In re Moran

• Court: U.S. Bankruptcy Court — District of Delaware
• Writing for the Court: Sontchi
• Citation: In re Moran, 413 B.R. 168 (Bankr. Del. 2009)
• Decision Date: 11 September 2009
• Docket Number: Bankruptcy No. 08-12684 (CSS).,Adversary No. 09-50040 (CSS).
• Parties: In re Todd H. MORAN and Jennifer Y. Moran, Debtors. Wayne A. Crowe and Deborah A. Crowe, Plaintiffs, v. Todd H. Moran, Defendant.

413 B.R. 168

In re Todd H. MORAN and Jennifer Y. Moran, Debtors Wayne A. Crowe and Deborah A. Crowe, Plaintiffs, v. Todd H. Moran, Defendant.

Bankruptcy No. 08-12684 (CSS).

Adversary No. 09-50040 (CSS).

United States Bankruptcy Court, D. Delaware.

September 11, 2009.

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Eric C. Howard, Wilson Halbrook & Bayard, P.A., Georgetown, DE, for Wayne A. Crowe and Deborah A. Crowe.

Kevin A. Guerke, Seitz Van Ogtrop & Green, P.A., Wilmington, DE, for Todd H. Moran.

OPINION¹

SONTCHI, Bankruptcy Judge.

INTRODUCTION

Before the Court is a motion brought by Todd H. Moran (the "Debtor") to dismiss the amended complaint of Wayne A. Crowe and Deborah A. Crowe (the "Discharge Plaintiffs" or "Crowes") to have debt declared non-discharged in accordance with section 523(a) of the Bankruptcy Code (the "Code"). The Debtor argues that the amended complaint fails to state a claim upon which relief can be granted. For the reasons set forth below, the Court will deny the Debtor's motion to dismiss.

JURISDICTION

The Court has subject matter jurisdiction under 28 U.S.C. § 1334. Venue is proper in this district under 28 U.S.C. §§ 1408 and 1409(a). This is a core proceeding under 28 U.S.C. § 157(b)(2)(I).

STATEMENT OF FACTS

I. Factual Background

The Crowes are individuals residing in Felton, Delaware. The Debtor is an individual residing in Dover, Delaware and is the owner of Todd's Custom Building, Inc. The Crowes entered into a contract (the "Contract") with the Debtor to provide labor and materials for the improvement of the Crowes's home (the "Property"). The Debtor was to provide labor and materials for a total price of $83,365. The Crowes paid the Debtor $68,000 on account of the Contract price, leaving a balance of $15,365.

The Debtor commenced performance of the Contract on February 5, 2008. His performance was sporadic. After March 30, 2008, the Debtor and his employees or subcontractors were rarely at the Property. By June 2008, the Debtor abandoned the project or failed to return to the Property. On July 16, 2008, the Crowes's counsel formally terminated the contract, based on the Debtor's failure to return.

On September 19, 2008, the Crowes sued the Debtor in the Superior Court of the State of Delaware in and for Sussex County. The complaint in that action (the "Superior Court Complaint") pled claims for breach of contract and breach of trust. On October 20, 2008, the Crowes obtained a default judgment against the Debtor in the amount of $59,625 (the "Default Judgment").

II. Procedural Background

On November 9, 2008, the Debtor and his wife filed a voluntary chapter 7 bankruptcy petition. The Crowes filed an adversary complaint on January 21, 2009, seeking to have the debt the Debtor owes them declared as non-discharged in accordance with section 523(a) of the Code. The debt at issue is based on the Default Judgment. The complaint in the discharge action referenced the breach of contract and breach of trust claims in the Superior Court Complaint. In addition, the Crowes asserted new factual allegations and claims that included fraud and breach of fiduciary duty. The Crowes also contended that the principles of res judicata and collateral estoppel barred the Debtor from disputing whether he breached his fiduciary duties to the Crowes and obtained funds from the Crowes through fraud.

On January 22, 2009, the Crowes filed an amended complaint in the discharge action (the "Bankruptcy Complaint"). The Court entered an order to discharge joint debts under section 727 of the Code on February 18, 2009. On April 15, 2009, the Debtor filed a motion to dismiss the Bankruptcy Complaint, asserting that res judicata and collateral estoppel did not help the Crowes. Rather, those doctrines barred the Bankruptcy Complaint. The Crowes opposed the motion to dismiss. Briefing is complete and this matter is ripe for decision.

