In re Neale

• Decision Date: 18 November 2010
• Docket Number: Bankruptcy No. 09-16668-7,Adversary No. 10-185
• Citation: In re Neale, 440 B.R. 510 (Bankr. W.D. Wis. 2010)
• Parties: In re Scott R. NEALE and Holly M. Neale, Debtors. John Iwaszczenko, Jr., Plaintiff, v. Scott R. Neale and Holly M. Neale, Defendants.
• Court: U.S. Bankruptcy Court — Western District of Wisconsin

440 B.R. 510

In re Scott R. NEALE and Holly M. Neale, Debtors.John Iwaszczenko, Jr., Plaintiff,

v.Scott R. Neale and Holly M. Neale, Defendants.

Bankruptcy No. 09-16668-7.

Adversary No. 10-185.

United States Bankruptcy Court, W.D. Wisconsin.

Nov. 18, 2010.

John Iwaszczenko, Jr., Stratford, WI, pro se.

Denis P. Bartell, DeWitt Ross & Stevens S.C., Madison, WI, for Defendants.

MEMORANDUM DECISION

THOMAS S. UTSCHIG, Bankruptcy Judge.

This is the second adversary filed by Mr. Iwaszczenko contesting the dischargeability of his claim against the Neales. The prior adversary proceeding was dismissed for failure to state a cause of action.¹ The Neales have moved to dismiss this case for similar reasons: namely, that the facts alleged in the complaint do not support a cause of action under 11 U.S.C. §§ 523(a)(2), 523(a)(6), or 727(a). The Court conducted a hearing on the motion to dismiss. The plaintiff, John Iwaszczenko, Jr., appeared pro se, and Attorney Denis P. Bartell appeared on behalf of the defendants. The following constitutes the Court's findings of fact and conclusions of law pursuant to Fed. R. Bankr.P. 7052, and, for the reasons indicated below, the defendants' motion is granted.

The following facts are uncontested. Scott Neale was involved in H2O Development Co. of Plover, LLC, an entity the parties refer to simply as "H2O Development." ² In 2005, Mr. Iwaszczenko sunk hundreds of thousands of dollars into H2O Development and its real estate development project.³ Three years later, H2O Development filed for bankruptcy, attempting to reorganize under chapter 11.⁴ In that case, Mr. Iwaszczenko filed a proof of claim indicating that he was owed $865,473.00. The Neales subsequently filed this case, and Mr. Iwaszczenko has attempted to avoid the discharge of his claim, contending that the debtors somehow engaged in conduct which precludes bankruptcy relief.

The facts alleged by the plaintiff in support of his claims are as follows. He alleges that Mr. Neale gave him a personal financial statement in December of 2004 that indicated a net worth of over $1.2 million and contends that this statementwas used to "coerce" him to provide money to H2O Development. He also says that Mr. Neale has not provided documentation to support the representations in the financial statement. The defendant apparently transferred $600,000 from H2O Development into a money market account and did not provide Mr. Iwaszczenko with an accounting. The defendant also testified in the company bankruptcy that he was owed some $2.8 million by H2O Development but has not documented the source of these funds. The defendant also executed a series of promissory notes on behalf of H2O Development to himself, and did not provide access to the corporate records or reveal the source of corporate funds. Finally, Mr. Iwaszczenko says that the Wausau Police Department has an ongoing investigation into whether Mr. Neale defrauded him.

Mr. Neale's response is that Mr. Iwaszczenko did not loan him money personally, and he did not guarantee the company's obligations. He admits that they were both investors in the H2O Development real estate project, and that both of them lost significant amounts of money when the project failed. He contends that he did not make any false statements to the plaintiff with regard to his financial condition, the H2O Development project, or H2O Holdings, Inc. And he submits that the failure to provide documentation or an accounting of various activities does not preclude the discharge of Mr. Iwaszczenko's claims. As such, he has moved to dismiss the complaint.

Fed.R.Civ.P. 12(b)(6), which is applicable in bankruptcy adversary proceedings pursuant to Fed. R. Bankr.P. 7012(b), provides that a defendant may raise the "failure to state a claim upon which relief can be granted" as a defense. This defense may be asserted by a motion to dismiss. While the federal civil procedure rules contemplate "notice" pleading, a complaint must still contain "a short and plain statement of the claim showing that the pleader is entitled to relief." See Fed.R.Civ.P. 8(a)(2), which is applicable to bankruptcy adversary proceedings pursuant to Fed. R. Bankr.P. 7008(a). In addition, the circumstances of certain special matters, most notably fraud, must be pled "with particularity." See Fed.R.Civ.P. 9(b), which is applicable to bankruptcy adversary proceedings pursuant to Fed. R. Bankr.P. 7009. The Neales' motion to dismiss is premised upon the contention that Mr. Iwaszczenko has not alleged facts which demonstrate that he is entitled to relief, and that he has also not pled his fraud claims with sufficient particularity.

