In re Jahelka

• Decision Date: 27 October 2010
• Docket Number: Adversary No. 10 A 01.,Bankruptcy No. 09 B 20289.
• Citation: 442 B.R. 663
• Parties: In re Andrew A. JAHELKA, Debtor.Wachovia Securities, LLC, n/k/a Wells Fargo Advisors, LLC, Plaintiff,v.Andrew A. Jahelka, Defendant.
• Court: U.S. Bankruptcy Court — Northern District of Illinois

442 B.R. 663

In re Andrew A. JAHELKA, Debtor.Wachovia Securities, LLC, n/k/a Wells Fargo Advisors, LLC, Plaintiff,

v.Andrew A. Jahelka, Defendant.

Bankruptcy No. 09 B 20289.

Adversary No. 10 A 01.

United States Bankruptcy Court, N.D. Illinois, Eastern Division.

Oct. 27, 2010.

Gary I. Blackman, Jonathan Friedland, Elizabeth B. Vandesteeg, Levenfeld Pearlstein, LLC, Chicago, IL, for plaintiff Wachovia Securities, LLC.Mark F. Smolens, Law Office of Mark F. Smolens, Chicago, IL, for defendant Andrew A. Jahelka.

MEMORANDUM OPINION

A. BENJAMIN GOLDGAR, Bankruptcy Judge.

This matter is before the court for ruling on the motion of debtor-defendant Andrew A. Jahelka (“Jahelka”) to dismiss the amended complaint of plaintiff Wachovia Securities, LLC (“Wachovia”) under Rules 9(b) and 12(b)(6) of the Federal Rules of Civil Procedure (made applicable by Fed. R. Bankr.P. 7009, 7012(b)). In an earlier order, the court granted Jahelka's motion to dismiss Wachovia's initial single-count complaint but also granted leave to amend. Wachovia filed an amended complaint expanding its original claim to seven counts.

For the reasons that follow, Jahelka's motion to dismiss will be granted as to the first five counts of the amended complaint with leave to amend. The remaining two counts will be dismissed on the court's own motion for lack of jurisdiction.

1. Facts

On a motion to dismiss under Rule 12(b)(6), the court takes as true all well-pleaded allegations in the complaint and draws all reasonable inferences in favor of the non-movant. Rujawitz v. Martin, 561 F.3d 685, 688 (7th Cir.2009).

Wachovia's amended complaint alleges the following facts. Jahelka was president and a shareholder of a small closely-held company called Loop Corp. (“Loop”) that he co-owned with Leon Greenblatt (“Greenblatt”), and Richard Nichols (“Nichols”). On January 3, 2000, Loop obtained from Banco Panamericano (“Banco”) a $9.9 million line of credit (the “Banco Loan”). The purpose of obtaining the Banco Loan was to make Loop judgment-proof, and the loan had that effect. The Banco Loan also shielded Loop from its creditors by fully encumbering Loop's assets and effectively placing Banco and Banco's majority shareholder in control of them.

On September 28, 2000, Loop opened a margin account at Wachovia. Before, during, and after the account was opened, Jahelka acted to give Wachovia the false impression that Loop was a viable company capable of covering its losses. In reality, Loop was at all times inadequately capitalized and was insolvent when it opened the Wachovia account. Loop used the Wachovia account to acquire stock in a company called “HMRI” on margin. In connection with the stock acquisition, Loop incurred substantial margin debt to Wachovia. Wachovia later obtained an NYSE arbitration award against Loop which was reduced to a judgment of $2,478,418.80. The judgment has not been paid. After Loop incurred the margin debt and after entry of the judgment, Loop transferred over $1 million in assets to its shareholders, including Jahelka.

In 2004, Wachovia filed an action in the district court against Loop and its shareholders, including Jahelka. On October 22, 2008, the district court entered a judgment piercing Loop's corporate veil and holding Jahelka liable to Wachovia.

In its opinion, the district court found, among other things, that:

• The representations of the shareholders to Wachovia created the false impression that Loop was a vital company capable of covering its losses when in fact a company insider had fully encumbered Loop's assets.

• Jahelka knew Loop was using the Wachovia account to acquire HRMI stock on margin, that Loop was inadequately capitalized and unable to function without Banco's loan, and that Loop's assets were fully encumbered as a result of the Banco loan.

• Because of Jahelka's purposeful actions, Loop was inadequately capitalized, it failed to issue stock, it failed to observe corporate formalities, it failed to pay its taxes, and it was insolvent when the Wachovia account was opened and the margin debt incurred.

• The Banco Loan was designed to shield Loop from its creditors by placing Greenblatt (who according to Wachovia was not only Banco's majority shareholder but also the majority shareholder of Loop) in control of Loop's fully encumbered assets.

• Jahelka knowingly assisted Greenblatt in his efforts to shield Loop from its creditors.

• After the margin debt came due, Jahelka and his fellow shareholders transferred to insiders and related entities more than $1 million in Loop's corporate assets, of which Jahelka received nearly $100,000.

