K&M Elec. Servs., Inc. v. Vito (In re Vito)
| Decision Date | 08 March 2019 |
| Docket Number | Case No. 18-12138-MMH,Adversary No. 18-00173-MMH |
| Citation | 598 B.R. 809 |
| Parties | IN RE: Sandra J. VITO, Debtor. K & M Electrical Services, Inc., Plaintiff, v. Sandra J. Vito, Defendant. |
| Court | U.S. Bankruptcy Court — District of Maryland |
Shawn C. Whittaker, Rockville, MD, for Plaintiff.
Steven L. Goldberg, Craig Palik, McNamee Hosea PA, Greenbelt, MD, for Defendant.
Business is often done based on the trust established between the contracting parties. The parties have worked together in the past and, satisfied with that relationship, agree to continue to work on projects in the future. When that trust is breached, the relationship and often at least one party's economic position suffer. That is the matter before the Court, and the Court must decide whether the breach that occurred gives rise to more than a mere breach of contract claim. If it does, the claim might garner protection against discharge in the Defendant's chapter 7 case under section 523 of the Bankruptcy Code.1 If it does not, the Defendant's liability on the claim will be discharged under section 727 of the Code.
As further explained below, the Court finds that the Plaintiff's Amended Complaint fails to state a claim upon which relief can be granted under section 523(a)(4) of the Code. The Court notes that the factual allegations contained in the Amended Complaint, while suggesting a breach of personal trust and of contract, do not establish a technical or express trust that results in the kind of fiduciary relationship required by section 523(a)(4). The Court recognizes the statutory trust language relied on by the Plaintiff but determines that the Maryland statute at issue does not give rise to an express or technical trust under section 523(a)(4).
That finding does not end the Court's consideration of the statutory trust language, however, as the statute does lend support to the Plaintiff's claim that the Defendant knowingly and intentionally disregarded the Plaintiff's rights in certain funds received by the Defendant for purposes of section 523(a)(6). The Court is sensitive to the Defendant's argument that casting a knowing decision to not pay a debt as an intentional injury to the creditor under section 523(a)(6) would severely undercut the effect of, and policy underlying, the bankruptcy discharge. Nevertheless, the statutory trust, the Plaintiff's rights thereunder, and the Defendant's conduct, as alleged in the Amended Complaint, amount to more than a mere payment default and adequately state a plausible claim for nondischargeability under section 523(a)(6) of the Code. The Court thus will dismiss Count I of the Amended Complaint under Federal Rule Civil Procedure 12(b)(6) and deny the pending Motion to Dismiss as to Count II.
The Defendant filed her chapter 7 case on February 20, 2018. Case No. 18-12138, ECF 1. The Defendant discloses her employment as being the "President of construction company," and then identifies the company as "Vito Construction, Inc." (" Vito Construction"). Case No. 18-12138, ECF 13, Schedule I. The Defendant lists Vito Construction as an unsecured creditor in her case but does not list the Plaintiff as a creditor or note any pending state court litigation between herself (in her individual capacity) and the Plaintiff.3 Case No. 18-12138, ECF 13, Schedule E/F.
The Plaintiff worked as a subcontractor for Vito Construction on several different construction projects prior to the petition date. According to the pleadings filed in this adversary proceeding, the Plaintiff and its principal developed a good working relationship with Vito Construction and the Defendant. That relationship began to deteriorate, however, at some point in 2016 when Vito Construction's payments to the Plaintiff slowed or ceased entirely, causing the Plaintiff to go unpaid for work it had performed. The Plaintiff further alleges that, on each of the projects, Vito Construction received full payment from the project owners but failed to remit appropriate amounts to the Plaintiff for its subcontracting work. At the time of the Defendant's bankruptcy filing, Vito Construction allegedly owed the Plaintiff approximately $ 150,575.99. ECF 1.
The Plaintiff commenced this adversary proceeding against the Defendant on May 22, 2018. The Plaintiff's initial Complaint sought a determination that its claims against the Defendant for amounts due under the Plaintiff's contracts with Vito Construction are nondischargeable in the Defendant's chapter 7 case under sections 523(a)(2), (a)(4), and (a)(6) of the Code. The Plaintiff generally alleges that it did not receive full payment due under the contracts and that the Defendant, as an officer or person in control of Vito Construction, is responsible for the Plaintiff's resulting monetary losses. The Defendant denies the Plaintiff's allegations against her.
The Defendant filed her original motion to dismiss on July 9, 2018. ECF 12. After full briefing by the parties and a hearing before the Court, the Court granted the relief sought by that motion to dismiss with leave for the Plaintiff to amend its complaint. ECF 19. The Plaintiff filed its Amended Complaint on October 24, 2018. ECF 21. The Amended Complaint eliminated the Plaintiff's allegations under section 523(a)(2) of the Code and with respect to construction projects other than the Vital Records Project (as that term is defined in the Amended Complaint). It continues to assert claims against the Plaintiff under section 523(a)(4) of the Code in Count I, and section 523(a)(6) of the Code in Count II.
