In re Jacobs

Decision Date09 April 2009
Docket NumberAdversary No. 07 A 00959.,Bankruptcy No. 07 B 13733.
PartiesIn re David J. JACOBS, Debtor. Juan Zamora, Plaintiff, v. David J. Jacobs, Defendant.
CourtUnited States Bankruptcy Courts. Seventh Circuit. U.S. Bankruptcy Court — Northern District of Illinois

Arthur R. Ehrlich, Goldman & Ehrlich, Chicago, IL, for Plaintiff.

Gregory K. Stern, Gregory K. Stern, P.C., Chicago, IL, for Defendant.

MEMORANDUM OPINION

SUSAN PIERSON SONDERBY, Bankruptcy Judge.

This matter comes before the court on the motion filed by the debtor defendant, David J. Jacobs ("Jacobs") for an order dismissing the second amended complaint filed by the creditor plaintiff, Juan Zamora ("Zamora"). For the reasons set forth below, the Motion to Dismiss will be granted in part and denied in part. The section 523(a)(2), (a)(4), and (a)(6) claims withstand dismissal. The section 727(a) claim will be dismissed.

Jurisdiction and Venue

This court has jurisdiction over this proceeding pursuant to 28 U.S.C § 1334(b) and Internal Operating Procedure 15(a) of the United States District Court for the Northern District of Illinois. The proceeding concerns a determination of the dischargeability of a particular debt and is therefore a core proceeding under 28 U.S.C. § 157(b)(2)(I). Venue is properly placed in this court pursuant to 28 U.S.C. § 1409(a).

Procedural Background

Zamora was an employee of Northwestern Plating Works, Inc. ("Northwestern Plating"), an Illinois corporation, and a participant in the company's profit-sharing plan. Jacobs was Northwestern Plating's sole shareholder and president.

Prior to Jacobs's bankruptcy filing, Zamora filed a complaint in the Circuit Court of Cook County, Illinois against Jacobs to recover damages caused by, inter alia, Jacobs's alleged conversion of funds in the profit-sharing account. The judge presiding over that lawsuit entered a default judgment on January 4, 2006, in favor of Zamora and against Jacobs in the amount of $553,876 (comprising $278,876 in actual damages and $275,000 in punitive damages based on a finding of malice). The judgment was based "on fraud and [Jacobs's] conversion of money owed to Zamora." (Complaint, ¶ 5). After entry of the judgment, Jacobs testified under oath at a September 2006 examination pursuant to a Citation to Discover Assets commenced by Zamora (the "Citation Proceeding").

Jacobs filed a voluntary petition under chapter 7 of the Bankruptcy Code on July 31, 2007. The deadline for filing a complaint to determine dischargeability of debts under section 523(a)(2), (4), or (6) of the Bankruptcy Code was October 29, 2007. See Fed. R. Bank. P. 4007(c). That date was also the deadline to file a complaint objecting to discharge under section 727(a) of the Bankruptcy Code. See Fed R. Bank. P. 4004(a). The deadline to file a complaint objecting to discharge was extended to September 11, 2008, at the request of and solely for the office of the United States Trustee. Zamora never asked for an extension of the deadline to file a complaint objecting to discharge.

On October 5, 2007, Zamora filed an adversary complaint, which was amended on October 11, 2007, alleging that the judgment debt Jacobs owed to him should be determined nondischargeable pursuant to 11 U.S.C. § 523(a). The complaint was not separated into counts, and Zamora did not specify on which subsections of section 523(a) his claim was based. The parties' arguments, however, are premised on subsections (2)(A), (4) or (6) of section 523(a).

On March 25, 2008, an order was entered on Jacobs's motion dismissing Zamora's amended complaint with leave to amend. On April 7, 2008, Zamora filed a second amended complaint (the "Complaint"). Zamora included factual allegations absent from the two prior versions of the Complaint concerning Jacobs's purportedly false sworn testimony at the Citation Proceeding. Zamora also added the following paragraph:

This debt [i.e., the debt Jacobs owes Zamora] should also not be discharged pursuant to 11 U.S.C. § 727(a)(2) because Debtor lied under oath [at the Citation Proceeding] and willfully concealed assets from [Zamora] when he falsely denied that he [had] taken nearly one million dollars from the pension fund for his personal use and therefore willfully concealed what he had done with this money. This willful concealment effectively prevented [Zamora] from finding other assets Debtor may have had.

(Complaint, ¶ 20).

