Opinion
Case No. 07-13346, Adversary Case No. 07-1302.
April 11, 2008
ORDER CONDITIONALLY GRANTING MOTION TO DISMISS
The complaint, filed by Charles Michael Harcourt ("Harcourt"), seeks a judgment of nondischargeability pursuant to 11 U.S.C. § 523(a)(2). Presently before the Court is a Fed.R.Civ.P. 12(b)(6) motion to dismiss ("Motion") (Doc. 4) filed by Patrick Mallaley ("Mallaley"). Mallaley contends that the complaint must be dismissed because it fails to plead alleged fraud with the particularity required by Fed.R.Civ.P. 9(b).
LAW
Harcourt notes that some courts have applied Rule 9(b) with less stringency in bankruptcy. "This less stringent standard is predicated upon the fact that it is often the trustee, a third party, who is pleading fraud based on second-hand information." In re LTV Steel Co., Inc., 333 B.R. 397, 417 (Bankr. N.D. Ohio 2005). Because Harcourt is not a bankruptcy trustee relying on second-hand information, there is no reason to apply a less stringent standard. See e.g., Gilbert v. Brown (In re Brown), 352 B.R. 841 (Bankr. E.D. Tenn. 2006) (applying traditional Rule 9(b) standard to creditor's complaint to determine dischargeability).
Although Rule 9(b) "is applied somewhat more liberally to bankruptcy trustees, a defendant is still entitled to notice of his alleged misconduct and, as such, [even] trustees remain responsible for pleading actual fraud with precision." State Bank and Trust Co. v. Paul H. Spaeth, Trustee (In re Motorwerks, Inc.), 371 B.R. 281, 295 (Bankr. S.D. Ohio 2007).
The purpose of Rule 9(b) is to ensure that the defendant is given enough information to defend in a meaningful and informed manner. Advocacy Org. for Patients and Providers v. Auto Club Ins. Ass'n, 176 F.3d 315, 322 (6th Cir. 1999). At a minimum, the complaint must allege the time, place, and content of the alleged misrepresentation. Walburn v. Lockheed Martin Corp., 431 F.3d 966, 972 (6th Cir. 2005).
Harcourt's complaint alleges that Mallaley purchased from Shannon Owens, Harcourt's fiancee, real estate formerly owned by Harcourt. According to the complaint, liability attaches under § 523(a)(2) because Mallaley "misrepresented and/or concealed from Harcourt the fact that the transaction was not in his best interest."
An omission or silence may be actionable under § 523(a)(2). James v. McCoy (In re McCoy), 114 B.R. 489, 498 (Bankr. S.D. Ohio 1990). However, the failure to disclose gives rise to liability only if the debtor had a duty to speak. Demerdjian v. Thompson (In re Thompson), 354 B.R. 174, 179 n. 4 (Bankr. E.D. Tenn. 2006).
When a plaintiff alleges fraud by omission, Rule 9(b) requires the pleading of the following additional matters: (1) the information withheld; (2) the relationship giving rise to the duty to speak; and (3) the events triggering the duty to speak. Randleman v. Fidelity Nat'l Title Ins. Co., 465 F. Supp. 2d 812, 822 (N.D. Ohio 2006); see also American United Life Ins. Co. v. Martinez, 480 F.3d 1043, 1065 (11th Cir. 2007) (affirming dismissal for failure to plead duty to disclose).
ANALYSIS
I. Time and Place
Although not expressly articulated, the complaint appears to suggest that the misrepresentation/omission may have occurred at the April 5, 2004 closing of the property that occurred at 11223 Cornell Park Drive, Suite 301, Cincinnati, Ohio. See Doc. 1 at Ex. C. This should be clarified.
II. Misrepresentation or Omission
A. Misrepresentation
According to the complaint, Mallaley "misrepresented . . . the fact that the transaction was not in [Harcourt's] best interest." Stated as a double-negative, it appears as though Mallaley is alleged to have stated that the transaction was in Harcourt's best interest. This, and any other express representations, should be clarified.
B. Omission
Alternatively, the complaint alleges that Mallaley "concealed from Harcourt the fact that the transaction was not in his best interest." Although this allegation provides notice of the information withheld, the complaint does not identify: (1) the relationship giving rise to a duty to speak; or (2) the events triggering a duty to speak.
C. Statement in Writing
The complaint appears to rely on both subsections of § 523(a)(2). If Harcourt is relying upon § 523(a)(2)(B), the complaint should clarify the identity of the "statement in writing" upon which he predicates this claim.
CONCLUSION
Based upon the foregoing, the Court concludes that the complaint does not give Mallaley enough information to defend in a meaningful and informed manner. Accordingly, the Motion is conditionally GRANTED. Harcourt shall have twenty days from the entry of this order to amend the complaint or it will be dismissed. IT IS SO ORDERED.
If Harcourt chooses to amend, he should: (1) remove the reference to 11 U.S.C. § 523(a)(4) cited at the beginning of Count I; and (2) remove the reference to "Objecting To Discharge" in the caption. Of course, Harcourt may retain these references if he wishes to assert separate counts for them.