By the pending Motion to Dismiss, the Defendant asserts that the Amended Complaint fails to state a claim upon which relief can be granted under Federal Rule of Civil Procedure 12(b)(6). ECF 22. The Defendant accordingly asks the Court to dismiss the Amended Complaint in its entirety. The Plaintiff disagrees and argues that it has pled more than adequate facts to meet the plausibility standard applicable to motions under Civil Rule 12(b)(6). ECF 23. It further states that relief based on those facts is warranted under applicable law interpreting sections 523(a)(4) and (a)(6) of the Code. The Court addresses below each of the two counts in the Amended Complaint.
The Court has jurisdiction over this proceeding pursuant to 28 U.S.C. § 1334, 28 U.S.C. § 157(a), and Local Rule 402 of the United States District Court for the District of Maryland. This proceeding is a "core proceeding" under 28 U.S.C. § 157(b)(2).
The Motion to Dismiss seeks dismissal of the Amended Complaint under Civil Rule 12(b)(6). Civil Rule 12(b) generally permits the filing of a motion to assert certain defenses, including that the complaint "fails to state a claim upon which relief may be granted." Fed. R. Civ. P. 12(b)(6). A motion to dismiss under Civil Rule 12(b)(6)"tests the legal sufficiency of a complaint to determine whether the plaintiff has properly stated a claim; ‘it does not resolve contests surrounding the facts, the merits of a claim, or the applicability of defenses.’ " Hall v. Greystar Management Servs., L.P. , 637 Fed. App'x 93, 99 (4th Cir. 2016) (quoting Republican Party of N.C. v. Martin , 980 F.2d 943, 952 (4th Cir. 1992) ). The Court must "accept the well-pled allegations of the complaint as true, and [ ] construe the facts and reasonable inferences derived therefrom in the light most favorable to the plaintiff." Ibarra v. United States , 120 F.3d 472, 474 (4th Cir. 1997). To survive a motion to dismiss under Civil Rule 12(b)(6), the complaint must plead facts that surpass speculation and " ‘state a claim to relief that is plausible on its face.’ " Ashcroft v. Iqbal , 556 U.S. 662, 678, 129 S.Ct. 1937, 173 L.Ed.2d 868 (2009) (quoting Bell Atl. Corp. v. Twombly , 550 U.S. 544, 570, 127 S.Ct. 1955, 167 L.Ed.2d 929 (2007) ).
The relief requested by the Motion to Dismiss is of particular import to the parties because the Amended Complaint involves the proper scope of the Defendant's discharge in her chapter 7 case and whether any part of the Plaintiff's claim against the Defendant will survive the bankruptcy. The bankruptcy discharge is a hallmark of U.S. bankruptcy law. It provides a debtor with that coveted fresh start, and it is one of the primary policy objectives underlying the Code. See, e.g. , Grogan v. Garner , 498 U.S. 279, 286, 111 S.Ct. 654, 112 L.Ed.2d 755 (1991). Indeed, the Code broadly defines the terms "debt"4 and "claim"5 so that, "[g]enerally, ‘all legal obligations of the debtor, no matter how remote or contingent,’ are potentially dischargeable in bankruptcy." Kubota Tractor Corp. v. Strack (In re Strack) , 524 F.3d 493, 497 (4th Cir. 2008) (citations omitted).
The bankruptcy discharge is not, however, absolute. It is limited by, among others, sections 727(a) and 523(a) of the Code. 11 U.S.C. §§ 727(a), 523(a). It also is reserved for the " ‘honest but unfortunate’ " debtor. See, e.g. , Brown v. Felsen , 442 U.S. 127, 128, 99 S.Ct. 2205, 60 L.Ed.2d 767 (1979) (quoting Local Loan Co. v. Hunt , 292 U.S. 234, 244, 54 S.Ct. 695, 78 L.Ed. 1230 (1934) ). Accordingly, in assessing a debtor's right to a discharge, "courts should be ‘equally concerned with ensuring that perpetrators of fraud are not allowed to hide behind the skirts of the Bankruptcy Code.’ " Twin City Fire Ins. Co. v. Estrin (In re Estrin) , No. 15-80039, 2016 WL 691506, at *7 (Bankr. D.S.C. Feb. 19, 2016) (). That said, "[i]n all exceptions to, and denial of, discharge cases, a creditor must prove their allegations by a preponderance of the evidence, ... and all exceptions to discharge are strictly construed against the creditor." In re Ogbebor , No. 08-24898-RAG, 2013 WL 5376531, at *7 (Bankr. D. Md. Sept. 25, 2013).
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