Opinion
Case No: 08-64596-wsd, Adv. Pro. No. 09-04165-wsd.
May 20, 2011
Plaintiff, Thomas Butcher, filed a two count complaint against Defendant, Paul L. Buscemi, requesting a judgment (a) declaring that the Defendant's alleged debt to him of $45,607.86 is excepted from discharge under 11 U.S.C. § 523(a); and (b) denial of a discharge under 11 U.S.C. § 727(a). This adversary proceeding is a core proceeding under 28 U.S.C. § 157(b)(2). This Court has subject matter jurisdiction over this proceeding under 28 U.S.C. §§ 1334(a), 157(a), and 157(b)(1) and E. D. Mich. LR 83.50(a).
Defendant moved to dismiss the Plaintiff's denial of discharge claim under § 727(a) or, alternatively, moved for summary judgment on both claims. The Court held a hearing on the Defendant's motion. Due to issues raised at the initial hearing, the Court entered an order allowing the Plaintiff to file an amended complaint with the proviso that the Court would revisit without a further hearing the dismissal or summary judgment motion after the filing of the amended complaint and any supplements to the motions. An amended complaint and such supplements were filed. After such review, the Court grants the Defendant's Motion as to the Plaintiff's claim under § 727(a)(3) and denies it as to the claims under § 727(a)(4) and § 523(a)(2)(A).
Like the original complaint, the Amended Complaint consists of two counts. There are now, however, additional factual allegations supporting both counts. Generally, Count I alleges that in violation of § 727(a)(3) the Defendant failed to fully disclose all of his business interests, or, omitted material information about the activity level of his businesses in his schedules and statement of financial affairs. Unlike the original complaint, the Amended Complaint contains detailed factual allegations about an alleged business entity, known as Buscemi Bros. Catering, that Plaintiff alleges is an active business being operated by the Defendant but that was not disclosed by the Defendant in his amended statement of financial affairs. As additional support for Count I, the Amended Complaint states factual allegations about the activities of the businesses Buscemi Brothers, LLC, and Buscemi Properties, LLC, which call in to question the veracity of the Defendant's representation in his amended statement of financial affairs that both of these businesses were "never active."
Count II asserts a cause of action (and supporting facts) which the Plaintiff's brief makes clear is one under 11 U.S.C. § 523(a)(2)(A) based on false representations made by the Defendant to the Plaintiff to obtain a release of a construction lien from the Plaintiff in order to close on a loan for one of the Defendant's business properties. In exchange for the Plaintiff's release of lien, the Defendant, in his personal capacity, executed two promissory notes to the Plaintiff. In the first, Defendant promised to pay the Plaintiff $15,202.62 within 120 days and in the second, Defendant promised to pay a third party $1,002.91 within 60 days. Unlike the original complaint, the Amended Complaint factually elaborates on the extent of the Defendant's false representations, including his alleged failure to fully disclose the loans being obtained by the Defendant from the bank, the amount of money actually being received by the Defendant's business from the closing, and the Defendant's intent to pay the promissory notes. In essence, the Plaintiff thereby alleges Defendant intended to deceive him because at the time he signed the promissory notes he had no intention of paying them.
