In re Yelverton, No. 09-00414 (Bankr. D.C. 11/16/2009), Case No. 09-00414.
| Decision Date | 16 November 2009 |
| Docket Number | Adversary Proceeding No. 09-10023.,Case No. 09-00414. |
| Parties | In re: STEPHEN THOMAS YELVERTON, Chapter 11, Debtor. LUDWIG & ROBINSON, PLLC, Plaintiff, v. STEPHEN THOMAS YELVERTON, Defendant. |
| Court | United States Bankruptcy Courts. District of Columbia Circuit |
This addresses the defendant's motion to dismiss the complaint under Fed. R. Civ. Proc. 12(b)(6). For the reasons set forth below, I will deny the motion.
On May 14, 2009, the debtor, Stephen Thomas Yelverton, commenced in this court his case under chapter 11 of the Bankruptcy Code (11 U.S.C.). Thereafter, the plaintiff instituted the above-captioned adversary proceeding seeking to have the court declare its claim non-dischargeable under § 523(a)(2)(A) of the Bankruptcy Code. The facts as alleged in the plaintiff's complaint are as follows.
On or about March 9, 2007, the debtor's law firm, Yelverton Law Firm (YLF), and the plaintiff, Ludwig & Robinson, PLLC (L&R), entered into a sub-sublease agreement. Under the terms of that agreement, the sub-sublease was to expire September 30, 2008. The master lease underlying the sub-sublease, however, was set to expire on February 28, 2008, seven months before the sub-sublease was set to expire. From April 2008 through the end of the sub-sublease, YLF failed to make payments as due. Also included in the sub-sublease was an agreement by L&R to provide office services to YLF. YLF did not make payments for these services from April 2008 through the end of the sub-sublease.
YLF and L&R also entered into a second agreement to provide health insurance to Yelverton's wife under L&R's group medical insurance policy. YLF failed to make payments due under that policy from March 2008 through September 2008.
After YLF first failed to make payments under the lease and health insurance policy, Yelverton made a series of representations to L&R regarding YLF's and Yelverton's purported ability and intent to pay the amounts due. Based upon these representations, L&R held off terminating the lease and medical coverage and continued to provide YLF and Yelverton with access to the leased office space, with office services, and with medical coverage. In its complaint, L&R alleges that when Yelverton made these representations to L&R he, in fact, had no intention of paying. In support of this, L&R points to Yelverton's withdrawal of significant personal and YLF funds for the personal use of his wife.
The purpose of a Rule 12(b)(6) motion to dismiss is "to test the legal sufficiency of the complaint." Kingman Park Civic Ass'n v. Williams, 348 F.3d 1033, 1040 (D.C. Cir. 2003). In deciding a motion to dismiss, although the court "must construe the allegations and facts in the complaint in the light most favorable to the plaintiff . . .," Gustave-Schmidt v. Chao, 226 F. Supp. 2d 191, 195 (D.D.C. 2002), the complaint must nevertheless plead "enough facts to state a claim to relief that is plausible on its face," Bell Atlantic Corp. v. Twombly, 550 U.S. 544 (2007), and Kowal v. MCI Communications Corp., 16 F.3d 1271, 1276 (D.C. Cir. 1994); see also Ashcroft v. Iqbal, 129 S. Ct. 1937, 1949—50 (2009). In deciding a motion to dismiss, "the Court may only consider the facts alleged in the complaint, documents attached as exhibits or incorporated by reference in the complaint, and matters about which the Court may take judicial notice." Gustave-Schmidt, 226 F. Supp. 2d at 196.
In his motion to dismiss, Yelverton sets out two general bases for dismissal: the invalidity of L&R's claim and L&R's failure to state a claim under § 523(a)(2)(A). I will address each in turn.
Yelverton's first basis for dismissal centers on whether the claims stemming from the YFL sub-sublease are enforceable against him. In this regard, Yelverton makes two alternative arguments. First, Yelverton states that dismissal of the complaint is proper because L&R failed to either allege or demonstrate that he was personally liable on the sub-sublease. Alternatively, Yelverton argues that even if he is personally liable, there is no liability for failure to pay the sub-sublease because the master lease underlying the sub-sublease expired prior to the period in which L&R claims damages.
Yelverton's first basis for dismissal is without merit. Under D.C. law, an individual who causes harm to another by engaging in fraud can be held liable for the harm arising from that fraud, here, a sub-sublease of property to YLF for which rent was not paid. Section 523(a)(2)(A) excludes from discharge a debt for property obtained by fraud. Historically, there were three views as to whether the debtor must personally receive the property in order for the debt to be excepted from discharge:
The first view . . . requires that the debtor personally receive the fruits of the fraud. The second view . . . is termed the "receipt of benefits" theory. This theory requires that the debtor gain a benefit from the [property] that was obtained by fraudulent means. A third view, which is the broadest, requires simply that a debtor obtain [property] by fraudulent means such that a debtor does not necessarily have to receive [property] personally or receive any benefit at all.
