In re Johny Brown & Kylee Brown

• Citation: 457 B.R. 919
• Decision Date: 04 August 2011
• Docket Number: Adversary No. 11–07001–JTL.,Bankruptcy No. 10–71843–JTL.
• Court: United States Bankruptcy Courts. Eleventh Circuit. U.S. Bankruptcy Court — Middle District of Georgia
• Parties: In re Johny BROWN & Kylee Brown, Debtors.Wilson Family Foods, Inc., Dion Griffis, & Wilson Griffis, Plaintiffs,v.Johny Brown & Kylee Brown, Defendants.

457 B.R. 919

In re Johny BROWN & Kylee Brown, Debtors.Wilson Family Foods, Inc., Dion Griffis, & Wilson Griffis, Plaintiffs,

v.Johny Brown & Kylee Brown, Defendants.

Bankruptcy No. 10–71843–JTL.

Adversary No. 11–07001–JTL.

United States Bankruptcy Court, M.D. Georgia, Valdosta Division.

Aug. 4, 2011.

Anna M. Humnicky, Karen Fagin White, Cohen Pollock Merlin & Small, PC, Atlanta, GA, for Plaintiffs.Floyd Banks Moon, Valdosta, GA, for Defendants.

Memorandum Opinion

JOHN T. LANEY, III, Chief Judge.

This matter comes before the Court on defendant Kylee Brown's Motion to Dismiss Plaintiff's Complaint for Failure to State a Claim Upon Which Relief Can be Granted and on the plaintiff's Motion Seeking Leave to Amend Complaint. The Court heard oral arguments on June 24, 2011. At the conclusion of the hearing, the Court took the matter under advisement. For the reasons set forth below, the Court will grant in part and deny in part the wife-defendant's motion to dismiss and will grant the plaintiff's motion to amend.

Background

Defendant Johny Brown and plaintiffs Dion Griffis and Wilson Griffis are family members and shareholders of Wilson Family Foods (“Wilson”). The plaintiffs allege that Mr. Brown illegally diverted funds from a construction loan, meant for Wilson, to Mr. Brown's personal checking account, held jointly with his wife, Kylee Brown. The plaintiffs further allege that the defendants used the funds for their own benefit, and that as a result of the defendants' actions, the defendants are indebted to the plaintiffs in the amount of $2,100,00.00 plus interest. This adversary proceeding seeks to except this debt from dischargeability under 11 U.S.C. §§ 523(a)(2)(A), 523(a)(4), and 523(a)(6). Section 523(a)(2)(A) excepts from discharge debts incurred by “false pretenses, a false representation, or actual fraud”; section 523(a)(4) excepts from discharge debts incurred “for fraud or defalcation while acting in a fiduciary capacity, embezzlement, or larceny”; and section 523(a)(6) excepts from discharge debts incurred “for willful and malicious injury by the debtor to another entity or to the property of another entity.” Mrs. Brown is not included in the allegations involving fiduciary capacity, as she is not claimed to be a Wilson fiduciary, but the plaintiffs include her in the fraud, embezzlement, larceny, and willful and malicious injury allegations.

While the original complaint named Mrs. Brown as a defendant, it contained no specific allegations against Mrs. Brown. The allegations involving Mrs. Brown were general statements that Mr. Brown diverted the loan money for his and Mrs. Brown's personal benefit—there were no allegations of affirmative actions or omissions on Mrs. Brown's part. The defendants' joint answer denied all the material allegations, but Mrs. Brown did not move to dismiss for failure to state a claim upon which relief can be granted until after the pleadings were closed. Thereafter, the plaintiffs moved to amend their complaint. The proposed new amended complaint included several allegations against Mrs. Brown. The gravamen of the allegations were that, upon information and belief, Mrs. Brown knew or should have known that her husband was diverting funds from the Wilson loan account because Mrs. Brown knew or should have known that she and her husband were living beyond their means.

The defendants argue that Mrs. Brown was not involved with the loan procurement, was not part of the Wilson business, and had nothing to do with the day-to-day finances of the marriage and thus would have no knowledge of any alleged diversion of funds or inflation of debt. They further argue that the proposed amended complaint still does not state a claim. The plaintiffs argue that (1) Mrs. Brown's motion to dismiss is untimely because the defendants already answered the complaint, (2) Mrs. Brown's alleged knowledge and inaction form the basis for the asserted claims, and (3) the Court should grant leave to amend because there has been no undue delay and because the case is still in its early stages.

Conclusions of Law

I. Timeliness of the Motion

The defendants filed the motion to dismiss for failure to state a claim on May 31, 2011, three months after the final pleading was filed on February 28. Federal Rule of Civil Procedure 12(b), made applicable to adversary proceedings through Federal Rule of Bankruptcy Procedure 7012(b), states, “Every defense to a claim for relief in any pleading must be asserted in the responsive pleading if one is required.” That section further states that a party may assert the defense of failure to state a claim (along with the other enumerated defenses) via motion, and that “[a] motion asserting any of these defenses must be made before pleading if a responsive pleading is allowed.” Put plainly, the 12(b) defenses must either be raised before a responsive pleading via motion or in the responsive pleading itself.

