Auto. Fin. Corp. v. Leonard (In re Leonard)
| Decision Date | 02 May 2012 |
| Docket Number | Adv. Pro. No. 11-5073,No. 11-52028,11-52028 |
| Parties | In re WESLEY EVAN LEONARD, Debtor. AUTOMOTIVE FINANCE CORPORATION, Plaintiff, v. WESLEY EVAN LEONARD, Defendant. |
| Court | U.S. Bankruptcy Court — Eastern District of Tennessee |
____________________
Marcia Phillips Parsons
[This opinion is not intended for publication as the precedential effect is deemed limited.]
Dudley Cheadle, Esq.
Nashville, Tennessee 37215
Joseph B. Lyle, Esq.
Bristol, Tennessee 37621
Marcia Phillips Parsons, United States Bankruptcy Judge. In this adversary proceeding, Automotive Finance Corporation ("AFC") seeks a determination of nondischargeability pursuant to 11 U.S.C. § 523(a)(2)(A), (a)(4), and (a)(6) arising out of the failure of the limited liability company of which the debtor Wesley Evan Leonard was a manager and a member to remit proceeds from the sale of vehicles financed by AFC under a floor plan financing agreement. Presently before the court is the Debtor's motion to dismiss for failure to state a claim upon which relief may be granted pursuant to Federal Rule of Bankruptcy Procedure 7012. Additionally, the Debtor seeks dismissal upon the basis that AFC is not the owner and holder of the underlying indebtedness. For the reasons discussed hereafter, the Debtor's motion to dismiss will be denied as to AFC's § 523(a)(6) claim and any standing contention, but granted as to AFC's § 523(a)(2)(A) and (a)(4) claims. This is a core proceeding. See 28 U.S.C. § 157(b)(2)(I).
On August 31, 2011, the Debtor filed a voluntary petition for bankruptcy relief under chapter 7. Subsequently, on December 5, 2011, AFC timely commenced this adversary proceeding. In its complaint, AFC states that the Debtor on behalf of Leonard Motors, LLC ("Leonard Motors"), executed a dealer application on October 9, 2006, in order to obtain floor plan financing from AFC. On the same date, the Debtor also executed on behalf of Leonard Motors a "Demand Promissory Note and Security Agreement" ("Note"), which secured initial floor plan financing of $25,000, and granted AFC a security interest in substantially all of Leonard Motors' assets, including its inventory. In connection with the loan, the Debtor also signed a personal guarantee. Thereafter, between January 10, 2007, and March 2, 2011, the amounts advanced under the Note were gradually increased to $300,000, with the Debtor executing on behalf of Leonard Motors a series of amendments to the Note in order to document the increases. Each additional increase was secured by the grant of a security interest in the Note and included in the Debtor's guarantee.1
AFC alleges that under the terms of the Note Leonard Motors was obligated to hold theproceeds from the sale of vehicles financed by AFC "in trust" for the benefit of AFC and to then pay these proceeds to AFC. Additionally, AFC maintains that each time Leonard Motors requested credit under the Note in order to finance the purchase of a vehicle, it represented, "through or at the direction of" the Debtor, that it would pay the "trust funds" derived from the sale of such vehicle to AFC. According to AFC, notwithstanding these representations and the terms of the Note, Leonard Motors sold nine vehicles but failed to pay to AFC the proceeds from the sales, totaling $90,724.04. AFC adds that with respect to the sale of two of the vehicles Leonard Motors, "through or at the direction of" the Debtor, presented AFC with two checks that were returned for insufficient funds. AFC concludes that as of the Debtor's bankruptcy filing, Leonard Motors was in default under the Note for failure to pay all amounts due and owing. AFC seeks a determination that the amounts owing, along with attorney fees, costs and expenses, are excepted from the Debtor's bankruptcy discharge pursuant to 11 U.S.C. § 523(a)(2)(A) for fraud, § 523(a)(4) as a defalcation while acting in a fiduciary capacity and embezzlement, and § 523(a)(6) for willful and malicious injury to property.
In his motion to dismiss, the Debtor seeks dismissal of all causes of action pursuant to Federal Rule of Civil Procedure 12(b)(6), as incorporated by Federal Rule of Bankruptcy Procedure 7012(b), for failure to state a claim upon which relief may be granted. The Debtor also asserts in his motion that AFC does not have a claim against him because it is no longer the owner and holder of the Note and the underlying indebtedness, although the Debtor cites no particular procedural rule or authority. In its response to the motion to dismiss, AFC denies that it does not hold a claim against the Debtor or that the complaint fails to state a claim for any of the cited bases for relief.
