Glass v. Brown (In re Brown), Case No. 16-26371-B-7

• Decision Date: 20 March 2017
• Docket Number: Adversary No. 17-2004,Case No. 16-26371-B-7
• Court: U.S. Bankruptcy Court — Eastern District of California
• Parties: In re: JAMES E. BROWN, Debtor(s). DAVID GLASS, Trustee of Reiswig Revocable Trust (Creditor), Plaintiff(s), v. JAMES E. BROWN, Defendant(s).

In re: JAMES E. BROWN, Debtor(s).

DAVID GLASS, Trustee of Reiswig Revocable Trust (Creditor), Plaintiff(s), v. JAMES E. BROWN, Defendant(s).

Case No. 16-26371-B-7

Adversary No. 17-2004

UNITED STATES BANKRUPTCY COURT EASTERN DISTRICT OF CALIFORNIA

March 20, 2017

DC No. GSJ-1

ORDER (1) GRANTING MOTION TO DISMISS; AND (2) GRANTING IN PART AND DENYING IN PART REQUEST FOR JUDICIAL NOTICE

Presently before the court is a motion to dismiss and a request for judicial notice filed by defendant James E. Brown. Defendant's motion to dismiss and request for judicial notice are opposed by plaintiff Dr. David Glass, trustee of the Reiswig Revocable Trust Dated February 24, 1998, as Restated January 4, 2012 ("Reiswig Trust"). Defendant did not reply to plaintiff's opposition.

This matter was heard on March 14, 2017. Appearances were noted on the record. This order modifies the court's tentative decision stated on the record in open court. It also takes into consideration the parties' arguments and plaintiff's request for leave to amend. To the extent there are any differences between the court's tentative decision stated orally on the record and this written decision, this written decision governs. Playmakers LLC v. ESPN, Inc., 376 F.3d 894, 896 (9th Cir. 2004) (citation omitted).

Introduction

The complaint initiating this adversary proceeding was filed on January 13, 2017. It purports to allege three claims for relief under 11 U.S.C. § 523(a): a § 523(a)(2)(A) claim in the first claim for relief; a § 523(a)(2)(B) claim in the second claim for relief; and a § 523(a)(4) claim in the third claim for relief. Defendant moves pursuant to Federal Rule of Civil Procedure 12(b)(6) (applicable by Federal Rule of Bankruptcy Procedure 7012(b)) to dismiss all three claims for relief. Defendant also requests that the court take judicial notice of exhibits consisting of documents filed in the underlying chapter 7 case, a related state court proceeding, certified copies of recorded public documents, and other documents.

The court initially notes that the defendant's motion raises a significant number of factual questions which are inappropriate for determination on a motion to dismiss. For example, questions regarding the defendant's intent and the truth or accuracy of representations by the defendant are factual issues more appropriate for summary judgment or trial. This is a motion to dismiss and that means the court must take as true the factual allegations in the complaint. If the complaint alleges that thedefendant's representations were false then, for purposes of this motion, the court must assume the defendant's representations are false. The same is true with respect to defendant's argument that he lacked an intent to deceive. Again, intent is a factual matter and typically not appropriate for resolution on a motion to dismiss.

Nevertheless, the complaint is deficient. As explained below, when considered in the context of matters subject to judicial notice, the allegations in the complaint are not sufficient to state actionable claims under §§ 523(a)(2)(A), 523(A)(2)(B), or 523(a)(4). Therefore, for the reasons and to the extent explained below, defendant's motion to dismiss will be granted and defendant's request for judicial notice will be granted in part and denied in part.

Background

Defendant is the former successor trustee of the Reiswig Trust. Following the commencement of an action by the plaintiff in the San Joaquin County Superior Court captioned Reiswig Revocable Trust, No. 39-2014-315733-PR-TR-STK, on March 20, 2015, the state court suspended defendant as the successor trustee of the trust. The state court appointed plaintiff as temporary successor trustee on or about April 24, 2015. The state court permanently removed defendant and appointed plaintiff as successor trustee following a trial held on or about June 10, 2015.

The state court appointed the plaintiff as the successor trustee because defendant obtained a $262,000 loan secured byreal property located at 600 Windsor Drive, Lodi, California ("Lodi Property"), a trust asset, and because the defendant failed to adequately account for payments from trust assets (deposit accounts) to himself or for his personal benefit. The complaint alleges that the defendant obtained the $262,000 with a loan application in which he misrepresented that he had fee title to the Lodi Property and authority to obtain financing on it when he had only a life estate and had no such authority.¹ Without providing any additional detail, the complaint merely refers to the payments the defendant made to himself or for his benefit from trust funds in deposit accounts and for which he did not adequately account as a misappropriation of trust funds by the defendant.

