In re Baker

• Citation: 66 BR 652
• Decision Date: 04 November 1986
• Docket Number: Bankruptcy No. BK-R-85-00413,Adv. No. 85-0113.
• Court: United States Bankruptcy Courts. Ninth Circuit. U.S. Bankruptcy Court — District of Nevada
• Parties: In re Douglas A. BAKER, dba Renegade Sports Center, and Debra J. Baker, dba Debra J. Baker, C.P.A., Debtors. Dick MAY and Chris May, Plaintiffs, v. Douglas A. BAKER and Debra J. Baker, Defendants.

66 B.R. 652 (1986)

In re Douglas A. BAKER, dba Renegade Sports Center, and Debra J. Baker, dba Debra J. Baker, C.P.A., Debtors Dick MAY and Chris May, Plaintiffs, v. Douglas A. BAKER and Debra J. Baker, Defendants.

Bankruptcy No. BK-R-85-00413, Adv. No. 85-0113.

United States Bankruptcy Court, D. Nevada.

November 4, 1986.

Bradley P. Elley, Law Office of D.G. Menchetti, Ltd., Incline Village, Nev., for plaintiffs Dick and Chris May.

John R. Martz, Reno, Nev., for defendants Douglas and Debra Baker.

MEMORANDUM DECISION AND ORDER

JAMES H. THOMPSON, Bankruptcy Judge.

This adversary proceeding is before the court on plaintiffs' complaint to determine the dischargeability of a debt under 11 U.S.C. §§ 523(a)(4) or (6) or that debtors should be denied discharge under §§ 727(a)(3) or (5). Defendants moved to dismiss for failure to state a claim on which relief can be granted. The motion to dismiss is based on Fed.R.Civ.P. 12(b)(6) made applicable to this adversary proceeding by Bankruptcy Rule 7012.

Rule 12(b)(6)

The Federal Rules of Civil Procedure provide that a claim for relief shall contain "a short and plain statement of the claim showing that the pleader is entitled to relief. . . ." Fed.R.Civ.P. 8(a)(2). The word "claim" means the aggregate of operative facts which give rise to a right enforceable in the courts, or refers to a set of facts giving rise to one or more legal rights. Goldstein v. North Jersey Trust Co., 39 F.R.D. 363, 366 (S.D.N.Y.1966). The complaint is sufficient if, within the framework of the complaint, the defendant is informed with reasonable particularity of a legally cognizable claim against him. United States v. Crown Zellerbach Corporation, 141 F.Supp. 118, 125 (N.D.Ill.1956). Allegations that are conclusory and do not set forth sufficient material facts to support plaintiffs' claim are not sufficient. See North Star International v. Arizona Corporation Commission, 720 F.2d 578, 583 (9th Cir.1983).

Plaintiffs' § 523(a)(4) claim

Plaintiffs' first claim is based on 11 U.S.C. § 523(a)(4) which excepts from discharge any debts of an individual "for fraud or defalcation while acting in a fiduciary capacity, embezzlement, or larceny. . . ." In support of this claim, plaintiffs' plead the following:

1. That defendants purchased all of plaintiffs\' shares of D & D Masonry, Inc.;

2. that the debt was evidenced by defendants\' promissory note and secured by a lien on corporate equipment;

3. that defendants, individually, and as officers of D & D Masonry, Inc., disposed of the property without plaintiffs\' permission or consent; and

4. that the corporation is defunct and its stock is now worthless.

Under Fed.R.Civ.P. 9(b) fraud must be pled with particularity. Reading Rule 9(b) in conjunction with Rule 8, plaintiffs' complaint must provide a short and simple description of the factual basis for the fraud claim. See Rosengarten v. Buckley, 565 F.Supp. 193, 196 (D.Md.1982). "Generally, a fraud claim is considered sufficient when it sets forth the time, place, particular contents of the false representations, the identity of the party making the false representations, and the consequences of the misrepresentation." Rudolph v. Merrill Lynch, Pierce, Fenner & Smith, Inc., 100 F.R.D. 807, 809 (N.D.Ill.1984). Plaintiffs' allegations of fraud merely state in a conclusory fashion that without plaintiffs' permission or consent, defendants as individuals and officers of D & D Masonry, Inc. disposed of corporate property secured by a lien in favor of plaintiffs. These allegations fail to show a sufficient factual basis to support a fraud claim which must be pled with particularity under Rule 9(b).

