Groom v. Krook (In re Krook)

Decision Date01 June 2020
Docket NumberNo. 19 B 2216,No. 19 A 982,19 B 2216,19 A 982
Citation615 B.R. 479
Parties IN RE: Patrick L. KROOK, Debtor. Chad A. Groom, Plaintiff, v. Patrick L. Krook, Defendant.
CourtU.S. Bankruptcy Court — Northern District of Illinois

Attorney for plaintiff Chad A. Groom : Paul M. Bach, Bach Law Offices, Northbrook, IL

Attorney for defendant Patrick L. Krook : James T. Magee, Magee, Hartman, P.C., Round Lake, IL

MEMORANDUM OPINION

A. Benjamin Goldgar, United States Bankruptcy Judge

Before the court for ruling is the motion of defendant Patrick Krook to dismiss the three-count adversary complaint of plaintiff Chad Groom. The complaint alleges that Krook, through his company, Show Your Auto, LLC, agreed to act as broker for Groom's purchase of a classic 1970s "muscle car." Groom paid Krook for the car. But Krook had never contacted the seller and so never delivered the car. He also never returned Groom's money. Groom objects to the dischargeability of Krook's debt.

For the reasons below, Krook's motion to dismiss the complaint will be denied.

1. Jurisdiction

The court has subject matter jurisdiction under 28 U.S.C. § 1334(b) and the district court's Internal Operating Procedure 15(a). This is a core proceeding under 28 U.S.C. § 157(b)(2)(I).

2. Background

On a Rule 12(b)(6) motion, all well-pleaded allegations in the complaint are taken as true, and all reasonable inferences are drawn in favor of the non-movant. Viamedia, Inc. v. Comcast Corp. , 951 F.3d 429, 454 (7th Cir. 2020). Exhibits attached to the complaint are also considered, as are matters subject to judicial notice. Geinosky v. City of Chi. , 675 F.3d 743, 745 n.1 (7th Cir. 2012).

The complaint and exhibits allege the following facts. Groom is a resident of Missouri. Krook lives in Lake Villa, Illinois, and is an automobile sales broker. Krook did business through an Illinois limited liability company, Show Your Auto, LLC. He was Show Your Auto's sole member as well as its manager.1

In August 2018, Groom found a 1970 Dodge Challenger listed for sale on the website classiccars.com. The price was $99,950. Groom asked about the car through the website and received a call from Krook that same day. Krook told Groom he was the broker for the car's owner and had authority to act as the owner's agent.

After negotiations, Groom and Krook reached an agreement for the sale of the car. The seller would make several cosmetic483 repairs, and Groom would pay $96,750.2

In December 2018, Krook sent Groom an email telling him to wire $86,750 (the purchase price minus Groom's initial $10,000 deposit) to Show Your Auto. Once the seller made the repairs, Krook would release the funds to him, and the seller would release the car for transport. Krook added that he would obtain the title from the seller.

Groom wired the money, but Krook never delivered the car because he never paid the seller. In fact, the seller knew nothing of the proposed sale until later when Groom contacted him.

In January 2019, Krook filed a chapter 7 bankruptcy case. Groom then began this adversary proceeding, filing a three-count complaint alleging that Krook's debt to him is nondischargeable. Count I is a claim under section 523(a)(2)(A) of the Bankruptcy Code, 11 U.S.C. § 523(a)(2)(A), that the debt is one for money obtained by fraud. Count II is a claim under section 523(a)(4), 11 U.S.C. § 523(a)(4), that the debt resulted from embezzlement. Count III is a claim under section 523(a)(6), 11 U.S.C. § 523(a)(6), that the debt is for a willful and malicious injury.

Krook has moved to dismiss all three counts for failure to state a claim. Groom opposes the motion.

3. Discussion

Krook's motion will be denied. All three counts of the complaint state plausible nondischargeability claims.

a. Rule 12(b)(6) Standards

To survive a motion to dismiss under Rule 12(b)(6), a complaint must clear "two easy-to-clear hurdles." EEOC v. Concentra Health Servs., Inc. , 496 F.3d 773, 776 (7th Cir. 2007). First, the complaint must describe the claim in enough detail to give the defendant fair notice of its nature. Cornielsen v. Infinium Capital Mgmt., LLC , 916 F.3d 589, 598 (7th Cir. 2019). "[A] formulaic recitation of the elements of a cause of action will not do." Bell Atl. Corp. v. Twombly , 550 U.S. 544, 555, 127 S.Ct. 1955, 167 L.Ed.2d 929 (2007).

Second, the claim must be "plausible on its face," id. , at 570, 127 S.Ct. 1955 , meaning the plaintiff's right to relief must rise above a "speculative level," id. at 555, 127 S.Ct. 1955 ; see also Cornielsen , 916 F.3d at 598. "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." Iqbal v. Ashcroft , 556 U.S. 662, 678, 129 S.Ct. 1937, 173 L.Ed.2d 868 (2009) ; see also Lewis v. City of Chi. , 914 F.3d 472, 475 (7th Cir. 2019).

b. Personal Liability

Before the substance of Groom's claims can be discussed, a threshold issue must be addressed. Krook contends that the funds Groom wired to Show Your Auto were "the funds of Show Your Auto," not Krook. (Mot. at 6). In Krook's view, then, any debt to Groom is not Krook's but "that of the corporation, Show Your Auto, LLC." ( Id. at 2).

