Sauer Inc. v. Lawson (In re Lawson)

• Citation: 505 B.R. 117
• Decision Date: 03 February 2014
• Docket Number: Adversary No. 13–01037.,Bankruptcy No. 13–10752.
• Parties: In re Carrie D. LAWSON, Debtor. Sauer Incorporated d/b/a Sauer Southeast, Plaintiff v. Carrie D. Lawson, Defendant.
• Court: United States Bankruptcy Courts. Ninth Circuit. U.S. Bankruptcy Court — Western District of Washington

505 B.R. 117

In re Carrie D. LAWSON, Debtor.Sauer Incorporated d/b/a Sauer Southeast, Plaintiff

v.Carrie D. Lawson, Defendant.

Bankruptcy No. 13–10752.

Adversary No. 13–01037.

United States Bankruptcy Court, D. Rhode Island.

Feb. 3, 2014.

Brian LaPlante, LaPlante Sowa Goldman, Providence, RI, for Plaintiff.

Christopher Lefebvre, Law Office of Claude Lefebvre & Sons, Pawtucket, RI, for Defendant.

DECISION AND ORDER

DIANE FINKLE, Bankruptcy Judge.

The Debtor–Defendant Carrie D. Lawson moves to dismiss this adversary proceeding in which Plaintiff Sauer Incorporated seeks a determination that debt owed by the Debtor is nondischargeable pursuant to Bankruptcy Code § 523(a)(2)(A).¹ The linchpin of this case is whether in this circuit a debt incurred as a result of a debtor's “actual fraud” in the absence of any misrepresentation by the debtor falls within the scope of this nondischarge provision. Sauer alleges that the Debtor colluded with her father and knowingly received money through a fraudulent transfer, thereby incurring a debt to Sauer with actual fraudulent intent to hinder and delay Sauer from collecting money owed by the Debtor's father. This Court is duty-bound to apply the law enacted by Congress as interpreted by the United States Supreme Court and the United States Court of Appeals for the First Circuit. Based on that precedent, the Court concludes that in this circuit a misrepresentation by a debtor to a creditor is an essential element of establishing a basis for the nondischarge of a debt under § 523(a)(2)(A). Consequently, while the outcome may seem harsh, the Court is constrained to hold that Sauer has failed to establish that the debt owed by the Debtor is nondischargeable under this provision.

I. JURISDICTION

The Court has jurisdiction over this matter and the parties pursuant to 28 U.S.C. §§ 1334 and 157(a). This is a core proceeding in accordance with 28 U.S.C. § 157(b)(2)(I).

II. STANDARD OF REVIEW

The Debtor moves to dismiss Sauer's complaint on the basis that it fails to state a claim upon which relief can be granted. SeeFed. R. Bankr.P. 7012(b) (incorporating Fed.R.Civ.P. 12(b)(6)).² In considering the motion to dismiss, the Court must accept as true the facts alleged in the complaint, construe all reasonable inferences in favor of Sauer, and determine whether under those facts and inferences Sauer would be entitled to the relief it seeks. See Beddall v. State Street Bank and Trust Co., 137 F.3d 12, 16 (1st Cir.1998).

III. FACTS ALLEGED IN THE COMPLAINT

In January 2007 Sauer filed a civil action in the Rhode Island Superior Court asserting claims including fraud against the Debtor's father, James Lawson. Complaint ¶ 4. Thereafter, in February 2010 Sauer obtained a judgment against Mr. Lawson in the amount of approximately $168,000. Id. ¶ 5. Immediately following entry of the judgment, Mr. Lawson transferred approximately $100,000 to Commercial Construction M & C, LLC (“CCMC”), an entity formed by the Debtor but controlled by Mr. Lawson. Id. ¶ 6. From February 2010 through early 2011, the Debtor transferred $80,000 of these funds from CCMC to herself. Id. ¶ 7.

In March 2011 Mr. Lawson filed a Chapter 13 petition in this Court, and in June 2011 Sauer initiated an adversary proceeding objecting to the discharge of Mr. Lawson's debt to Sauer. Id. ¶¶ 8, 9. Subsequently, in August 2011 the Superior Court found Mr. Lawson's post-judgment transfer to CCMC to be fraudulent within the scope of the Rhode Island Uniform Fraudulent Transfers Act, R.I. Gen. Laws § 6–16–1 et seq. (“UFTA”), and issued an execution against CCMC in the amount of the transfer, approximately $100,000. Id. ¶ 10. In September 2011 this Court entered a default judgment against Mr. Lawson in Sauer's adversary proceeding, declaring Mr. Lawson's debt to Sauer nondischargeable. Id. ¶ 11.

The Superior Court action against Mr. Lawson proceeded, and in March 2013 that court ruled the transfers from CCMC to the Debtor to be fraudulent under the UFTA and issued an execution against the Debtor in the amount of the $80,000 she transferred from CCMC to herself.³Id. ¶ 12. In March 2013 the Debtor filed a Chapter 13 petition in this Court, and in June 2013 Sauer initiated the instant adversary proceeding objecting to the discharge of the Debtor's debt to Sauer.

