Am. Asset Fin., LLC v. Feldman (In re Feldman)

• Decision Date: 06 November 2013
• Docket Number: Bankruptcy No. 13–11302.,Adversary No. 13–0287.
• Citation: 500 B.R. 431
• Parties: In re Lawrence F. FELDMAN and Robyn Feldman, Debtor(s). American Asset Finance, LLC, Plaintiff(s) v. Lawrence F. Feldman, Defendant(s).
• Court: U.S. Bankruptcy Court — Eastern District of Pennsylvania

500 B.R. 431

In re Lawrence F. FELDMAN and Robyn Feldman, Debtor(s).

American Asset Finance, LLC, Plaintiff(s)

v.Lawrence F. Feldman, Defendant(s).

Bankruptcy No. 13–11302.

Adversary No. 13–0287.

United States Bankruptcy Court,

E.D. Pennsylvania.

Nov. 6, 2013.

Scott M. Rothman, Esquire, Halberstadt Curley, LLC, Conshohocken, PA, for Plaintiff.

Roseann Weisblatt, Esquire, Law Office of Roseann E. Weisblatt, Abington, PA, United States Trustee, Office of the U.S. Trustee, Philadelphia, PA, for Defendant.

Opinion

STEPHEN RASLAVICH, Bankruptcy Judge.

Introduction

American Asset Finance LLC (American) has filed suit against Lawrence F. Feldman (the Debtor) to except its claim from discharge as well as to deny the Debtor a discharge altogether. The Debtor has filed a motion to dismiss the Complaint. A hearing on the matter was held on September 25, 2013. The Court thereafter took the matter under advisement. For the reasons which follow, the Motion will be granted and the Complaint will be dismissed without prejudice. ¹

Counts

The Complaint pleads four counts. Three of the counts seek a declaration of non-dischargeability as to Plaintiff's claim. Count I seeks non-dischargeability based on actual fraud. See11 U.S.C. § 523(a)(2)(A). Count II seeks non-dischargeability based on a writing. See11 U.S.C. § 523(a)(2)(B). Count III seeks the same relief based on fiduciary fraud. See11 U.S.C. § 523(a)(4). The fourth count objects to the granting of discharge based on alleged failure to retain records. See11 U.S.C. § 727(a)(3).

Grounds for Dismissal

The Debtor seeks dismissal of the complaint based on two rules. First, he maintains that none of the four counts states a claim upon which relief may be granted. See F.R.C.P. 12(b)(6).² In the alternative, he argues that the complaint fails to join an indispensable party and so must be dismissed under F.R.C.P. 7019.³

Pleading Standard

To state a claim under Rule 8 ⁴ of the Federal Rules of Civil Procedure, a complaint must contain “a short and plain statement of the claim showing that the pleader is entitled to relief.” F.R.C.P. 8(a)(2). However, “recitals of the elements of a cause of action, supported by mere conclusory statements, do not suffice.” Ashcroft v. Iqbal, 556 U.S. 662, 678, 129 S.Ct. 1937, 1949, 173 L.Ed.2d 868 (2009) (citing Bell Atl. Corp. v. Twombly, 550 U.S. 544, 555, 127 S.Ct. 1955, 167 L.Ed.2d 929 (2007)). Rather, “a complaint must contain sufficient factual matter, accepted as true, to ‘state a claim to relief that is plausible on its face.’ ” Id. at 678, 129 S.Ct. at 1949 (quoting Twombly, 550 U.S. at 570, 127 S.Ct. 1955). Pleading fraud requires the complaint to include specificity as to the “circumstances constituting fraud” such as the “who, what, when, where, and how.” In re Dulgerian, 388 B.R. 142, 147 (Bankr.E.D.Pa.2008) (citing In re Rockefeller Center Properties, Inc. Sec.Litig., 311 F.3d 198, 217 (3d Cir.2002)).

Allegations

The Debtor is an attorney who represented plaintiffs in class action lawsuits. See Motion to Dismiss, 1. In July 2007, he entered into an agreement with the Plaintiff (the 2007 Agreement). Complaint, ¶ 11. Under the agreement, Debtor assigned his interest in legal fees due him from certain class action cases (fen-phen litigation). Id. In August 2008 Debtor received a fee award of $1.2 million. Id. ¶ 12. Under the 2007 Agreement, Debtor owed the Plaintiff $800,000 from that amount. Id. ¶ 13. Notwithstanding, Debtor paid the Plaintiff only $700,000. Id. Debtor has allegedly never paid the Plaintiff all amounts due under the 2007 Agreement. Id. ¶ 15.

In June 2009, the parties resolved their dispute over the 2007 Agreement by entering into a second agreement (the 2009 Agreement). Id. ¶ 16. As part of the 2009 Agreement, the Debtor assigned to Plaintiff his interest in legal fees in two other class actions (the iPod Nano and Vioxx cases). Id. ¶ 17. When the Debtor received his fee in both cases, he failed to turn over those fees to the Plaintiff. Id. ¶ 19. At the present time, Debtor allegedly owes Plaintiff $427,000 plus a penalty of $18,000. Id. ¶ 20. It is these amounts for which Plaintiff seeks a declaration of non-dischargeability.

