Wall St. Consulting, LLC v. Klein (In re Klein)

• Decision Date: 16 January 2013
• Docket Number: PROC. NO. 12-3052,CASE NO. 12-31617 HCD
• Court: U.S. Bankruptcy Court — Northern District of Indiana
• Parties: IN THE MATTER OF KENNETH SHAY KLEIN and CYNTHIA RUTH KLEIN, DEBTORS. WALL STREET CONSULTING, LLC, PLAINTIFF, v. KENNETH SHAY KLEIN and CYNTHIA RUTH KLEIN, DEFENDANTS.

IN THE MATTER OF KENNETH SHAY KLEIN and CYNTHIA RUTH KLEIN, DEBTORS.

WALL STREET CONSULTING, LLC, PLAINTIFF, v. KENNETH SHAY KLEIN and CYNTHIA RUTH KLEIN, DEFENDANTS.

CASE NO. 12-31617 HCD

PROC. NO. 12-3052

UNITED STATES BANKRUPTCY COURT NORTHERN DISTRICT OF INDIANA SOUTH BEND DIVISION

Dated: January 16, 2013

CHAPTER 7

Appearances:

Thomas M. Walz, Esq., and Thomas J. Walz, Esq., counsel for plaintiff, Hahn, Walz and Knepp, 509 West Washington Avenue, South Bend, Indiana 46614; and

Douglas R. Adelsperger, Esq., counsel for defendants, Skekloff, Adelsperger & Kleven, LLP, 927 South Harrison Street, Fort Wayne, Indiana 46802.

MEMORANDUM OF DECISION

At South Bend, Indiana, on January 16, 2013.

Before the court are the Amended Complaint in Objection to Discharge, filed by the plaintiff Wall Street Consulting, LLC ("plaintiff"); the Motion to Dismiss Amended Complaint, filed by the defendants Kenneth Shay Klein and Cynthia Ruth Klein, chapter 11 debtors¹ ("defendants" or "debtors"); the plaintiff's Motion for Leave to Amend Amended Complaint; and the plaintiff's Second Amended Complaint in Objection to Discharge. For the reasons that follow, the court grants the defendants' Motion to Dismiss and denies the plaintiff's Motion for Leave to Amend Amended Complaint as moot.²

A. Motion to Dismiss

When the defendants first sought dismissal of the original Complaint, the plaintiff filed a Response to the Motion to Dismiss and also moved to amend the Complaint. The defendants then filed a Motion to Dismiss the Amended Complaint. The plaintiff replied with a Motion to Amend the Amended Complaint; however, it did not respond to the second Motion to Dismiss. The court considers whether dismissal of the Amended Complaint is warranted. In weighing the sufficiency of the pleading, the court is required to "accept all well pled facts as true and draw all permissible inferences in favor of the plaintiff." Agnew v. National Collegiate Athletic Ass'n, 683 F.3d 328, 334 (7th Cir. 2012) (citing case).

The defendants seek dismissal of the Amended Complaint on two grounds: the plaintiff's failure to file a timely proof of claim and its failure to state a claim upon which relief can be granted. The court considers each argument.

(1) Untimely Proof of Claim

In its Motion to Dismiss, the defendants pointed out that the plaintiff failed to file a timely proof of claim pursuant to 11 U.S.C. § 1111(a), and argued that the Complaint should be dismissed as moot. The plaintiff responded that its original Complaint, filed on August 2, 2012, was an informal proof of claim that was filed timely. It further asserted that the actual proof of claim, filed ten weeks later, served as an amendment to the informal proof-of-claim Complaint and related back to the filing of the Complaint.

The plaintiff, listed on the defendants' Schedule F as an "unliquidated" unsecured creditor, was required to file a proof of claim. See R. 49 (Case No. 12-31617); see also Woodhollow Loft, Inc. v. Sisters of St. Francis Health Servs., 472 B.R. 494, 519 (N.D. Ind. 2010) (stating that § 1111 exempts chapter 11 creditors from the proof-of-claim requirement only if the debtor did not list their claims as disputed, contingent or unliquidated). The bar date for filing proofs of claim in this case was set at September 4, 2012. The plaintiff's proof of claim, filed on October 15, 2012, clearly was untimely. The plaintiff did not claimthat its belated filing was due to excusable neglect. See Fed. R. Bankr. P. 3003(c)(3), 9006(b)(1); see also In re National Steel Corp., 316 B.R. 510, 515 (Bankr. N.D. Ill. 2004). Instead, it asserted that the Complaint, timely filed, constituted an informal proof of claim.

"The informal proof-of-claim doctrine is an equitable doctrine that permits bankruptcy courts to treat a creditor's late formal claim as an amendment to a timely informal claim." In re marchFIRST, Inc., 573 F.3d 414, 418 (7th Cir. 2009) (rejecting untimely faxed submission as an informal claim). Although some courts have construed complaints as informal proofs of claim, the courts of this circuit have opined that the doctrine "is largely a dead letter in the Seventh Circuit since [Matter of] Greenig, [152 F.3d 631 (7th Cir. 1998)]. . . [and] its remaining utility is limited to situations where a document is filed within the bar date, . . . is intended to be a proof of claim but is somehow defective or incomplete, and is then permitted to be corrected or completed after the bar date." In re Brooks, 370 B.R. 194, 204 (Bankr. C.D. Ill. 2007); cf. In re Outboard Marine Corp., 386 F.3d 824, 828 (7th Cir. 2004) (affirming that proof of claim was untimely; refusing to excuse late proof of claim of a sophisticated claimant, represented by counsel, who received notice of the bar date; noting that late proofs of claim may adversely impact efficient judicial administration of a case).