Krook is mistaken. Although he did business through his limited liability company, he can be held personally liable to Groom. It is well established in Illinois that a business corporation's officer who participates actively in the corporation's torts is subject to personal liability. See Bank of Commerce & Trust Co. v. Strauss (In re Strauss) , 523 B.R. 614, 632 (Bankr. N.D. Ill. 2014). The same principle applies to limited liability companies. In 2019, the General Assembly amended the Illinois Limited Liability Company Act to provide that "a member or manager of a limited liability company may be liable under law other than this Act for its own wrongful acts or omissions, even when acting or purporting to act on behalf of a limited liability company." 805 ILCS 180/10-10(a-5).3 Although the General Assembly enacted the amendment after the events alleged here, its intention was to "clarify ... existing law," not change it. Id. Clarifying amendments apply retroactively. United States ex rel. Garbe v. Kmart Corp. , 824 F.3d 632, 642 (7th Cir. 2016) ; People v. Ramsey , 192 Ill. 2d 154, 167, 735 N.E.2d 533, 540, 248 Ill.Dec. 882 (2000).

Groom alleges that Krook participated in Show Your Auto's tortious conduct. That is enough to make Krook personally liable to Groom and the debt potentially nondischargeable in Krook's bankruptcy case.

c. Count I – False Representation

So to the claims themselves. Count I alleges a plausible claim under section 523(a)(2)(A) that Krook fraudulently induced Groom to pay him $97,650 for a car Krook had no intention of delivering.

Section 523(a)(2)(A) of the Code excepts from discharge "any debt ... for money ... to the extent obtained by false pretenses, a false representation, or actual fraud." 11 U.S.C. § 523(a)(2)(A). Although some courts suggest there is a single test for determining nondischargeability under section 523(a)(2)(A), that section in fact describes three separate grounds: false pretenses, false representation, and actual fraud. City of Chi. v. Spielman (In re Spielman) , 588 B.R. 198, 204 (Bankr. N.D. Ill. 2018) ; Board of Educ. v. Monarrez (In re Monarrez) , 588 B.R. 838, 858 (Bankr. N.D. Ill. 2018).

Count I is a claim for representational fraud. To state a representational fraud claim under section 523(a)(2)(A), a creditor must allege that (1) the debtor made a false representation he either knew was false or made with reckless disregard for its truth; (2) the debtor made the false representation with an intent to deceive or defraud; and (3) the creditor justifiably relied on the false representation. In re Davis , 638 F.3d 549, 553 (7th Cir. 2011) ; Ojeda v. Goldberg , 599 F.3d 712, 716-17 (7th Cir. 2010) ; Strauss , 523 B.R. at 625.

Groom alleges each element. According to Groom, Krook represented that he was the seller's broker and could act as his agent. Krook also represented that if Groom would wire his company the remaining $86,750, he would obtain the car title from the seller, would have the seller make the agreed repairs, would release the payment to the seller, and would have the seller release the car for transport. Not one of these representations was true – and Krook knew it, because he never told the seller any of this. Instead, Krook fabricated the entire transaction to induce Groom to part with his money. That Krook never spoke to the seller suggests both that he knew his representations were false and that he intended to deceive Groom. And Groom justifiably relied on the representations, taken in by Krook's phone call in response to his website inquiry. No "cursory examination or investigation" would have revealed that Krook was making the whole thing up. Field v. Mans , 516 U.S. 59, 71, 116 S.Ct. 437, 133 L.Ed.2d 351 (1995) (internal quotation omitted).

Apart from his contention that the debt is purely corporate, Krook's only basis for urging dismissal is that Count I alleges false promises – false representations of future conduct – and those are not actionable.4

Not so. Krook is right that a false representation must ordinarily relate to a "present or past fact." Landmark Credit Union v. Sharp (In re Sharp ), 561 B.R. 673, 680 (Bankr. N.D. Ill. 2016) (internal quotation omitted); Berger Schatz, LLP v. Livermore (In re Livermore) , Nos. 12 B 30720, 12 A 1689, 2013 WL 1316549, at *4 (Bankr. N.D. Ill. Apr. 3, 2013). He is also right that the false representations Count I alleges are mostly promises.5 But a false promise will be actionable and so will support a section 523(a)(2)(A) claim if the debtor made the promise with no intention of keeping it. Holtz v. JPMorgan Chase Bank, N.A. , 846 F.3d 928, 932 (7th Cir. 2017) ("[M]aking a promise with intent not to keep it is fraud."); Sullivan v. Ratz , 551 B.R. 338,...

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