The complaint alleges the defendant owes the Reiswig Trust at least $105,303.91. The state court made that determination on October 2, 2015, and allocated the defendant's repayment obligation as follows: (i) the balance owed on the $262,000 loan after it was repaid;² plus, (ii) $59,769 in payments thedefendant made to himself or for his benefit from trust funds in deposit accounts which were not adequately accounted for. A judgment in that amount was entered against the defendant on June 29, 2016.

Legal Standard

A motion to dismiss under Rule 12(b)(6) tests the legal sufficiency of the claims alleged in the complaint. Ileto v. Glock, Inc., 349 F.3d 1191, 1199-1200 (9th Cir. 2003). "Dismissal can be based on the lack of a cognizable legal theory or the absence of sufficient facts alleged under a cognizable legal theory." Balistreri v. Pacifica Police Dep't, 901 F.2d 696, 699 (9th Cir. 1990).

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.'" Ashcroft v. Iqbal, 556 U.S. 662, 678 (2009) (quoting Bell Atl. Corp. v. Twombly, 550 U.S. 544, 570 (2007)). All allegations of material fact are taken as true and construed in the light most favorable to the plaintiff. Johnson v. Lucent Techs., Inc., 653 F.3d 1000, 1010 (9th Cir. 2011). Additionally, the court may take judicial notice of court records and certified recorded documents on a motion to dismiss. C.B. v. Sonora Sch. Dist., 691 F. Supp. 2d 1123, 1138 (E.D. Cal. 2009) (stating that the court "may take judicial notice of matters of public record, including duly recorded documents, and court records available to the publicthrough the PACER system via the internet"); U.S. v. Ritchie, 342 F.3d 903, 908 (9th Cir. 2003) (court may consider matters properly subject to judicial notice on a motion to dismiss).

Defendant's Request for Judicial Notice

To the extent judicially-noticed facts are included in the court's presentation of facts, plaintiff's objection to the defendant's request for judicial notice is overruled. For the avoidance of doubt, the court will take judicial notice of defendant's Exhibits A, B, C, D, E, F, and I.

Exhibits A and B are court documents filed in related judicial proceedings. Exhibit A is a document filed in the aforementioned state court proceeding which is related to this adversary proceeding.³ Exhibit B is a document filed in the underlying chapter 7 case in support of plaintiff's earlier motion for relief from the automatic stay. Exhibits C, D, E, F, and I are certified copies of public records.

It is not necessary for the court to take judicial notice of defendant's Exhibits G, H, or J, or to draw any inferences from those documents in order to dispose of defendant's motion to dismiss. Therefore, as to those and any other documents, defendant's request for judicial notice will be denied.

Discussion

The § 523(a)(2)(B) Claim Alleged in the Second Claim for Relief.

The second claim for relief purports to allege a claim under § 523(a)(2)(B). Section 523(a)(2)(B) states as follows:

(a) A discharge under section 727 . . . does not discharge an individual debtor from any debt—

(2) for money, property, services, or an extension, renewal, or refinancing of credit, to the extent obtained by—

[ . . .]

(B) 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).

Although the complaint alleges the entire debt is non-dischargeable under § 523(a)(2)(B), allegations in support of the second claim for relief only refer to the defendant's written misrepresentations associated with that portion of the debt the state court allocated to the $262,000 loan. The complaint refers to a misappropriation of trust funds by the defendant. Construed liberally and in the plaintiff's favor, that could refer to the defendant's personal use of and failure to account for trust funds from deposit accounts. And it may be that there were written misrepresentations associated with that portion of the debt as allocated by the state court which, if made, may meet the requirements of § 523(a)(2)(B). Therefore, as to that portion of the debt the state court allocated to the defendant's personal use of and failure to adequately account for trust funds from deposit accounts, the § 523(a)(2)(B) claim alleged in the second claim for relief will be dismissed without prejudice and withleave to amend. However, as to the portion of the debt the state court allocated to the $262,000 loan, the § 523(a)(2)(B) claim will be dismissed with prejudice consistent with the court's tentative decision stated on the record.

Section 523(a)(2)(B)(iii) requires reliance on the debtor's written misrepresentations by the creditor to whom the debtor is liable. The creditor to whom the defendant is liable here is the plaintiff (or the trust). However, with respect to the portion of the debt that the state court allocated to the $262,000 loan,...