Jou v. Adalian (In re Adalian)
| Decision Date | 07 June 2012 |
| Docket Number | Bankruptcy No. 5–11–bk–04952–RNO.,Adversary No. 5–11–ap–00480–RNO. |
| Citation | 474 B.R. 150 |
| Parties | In re Gregory M. ADALIAN, Debtor. Emerson M.F. Jou, Plaintiff v. Gregory M. Adalian, Defendant. |
| Court | U.S. Bankruptcy Court — Middle District of Pennsylvania |
OPINION TEXT STARTS HERE
Lisa M. Doran, Doran & Doran, P.C., Wilkes–Barre, PA, for Plaintiff.
Mark J. Conway, Law Offices of Mark J. Conway PC, Dunmore, PA, for Defendant.
Presently pending before the Court is a Motion to Dismiss filed by the Debtor/Defendant, Gregory M. Adalian (“Adalian” or “Debtor”). The Motion seeks to dismiss the Adversary Complaint filed by the Plaintiff, Emerson M.F. Jou (“Jou” or “Plaintiff”). For the reasons stated herein, the Motion to Dismiss is denied in part and granted in part.
The Court has jurisdiction over this matter pursuant to 28 U.S.C. §§ 157 and 1334. This is a core proceeding under 28 U.S.C. § 157(b)(2)(I) and (J).
On July 14, 2011, Adalian filed a petition under Chapter 7 of the Bankruptcy Code. Several months later, on November 1, 2011, this Adversary Proceeding was commenced by Jou who has filed a Complaint seeking a determination of non-dischargeability of certain debts pursuant to 11 U.S.C. § 523(a)(2), (4) and (6) as well as a denial of discharge under 11 U.S.C. § 727(a)(3), (4) and (5).2 The debt that Jou seeks to be held non-dischargeable relates to two notes executed between the Parties in the early 1990's. I note that at no point in this part of this Opinion am I making any law of the case. Here, I am merely narrating the facts as they have been alleged.
Jou and Adalian were initially partners in SCV Development, a California Limited Partnership (“SCV Development”). Adalian was the General Partner and Jou was a Limited Partner. Jou claims to have invested approximately $282,000 in SCV Development. He also alleges that on March 1, 1991, Adalian borrowed $70,000 from him and two other individuals. Ostensibly, the money was to be used solely to meet partnership obligations. Jou's share of this note was $50,000. As security for the note Adalian assigned to Jou and the two other lenders his interest in certain vacant land in Pasadena, California as well as his interest in an “ABS partnership.”
Subsequently, on August 3, 1992, Adalian borrowed an additional sum of $50,000 from Jou. Again, the money was purportedly to provide funds so that Adalian could continue to meet partnership obligations. As security for this note, Adalian again assigned to Jou his interest in the Pasadena property and ABS Partnership. As additional security, Adalian assigned his interest in SCV Development.
The notes were never repaid, and the loan funds were allegedly used for purposes other than to meet the partnership obligations. Jou claims that the vacant land in Pasadena, was never quitclaimed to him by Adalian as was required by the terms of notes. Adalian also allegedly transferred all of his interest in SCV Development to a third party without notifying Jou, who was protected by a written assignment of those interests and by Adalian's fiduciary obligation as a General Partner under California law.
The parties have been disputing this debt for some time now. Prior to the bankruptcy Jou filed a civil action against Adalian in the United States District Court for the District of Hawaii, case # 1:09–cv–00226–JMS–KSC for various counts including a money judgment for amounts unpaid on various notes, plus counts for fraud. (“Hawaii Litigation”).
III. DiscussionA. Standard to Decide a Motion to Dismiss Under F.R.B.P. 7012(b)
Federal Rule of Bankruptcy Procedure 7012(b) incorporates, and makes applicable to bankruptcy adversary proceedings, Rules 12(b)–(i) of the Federal Rules of Civil Procedure. Rule 12(b)(6) requires dismissal of a complaint which fails to state a claim upon which relief can be granted. The complaint must contain “a short and plain statement of the claim showing that the pleader is entitled to relief”. Fed.R.Civ.P. 8(a), made applicable by Fed. R. Bankr.P. 7008. Factual allegations in the complaint should be treated as true and construed in the light most favorable to the non-moving party. Kehr Packages, Inc. v. Fidelcor, Inc., 926 F.2d 1406, 1410 (3d Cir.1991).