With specific regard to Count I, Defendant moves for dismissal or summary judgment on the basis that the Plaintiff's Amended Complaint fails to state a claim under § 727(a)(3). Defendant asserts that although paragraph 18 of the Amended Complaint quotes the statutory language of § 727(a)(3), the remaining factual allegations of the Amended Complaint "all have to do with a failure to make certain disclosures within the bankruptcy petition." Defendant contends that these factual allegations are insufficient to state a claim under § 727(a)(3). In his briefs opposing the Defendant's motion, the Plaintiff in a rather haphazard manner asserts in those pleadings that Count I variously states a denial of discharge claim under 11 U.S.C. § 727(a)(4) and not § 727(a)(3). In support of that argument, the Plaintiff further relied on Casa Invs. Co. v. Brenes (In re Brenes), 261 B.R. 322, 334 (Bankr. D. Conn. 2001), which applied the standard under § 727(a)(4) to determine whether a debtor should be denied a discharge. Based on its review of the Amended Complaint and the parties' briefs, the Court determines that the factual allegations in the Amended Complaint to support Count I plausibly suggest an entitlement to relief under § 727(a)(4) but fail to plausibly suggest a claim under § 727(a)(3). Bell Atlantic Corp. v. Twombly, ___ U.S. ___, 127 S.Ct. 1955, 1964-65 (2007) (holding that "stating . . . a claim requires a complaint with enough factual matter (taken as true) to suggest [grounds for relief]. Asking for plausible grounds to infer [a right to relief] does not impose a probability requirement at the pleading stage; it simply calls for enough fact to raise a reasonable expectation that discovery will reveal evidence [of an entitlement to relief]"); see also Weisbarth v. Geauga Park District, 499 F.3d 538, 541 (6th Cir. 2007) (explaining that Twombly does "not requir[e] a universal standard of heightened fact pleading, but [] instead requir[es] a flexible `plausibility standard,' which obliges a pleader to amplify a claim with some factual allegations in those contexts where such amplification is needed to render the claim plausible").
Section 727(a)(3) provides that a debtor shall be granted a discharge unless:
the debtor has concealed, destroyed, mutilated, falsified, or failed to keep or preserve any recorded information, including books, documents, records, and papers, from which debtor's financial condition or business transactions might be ascertained, unless such act or failure to act was justified under all the circumstances of the case.
A debtor is required under § 727(a)(3) "to provide creditors with enough information to ascertain the debtor's financial condition and track his financial dealings with substantial completeness and accuracy for a reasonable period past to present." Turoczy Bonding Co. v. Strbac (In re Strbac), 235 B.R. 880, 882 (6th Cir. BAP 1999) ( quoting In re Martin, 141 B.R. 986, 995 (Bankr. N.D. Ill. 1992)). In comparison, § 727(a)(4)(A) provides that a debtor shall be granted a discharge unless — "the debtor knowingly and fraudulently, in or in connection with the case — (A) made a false oath or account[.]" "In order to deny a debtor a discharge under this section, a plaintiff must prove by a preponderance of the evidence that: 1) the debtor made a statement under oath; 2) the statement was false; 3) the debtor knew the statement was false; 4) the debtor made the statement with fraudulent intent; and 5) the statement related materially to the bankruptcy case." Keeney v. Smith (In re Keeney), 227 F.3d 679, 685 (6th Cir. 2000) (citation omitted). As expressly recognized by the Defendant, the factual allegations in the Amended Complaint pertain to the Defendant's false representations or his omission of material information about his business interests or the extent of the activities engaged in by his businesses in his original and amended statement of financial affairs, which the Defendant signed under penalty of perjury and swore to the truthfulness of the representations contained therein. As pled, these allegations taken as true plausibly suggest an entitlement to relief under § 727(a)(4), but do not sufficiently plead a claim under § 727(a)(3). Only one paragraph in the original complaint and the Amended Complaint referred to or addressed § 727(a)(3), and did so only by quoting the statutory language of that provision. That by itself is nothing more than a legal conclusion. It is not a factual allegation. Defendant's motion while appearing to also be seeking summary judgment as to Count I repeatedly refers to the "failure to state a claim" standard of Rule 12(b)(6). In addition, the Defendant's motion as to Count I is solely limited to the allegations of the Amended Complaint, which is appropriate for a Rule 12(b)(6) motion. The Defendant does not refer to or rely on any extrinsic evidence (i.e., deposition transcripts) to support his request to dismiss Count I. Therefore, it is appropriate to dispose of the matter under Rule 12(b)(6) rather than a summary judgment basis. For these reasons, the Court will grant the Defendant's motion to dismiss Count I as to § 727(a)(3) but deny the Defendant's motion to either dismiss or for summary judgment (as to which there are clearly questions of fact) to the extent Count I states a claim under § 727(a)(4).
