Opinion
Case No. 13-15708 Adversary Case No. 14-1035
02-26-2015
In Re EDWARD JOSEPH FLYNN TRACY DONAHUE FLYNN Debtors JOHN KUNESH TIMOTHY VIOX T/S VIOX HOLDING TRUST Plaintiffs v. EDWARD JOSEPH FLYNN Defendant
Chapter 7
ORDER GRANTING MOTION TO DISMISS
This is an action to determine the dischargeability of debt pursuant to 11 U.S.C. § 523(a)(2) and (6). Presently before the Court is a motion to dismiss ("Motion")(Doc. 17) pursuant to Fed. R. Civ. P. 12(b)(6) for failure to state a claim.
The threshold issue presented by the Motion is whether the Plaintiffs possess statutory standing. Statutory standing asks whether the plaintiff asserting a statutory cause of action is entitled to assert the action. Roberts v. Hamer, 655 F.3d 578, 580 (6th Cir. 2011). The complaint is subject to dismissal under Rule 12(b)(6) if the plaintiff lacks statutory standing. Id. at 581.
ARE THE PLAINTIFFS CREDITORS?
The Motion questions whether the Plaintiffs are creditors of the Defendant.
Only a "creditor" has standing to file an action under § 523(a)(2) and (6). See 11 U.S.C. § 523(c)(1); Fed. R. Bankr. P. 4007(a); Bankers Healthcare Group, Inc. v. Bilfield (In re Bilfield), 493 B.R. 748, 753 (Bankr. N.D. Ohio 2013)(collecting cases). A creditor is the holder of a prepetition right to payment against the debtor. See 11 U.S.C. § 101(10)(A); 11 U.S.C. § 101(5)(A). Whether such a right exists is determined by applicable non-bankruptcy law. See Grogan v. Garner, 498 U.S. 279, 283-84 (1991). It is not established by any of the subsections of § 523(a). S&L Enters. I, LLC v. Eisaman (In re Eisaman), 387 B.R. 219, 224 (Bankr. N.D. Ind. 2008).
Stated differently, the plaintiff in a dischargeability action must first establish the existence of a debt owed by the debtor to the plaintiff. Lawson v. Conley (In re Conley), 482 B.R. 191, 207 (Bankr. S.D. Ohio 2012); Weidle Corp. v. Leist (In re Leist), 398 B.R. 595, 601 (Bankr. S.D. Ohio 2008).
The Plaintiffs bear the burden of proving that they are creditors. Bilfield, 493 B.R. at 751. When reviewing a complaint under Rule 12(b)(6), the allegations of the complaint must be accepted as true and construed in favor of the plaintiffs. Lutz v. Chesapeake Appalachia, L.L.C., 717 F.3d 459, 464 (6th Cir. 2013).
THE COMPLAINT'S ALLEGATIONS
Two of the Plaintiffs, John Kunesh ("Kunesh") and T/S Viox Holding Trust ("VHT"), and the Defendant, chapter 7 Debtor Edward Joseph Flynn ("Flynn"), were members of a limited liability company called Castle Human Resources, LLC ("Castle"). Plaintiff Timothy Viox ("Viox") is a trustee of VHT.
Flynn was the managing member of Castle, responsible for the company's daily operations. Kunesh, VHT, and Viox relied upon Flynn for accurate information regarding the financial health of Castle.
Castle obtained a line of credit from Huntington National Bank ("Huntington"). Kunesh and Viox guaranteed the line of credit, with Flynn, relying upon financials provided by Flynn.
Flynn caused Castle to loan one of its customers $300,000 without security or documentation, outside the ordinary course of Castle's business. Flynn did so without authority or the Plaintiffs' knowledge. Castle never recovered the $300,000.
Also without the Plaintiffs' knowledge, Flynn underreported and underpaid withholding taxes owed by Castle to the Internal Revenue Service. Flynn deliberately withheld his falsification of tax documents from the Plaintiffs. The financial reports that Flynn provided to the Plaintiffs did not disclose the true financial status of Castle, its true withholding tax liability, or Flynn's falsification of tax documents.
