Econocare, Inc. v. Georgios Spyropoulos (In re Spyropoulos)
| Decision Date | 19 July 2021 |
| Docket Number | Adversary Proceeding No. 20-179,District Court Case No. 21 C 20,Bankruptcy Case No. 20-3995 |
| Citation | 632 B.R. 646 |
| Parties | IN RE: Georgios SPYROPOULOS, Debtor. Econocare, Inc., Plaintiff-Appellant, v. Georgios Spyropoulos and CDBG1, Inc., Defendants-Appellees. |
| Court | U.S. District Court — Northern District of Illinois |
Charles Aaron Silverman, Charles Aaron Silverman PC, Jonathan D. Lubin, Attorney at Law, Skokie, IL, for Plaintiff-Appellant.
Paul Mathew Bach, Bach Law Offices, Northbrook, IL, for Defendants-Appellees Georgios Spyropoulos.
Clerk Bankruptcy Court, U.S., United States Trustee, Office of the United States Trustee, Judge Schmetterer, Chicago, IL, for Defendants-Appellees Service List.
Plaintiff-appellant Econocare, Inc., ("Econocare") filed an adversary complaint in the United States Bankruptcy Court, claiming that debtor Georgios Spyropoulos owes Econocare a debt that is excepted from discharge under 11 U.S.C. § 523(a)(2)(A). The bankruptcy court dismissed the adversary proceeding with prejudice for failure to state a claim. Econocare appeals to this Court pursuant to 28 U.S.C. § 158(a)(1). For the following reasons, the bankruptcy court's decision is reversed.
Spyropoulos's debt to Econocare stems from a long-running business relationship. Econocare provides interior design and renovation services to nursing homes and similar facilities. For many years, Econocare had engaged Spyropoulos, via his business entity, as a subcontractor to build and install cabinetry and furniture and perform other carpentry services. Between 2015 and 2017, Econocare paid Spyropoulos deposits for certain jobs, but he never completed the work. As a result, in May 2018, Econocare filed suit against Spyropoulos and his business entity in the Circuit of Cook County for breach of contract and unjust enrichment.
In February 2020, as the Cook County case was drawing to a close, Spyropoulos filed a Chapter 13 bankruptcy petition. Econocare moved in the bankruptcy court for relief from the automatic stay so it could conclude the Cook County case. The bankruptcy court granted the motion.
Following trial, the Cook County court issued a judgment order and opinion in which it explained that, on four jobs in particular, the funds Econocare deposited with Spyropoulos exceeded the goods and services it received from him in the amount of $83,500. Spyropoulos had used the deposited funds to purchase materials and had begun to build furniture, but the materials and goods were destroyed when Spyropoulos's shop flooded in early 2019.
Later that year, Spyropoulos submitted a claim to his insurer and recovered the full value of the goods and materials in a total amount of $87,000. On April 23, 2020, the Cook County court entered judgment against Spyropoulos and in favor of Econocare in the amount of $83,550, plus costs.
In May 2020, Econocare filed an adversary complaint against Spyropoulos in the bankruptcy court. In the adversary complaint, Econocare described the Cook County lawsuit and its underlying facts, including the payment of $87,000 in insurance proceeds, and it sought, among other relief, a declaration that the judgment debt was non-dischargeable because it was obtained by fraud and embezzlement and represented a willful and malicious injury. See 11 U.S.C. § 523(a)(2)(A), (4), & (6). Spyropoulos moved to dismiss, and the bankruptcy court granted the motion in a written order, without prejudice to filing an amended complaint. The court reasoned that Econocare had not pleaded that Spyropoulos had obtained funds from Econocare by "false pretenses or misrepresentations" (Appellant Designation of R. on Appeal (hereinafter, "R.") at PageID# 132, ECF No. 5-2), it had not plausibly pleaded any fraudulent intent, and Spyropoulos had not yet sought a hardship discharge, so the question of nondischargeability under § 523(a)(6) was not ripe.
Econocare filed an amended adversary complaint under an altered legal theory, asserting that Spyropoulos set up a new business entity (identified as "CDBG1, Inc.") in March 2018, shortly before Econocare filed the Cook County lawsuit, and he fraudulently transferred assets to that entity—including, for example, the insurance proceeds—to frustrate creditors such as Econocare. Spyropoulos moved to dismiss again. Following a December 16, 2020 hearing, the bankruptcy court granted the motion, issuing a short, one-page order dismissing the complaint without leave to amend "for reasons stated from bench by court" and terminating the adversary proceeding. (R. at PageID# 213.) The reasons the bankruptcy court gave from the bench consisted of the following:
Now this amended complaint alleges purported grounds under 523(a)(6), but it is not available—that remedy is not available or that cause of action is not available unless a hardship discharge has been requested, but the amended complaint does not request it. Therefore, that part of the complaint must be dismissed. The complaint adds a new defendant who has not been served as of yet. And, finally, no facts pled to support the purported allegation and the purported claim under 523(a)(2)(A). And for reasons stated from the bench by the court, the adversary is dismissed. Because this is the second complaint, I will make it final—the order final and appealable, and I will not give leave to amend the complaint further.