Federal Rule of Civil Procedure 12(b)(6), applicable in adversary proceedings through Federal Rule of Bankruptcy Procedure 7012, provides that complaints may be dismissed for "failure to state a claim on which relief can be granted." As explained by the Sixth Circuit Court of Appeals:
The moving party has the burden of proving that no claim exists. Although a complaint is to be liberally construed, it is still necessary that the complaint contain more than bare assertions or legal conclusions. In re DeLorean Motor Co., 991 F.2d 1236, 1240 (6th Cir.1993) (citing Scheid v. Fanny Farmer Candy Shops, Inc., 859 F.2d 434, 436 (6th Cir.1988)). All factual allegations in the complaint must bepresumed to be true, and reasonable inferences must be made in favor of the non-moving party. Great Lakes Steel v. Deggendorf, 716 F.2d 1101, 1105 (6th Cir.1983); 2 Moore's Federal Practice § 12.34[1][b] (Matthew Bender 3d ed. 2003). The court need not, however, accept unwarranted factual inferences. Morgan v. Church's Fried Chicken, 829 F.2d 10, 12 (6th Cir.1987). To survive a motion to dismiss, the complaint must present "enough facts to state a claim to relief that is plausible on its face." Bell Atlantic Corp. v. Twombly, 550 U.S. 544, 127 S. Ct. 1955, 1974, 167 L.Ed.2d 929 (2007).
Total Benefits Planning Agency, Inc. v. Anthem Blue Cross and Blue Shield, 552 F.3d 430, 434 (6th Cir. 2008). The Supreme Court of the United States has further stated that:
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." 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. The plausibility standard is not akin to a "probability requirement," but it asks for more than a sheer possibility that a defendant has acted unlawfully. Where a complaint pleads facts that are "merely consistent with" a defendant's liability, it "stops short of the line between possibility and plausibility of 'entitlement to relief.'"
Ashcroft v. Iqbal, 556 U.S. 662, 678, 129 S. Ct. 1937 (2009) (internal citations omitted). Moreover, "'a legal conclusion couched as a factual allegation' need not be accepted as true on a motion to dismiss, nor are recitations of the elements of a cause of action sufficient." Fritz v. Charter Twp. of Comstock, 592 F.3d 718, 722 (6th Cir. 2010). This court will examine each of the claims for relief set forth in the complaint and determine if the required plausibility standard is met. First, however, the court will address whether the complaint should be dismissed because AFC allegedly lacks a claim against the Debtor.
The Debtor argues that AFC does not have a claim against him as a matter of law because the loan documents, including the Note, copies of which are attached to the complaint as Exhibits 1 through 4, state on their face that AFC has sold the obligation owed to it by Leonard Motors and guaranteed by the Debtor. Specifically, each page of these documents includes the following legend: "This receivable has been sold to AFC Funding Corporation and an interest therein has been granted to Harris Nesbitt Corp. as agent." The Debtor contends that because AFC is not the owner and holder of the Note the complaint must be dismissed.
In response, AFC does not deny that it has sold the right to receive payment from Leonard Motors, the "Leonard Motors Receivables," to AFC Funding Corporation. AFC explains that the legend on the loan documents refers to a "conduit financing transaction between AFC and AFC Funding Corporation," with the latter entity being "wholly owned by AFC and . . . formed for the purpose of purchasing finance receivables from AFC and selling undivided participation interest in the resulting pool of finance receivables, commonly referred to as a securitization pool, to a bank conduit facility on a revolving basis." According to AFC, this transaction does not affect its ability to bring this action because the receivables purchase agreement designates AFC as servicer of the receivables, including the Leonard Motors Receivables, and as a servicer it is a party in interest under Federal Rule of Civil Procedure 17 with standing to bring this action. These factual averments are supported by the affidavit of James E. Money II, the treasurer of AFC Funding Corporation. Mr. Money also states in his affidavit that AFC Funding Corporation "authorizes" the continuation of this adversary proceeding and "agrees to be bound by the result."
For purposes of § 523(a)(2)(a), (a)(4), and (a)(6), the party entitled to bring a nondischargeability action is "the creditor to whom such debt is owed." See 11 U.S.C. § 523(c)(1); see also Fed. R. Bankr. P. 4007(a) (). As adversary proceedings, nondischargeability actions are governed by Federal Rule of Bankruptcy Procedure 7017, which incorporates Federal Rule of Civil Procedure 17. See Fed. R. Bankr. P. 7001 ()....
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