Sauer alleges it “has traced portions of the original Judgment amount (awarded based upon fraud) to CCMC (an insider company owned by [the Debtor] and controlled by [Mr. Lawson] ), then subsequently transferred to [the Debtor] directly (an insider as daughter to [Mr. Lawson] and owner of CCMC).” Id. ¶ 13. The complaint further alleges that the Debtor “incurred her debt to Sauer through actual fraud by ... knowingly receiving the fraudulent transfer....” Id. ¶ 14. Sauer asserts that as a result of the “continued attempts to conceal and dispose of monies owed to Sauer through fraudulent transfers under the UFTA, Sauer has suffered, and continues to suffer, severe and substantial damages.” Id. ¶ 15. Sauer prays the debt to Sauer owed by the Debtor be declared nondischargeable pursuant to § 523(a)(2)(A).⁴

IV. THE PARTIES' ARGUMENTS

The Debtor first argues in her motion to dismiss (Doc. # 15) that because the complaint alleges fraud it must meet the heightened pleading standard of Fed.R.Civ.P. 9(b), which 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.” Moreover, the Debtor contends that a plaintiff must plead “the who, what, where, and when of the allegedly false or fraudulent representation,” citing Rodi v. S. New Eng. Sch. of Law, 389 F.3d 5, 15 (1st Cir.2004). Sauer, the Debtor argues, has failed to do so. This goes to the heart of the question presented by Sauer's complaint and the Debtor's motion; the complaint does not allege a false representation by the Debtor in connection with the incurrence of the debt. Sauer, while conceding that, nonetheless argues that the complaint should not be dismissed because a broader category of fraud is encompassed by the term “actual fraud” used in § 523(a)(2)(A).

The Debtor correctly points out that First Circuit case law regarding the fraud exception to discharge is seemingly well established. For a debt to be nondischargeable under § 523(a)(2)(A), “a creditor must show that (1) the debtor made a knowingly false representation or one made in reckless disregard of the truth; (2) the debtor intended to deceive; (3) the debtor intended to induce the creditor to rely upon the false statement; (4) the creditor actually relied upon the misrepresentation; (5) the creditor's reliance was justifiable; and (6) the reliance on the false statement caused damage.” McCrory v. Spigel (In re Spigel), 260 F.3d 27, 32 (1st Cir.2001) (citing Palmacci v. Umpierrez, 121 F.3d 781, 786 (1st Cir.1997)). The complaint fails to allege those elements—in particular it lacks an allegation of misrepresentation—and therefore, the Debtor maintains, the complaint must be dismissed. Indeed, even Sauer concedes that the complaint does not satisfy the Spigel/Palmacci criteria. See Sauer's Memorandum in Support of Opposition to Debtor's Motion to Dismiss at 4–5 (Doc. # 16) (“Objection”).

Instead, Sauer argues that the Spigel/Palmacci test should not be the end of the analysis, that the fraud exception of § 523(a)(2)(A) is not (or should not be) limited to cases of misrepresentation, and that UFTA violations fall within § 523(a)(2)(A)'s “actual fraud” component. To advance this argument, Sauer relies upon the decision of the United States Court of Appeals for the Seventh Circuit in McClellan v. Cantrell, 217 F.3d 890 (7th Cir.2000), and its progeny, including the decisions of two bankruptcy appellate panels that have adopted this viewpoint. See Diamond v. Vickery (In re Vickery), 488 B.R. 680 (10th Cir. BAP 2013); Mellon Bank v. Vitanovich (In re Vitanovich), 259 B.R. 873 (6th Cir. BAP 2001). This interpretation of the term “actual fraud,” Sauer reasons, is consistent with existing First Circuit precedent and should be applied to the circumstances of this proceeding because the Debtor allegedly engaged in “actual fraud” by knowingly colluding with her father to effectuate the fraudulent transfers to her with the intent to defeat Sauer's rights as a creditor.

To counter this argument, the Debtor emphasizes that the First Circuit has takenno position on the validity of McClellan's analysis of the term “actual fraud” in this statutory provision. Furthermore, the Debtor relies upon the conclusions of two Massachusetts bankruptcy judges, in separate cases, that McClellan is inconsistent not only with First Circuit precedent but also with Supreme Court precedent as enunciated in Field v. Mans, 516 U.S. 59, 116 S.Ct. 437, 133 L.Ed.2d 351 (1995). See Morrissette v. Sorbera (In re Sorbera), 483 B.R. 580 (Bankr.D.Mass.2012) (Bailey, J.); Blacksmith Investments, LLC v. Woodford (In re Woodford), 403 B.R. 177 (Bankr.D.Mass.2009) (Feeney, J.).

V. DISCUSSION

In relevant part § 523(a)(2)(A) declares nondischargeable a debt “for money, property, services, or an extension, renewal, or refinancing of credit, to the extent obtained by false pretenses, a false representation, or actual fraud....” Reading the allegations in the complaint, drawing all reasonable inferences in favor of Sauer, and reviewing § 523(a)(2)(A), it would be easy to view the Debtor's alleged conduct as falling within the ambit of this provision. Certainly, the alleged conduct evidences a debt to Sauer arising from money obtained by fraudulent means. However, the term “actual fraud” is not defined in the Bankruptcy Code, and in its historical context and under First Circuit case law the meaning ascribed to this term is not broad enough to encompass the Debtor's actions.

A. McClellan

In McClellan, the Seventh Circuit reviewed de novo the dismissal of...