In re Cole, C/A No. 07-04074-HB (Bankr. S.C. 10/17/2008)
| Decision Date | 17 October 2008 |
| Docket Number | C/A No. 07-04074-HB,Adv. Pro. No. 07-80165-HB |
| Court | United States Bankruptcy Courts. Fourth Circuit. U.S. Bankruptcy Court — District of South Carolina |
| Parties | In re, CHARLES J. COLE, Chapter 7, Debtor(s). PROSPECT CAPITAL CORPORATION, Plaintiff(s), v. CHARLES J. COLE, Defendant(s). |
This matter came before the Court on the Motion of Plaintiff Prospect Capital Corporation to Dismiss Amended Counterclaims of Defendant Charles J. Cole pursuant to Fed. R. Civ. P. 12(b)(6) and Fed. R. Bankr. P. 7012(b).
The following is gleaned from Cole's pleadings. Cole was the majority shareholder of ESA Environmental Specialists, Inc., a contractor doing business with the government. On April 11, 2007, Prospect entered into a Credit Agreement with ESA for credit of up to $12,200,000, and Cole executed a Guaranty Agreement for ESA's obligations to Prospect.1 The loan documents were amended on May 5, 2007, and May 17, 2007, to increase the amount of the loan. On August 1, 2007, ESA filed for Chapter 11 relief in the United States Bankruptcy Court for the Western District of North Carolina, C/A No. 07-031532, and Cole filed a Chapter 11 petition for bankruptcy relief in this Court, converting subsequently to Chapter 7.
Prospect initiated this adversary proceeding to oppose discharge, to challenge dischargeability, and to demand judgment in its favor against Cole on the outstanding debt under the Guaranty Agreement in the amount of $13,800,000, plus reasonable attorneys' fees and costs. Cole filed counterclaims against Prospect alleging causes of action for fraud, constructive fraud, negligence, negligent supervision, breach of fiduciary duty, tortuous interference and breach of the covenant of good faith and fair dealing. This Court previously granted Prospect's request to dismiss those counterclaims as they asserted causes of action and requested relief for damage done to ESA, and not for any direct harm suffered by Cole in his individual capacity for which he could recover under applicable law.2 With leave of court Cole filed an Amended Answer and Counterclaim alleging that Prospect is liable for his personal damages suffered on account of Prospect's alleged fraud, constructive fraud, negligence, negligent supervision, breach of fiduciary duty, breach of contract, intentional infliction of emotional distress, and defamation. Cole also filed, and the Court granted, a Motion to join the Chapter 7 Trustee as an additional plaintiff in this matter.
In his Objection to Prospect's Motion, Cole argues that the Amended Counterclaims set forth "additional allegations showing that much of Prospect's conduct has been directed at the Debtor [Cole] personally and that he has suffered damages in his individual capacity." He also adds allegations that Prospect's conduct jeopardized certain valuable government certifications that were personal to him and relevant to his future employment. Prospect again argues that Cole's alleged injuries are merely indirect harm as a result of Cole's status as a shareholder of ESA and are not actionable at law.
Federal Rule of Civil Procedure 12(b)(6) permits a party to move for dismissal if the opposing party fails to state a claim for which relief can be granted. The purpose of such a motion is to test the sufficiency of the complaint. Graves v. Horry-Georgetown Technical College, 512 F.Supp.2d 413, 421 (D.S.C. 2007). "[A] Rule 12(b)(6) motion should only be granted if, after accepting all well-pleaded allegations in the plaintiff's complaint as true and drawing all reasonable factual inferences from those facts in the plaintiff's favor, it appears certain that the plaintiff cannot prove any set of facts in support of his claim entitling him to relief." Edwards v. City of Goldsboro, 178 F.3d 231, 244 (4th Cir. 1999). A motion to dismiss will not be granted unless "it is clear that no relief could be granted under any set of facts that could be proved consistent with the allegations." Hishon v. King & Spaulding, 467 U.S. 69, 73, 104 S.Ct. 2229, 2232 (1984). Further, the pleadings must also comply with Rule 8(a)(2), which requires "a short and plain statement of the claim showing that the pleader is entitled to relief." Fed. R. Civ. P. 8(a)(2). Accordingly, a complaint does not require detailed facts; however, a "formulaic recitation of the elements of a cause of action will not do." Bell Atlantic Corp. v Twombly, 127 S. Ct. 1955, 1964-65 (2007). Finally, "`[u]nder the liberal rules of federal pleading, a complaint should survive a motion to dismiss if it sets out facts sufficient for the court to infer that all the required elements of the cause of action are present." City of Charleston, S.C. v. Hotels.com, LP, 520 F.Supp.2d 757, 763-64 (D.S.C. 2007). The Amended Counterclaims identify eight causes of action discussed separately below.3
Prospect argues that the fraud and constructive fraud claims are subject to dismissal because Cole failed to plead them with particularity. When bringing a fraud claim under South Carolina law4:
A plaintiff must specifically . . . allege . . . the following nine distinct elements: (1) a representation; (2) its falsity; (3) its materiality; (4) either knowledge of its falsity or a reckless disregard of its truth or falsity; (5) intent that the representation be acted upon; (6) the hearer's ignorance of its falsity; (7) the hearer's reliance on its truth; (8) the hearer's right to rely thereon; and (9) the hearer's consequent and proximate injury. Enhance-It, L.L.C. v. American Access Technologies, Inc., 413 F.Supp.2d 626, 629-30 (D.S.C. 2006). A complaint that fails to allege each of these nine elements is wholly insufficient and subject to dismissal. Brown v. Stewart, 348 S.C. 33, 557 S.E.2d 676, 680 (S.C.Ct.App. 2001).
