Fennel v. Yelverton

UNITED STATES BANKRUPTCY COURT
FOR THE DISTRICT OF COLUMBIA
In re
STEPHEN THOMAS YELVERTON,
Debtor.
____________________________
MELODY H. FENNEL,
Plaintiff,
v.
STEPHEN THOMAS YELVERTON,
Defendant.
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Case No. 09-00414
(Chapter 11)
Adversary Proceeding No.
09-10021
Not for Publication in
West’s Bankruptcy Reporter
MEMORANDUM DECISION AND ORDER DENYING MOTION TO DISMISS
This addresses the defendant’s motion to dismiss this
adversary proceeding. 	For the reasons set forth below, the
defendant’s motion will be DENIED.
I
On May 14, 2009, defendant Yelverton commenced his case in
this court under chapter 11 of the Bankruptcy Code (11 U.S.C.).
Thereafter, the plaintiff, Fennel, commenced this adversary
The document below is hereby signed.
Signed: November 16, 2009.
_____________________________
S. Martin Teel, Jr.
United States Bankruptcy Judge
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proceeding seeking to have the court declare two loans she made
to Yelverton non-dischargable under 11 U.S.C. §§ 523(a)(2)(A),
(a)(2)(B), and (a)(6). 	The facts as alleged in Fennel’s
complaint are as follows.
On or about May 9, 2008, Yelverton called Fennel and
requested a meeting with her later that day. 	At that meeting,
Yelverton told her that his wife had left him a few days prior,
taking with her $400,000 from his bank account. 	Yelverton then
represented to Fennel that this resulted in a cash flow problem
for him and requested a loan for $50,000, to be repaid no later
than July 15, 2008. 	At the time of Yelverton’s request, Fennel
had little knowledge of his financial condition other than having
read, upon his request, at Yelverton’s law firms site that he was
an established Washington, D.C. attorney and the managing
principal of his law firm, which maintained an international
subsidiary to assist clients overseas. 	Based on these
representations, Fennel extended the loan to Yelverton, who
executed a promissory note.
Several weeks later, Yelverton contacted Fennel again and
requested a second loan in the amount of $5,000, representing
that he was still experiencing cash flow difficulties and that he
would repay the $5,000 no later than July 15, 2008. 	Fennel again
extended the requested loan to Yelverton, who executed a second
promissory note, payment upon demand. 	Yelverton defaulted under
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both notes, and the entire amount remains outstanding with
interest accruing.
Finally, in her complaint Fennel alleges that Yelverton’s
representations, upon which she relied, were largely false:
Yelverton’s wife had not withdrawn $400,000 from his bank account
several days before the first loan request, Yelverton knew he had
no ability to repay Fennel by July 15, 2008, and his law firm had
no international subsidiary.
II
The purpose of a motion to dismiss is “to test the legal
sufficiency of the complaint.” 	Kingman Park Civic Ass'n v.
Williams, 348 F.3d 1033, 1040 (D.C. Cir. 2003). 	In deciding a
motion to dismiss, although the court “must construe the
allegations and facts in the complaint in the light most
favorable to the plaintiff . . . ,” Gustave-Schmidt v. Chao, 226
F. Supp. 2d 191, 195 (D.D.C. 2002), the complaint must
nevertheless plead “enough facts to state a claim to relief that
is plausible on its face,” Bell Atlantic Corp. v. Twombly, 550
U.S. 544 (2007), and “the court need not accept inferences drawn
by plaintiffs if such inferences are unsupported by the facts set
out in the complaint . . . . [nor must it] accept legal
conclusions cast in the form of factual allegations.” 	Kowal v.
MCI Communications Corp., 16 F.3d 1271, 1276 (D.C. Cir. 1994).
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In deciding a motion to dismiss, “the Court may only consider the
facts alleged in the complaint, documents attached as exhibits or
incorporated by reference in the complaint, and matters about
which the Court may take judicial notice.” 	Gustave-Schmidt, 226
F. Supp. 2d at 196.
III
Yelverton sets out five bases for dismissal. 	I will address
each in turn.
A.
Yelverton first bases his motion to dismiss on the doctrine
of res judicata. 	Specifically, Yelverton argues that Fennel’s
non-dischargeability complaint is barred because she previously
filed a complaint in the D.C. Superior Court seeking to collect
payment on the two loans and in that proceeding did not make any
allegations of fraud.