HSSM #7 Limited P'ship v. Bilzerian (In re Bilzerian), 100 F.3d 886, 890 (11th Cir. 1996). Most courts to confront the issue agreed that an indirect benefit to the debtor was sufficient. See, e.g., Brady v. McAllister (In re Brady), 101 F.3d 1165, 1172 (6th Cir. 1996); HSSM #7 Limited P'ship v. Bilzerian (In re Bilzerian), 100 F.3d 886 (11th Cir 1996); Ashley v. Church (In re Ashley), 903 F.2d 599, 604 (9th Cir. 1990). In 1998, however, the Supreme Court provided a more expansive view of § 523(a)(2)(A) and arguably did away with the indirect benefits theory.
In Cohen v. de la Cruz, 523 U.S. 213 (1998), the Supreme Court addressed the issue of whether treble damages awarded in a state court fraud action were non-dischargeable under § 523(a)(2)(A) or whether the exception only encompassed the money or property the debtor actually obtained through the fraud. Id. at 215. The Cohen Court held that "§ 523(a)(2)(A) prevents the discharge of all liability from fraud, and that an award of treble damages therefore falls within the scope of the exception." Id. (emphasis added). Important to the Court's reasoning was that the phrase "to the extent obtained by" did not relate to benefit, but instead meant causation:
Moreover, the phrase "to the extent obtained by" in § 523(a)(2)(A) . . . does not impose any limitation on the extent to which "any debt" arising from fraud is excepted from discharge. "[T]o the extent obtained by" modifies "money, property, services, or . . . credit"——not "any debt"——so that the exception encompasses "any debt . . . for money, property, services, or . . . credit, to the extent [that the money, property, services, or . . . credit is] obtained by" fraud. The phrase thereby makes clear that the share of money, property, etc., that is obtained by fraud gives rise to a nondischargeable debt. Once it is established that specific money or property has been obtained by fraud, however, "any debt" arising therefrom is excepted from discharge.
Id. at 218—19; see also Nat'l Dev. Servs., Inc. v. Denbleyker, 251 B.R. 891, 896 (Bankr. D. Colo. 2000). At least three circuit courts to address the issue post-Cohen have abandoned the direct/indirect benefit framework and found that as long as someone or something received property on account of the debtor's fraud, the claim arising from that fraud was non-dischargeable. See Muegler v. Bennings, 413 F.3d 980, 983-84 (9th Cir. 2005); Deodati v. M.M. Winkler & Assoc., 239 F.3d 746, 749 (5th Cir. 2001); Pleasants v. Kendrick, 219 F.3d 372, 375 (4th Cir. 2000). Regardless of which view prevails, L&R has stated a claim notwithstanding that Yelverton is not a signatory to the sub-sublease.
First, L&R has alleged that Yelverton indirectly benefitted from the sub-sublease from L&R to YLF. In its complaint, L&R states that Yelverton is the founder and principal officer in YLF, and that Yelverton and his wife used the office space provided by L&R. In situations analogous to this, other courts have found an indirect benefit to a debtor when financing was extended to a corporation that the debtor controlled. See Church, 903 F.2d at 604; Simmons v. Wade (In re Wade), 43 B.R. 976, 981—82 (Bankr. D. Colo. 1984). Such is the case here. Yelverton is the founder and principal officer of YLF. L&R has alleged that both he and his wife used the office space. This is enough of an indirect benefit to fall within the purview of the indirect benefit view of § 523(a)(2)(A). Moreover, under Cohen's reasoning, it does not matter whether Yelverton received any benefit at all. All that matters is that some property was obtained because of his misrepresentations. In their complaint, L&R has sufficiently alleged that they opted to forbear evicting YLF based on Yelverton's alleged misrepresentations, thereby giving YLF the benefit of using the leased premises for a longer period.
Yelverton's second basis for dismissal——that even if he is personally liable, there is no liability for failure to pay the sub-sublease because the master lease underlying the sub-sublease expired prior to the period in which L&R claims damages——is also without merit. Under D.C. Code § 42-3229, if a lease is surrendered to be renewed, any sublease of that lease remains enforceable as if it had been renewed at the time the master lease was renewed. L&R's complaint does not explicitly state that L&R renewed its lease with the master landlord. But if such renewal was required for L&R to comply with its agreement...
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