After renewing their guarantees with Huntington, Kunesh and Viox discovered that Flynn withheld from them material information regarding the financial condition of Castle. They initiated an extensive review of the books and records of Castle, hiring an accounting firm and tax counsel at their own expense.
Castle filed corrected tax returns. The corresponding tax liabilities caused the Plaintiffs to seek a sale of the company. Castle's substantial tax liability chilled sale prospects. Without a buyer, the business closed.
Kunesh and Viox paid $500,000 to Huntington to honor their guarantees. They also paid at least $150,000 for, among other things, professional fees and costs associated with the audit of Castle.
The complaint asserts two causes of action. Both actions seek a determination of nondischargeability-one under § 523(a)(2) and the other under § 523(a)(6). The complaint does not include a separate cause of action, under non-bankruptcy law, to liquidate or establish a debt.
T HE P LAINTIFFS H AVE N OT S USTAINED T HIER B URDEN OF P ROOF
The Plaintiffs' response to the Motion does not cite any non-bankruptcy law as a predicate for Flynn's alleged liability. Instead, their sole response to the standing challenge is that Flynn's bankruptcy schedules preclude him from questioning whether they are creditors. Specifically, Flynn's listing of Kunesh and Viox on Schedule F constitutes a judicial admission that they are creditors.
Flynn's bankruptcy schedules do not preclude him from questioning whether the Plaintiffs are creditors. First, the Plaintiffs' argument does nothing for VHT, which is not listed anywhere on Flynn's schedules. Second, Kunesh and Viox are listed on Schedule F with a claim description of "Notice Only" and a claim amount of $0. It is questionable, at best, whether this constitutes an admission of liability. Third, at least one court has held that the inclusion of a person on the bankruptcy schedules does not waive the debtor's ability to challenge the standing of that person as a creditor in a dischargeability action under § 523(a)(2) and (6). See Bilfield, 493 B.R. at 754.
Significantly, the complaint states no cause of action to establish the existence of a prepetiton right to payment against Flynn. The causes of action under § 523(a)(2) and (6) do not accomplish this. Eisaman, 387 B.R. at 224 ("The provisions of § 523(a) do not make a debtor liable to a creditor. They merely determine whether an existing liability is a dischargeable one."). It may be that a debt exists under some theory of non-bankruptcy law. However, the burden is upon the Plaintiffs to assert such a cause of action and they have failed to do so. In current form, the complaint does not contain allegations sufficient to establish the Plaintiffs' statutory standing as creditors of Flynn.
CONCLUSION
For the foregoing reasons, the Motion is GRANTED. The Plaintiffs shall have twenty-one days from the entry of this order to file an amended complaint that states, as the basis for the alleged debt, at least one non-bankruptcy law cause of action alleging a prepetition right to payment against Flynn. If the Plaintiffs fail to do so, the pending complaint will be dismissed without further notice or hearing.
See 5B Charles Alan Wright, et al., Federal Practice and Procedure § 1357 (3d ed. 2014)("[D]ismissal under Rule 12(b)(6) generally is not immediately final or on the merits because the district court normally will give the plaintiff leave to file an amended complaint to see if the shortcomings of the original document can be corrected. The federal rule policy of deciding cases on the basis of the substantive rights involved rather than on technicalities requires that the plaintiff be given every opportunity to cure a formal defect in the pleading."). --------
This document has been electronically entered in the records of the United States Bankruptcy Court for the Southern District of Ohio.
IT IS SO ORDERED.
/s/ _________
Jeffery P. Hopkins
United States Bankruptcy Judge Dated: February 26, 2015 Copies to: Michael L. Baker
mlb@zslaw.com
mbaker@zslaw.com Jeffrey S. Rosenstiel
jrosenstiel@graydon.com J. Michael Debbeler
mdebbeler@graydon.com