The amended complaint has seven counts. Counts I through V allege claims that Jahelka owes Wachovia a debt nondischargeable under section 523(a) of the Code. Specifically, Counts I through III are claims under section 523(a)(2)(A) asserting that Jahelka owes Wachovia a debt “for money, property, services, or an extension, renewal, or refinancing of credit” obtained by actual fraud, false pretenses, or false representations. Count IV is a claim under section 523(a)(4) that Jahelka owes Wachovia a debt for fraud or defalcation by a fiduciary. Count V is a claim under section 523(a)(6) that Jahelka owes Wachovia a debt for willful and malicious injury.

Counts VI and VII are objections to Jahelka's discharge under section 727(a) of the Code. Count VI alleges that Jahelka is not entitled to a discharge under section 727(a)(3) because he has failed to keep records from which his business transactions might be ascertained. Count VII is a claim under section 727(a)(5) alleging that Jahelka cannot explain satisfactorily the loss of $10,000 in assets while the bankruptcy case was pending.¹

Jahelka now moves to dismiss the amended complaint on the ground that all seven counts are premised on fraud, and the complaint fails to allege fraud with sufficient specificity to satisfy Rule 9(b)—or, for that matter, Rule 8(a).²

2. Discussion

The gist of Wachovia's amended complaint is the same as its initial complaint: that Jahelka and others fraudulently induced Wachovia to open the margin account for Loop by leading Wachovia to believe that Loop had the ability to cover its losses when in fact Jahelka and others had deliberately rendered Loop unable to do so through the Banco Loan. The amended complaint is essentially the same as the initial complaint, except that it (1) recites specific findings from the district court's opinion, (2) in some respects contains even less information than its predecessor, (3) teases a single claim into five separate legal theories, and (4) adds two section 727 claims.

Jahelka's motion will be granted on the section 523(a) claims in Counts I–V of the amended complaint. Those counts will be dismissed, and Wachovia will be given one final chance to amend. The section 727(a) claims in Counts VI and VII will also be dismissed, though not for failure to state a claim. Counts VI and VII will be dismissed for lack of jurisdiction on the court's own motion because those claims are not ripe.

a. Rule 12(b)(6) and Rule 9(b) Standards

Under Rule 12(b)(6), a complaint will be dismissed unless it clears “two easy-to-clear hurdles.” E.E.O.C. v. Concentra Health Servs., Inc., 496 F.3d 773, 776 (7th Cir.2007).

First, the complaint must give the defendant fair notice of the claim. See Pratt v. Tarr, 464 F.3d 730, 733 (7th Cir.2006). A complaint will be dismissed if it is “so sketchy” that it does not provide “the type of notice ... to which the defendant is entitled under Rule 8.” Airborne Beepers & Video, Inc. v. AT & T Mobility LLC, 499 F.3d 663, 667 (7th Cir.2007). Although a complaint need not include “ ‘detailed factual allegations,’ ” “ ‘a formulaic recitation of the elements of a cause of action’ ” will not suffice. Ashcroft v. Iqbal, ––– U.S. ––––, ––––, 129 S.Ct. 1937, 1949, 173 L.Ed.2d 868 (2009) (quoting Bell Atl. Corp. v. Twombly, 550 U.S. 544, 555, 127 S.Ct. 1955, 167 L.Ed.2d 929 (2007)). At least some facts must support each element of the claim. Id. at 1949–50.

Second, the complaint's allegations must plausibly suggest that the plaintiff has a right to relief, raising that right above a “ ‘speculative level.’ ” Concentra, 496 F.3d at 776 (quoting Twombly, 550 U.S. at 555, 127 S.Ct. 1955). Plausibility means the allegations must allow “the court to draw the reasonable inference that the defendant is liable for the misconduct alleged.” Iqbal, ––– U.S. at ––––, 129 S.Ct. at 1949.

Where fraud is concerned, Rule 9(b) requires more. Rule 9(b) declares that “in alleging fraud or mistake, a party must state with particularity the circumstances constituting fraud or mistake.” Fed.R.Civ.P. 9(b). “Particularity” means “the who, what, when, where, and how: the first paragraph of any newspaper story.” Katz v. Household Int'l, Inc., 91 F.3d 1036, 1040 (7th Cir.1996) (internal quotation omitted); see also Borsellino v. Goldman Sachs Group, Inc., 477 F.3d 502, 507 (7th Cir.2007). A complaint alleging fraud based on a misrepresentation must accordingly identify who made the misrepresentation, state the time, place and content of the misrepresentation, and describe how the misrepresentation was communicated. Windy City Metal Fabricators & Supply, Inc. v. CIT Tech. Fin. Servs., Inc., 536 F.3d 663, 668 (7th Cir.2008); Kennedy v. Venrock Assocs., 348 F.3d 584, 593 (7th Cir.2003).

b. Counts I–III: Section 523(a)(2)(A)

Counts I through III, the claims under section 523(a)(2)(A), will be dismissed—Counts II and III for failure to plead fraud with specificity under Rule 9(b), and Count I for failure to state a claim.

Section 523(a)(2)(A) excepts from discharge any debt “for money, property, services, or an extension, renewal, or refinancing of credit, to the extent obtained by ... false pretenses, a false representation, or actual fraud, other than a statement respecting the debtor's or an insider's financial condition[.]” 11 U.S.C. § 523(a)(2)(A). Although some courts have...