LEGAL DISCUSSION

I. Legal Standard On A Motion To Dismiss

A motion under Rule 12(b)(6) serves to test the sufficiency of the factual allegations in the plaintiff's complaint.² Under Federal Rule of Civil Procedure 8(a)(2), which is applicable in adversary proceedings pursuant to Federal Rule of Bankruptcy Procedure 7008, a pleading must contain a "short and plain statement of the claim showing that the pleader is entitled to relief."³ This pleading standard does not require detailed factual allegations, but it demands more than an unadorned, the-defendant-unlawfully-harmed-me-accusation.⁴ A pleading that offers "labels and conclusions or a formulaic recitation of the elements of a cause of action will not do." Nor does a complaint suffice if it tenders "naked assertion[s]" devoid of "further factual enhancement."⁵

To survive a motion to dismiss, a complaint must contain sufficient factual matter, accepted as true, to "state a claim to relief that is plausible on its face."⁶ A claim has facial plausibility when the plaintiff pleads factual content that allows the court to draw the reasonable inference that the defendant is liable for the misconduct alleged. The plausibility standard is not akin to a "probability requirement," but it asks for more than a sheer possibility that a defendant has acted unlawfully. Where a complaint pleads facts that are "merely consistent with" a defendant's liability, it "stops short of the line between possibility and plausibility of `entitlement to relief.'"⁷

In deciding a motion to dismiss, the Court must "accept all factual allegations in the complaint as true."⁸ However, this tenet is inapplicable to legal conclusions.⁹ Furthermore, threadbare recitals of the elements of a cause of action, supported by mere conclusory statements, do not suffice.¹⁰

The Court will "construe the complaint in the light most favorable to the plaintiff, and determine whether, under any reasonable reading of the complaint, the plaintiff may be entitled to relief."¹¹ "The issue is not whether a plaintiff will ultimately prevail but whether he or she is entitled to offer evidence to support the claims."¹² Where the well-pleaded facts do not permit the court to infer more than the mere possibility of misconduct, the complaint has alleged — but it has not shown — that the pleader is entitled to relief.¹³

The Court may consider documents attached as exhibits to the Bankruptcy Complaint and any documents incorporated into the Bankruptcy Complaint by reference. The Court may also consider matters of which it may take judicial notice.¹⁴ In considering the documents attached to the Bankruptcy Complaint, "if the allegations of [the] complaint are contradicted by documents made a part thereof, the document controls and the Court need not accept as true the allegations of the complaint."¹⁵

Furthermore, complaints asserting claims for fraud must meet a heightened pleading standard. Federal Rule of Civil Procedure Rule 9(b), which applies in adversary proceedings under Federal Rule of Bankruptcy Procedure 7009, requires these complaints to set forth facts with sufficient particularity to apprise the defendant of the charges against him so that he may prepare an adequate answer.¹⁶ To provide fair notice, the complaint must go beyond merely quoting the relevant statute.¹⁷ The Third Circuit has explained the purpose of the particularity requirements of Rule 9(b) as follows:

Rule 9(b) requires plaintiffs to plead with particularity the "circumstances" of the alleged fraud in order to place the defendants on notice of the precise misconduct with which they are charged, and to safeguard defendants against spurious charges of immoral and fraudulent behavior. It is certainly true that allegations of "date, place or time" fulfill these functions, but nothing in the rule requires them. Plaintiffs are free to use alternative means of injecting precision and some measure of substantiation into their allegations of fraud.¹⁸

II. Res Judicata Does Not Prevent The Crowes From Objecting To The Discharge Of The Debt The Debtor Owes Them

Under federal law, "judicial proceedings ... shall have the same full faith and credit in every court within the United States and its Territories and Possessions as they have by law or usage in the courts of such State ... from which they are taken."¹⁹ Thus, section 1738 requires federal courts to give res judicata effect to a state court judgment to the extent the state would give its own prior judgment such effect.²⁰ Res judicata, however, is an affirmative defense,²¹ and the party asserting such a bar bears the burden of showing that it applies.²² The Crowes obtained their default judgment in Delaware state court. Therefore, the Court will apply Delaware law to determine whether or not res judicata precludes the Crowes from maintaining this adversary proceeding.

The doctrine of res judicata forecloses a party from bringing a second suit based on the same cause of action after a judgment has been entered in a prior suit involving the same parties.²³ "The procedural `bar of res judicata extends to all issues which might have been raised and decided in the first suit as well as to all issues that actually were decided.'"²⁴ In Delaware, res judicata operates to bar a claim when the following five-part test is satisfied:

(1) the original court had jurisdiction over the subject matter and the parties;

(2) the parties to the original action were the same as those parties, or in privity, in the case at bar;

(3) the original causes of action or the issues decided were the same as those in the case at bar;

(4) the issues in the prior action must have been decided adversely to the plaintiffs' contentions in the instant case; and

(5) the decree in the prior action was a final decree.²⁵

Delaware, like the federal courts, follows a transactional approach to res judicata.²⁶ Determining whether two claims arise from the same transaction requires pragmatic...