Res judicata, or claim preclusion, “prevents parties from
relitigating issues they raised or could have raised in a prior
action on the same claim.” NextWave Personal Comm’ns Inc. v. FCC,
254 F.3d 130, 143 (D.C. Cir. 2001). “The three elements of res
judicata are: (i) a final judgment on the merits in the first
action; (ii) the present claim is the same as a claim that was
raised or that might have been raised in the first proceeding;
and (iii) the party against whom res judicata is asserted was a
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party or in privity with a party in the previous case.” 	Jacobsen
v. Oliver, 201 F. Supp. 2d 93, 102-03 (D.D.C. 2002) (citing Allen
v. McCurry, 449 U.S. 90, 94 (1980)). 	Because Fennel’s non-
dischargeability complaint could not have been brought in D.C.
Superior Court, Yelverton’s first basis for dismissal fails.
United States Code Title 28, Section 1334(a), vests
exclusive jurisdiction of all bankruptcy cases in the federal
district courts. 	Section 1334(b) vests original, but not
exclusive, jurisdiction of all civil matters arising under title
11 in the federal district court. 	By local rule, the District
Court for the District of Columbia has referred all cases arising
under title 11 to this bankruptcy court.
Non-dischargeability complaints are, by their nature, claims
that arise under the Bankruptcy Code: they exist solely by virtue
of the Code and operate within the limited scope of the rights
provided by it. 	Because the D.C. District Court has not referred
these matters to the D.C. Superior Court, that court lacks
jurisdiction to hear any complaint of non-dischargeability under
the Bankruptcy Code. 	Because Fennel could not have brought her
non-dischargeability claim under § 523 in the D.C. Superior
Court, her claim is not barred by res judicata and Yelverton’s
motion to dismiss on this basis fails.
B.
Yelverton’s next argues that the court should dismiss
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Fennel’s § 523(a)(2)(A) claim because that section excepts from
its reach statements concerning the debtor’s financial condition.
Section 523(a)(2)(A) excepts from discharge any “extension
of credit, to the extent obtained, by false pretenses, a false
representation, or actual fraud, other than a statement
respecting the debtor’s or an insider’s financial condition.” 	A
statement of a debtor’s financial condition “has been interpreted
narrowly to refer to representations specifically concerning the
debtor’s financial worth or condition,” 	In re Tillman, 197 B.R.
165, 167 n.1 (Bankr. D.D.C. 1996) (citing Field v. Mans, 516 U.S.
59, 74 (1995)), or more specifically, statements concerning the
debtor’s ability to pay.
Although, to be sure, some of the false representations
alleged by Fennel are statements respecting Yelverton’s financial
condition, her complaint is not limited to just these. 	Fennel
also alleges that Yelverton’s statement that his wife had left
him just days prior to their May 9, 2008, meeting, taking with
her $400,000 from his bank account, induced her to lend him the
money on such an expedited basis. 	Absent this fact, Fennel
argues, she would have been unwilling to make the loans to
Yelverton without a more complete investigation of his financial
situation. 	Because Yelverton’s purported urgency does not speak
to his ability to pay, Fennel has alleged a misrepresentation
that would entitle her to relief under § 523(a)(2)(A).
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Consequently, Yelverton’s second basis for dismissal fails.
In addition, when Yelverton falsely represented that he
would repay the loan by July 15, 2008, when he had no ability to
repay. 	Yelverton implicitly represented an intention to repay,
when he had no ability to repay, and it may be inferred that his
false representation that he intended to repay by July 15, 2008,
was made with an intent to deceive. 	See, e.g., Citibank (South
Dakota), N.A. v. Eashi (In re Eashi), 87 F.3d 1082 (9th Cir.
1999); Chevy Chase Bank FSB v. Kukuk (In re Kukuk), 225 B.R. 778,
786 (10th Cir. B.A.P. 1998) (“An implied representation of intent
to repay will be fraudulent if the credit card issuer
demonstrates that at the time the debtor used a credit card he or
she had no intent to repay the debt incurred.”); Mercantile Bank
v. Hoyle (In re Hoyle), 183 B.R. 635, 638 (Bankr. D. Kan.