Count I—False Pretenses

The first count is based on § 523(a)(2) which provides that a debtor will not receive a discharge of any debt: “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, other than a statement respecting the debtor's or an insider's financial condition.” 11 U.S.C. § 523(a)(2)(A) (emphasis added). To successfully challenge the dischargeability of debt under § 523(a)(2)(A) a creditor must establish that: (1) the debtor made the representations knowing they were false; (2) the debtor made the representations with the intent and purpose of deceiving the plaintiff; (3) the creditor justifiably relied on the debtor's false representations; and (4) the creditor suffered a loss or damage as a proximate consequence of the representation having been made. See, e.g., In re Maurer, 112 B.R. 710, 712–13 (Bankr.E.D.Pa.1990). In general, this test applies for all three grounds listed in § 523(a)(2)(A) even though the elements for each vary slightly. In re Vepuri, 2009 WL 2921305, at *10 n. 7 (Bkrtcy.E.D.Pa. Mar. 25, 2009)Plaintiff contends that the Debtor acted under false pretenses when it induced the Plaintiff to enter in to the 2009 Agreement.

A “false pretense” is an “implied misrepresentation or conduct which creates and fosters a false impression, as distinguished from a ‘false representation’ which is an express misrepresentation.” In re Antonious, 358 B.R. 172, 182 (Bkrtcy.E.D.Pa.2006) (quoting In re Haining, 119 B.R. 460, 463–464 (Bankr.D.Del.1990)). A “false pretense” may be “any series of events, when considered collectively, that create a contrived and misleading understanding of a transaction, in which a creditor is wrongly induced to extend money or property to the debtor.” A false pretense must be “fostered ‘willfully, knowingly, and by design; it is not the result of inadvertence.’ ” In re Antonious, 358 B.R. at 182. As false pretenses is a species of fraud, ( see In re Ricker, 475 B.R. 445, 456 (Bkrtcy.E.D.Pa.2012)), the heightened pleading requirement applicable to fraud claims applies equally.

The Plaintiff alleges that the Debtor fraudulently induced the Plaintiff into signing the second agreement. Id. ¶ 24. It next explained that before he signed the 2009 Agreement, the Defendant owed money to Plaintiff under the first agreement. Id. ¶ 25. In order to avoid the consequences of that default, Defendant is alleged to have induced Plaintiff to waive its remedies and sign the second agreement. Id. ¶ 26. This was done without the intent to perform under the second and so, concludes Plaintiff, the promise to pay under the 2009 agreement was given under false pretenses. Id. ¶¶ 27–28.

In reviewing Count II, the Court fails to see a pretense alleged. Plaintiff would have the Court infer that the second agreement was a false pretense because Defendant never intended to comply with agreement. Yet what is required is a representation which Defendant knew to be untrue when he made it. The only affirmative acts attributed to the Defendant is that he “fraudulently induced” Plaintiff to execute the 2009 contract or to waive certain rights under the 2007 contract. Id. ¶¶ 24, 26. These are legal conclusions. Neither does it help to allege that Defendant lacked the intent to perform under the second agreement. There are simply no allegations of a specific representation—express or implied—on Defendant's part. Without that, there cannot be reliance on the Plaintiff's part. Accordingly, the Court finds that Count I fails to state a claim upon which relief can be granted. This count will be dismissed without prejudice.

Count II—Fraud Based On a Writing

Next the Court turns to whether Count II states a cause of action under § 523(a)(2)(B). This section excepts from discharge a debt obtained by “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.” 11 U.S.C. § 523(a)(2)(B); In re Cohn, 54 F.3d 1108, 1114 (3d Cir.1995) (listing the five elements).

The Court finds that four of the five elements are sufficiently plead. The Debtor is alleged to have used a writing (the 2009 Agreement) to obtain the fee advance (¶ 32). The writing contained a material, false statement (¶¶ 33–34). The Plaintiff reasonably relied on that statement when extending credit to Debtor (¶¶ 47–48). Finally, the Debtor intended to deceive the Plaintiff when he made that statement (¶ 44). What remains to be determined is whether it has been alleged that the material misrepresentation pertains to a specific type of information.

Respecting the Debtor's Financial Condition

Section 523(a)(2)(B) does not cover every material statement of fact made in writing to a creditor to induce agreement. It is confined in its application to statements about the financial condition of the debtor (or of an insider). 4 Collier on Bankruptcy ¶ 523.08[2][c] (16th ed.). As to what is meant by “respecting the debtor's ... financial condition,” neither the phrase “respecting the debtor's ... financial condition” nor the term “financial condition” is defined in the Bankruptcy Code. The Third Circuit has not yet had occasion to clarify what either means. Elsewhere, courts are divided on the proper scope of the phrase. The majority view holds that the term “financial condition” refers only to the debtor's overall financial condition, such as the debtor's solvency or net worth. See In re Joelson, 427 F.3d 700, 709 (10th Cir.2005); In re Chivers, 275 B.R. 606, 615 (Bkrtc...