The plaintiffs assert that the motion to dismiss is untimely because it was filed after the pleadings were closed. While that is true, the defendants also raised the defense in their answer's first numbered paragraph, under the heading “Affirmative Defenses.” The defense was raised generally as to both defendants, and perhaps it was added as part of a boilerplate enumeration of standard defenses, but such standard language is added for a reason—to give notice that those defenses are not waived.

Even if the defense was not raised in the answer, the Court would nevertheless not dismiss the motion as untimely. Federal Rule of Civil Procedure 12(h)(2)(B), which applies to adversary proceedings through Federal Rule of Bankruptcy Procedure 7012(b), states, “Failure to state a claim upon which relief can be granted ... may be raised ... by motion under Rule 12(c).” Rule 12(c) (also applicable through Bankruptcy Rule 7012(b)) states that “[a]fter the pleadings are closed—but early enough not to delay trial—a party may move for judgment on the pleadings.” Consequently, “the defense of failure to state a claim is not waivable,” Patel v. Contemporary Classics of Beverly Hills, 259 F.3d 123, 126 (2nd Cir.2001), and such motions filed after the pleadings are closed “will be treated as a motion for judgment on the pleadings based on a failure to state a claim on which relief may be granted,” Jones v. Greninger, 188 F.3d 322, 324 (5th Cir.1999).

II. Sufficiency of the Complaint

On a motion to dismiss for failure to state a claim, the Court “must take the factual allegations of the complaint as true and make all reasonable inferences from those facts to determine whether the complaint states a claim that is plausible on its face.” Cline v. Tolliver, No. 10–13444, 2011 WL 2749566, at *2 (11th Cir. July 14, 2011) (citing Ashcroft v. Iqbal, 556 U.S. 662, 129 S.Ct. 1937, 1949, 173 L.Ed.2d 868 (2009)). While the original complaint arguably implies wrongdoing or omissions, it includes scant information about Mrs. Brown and no direct allegations. This is insufficient. For the Court to take factual allegations at face value, there must be factual allegations. The proposed amended complaint directly addresses Mrs. Brown's alleged participation. The following analysis is based on the allegations in the proposed amended complaint.

A. Fraud Under § 524(a)(2)

The elements of a fraud claim under 523(a)(2)(A) are the following: “the debtor made a false statement with the purpose and intention of deceiving the creditor; the creditor relied on such false statement; the creditor's reliance on the false statement was justifiably founded; and the creditor sustained damage as a result of the false statement.” Fuller v. Johannessen (In re Johannessen), 76 F.3d 347, 350 (11th Cir.1996).¹ Silence or omission of material fact can also be the basis for a false representation actionable under section 523(a)(2)(A) if the debtor has a duty to speak. See, e.g., AT&T Universal Card Servs. v. Mercer (In re Mercer), 246 F.3d 391, 404 (5th Cir.2001). Identifying the elements of fraud and assessing whether the complaint's allegations meet those elements, however, are not the whole analysis.

Bankruptcy Rule 7009 makes Federal Rule of Civil Procedure 9 applicable to adversary proceedings. Federal Rule 9(b) states, “In alleging fraud or mistake, a party must state with particularity the circumstances constituting fraud or mistake. Malice, intent, knowledge, and other conditions of a person's mind may be alleged generally.” This particularity requirement serves several purposes, among them are to provide defendants with adequate notice of the claims against them, to deter complaints used as a pretext for discovery to uncover unknown wrongs (“fraud by hindsight”), and to protect reputations against damaging, frivolous charges of fraud. See, e.g., Kearns v. Ford Motor Co., 567 F.3d 1120, 1125 (9th Cir.2009). The Court is sympathetic that fraud often cannot be pled with certainty before discovery. The Court will therefore “look carefully for specific allegations of fact giving rise to a ‘strong inference’ of fraudulent intent, keeping in mind that the pleading of scienter ‘may not rest on a bare inference that a defendant “must have had knowledge of the facts.” ’ ” Maldonado v. Dominguez, 137 F.3d 1, 9–10 (1st Cir.1998) (citation omitted) (quoting Greenstone v. Cambex Corp., 975 F.2d 22, 25, 26 (1st Cir.1992)). If more than one defendant is alleged to have participated in a fraudulent transaction, the plaintiff cannot lump multiple defendants and vaguely attribute alleged fraud to “defendants” but must individualized the allegations and give specific facts as to each defendant. See, e.g., Mills v. Polar Molecular Corp., 12 F.3d 1170, 1175 (2nd Cir.1993); WMCV Phase 3, LLC v. Shushok & McCoy, Inc., 750 F.Supp.2d 1180, 1188 (D.Nev.2010); Woodhams v. Allstate Fire & Cas. Co., 748 F.Supp.2d. 211, 222 (S.D.N.Y.2010).

The proposed amended complaint alleges that, upon information and belief, Mrs. Brown spent...