In Bell Atl. Corp. v. Twombly, 550 U.S. 544, 127 S.Ct. 1955, 1964, 167 L.Ed.2d 929 (2007), the Supreme Court recently outlined the standard by which a complaint must be judged when it is "attacked" by a Rule 12(b)(6) motion to dismiss. The complaint need not contain exhaustive factual allegations, but a plaintiff's obligation to demonstrate an entitlement to relief "requires more than labels and conclusions." Id. Further, a "formulaic recitation of the elements of a cause of action will not do." Id. To survive a motion to dismiss, the complaint must contain sufficient factual detail that if the allegations were proven to be true, the complaint would state a claim to relief that is plausible on its face. Ashcroft v. Iqbal, --- U.S. ----, 129 S.Ct. 1937, 1949, 173 L.Ed.2d 868 (2009). Of course, as the Seventh Circuit has cautioned, Bell Atlantic must not be "overread." Limestone Dev. Corp. v. Vill. of Lemont, 520 F.3d 797, 803 (7th Cir.2008). Allowing an action to survive dismissal and proceed to the summary judgment state is often "unlikely to place on the defendants a heavy burden of compliance with demandsfor pretrial discovery." Smith v. Duffey, 576 F.3d 336, 340 (7th Cir.2009). Still, despite the relative latitude afforded by notice pleading, a complaint must always allege enough facts to state a claim that is plausible on its face. Limestone Dev., 520 F.3d at 803. How many facts are enough "will depend on the type of case." Id. And the facts as alleged have to be sufficient that if taken as true, they would support the legal claim submitted by the complaint. See Smith, 576 F.3d at 339-40 (facts alleged in complaint could not support cause of action; it was apparent from the complaint that the plaintiff's case had no merit).

In Riley v. Vilsack, 665 F.Supp.2d 994 (W.D.Wis.2009), the district court charted the Court of Appeals' evolving evaluation of the impact of Twombly and Iqbal on existing practice within the Seventh Circuit. The primary point of emphasis is that the Supreme Court has not changed the "fundamentals of pleading." Id. at 1003; see also Bissessur v. Ind. Univ. Bd. of Trs., 581 F.3d 599, 603 (7th Cir.2009) ("Our system operates on a notice pleading standard; Twombly and its progeny do not change this fact."). In the context of determining whether the plaintiff's claim is plausible on its face, it must be remembered that a complaint is not implausible simply because the allegations appear fanciful, unrealistic, or even nonsensical. Instead, "implausibility" in the context of a Rule 12(b)(6) motion to dismiss exists when the allegations of the complaint are too conclusory or the complaint fails to include essential facts about the elements of a claim. Vilsack, 665 F.Supp.2d at 1004. Put simply, a court assessing the sufficiency of a complaint should ask:

[I]f all the facts the plaintiff alleges in his complaint are accepted as true, but all the conclusions are rejected, is it still plausible (that is, more than speculative) to believe that additional discovery will fill in whatever gaps are left in the complaint?

Id.

Further, where the complaint is grounded in allegations of fraud, the plaintiff has the additional burden of pleading those claims "with particularity." See General Ins. Co. of America v. Clark Mali Corp., 2010 WL 1286076, at *7 (N.D.Ill. Mar.30, 2010) (under Twombly and Iqbal, "the idea is to state enough facts to present a plausible claim for relief. Where the claim involves fraud, more is required."). The circumstances of fraud include the identity of the person who made the misrepresentation, the time, place and content of the misrepresentation, and the method by which the misrepresentation was communicated to the plaintiff. Windy City Metal Fabricators & Supply, Inc. v. CIT Tech. Fin. Servs., 536 F.3d 663, 668 (7th Cir.2008) (citing GE Capital Corp. v. Lease Resolution Corp., 128 F.3d 1074, 1078 (7th Cir.1997)). Rule 9(b) particularity is "the who, what, when, where, and how: the first paragraph of any newspaper story." DiLeo v. Ernst & Young, 901 F.2d 624, 627 (7th Cir.1990). A complaint which fails to identify the fraudulent statements or the reasons why they are fraudulent does not satisfy the particularity requirements of Rule 9(b). Skycom Corp. v. Telstar Corp., 813 F.2d 810, 818 (7th Cir.1987); S & L Enters. I, LLC v. Eisaman (In re Eisaman), 387 B.R. 219, 222 (Bankr.N.D.Ind.2008).

When considering a motion to dismiss a complaint, the Court accepts the facts stated in the complaint as true and draws reasonable inferences in favor of the plaintiff. Hallinan v. Fraternal Order of Police of Chicago Lodge No. 7, 570 F.3d 811, 820 (7th Cir.2009). To consider the plaintiff's complaint in accordance with thestandards set out in the foregoing authorities, however, it is also necessary to determine the elements of the causes of action asserted in the complaint and to compare those elements with the plaintiff's allegations. Lazzaro v. Weichman (In re Weichman), 422 B.R. 143, 149 (Bankr.N.D.Ind.2010). Here, Mr. Iwaszczenko's complaint alleges that "fraud" occurred but only includes a vague reference to 11 U.S.C. § 523(a)(2) and (a)(6).⁵ In addition, the adversary cover sheet (but not the complaint itself) references that he is objecting to the debtor's discharge under § 727. The joint pre-trial statement...