1995)(stating that the “purchase of goods on credit by a debtor
who does not intend to repay . . . 	constitutes a false
representation” within the meaning of 11 U.S.C. § 523(a)(2)(A))
(citation omitted); Bombardier Capital, Inc. v. Dobek (In re
Dobek), 278 B.R. 496, 507 (Bankr. N.D .Ill. 2002) (finding that a
debtor who purchased a motorcycle on credit for her boyfriend and
never intended to make payments on the loan misrepresented her
role in the transaction to the lender, and that such
misrepresentations constituted false pretenses under 11 U.S.C.
§ 523(a)(2)(A)).
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C.
Yelverton next argues that dismissal is proper because
Fennel has failed to allege with specificity the written
statements made by him to make the debt non-dischargeable under
§ 523(a)(2)(B).
Section 523(a)(2)(B) excepts from discharge extensions of
credit to the extent obtained by (1) use of a written statement;
(2) that is materially false; (3) about the debtor’s financial
condition; (4) on which the creditor reasonably relied; and (5)
that the debtor made or published with the intent to deceive.
Moreoever, Federal Rule of Bankruptcy Procedure 7009 requires
that a party alleging fraud state the circumstances giving rise
to the fraud with particularity. 	Here, the written statement
that Fennel points to is Yelverton’s law firm’s website, and its
false statements that the law firm had an international
subsidiary. 	That is a sufficient identification of an allegedly
false written statement. 	And if it is a statement regarding
financial condition, the § 523(a)(2)(B) claim must survive the
motion to dismiss. 	If it is not a statement of financial
condition, then it is actionable under the less stringent
standards of § 523(a)(2)(A). 	At this junction, I need not decide
whether the website’s false statement fits under § 523(a)(2)(A)
or instead § 523(a)(2)(B).
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D.
Yelverton’s fourth argument is that dismissal is proper
because Fennel failed to disclose to the court that Yelverton,
through his law firm, worked with Fennel to obtain a consulting
contract for her with the Republic of Nigeria. 	Even assuming for
the sake of the debtor’s motion that this were true, it does not
provide a basis for dismissing Fenel’s complaint. 	None of the
provisions on which Fennel relies limits their use when the
debtor might have a potential right of setoff. 	If it is the
debtor’s intent to say that his assisting Fennel in procuring a
consulting contract had the effect of satisfying his debt, that
claim may be a defense to liability for the debt (if Fennel’s
Superior Court judgment does not bar the defense as a matter of
res judicata), but Fennel had no obligation to plead the
potential existence of the defense
E.
Yelverton’s final argument for dismissal is that Fennel has
failed to allege that his actions constitute “bad faith,”
“immorality,” or “moral turpitude.” 	“For a debt to be
nondischargeable under section 523(a)(2), the debtor's conduct
must involve moral turpitude or intentional wrong; mere
negligence, poor business judgment or fraud implied in law is
insufficient.” 	In re Mones, 169 B.R. 246, 254 (Bankr. D.D.C.
1994). 	In her complaint, Fennel alleges that the statements by
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1 	The parties have not addressed whether § 523(a)(6)
applies to a debt for property obtained by fraud even though
§ 523(a)(2) specifically deals with such debts. 	I will not
address that issue now because litigation will be necessary to
address at a minimum the § 523(a)(2) claim.
10	O:\TEEL\Garrett\Decisions\Yelverton (Fennel).wpd
Yelverton were “intended to deceive.” 	This is sufficient as a
matter of law to meet the requirement of § 523(a)(2) that the
debtor’s conduct involve moral turpitude or intentional wrong.
Regarding Fennel’s § 523(a)(6) claim, nothing in that
provision requires the plaintiff to allege moral turpitude.
Instead, the plaintiff must allege that the injury was “willful
and malicious,” and Fennel alleges precisely that by alleging
that Yelverton’s conduct was “willful and malicious and was
undertaken with the intent to defraud Plaintiff.” 1 	For these
reasons, Yelverton’s final basis for dismissal also fails.
CONCLUSION
Pursuant to the foregoing, it is
ORDERED that the defendant’s motion to dismiss is denied.
[Signed and dated above.]
Copies to: All counsel of record; Office of United States
Trustee.
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