Williams v. Hinson, No. 06-3465, 2008 WL 410110, at *6 (D.S.C. Feb. 12, 2008). The constructive fraud claim differs from the fraud claim only in that the element of intent to deceive is not required to be established in a constructive fraud claim. Armstrong v. Collins, 366 S.C. 204, 621 S.E.2d 368 (S.C.Ct.App. 2005).
As required by Fed. R. Civ. P. 9(b), made applicable to this adversary proceeding via Fed. R. Bankr. P. 7009, when pleading fraud The Fourth Circuit has provided that "the `circumstances' required to be pled with particularity under Rule 9(b) are "the time, place, and contents of the false representations, as well as the identity of the person making the misrepresentation and what he obtained thereby." Harrison v. Westinghouse Savannah River Co., 176 F.3d 776, 784 (4th Cir. 1999) (citing 5 Charles Alan Wright and Arthur R. Miller, Federal Practice and Procedure § 1297 (2d ed. 1990)).
"Rule 9(b) has four purposes: (1) the rule ensures that the defendant has sufficient information to formulate a defense by putting it on notice of the conduct complained of; (2) the rule exists to protect defendants from frivolous suits; (3) the rule eliminates fraud actions in which all the facts are learned after discovery; and (4) the rule protects defendant from harm to their goodwill and reputation."
In re Derivium Capital, LLC, 380 B.R. 407, 421 (Bankr.D.S.C. 2006) (citing Harrison, 176 F.3d at 784).
When dealing with Rule 9(b):
"A court should hesitate to dismiss a complaint . . . if the court is satisfied (1) that the defendant has been made aware of the particular circumstances for which she will have to prepare a defense at trial, and (2) that plaintiff has substantial prediscovery evidence of those facts."
Analysis of the allegation supporting these causes of action is difficult due to the fact that many of the representations set forth in the general allegations are alleged to have been made to ESA, not a party to this lawsuit, and resulting actions were taken by ESA rather than Cole. Further, Cole simply alleges that allegations were made by "Prospect." Analysis is further complicated by the structure and length of the counterclaim. Working backwards from the two damage allegations relevant to these causes of action, it appears that Cole claims (1) had he known the truth about representations made to him, he would not have signed the Guaranty Agreement; and (2) he would not have jeopardized his government certifications "by entering into new contracts when Prospect had no intention of resolving the bonding problem or providing additional funding for the purchase of equipment."
The law requires Cole to identify the time and place of any false representations, and the identity of the person making such representations. Cole does allege a specific date in one paragraph of the allegations—a meeting held on July 3, 2007. Representations about "resolving the bonding problem" and "providing additional funding" for ESA occurred at that meeting per a reading of all of the allegations.5 That meeting occurred after Cole signed the Guaranty Agreement and after the amendment of the loan documents, so any representations on that date could not have induced him to execute the Guaranty Agreement or any associated documents to his detriment.
Regarding any representation about further equipment funding, the counterclaim specifically alleges:
118. Prior to closing, Prospect advised ESA that it would provide the necessary financing, above the amount in the Credit Agreement, for ESA to purchase new equipment.
119. In reliance on that commitment, ESA secured more...
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