Brooks described an informal proof of claim as an attempt to assert a claim against the bankruptcy estate which fails to satisfy the claim requirements, usually because of technical errors. It pointed out that a proof of claim is filed for a particular purpose, and concluded that neither a motion for relief from stay nor an adversary complaint to determine dischargeability qualifies as an informal proof of claim. See In re Brooks, 370 B.R. at 205 (citing In re Fink, 366 B.R. 870, 876-77 (Bankr N.D. Ind. 2007)); see also Woodhollow Loft, Inc., 472 B.R. at 523-24 (affirming ruling that creditor's motion for relief from stay did not constitute an informal proof of claim).

The court finds that the plaintiff's Complaint in Objection to Discharge, seeking a determination of nondischargeability against the defendants, does not fall within the limited scope of the informal proofof claim doctrine. Its Amended Complaint, filed to remedy other issues, did not address or change the untimeliness of the plaintiff's proof of claim. It concludes that dismissal of the plaintiff's Amended Complaint is warranted on the ground that the proof of claim was untimely and that the Complaint cannot constitute an informal proof of claim.

(2) Failure to State a Claim

A motion to dismiss pursuant to Federal Rule of Civil Procedure 12(b)(6)³ is reviewed under the Supreme Court's directives established in Bell Atlantic Corp. v. Twombly, 550 U.S. 544, 127 S. Ct. 1955, 167 L.Ed.2d 929 (2007), and Ashcroft v. Iqbal, 556 U.S. 662, 129 S. Ct. 1937, 173 L.Ed.2d 868 (2009). Those decisions dictate that a complaint must be dismissed if its allegations do not "contain sufficient factual matter, accepted as true, to 'state a claim to relief that is plausible on its face.'" Iqbal, 556 U.S. at 678 (quoting Twombly, 550 U.S. at 570); see also Atkins v. City of Chicago, 631 F.3d 823, 831-32 (7th Cir. 2011), cert. denied, 132 S. Ct. 1569 (2012); Reger Dev., LLC v. National City Bank, 592 F.3d 759, 764 (7th Cir.), cert. denied, 130 S. Ct. 3507 (2010). The court is required to decide whether the factual allegations plausibly suggest an entitlement to relief to a degree that "rises above the speculative level." Munson v. Gaetz, 673 F.3d 630, 633 (7th Cir. 2012) (quoting Iqbal and Bell Atlantic, internal quotations omitted). In addition, when a party alleges material falsity or fraud in the complaint, he "must state with particularity the circumstances constituting fraud or mistake." Fed. R. Civ. P. 9(b); Fed. R. Bankr. P. 7009; see also Reger Dev., 592 F.3d at 764.

The Amended Complaint requests that the debt owed by the defendants to the plaintiff be excepted from the defendants' discharge pursuant to 11 U.S.C. § 523(a)(2)(B), which provides:

A discharge . . . does not discharge an individual debtor from any debt . . . for money, property, services, or an extension, renewal, or refinancing of credit, to the extent obtained, by . . . the use of a statement in writing -

(I) that is materially false;

(ii) respecting the debtor's or an insider's financial condition;

(iii) on which the creditor to whom the debtor is liable for such money, property, services, or credit reasonably relied; and

(iv) that the debtor caused to be made or published with intent to deceive.

11 U.S.C. § 523(a)(2)(B). A creditor who seeks an exception to discharge under this section has the burden of proving each element by a preponderance of the evidence. See In re Hanselman, 454 B.R. 460, 465 (Bankr. S.D. Ind. 2011) (stating that plaintiff bears burden of proving all elements of nondischargeability); In re Martin, 299 B.R. 234, 239 (Bankr. C.D. Ill. 2003) ("The failure of a plaintiff to prove any one of the above elements contained in Section 523(a)(2)(B) will result in a dismissal of the dischargeability complaint."). Exceptions to discharge are construed strictly against the complaining creditor and liberally in favor of the debtor. See id.

In order to prevail on a § 523(a)(2)(B) claim, the creditor must prove that: (1) the debtor made a statement in writing; (2) the statement was materially false; (3) the statement concerned the debtor's financial condition; (4) the debtor intended to deceive the creditor; and (5) the creditor reasonably relied on that statement.

In re Carmell, 424 B.R. 401, 415-16 (Bankr. N.D. Ind. 2010). Moreover, when the creditor alleges a fraudulent financial statement under § 523(a)(2)(B), it is required to support its claim of material misrepresentation or fraud in the written statement with particularity, pursuant to Federal Rule of Civil Procedure 9(b). See In re Neale, 440 B.R. 510, 522 (Bankr. W.D. Wis. 2010) ("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)."); In re Carmell, 424 B.R. at 412 (setting forth particularity requirement of Rule 9(b) under § 523(a)(2)(B)).

The Amended Complaint acknowledged each element of § 523(a)(2)(B). It asserted that the defendants made "materially false written statements and /or representations about their financial condition...