The Court construes the Defendant's motion on Count II of the Amended Complaint as a motion for summary judgment under Fed.R.Bankr.P. 7056. As noted previously, Count II of the Amended Complaint asserts a cause of action under 11 U.S.C. § 523(a)(2)(A). In this circuit, to except a debt from discharge under § 523(a)(2)(A) a plaintiff must prove the following elements by a preponderance of the evidence: "(1) the debtor obtained money through a material misrepresentation that, at the time, the debtor knew was false or made with gross recklessness as to its truth; (2) the debtor intended to deceive the creditor; (3) the creditor justifiably relied on the false representation; and (4) its reliance was the proximate cause of loss." Rembert v. AT T Universal Card Services, Inc. (In re Rembert), 141 F.3d 277, 280 (6th Cir. 1998) (citation omitted). "Whether a debtor possessed an intent to defraud a creditor within the scope of § 523(a)(2)(A) is measured by a [debtor's] subjective [fraudulent] intent." Id. at 281-82 (recognizing that "a subjective analysis of a debtor's fraudulent intent is extremely difficult to establish" but holding that "the proper inquiry to determine a debtor's fraudulent intent is whether the debtor subjectively intended to repay the debt"). The Defendant argues that the Plaintiff cannot establish that he justifiably relied on any of the Defendant's alleged false representations about the extent of the loans obtained by the Defendant at the time of the closing because the Plaintiff was at the closing and could have inquired about the details of the transaction but failed to do so. To support this argument, the Defendant relies on Plaintiff's representations during his deposition that he did not ask to review any of the closing documents and that he did not specifically ask the Defendant about how much money he was borrowing from the bank or about the total amounts being disbursed. Plaintiff contends that the Defendant's argument is contrary to the United States Supreme Court's decision in Field v. Mans, 516 U.S. 59, 74-75, 116 S. Ct. 437, 446 (1995), which held "that § 523(a)(2)(A) requires justifiable and not reasonable reliance." The Court determines that genuine issues of material fact exist on the justifiable reliance element under § 523(a)(2)(A). In viewing the materials in the record and as required, in the light most favorable to the Plaintiff, there is no evidence to suggest that the Plaintiff was required to take steps to discover the Defendant's false representations or that Plaintiff disregarded signs of being deceived by the Defendant. Field v. Mans, 516 U.S. at 71, 72, 116 S. Ct. 444 (explaining that in false representation cases a duty to investigate exists "only where, under the circumstances, the facts should be apparent to one of his knowledge and intelligence from a cursory glance, or he has discovered something which should serve as a warning that he is being deceived, that he is required to make an investigation of his own") ( quoting W. Prosser, Law of Torts § 108, p. 718 (4th ed. 1971)).
In addition, the Court determines that genuine issues of material fact exist as to whether the Defendant intended to deceive the Plaintiff. In § 523(a)(2)(A) cases, proving actual intent with direct evidence is difficult but may be inferred from circumstantial evidence. To do so, the Court is required to consider the totality of the circumstances. In re Rembert, 141 F.3d at 282 (explaining that [w]hat courts need to do is determine whether all the evidence leads to the conclusion that it is more probable than not that the debtor had the requisite fraudulent intent" and recognizing a non-exclusive list of twelve factors to be considered to determine whether a debtor intended to repay a debt). But as explained by the Sixth Circuit Court of Appeals, "summary judgment is particularly inappropriate" due to the nature of the inquiry involved when an individual's intent is at issue. Hoover v. Radabaugh, 307 F.3d 460, 467 (6th Cir. 2000) (citation omitted).
For these reasons, the Court concludes that the Defendant's motion for summary judgment on Count II is denied because the Defendant failed "to demonstrate that an essential element of the non-moving party's case is lacking." Kalamazoo River Study Group v. Rockwell International Corp., 171 F.3d 1065, 1068 (6th Cir. 1999) (citing Celotex Corp. v. Catrett, 477 U.S. 317, 322-23 (1986)).
NOW, THEREFORE, IT IS HEREBY ORDERED that the Defendant's Motion is granted as to the Plaintiff's § 727(a)(3) claim and denied as to the Plaintiff's claims under § 727(a)(4) and § 523(a)(2)(A);
IT IS FURTHER ORDERED that the Court will conduct a status conference in Room 1029, 231 W. Lafayette Street, Detroit, Michigan on June 7, 2011 at 10:30 a.m. to discuss and schedule further proceedings.