The standards for considering a dismissal motion under Rule 12(b)(6) have been discussed at length in two fairly recent Supreme Court decisions. In 2007, Bell Atlantic Corp. v. Twombly, 550 U.S. 544, 127 S.Ct. 1955, 167 L.Ed.2d 929 (2007) was decided. Its holding was clarified by the Court two years later in Ashcroft v. Iqbal, 556 U.S. 662, 129 S.Ct. 1937, 173 L.Ed.2d 868 (2009). In Twombly, the Supreme Court explained, “[w]hile a complaint attacked by a Rule 12(b)(6) motion to dismiss does not need detailed factual allegations, a plaintiff's obligation to provide the grounds of his entitlement to relief requires more than labels and conclusions, and a formulaic recitation of the elements of a cause of action will not do”. Twombly at 555, 127 S.Ct. 1955 (quotations and citations omitted). The Court further elaborated in Iqbal that a complaint requires more than naked assertions devoid of factual enhancement, it must be plausible on its face:
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.
Iqbal, at 1949 (internal citations and quotations omitted).
B. Pleading Requirements for Allegations of Fraud Under F.R.B.P. 7009
As the instant Complaint includes allegations of fraud, it is first helpful to review the heightened pleading requirements for claims that allege fraud. Federal Rule of Civil Procedure 9(b), as incorporated in Federal Rule of Bankruptcy Procedure 7009, applies to a complaint where fraud is plead. Rule 9(b) requires the party alleging fraud to “state with particularity the circumstances constituting fraud”. Fed.R.Civ.P. 9(b). The Third Circuit has explained that a complainant “should accompany her pleading with ‘the first paragraph of any newspaper story’—that is, the ‘who, what, when, where and how’ of the events at issue.” In re Rockefeller Center Properties, Inc. Securities Litigation, 311 F.3d 198, 217 (3d Cir.2002) (quoting In re Burlington Coat Factory Securities Litigation, 114 F.3d 1410, 1422 (3d Cir.1997)).
This heightened pleading standard for fraud allegations furthers important purposes. For example, it gives defendantsnotice of the claims against them, provides increased protection for their reputations, and reduces the number of frivolous suits brought to compel settlements. In re Rockefeller Center at 217. However, the specificity required can be met “through ‘alternative means of injecting precision and some measure of substantiation into their allegations of fraud.’ ” Lum v. Bank of America, 361 F.3d 217, 224 (3d Cir.2004) (quoting Seville Indus. Machinery Corp. v. Southmost Machinery Corp., 742 F.2d 786, 791 (3d Cir.1984)). Still, Rule 9(b) should not be applied without limit. The rule should be applied with some flexibility; “courts should be ‘sensitive’ to the fact that application of the Rule prior to discovery ‘may permit sophisticated defrauders to successfully conceal the details of their fraud.’ ” In re Burlington at 1418 (citing Shapiro v. UJB Financial Corp., 964 F.2d 272, 284 (3d Cir.1992)).
C. Counts of Dischargeability Under § 523
The first three Counts of the Complaint assert causes of action under § 523(a)(2) for false pretenses, representation or fraud; § 523(a)(4) fraud as a fiduciary or embezzlement; and, § 523(a)(6) for willful and malicious injury. Adalian has argued that applicable statutes of limitation bar all of these claims under California law, where the notes were executed. California has a four year statute of limitations to commence an action under a written contract and a three year limitation to commence an action for fraud. See generally, Cal.Civ.Proc.Code §§ 337 and 338 (West). When considering the timeliness of dischargeability actions, bankruptcy courts have developed a two-step inquiry. A debt must first be established and second it's dischargeability is adjudicated. The first inquiry, the establishment of the debt, addresses any underlying state statutes of limitation; and second, “the nature and ultimate decision as to the dischargeability of such debt, is solely governed by the limitations periods established by bankruptcy law.” In re Glunk, 343 B.R. 754, 761 (Bankr.E.D.Pa.2006) ().
If a statute of limitations defense exists under state law, it is applicable within the first inquiry; whether the debt is established. Jou and Adalian dispute whether the debt has been properly established. Previously, Adalian filed an adversary proceeding within this bankruptcy case, Adversary Case Number 11–ap–00436. Therein, Adalian sought a temporary restraining order and/or a preliminary injunction to restrain Jou's collection attempts, which included an action in the U.S. District Court for the District of Hawaii. That adversary proceeding was settled by the parties. There, they agreed that the automatic stay would remain in effect until a final determination of whether or not Jou's claim against Adalian is discharged. In accordance with their settlement, I will not here address whether a debt has been properly established. Consequently, I will not address the underlying state statute of limitation defenses. To the extent that I may...
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