(Suppl. Ex., Tr. of Dec. 16, 2020 Hr'g at 9:1-18, ECF No. 15.) This appeal followed.
This Court has jurisdiction to review "judgments, orders and decrees" issued by the bankruptcy court. 28 U.S.C. § 158(a)(1). "A bankruptcy court's findings of fact are reviewed for clear error, and its conclusions of law are reviewed de novo." In re Midway Airlines, Inc. 383 F.3d 663, 668 (7th Cir. 2004) (citing In re Smith , 286 F.3d 461, 464-65 (7th Cir. 2002) ).
Chapter 13 of the bankruptcy code "provides, for individuals" below a certain debt threshold, see 11 U.S.C. § 109(e), In re Schaitz , 913 F.2d 452, 453 (7th Cir. 1990). Following completion of the payment plan, the bankrupt debtor's remaining debts are discharged, except those (among other exceptions) that are nondischargeable under "paragraph (1)(B), (1)(C), (2), (3), (4), (5), (8), or (9) of section 523(a)." 11 U.S.C. § 1328(a)(2). Further, if the court grants a hardship discharge under § 1328(b) because, for example, the debtor could not complete the plan due to circumstances outside of his control, see id. , the debts described in all other paragraphs of § 523, including subsection (a)(6), are also nondischargeable. See 11 U.S.C. § 1328(c)(2).
The Federal Rules of Bankruptcy Procedure require certain matters—including "the dischargeability of a debt"—to be raised in the bankruptcy court, not by motion, but by filing a complaint to initiate an "adversary proceeding." See Fed. R. Bankr. P. 7001(6), see also Fed. R. Bankr. P. 4007. Federal Rules of Civil Procedure 12(b) and 8 apply in adversary proceedings. See Fed. R. Bankr. P. 7008, 7012(b). "A motion under Federal Rule of Civil Procedure 12(b)(6) tests whether the complaint states a claim on which relief may be granted." Richards v. Mitcheff , 696 F.3d 635, 637 (7th Cir. 2012). Under Rule 8(a)(2), a complaint must include "a short and plain statement of the claim showing that the pleader is entitled to relief." Fed. R. Civ. P. 8(a)(2). The short and plain statement under Rule 8(a)(2) must " ‘give the defendant fair notice of what ... the claim is and the grounds upon which it rests.’ " Bell Atl. Corp. v. Twombly , 550 U.S. 544, 555, 127 S.Ct. 1955, 167 L.Ed.2d 929 (2007) (quoting Conley v. Gibson , 355 U.S. 41, 47, 78 S.Ct. 99, 2 L.Ed.2d 80 (1957) ). Under this standard, a plaintiff's "[f]actual allegations must be enough to raise a right to relief above the speculative level." Id. Stated differently, "a complaint must contain sufficient factual matter, accepted as true, to ‘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 Twombly , 550 U.S. at 570, 127 S.Ct. 1955 ). "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." Id. (citing Twombly , 550 U.S. at 556, 127 S.Ct. 1955 ). Additionally, any claims of or including acts of fraud must comply with Federal Rule of Civil Procedure 9(b), which requires the pleading party to "state with particularity the circumstances constituting fraud," United States ex rel. Presser v. Acacia Mental Health Clinic, LLC , 836 F.3d 770, 775 (7th Cir. 2016), although fraudulent or deceptive intent "may be alleged generally."
In the amended adversary complaint, Econocare asserted that Spyropoulos's debt is nondischargeable under § 523(a)(2)(A), which provides that a debt "for money, property, [or] services" is nondischargeable "to the extent obtained by ... false pretenses, a false representation, or actual fraud." Econocare also briefly cited § 523(a)(6), but it admitted in its response brief, and it reiterates in its opening brief on appeal, that this was a scrivener's error, and it clarifies that it intended to assert nondischargeability only under § 523(a)(2)(A).
On appeal, Econocare makes three arguments. Only one of them addresses the basis for dismissal that the bankruptcy court articulated in its December 16, 2020 ruling: Econocare argues that its amended adversary complaint stated a claim—in particular, it stated a claim that Spyropoulos...
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