Plaintiffs' pleading burden with respect to the defalcation claim is much lighter. The term "defalcation" is a broader term than fraud and would include the taking of money entrusted to a fiduciary. Central Hannover Bank and Trust Co. v. Herbst, 93 F.2d 510 (2d Cir.1937). Further, if it is proven that a debtor committed a defalcation with respect to funds held in trust, it is not necessary to prove that the defalcation was intentional. Gonzalles v. Raiser Constr. Co. Inc., 22 B.R. 58, 59 (Bankr. 9th Cir.1982). Finally, Fed.R. Civ.P. 9(b) does not require that a defalcation claim be stated with particularity. However, in order to survive defendants' motion to dismiss, under § 523(a)(4), both of plaintiffs' claims of fraud or defalcation must also sufficiently allege that defendants committed the fraud or defalcation while acting in a fiduciary capacity. Crawford v. Burke, 195 U.S. 176, 25 S.Ct. 9, 49 L.Ed. 147 (1904) (interpreting former § 17(a)(4) of the Bankruptcy Act).

The meaning of "fiduciary" in § 523(a)(4) is an issue of federal law. The broad, general definition of fiduciary — a relationship involving confidence, trust and good faith—is inapplicable in the dischargeability context. The trust giving rise to the fiduciary relationship must be imposed prior to any wrongdoing and the debtor must have been a "trustee" before the wrong and without reference to it. These requirements eliminate constructive, resulting or implied trusts.

Ragsdale v. Haller, 780 F.2d 794, 796 (9th Cir.1986) (citations omitted).

In Schlecht v. Thorton, 544 F.2d 1005, 1006 (9th Cir.1976), the court announced several criteria or characteristics that must exist in order to give rise to an express trust; these are:

1. Specific words in the contract or other document that create a trust;

2. definite subject matter and beneficiary;

3. a specified res or trust corpus; and most importantly,

4. a specific intent to create a fiduciary relationship.

In In re Graham, 7 B.R. 5 (Bankr.D. Nev.1980), a security agreement was entered into by a corporation and provided that all proceeds from the sale of collateral was to be held in trust by the corporation. The security agreement was personally guaranteed by the debtor as principals of the corporation. In Graham, this court held that in the absence of a separate account relating to the trust corpus, "a trust clause inserted in a document which sets up a debtor-creditor relationship in an effort to assure the debtor's performance of its obligation does not create a trust." This result is consistent with a narrow interpretation of "fiduciary" under § 523(a)(4) and with the narrow construction of exceptions to discharge. See In re Long, 44 B.R. 300, 304-306 (Bankr.D.Minn 1983), aff'd, 774 F.2d 875 (8th Cir.1985).

Plaintiffs' complaint fails to indicate how any type of fiduciary relationship exists. The complaint merely indicates that there was some form of debtor/creditor relationship between the parties resulting from the purchase of D & D Masonry, Inc. Since a debtor/creditor relationship, without more will not establish a fiduciary/beneficiary relationship under § 523(a)(4), plaintiffs' first cause of action does not state a claim upon which relief can be granted.

Plaintiffs' § 523(a)(6) claim

Plaintiffs' second claim is based on 11 U.S.C. § 523(a)(6) which excepts from discharge any debts of an individual "for willful and malicious injury by the debtor to another entity or to the property of another entity. . . ." In support of this claim, plaintiffs repeat their allegations in support of their 523(a)(4) claim. Plaintiffs add that their injury was caused by defendants' conversion of proceeds from the secured collateral to their own use or improper uses of the corporation.

The phrase "willful and malicious" as it appears in § 523(a)(6) requires an intentional act by the debtor "which necessarily produces harm and is without just cause or excuse." In re Cecchini, 780 F.2d 1440, 1443 (9th Cir.1986). Proof of specific intent to injure is not necessary. Id. It has been clearly held in this district that "when a debtor intentionally and knowingly sells collateral without the knowledge or consent of the secured creditor, the sale constitutes a willful and malicious act" and is not dischargeable under § 523(a)(6). In re Linklater, 48 B.R. 916, 920 (Bankr.Nev. 1985).

Plaintiffs' complaint gives defendant fair notice of plaintiffs' claim that the defendant-debtor converted proceeds from secured collateral in violation of plaintiffs' security agreement. While Plaintiffs' allegations relating to the second cause of action are sketchy at best, they are...