The paragraph is followed immediately by a prayer for relief asking that the "Court deny [Jacobs] a discharge with respect to creditor ... Zamora." On October 6, 2008, an order was entered granting Jacobs a discharge under section 727. On that date, the extended deadline for the United States trustee to file a complaint objecting to discharge had passed and there was no timely-filed complaint objecting to discharge on file. There being no section 727 discharge objection complaint of record, a discharge order was entered. See Disch v. Rasmussen, 417 F.3d 769, 775 (7th Cir.2005) (agreeing with the bankruptcy court that "it is permissible as a procedural matter for a court to grant a discharge when no complaint objecting to discharge has been filed at the expiration of the 60-day period, notwithstanding a pending claim under § 523 seeking to exempt a particular debt from discharge.").

The Motion to Dismiss

On May 15, 2008, Jacobs filed this motion to dismiss the Complaint pursuant to Rule 12(b)(6) of the Federal Rules of Civil Procedure, made applicable in this proceeding pursuant to Fed.R.Bankr.P. 7012(b).1 He further contends that the Complaint fails to plead fraud with particularity as required by Rule 9(b). Finally, Jacobs contends that Zamora has brought an untimely claim for denial of discharge pursuant to § 727(a)(2) that does not relate back to the original complaint, and should therefore be dismissed.

Sufficiency of the Complaint Under Rules 9 and 12(b)(6)

Well-pleaded allegations in the Complaint are assumed to be true for purposes of the motion to dismiss, all reasonable inferences being drawn in Zamora's favor. See Hecker v. Deere & Co., 556 F.3d 575, 580 (7th Cir.2009); Andonissamy v. Hewlett-Packard Co., 547 F.3d 841, 847 (7th Cir.2008). Zamora was an hourly employee of Northwestern Plating. Jacobs was in full control of the day-to-day affairs of Northwestern Plating. Without prior notice to its employees, the company ceased operating on August 2, 2005.

Allegations Concerning the Northwestern Plating Profit-Sharing Plan

Jacobs was the sole trustee of the profit-sharing plan established prior to 2000 for Northwestern Plating's participating employees, including Zamora. Jacobs "was responsible for ensuring that ... profit sharing contributions were properly maintained and paid for ..." and had "a fiduciary duty to properly manage [the profit-sharing plan funds] for the benefit of Zamora and other employees." (Complaint, ¶¶ 7, 16). Zamora alleges that the profit-sharing plan was subject to the Employee Retirement Income Security Act, 29 U.S.C. § 1001 et seq. ("ERISA").

Northwestern Plating was obligated to and made regular contributions to the profit-sharing plan account for Zamora, which were added to Zamora's voluntary contributions from portions of his paychecks. Jacobs gave Zamora quarterly statements reporting Zamora's plan benefits, comprising Zamora's voluntary contributions and the company's contributions.

Zamora's plan statement for the time period from April 1, 1999 to March 31, 2000, is attached to the Second Amended Complaint and will be considered without converting this motion to dismiss to a motion for summary judgment. See Hecker, 556 F.3d at 582 (citing Tierney v. Vahle, 304 F.3d 734, 738 (7th Cir.2002)). The statement notes that it is prepared for Zamora and that he is "100% vested in [his] Employer Contribution Account." (Complaint, Exhibit B). The statement reports the beginning and ending balances of Zamora and Northwestern Plating's contributions in the "Participant Accounts." After an accounting for contributions, forfeitures, gains, losses, transfers, and distributions, Zamora's total "vested account balance" as of March 31, 2000, is reported as $240,209.70. (Id.). The statement notes that "100% of your Account balance will be paid upon termination due to death, disability or retirement" and that "[y]ou will receive the vested account balance shown on th[e] statement in the event of termination of employment for any other reason." (Id.). Zamora does not provide a copy of the profit-sharing plan agreement or details about the "Employer Contribution Account" or "Participant Accounts," which appear to refer to the same account, i.e., an account established pursuant to the profit-sharing plan into which contributions by and on behalf of all participating Northwestern Plating employees were deposited and allocated on the books to the individual employees.

In or about 2000, there was more than one million dollars in the profit-sharing plan account. Jacobs repeatedly made unauthorized, surreptitious withdrawals totaling approximately $940,000 from the plan account funds for his own personal use. Zamora does not relate when those withdrawals started and over what period of time they took place, but he does allege that when the withdrawals were made, Jacobs knew he had no right or interest in the plan account funds. Further, Zamora alleges that Jacobs "willfully converted money owed to Zamora ... from [Zamora's] vested pension fund for [his] own personal benefit." (Complaint, ¶ 15).

Jacobs was indicted by the United States Attorney's Office for embezzling the plan account funds, Jacobs pleaded guilty to the criminal charges.

Allegations Concerning Zamora's Paychecks

On eleven occasions between February 24, 2005 and August 2, 2005, the date Northwestern Plating shut down, Jacobs issued paychecks to Zamora which were not honored due to insufficient funds. Jacobs,...

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