(4), is defined as "the fraudulent and wrongful taking and carrying away of the property of another with intent to convert such property to the taker's use without the consent of the owner." Graffice v. Grim (In re Grim) , 293 B.R. 156, 166 n.3 (Bankr. N.D. Ohio 2003). Defendant's Motion argues that the Amended Complaint fails to state a plausible claim for larceny under § 523(a)(4). As stated in the previous section, the funds that Defendant received from the lenders and homeowners were not property of Plaintiff to begin with. Plaintiff cannot establish larceny of property it does not own. Accordingly, Count Four of the Amended Complaint must be dismissed.
V. CONCLUSION
In accordance with the foregoing, it is hereby
ORDERED AND ADJUDGED that Defendant's Motion to Dismiss in Part Plaintiff's First Amended Complaint (Doc. #17) is GRANTED , and Counts Two through Four of Plaintiff's First Amended Complaint to Determine Dischargeability of Particular Indebtedness (Doc. #16) are DISMISSED with prejudice.