Spring Creek Capital, LLC v. Hawkes (In re Hawkes)

• Decision Date: 10 March 2020
• Docket Number: Bankruptcy Case No. 19-00880-JDP,Adversary Proceeding No. 19-6057-JDP
• Parties: In Re: Ryan William Hawkes and Suzann Margaret Hawkes, Debtors. Spring Creek Capital, LLC, Plaintiff, v. Ryan William Hawkes, Defendant.
• Court: United States Bankruptcy Courts. Ninth Circuit. U.S. Bankruptcy Court — District of Idaho

In Re: Ryan William Hawkes and Suzann Margaret Hawkes, Debtors.

Spring Creek Capital, LLC, Plaintiff, v. Ryan William Hawkes, Defendant.

Bankruptcy Case No. 19-00880-JDP

Adversary Proceeding No. 19-6057-JDP

UNITED STATES BANKRUPTCY COURT DISTRICT OF IDAHO

March 10, 2020

MEMORANDUM OF DECISION

Appearances:

Joshua M. O'Hare, FOLEY FREEMAN, PLLC, Meridian, Idaho, Attorney for Plaintiff.

Holly Roark, Boise, Idaho, Attorney for Defendant.

Introduction

Before the Court is a motion to dismiss Count I of plaintiff Spring Creek Capital, LLC's ("Plaintiff") first amended adversary complaint. The motion was filed by defendant Ryan William Hawkes ("Defendant"). Dkt. Nos. 11, 14. Following the briefing, and a hearing held on February 25, 2020, the motion was taken under advisement. Dkt. No. 19. Having considered the parties' briefs and arguments, as well as the applicable law, the following decision disposes of the motion. Fed. R. Bankr. P. 7052; 9014.¹

Analysis and Disposition

Plaintiff's amended complaint seeks both to deny Defendant a discharge in his bankruptcy case under § 727(a) for several reasons, as well as to deem the debt owed to him by Defendant excepted from discharge under § 523(a)(2)(a) based upon Defendant's alleged fraudulent conduct. In his motion, Defendant seeks dismissal of Count I of Plaintiff's amended complaint under Civil Rule 12(b)(6), made applicable in adversary proceedings by Rule 7012(b), arguing that Plaintiff failed to allege enough facts to support the relief requested.

A. Elements of an Exception to Discharge Under §§ 523(a)(2)(a) and (b)

Two related exceptions to discharge based on a debtor's fraud are found in § 523(a). To prove that a debt is excepted from discharge under § 523(a)(2)(A), the creditor must establish by a preponderance of the evidence: (1) misrepresentation, fraudulent omission, or deceptive conduct by the debtor; (2) knowledge of the falsity or deceptiveness of his statement or conduct; (3) an intent to deceive; (4) justifiable reliance by the creditor on the debtor's statement or conduct; and (5) damage to the creditorproximately caused by its reliance on the debtor's statement or conduct. In re Mcharo, No. 6:18-BK-61242, 2020 WL 699881, at *2-3 (9th Cir. BAP Jan. 9, 2020) (quoting Turtle Rock Meadows Homeowners Ass'n v. Slyman (In re Slyman), 234 F.3d 1081, 1085 (9th Cir. 2000)); In re Mowery, 591 B.R. 1, 5 (Bankr. D. Idaho 2018) (citing In re Sabban, 600 F.3d 1219, 1222 (9th Cir. 2010) (citing Am. Express Travel Related Servs. Co. v. Hashemi (In re Hashemi), 104 F.3d 1122, 1125 (9th Cir. 1996)). Because "[d]irect evidence of knowledge and fraudulent intent is rarely present; instead, [p]laintiff may prove knowledge and intent through circumstantial evidence." Fetty v. DL Carlson Enters., Inc. (In re Carlson), 426 B.R. 840, 855 (Bankr. D. Idaho 2010) (citing Cowen v. Kennedy (In re Kennedy), 108 F.3d 1015, 1018 (9th Cir. 1997)).

Section 523(a)(2)(B) sanctions a debtor's fraud concerning its, or an insider's, financial condition. To prevail on this exception to discharge, the creditor must show by a preponderance of the evidence that: (1) it provided debtor with money, property, services, credit, or an extension of credit, based upon a written representation of fact by the debtor as to the debtor's financial condition, or the financial condition of debtor's insider; (2) the representation was materially false; (3) the debtor knew the representation was false when made; (4) the debtor made the representation with the intention of deceiving the creditor; (5) the creditor relied on the representation; (6) the creditor's reliance was reasonable; and (7) damage proximately resulted from the representation. In re Maxwell, 600 B.R. 62, 69-70 (9th Cir. BAP 2019) (citing Grogan v. Garner, 498 U.S. 279, 286-87, 111 S.Ct. 654, 112 L.Ed.2d 755 (1991) (setting forth the preponderance ofthe evidence standard); Candland v. Ins. Co. of N. Am. (In re Candland), 90 F.3d 1466, 1469 (9th Cir. 1996); Gertsch v. Johnson & Johnson Fin. Corp. (In re Gertsch), 237 B.R. 160, 167 (9th Cir. BAP 1999); In re Siriani, 967 F.2d at 304 (adopting the elements required under the companion § 523(a)(2)(A), with the additional and obvious requirement that the alleged fraud stem from a false statement in writing)).

The crucial difference in the scope of these two similar discharge exceptions is highlighted in § 523(a)(2)(A) which applies only to a debt "obtained by false pretenses, a false representation, or actual fraud, other than a statement respecting the debtor's or an insider's financial condition," whereas § 523(a)(2)(B) excepts from discharge debts obtained by materially false written statements respecting a debtor's or insider's financial condition. In other words, debts obtained by a debtor's materially false, but unwritten, statements respecting its financial condition are subject to discharge. See Lamar, Archer, & Cofrin, LLP v. Appling, ___ U.S. ___, 138 S. Ct. 1752, 1757, 201 L.Ed.2d 102 (2018) (emphasis added).

The creditor's reliance on a debtor's fraud required under § 523(a)(2)(B) must be both actual and reasonable. Heritage Pac. Fin., LLC v. Montano (In re Montano), 501 B.R. 96, 115 (9th Cir. BAP 2013) (citing Field v. Mans, 516 U.S. 59, 68, 116 S.Ct. 437, 133 L.Ed.2d 351 (1995)). Moreover, the degree of reliance required—reasonable—is more stringent than the justifiable reliance required under § 523(a)(2)(A), and evidences Congressional intent to create a heightened bar to discharge exceptions. Lamar, 138 S.Ct. at 1763; In re Maxwell, 600 B.R. at 70.

B. Allegations in the Amended Complaint

Plaintiff's amended complaint offers the following general allegations, relevant to Count I:

7. Doug Clegg is the owner and operator of Plaintiff Spring Creek Capital, LLC.

8. Clegg and Defendant had a close relationship before these proceedings and often spent time together.

[9-13.]Describes loan made by Plaintiff to Defendant's wholly-owned auto dealership, C.A.R.S. Inc. [C.A.R.S.] , the terms of the loan agreement and of Defendant's personal guarantee of that loan, the default on the loan by C.A.R.S. Inc. and under the guarantee by Defendant, and that the outstanding balance due on the loan is $300,000 plus interest.

14. Because of the relationship between Clegg and Defendant, Clegg decided to forego any recourse to secure repayment from C.A.R.S. and instead gave them more time to pay back his debt.

15. Debtor made several assertions regarding C.A.R.S. output including about the large numbers of cars being sold in any given month, that things were going well, and that C.A.R.S. was very profitable.

16. These assertions were all false, in that C.A.R.S. was in fact in poor financial health and Defendant had taken millions of dollars of loans to support the dealership, personally guaranteeing many of them.

17. Defendant has not provided any accounting of C.A.R.S.'s income and expenses.

18. Defendant lists $1,233,140.13 in assets and $7,629,581.70 in liabilities in the bankruptcy schedules.

Dkt. No. 11. Incorporating these general allegations, Plaintiff specifically alleges in Count I of the amended complaint, the § 523(a)(2(A) claim, that:

22. Defendant specifically told Plaintiff that he would be continuing to make the payments on the debt owed to Plaintiff.

23. Defendant assured Plaintiff numerous times that cash flow was good.

24. Defendant told Plaintiff on several occasions that Defendant's vehicle retail business had a "60-car month" or "80-car month" and that the sales would be sufficient to make payments to Plaintiff.

25. That said statements were false because Defendant had made representations that many vehicles had been sold when, in fact, the vehicles were still on the car lot of C.A.R.S..

26. That said statements were false because money received as payments for sold cars was not used to pay debt owed to Plaintiff.

27. The false statements made by Defendant were intended to prevent or delay Plaintiff from seeking other recourse to receive payments on his debt.

28. Defendant established a pattern of continuously misleading Plaintiff to delay Plaintiff's collection of the debt.

29. That Plaintiff relied on those statements by foregoing other options for recovery and facing the possibility of nonpayment through discharge.

30. Plaintiff was damaged by these misrepresentations pursuant to Carroll v. Jadallah, 752 F. App'x 497 (9th Cir. 2019).

Dkt. No. 11.

C. Legal Standard for Motions to Dismiss

Civil Rule 12(b)(6) governs motions to dismiss for failure to state a claim upon which relief may be granted. This Court has explained the standard to be applied in addressing such a motion in In re Baker, 574 B.R. 184 (Bankr. D. Idaho 2017):

The purpose of such a motion is to "test a claim's legal sufficiency." Beach v. Bank of Am. (In re Beach), 447 B.R. 313, 318 (Bankr. D. Idaho 2011) (citing Navarro v. Block, 250 F.3d 729, 732 (9th Cir. 2001)). To survive a Rule 12(b)(6) motion, a complaint must plead sufficient facts, which when accepted as true, support a claim that is "plausible on its face." Ashcroft v. Iqbal, 556 U.S. 662, 678, 129 S.Ct. 1937, 173 L.Ed.2d 868 (2009) (citing Bell Atlantic Corp. v. Twombly, 550 U.S. 544, 570, 127 S.Ct. 1955, 167 L.Ed.2d 929 (2007)). A claim is plausible so long as it is based on a cognizable legal theory and has sufficiently alleged facts to support that theory. In re Beach, 447 B.R. at 318 (citing Johnson v. Riverside Healthcare Sys., LP, 534 F.3d 1116, 1121-22 (9th Cir. 2008) (quoting Balistreri v. Pacifica Police Dep't, 901 F.2d 696, 699 (9th Cir. 1988))).

"[Under Civil Rule 12(b)(6)], the issue is not whether a plaintiff will ultimately prevail but whether the claimant is entitled to offer evidence to support the claims." Cornelius v. DeLuca, 709 F.Supp.2d 1003, 1017 (D.Idaho 2010) (quoting Jackson v. Birmingham Bd. of Educ., 544 U.S. 167, 184, 125 S.Ct. 1497, 161 L.Ed.2d 361 (2005)).

In re Baker, 574 B.R. at 188 (quoting Hillen v. City of Many Trees, LLC (In re CVAH, Inc.), 570 B.R....