Abbott v. Hanley

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UNITED STATES BANKRUPTCY COURT
FOR THE
DISTRICT OF MASSACHUSETTS

In re
MATTHEW J. HANLEY, Chapter 7

Debtor Case No. 08-17056-JNF
WALTER R. ABBOTT, JR.,

Plaintiff
Vv. Adv. P. No. 08-1381
MATTHEW J. HANLEY,

Defendant

MEMORANDUM

I. INTRODUCTION

The matter before the Court is. the Motion to Dismiss the Plaintiff's Amended
Complaint filed by the Defendant, Matthew J. Hanley (the “Debtor” or the “Defendant”).
The Debtor seeks dismissal of the Amended Complaint filed by Walter R. Abbc tt, Jr.
(“Abbott” or the “Plaintiff’) on the ground that his Amended Complaint fails to allege
plausible facts to state a claim under 11 U.S.C. § 523(a}(2) (A) based upon the standard for
evaluating the sufficiency of complaints articulated by the United States Supreme ‘Court

in Ashcroft v. Iqbal,___U.S. __, 129 S.Ct. 1937 (2009), and Bell Atlantic Corp. v. Two-nbly,

550 U.S. 544 (2007).

AUTHENTICATED
U.S. GOVERNMENT
INFORMATION

GPO

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The Plaintiff timely filed his initial Complaint against the Debtor on December 15,
2008, and the Debtor moved to dismiss that Complaint. Treating the Debtor's first Motion
to Dismiss as.a motion for a more definite statement pursuant to Fed. R. Civ, P. 12(e), made
applicable to this proceeding by Fed. R. Bankr. P. 7012, the Court ordered the Plaintiff to.
filean Amended Complaint. The Plaintiff complied, and the Debtor now moves toc ismiss
the Amended Complaint. The issue presented is whether the Plaintiff satisfied his burden
of alleging sufficient facts, which if accepted as true, state a claim for relief that is plausible
on its face. See Iqbal, 129 S.Ct. at 1949,
II. PROCEDURAL BACKGROUND

The Debtor filed a voluntary Chapter 7 petition on September 19, 2008. On Schedule
F-Creditors Holding Unsecured Nonpriority Claims, he listed Abbott and Associates. and
Walter R. Abbott, Jr. as the holders of unliquidated claims in the sum of $125,009. On
January 26, 2009, after the commencement of the adversary procéeding, the Debtor
amended Schedule F to designate the claims as disputed.

On November 11, 2008, the Chapter 7 Trustee filed a Report of No Distribution. On
December 17, 2008, the Court granted the Debtor a discharge.
IfI. THE AMENDED COMPLAINT

In order to properly apply the standard articulated by the Supreme Cour:, this
Court must summarize'the allegations of the Plaintiff's Amended Complaint.

According to the Plaintiff, he and the Debtor and members of the Debtor's family,

including his mother, Joan Hanley, and his sister, Jennifer Hanley, were long-time friends.

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The Debtor owned a business known as Business Products Online, Inc. (“Business
Products”). He regularly apprised Abbott about the status of his business, ‘and in the late
1990s and again in late 2000, the Debtor informed Abbott that he and Business Products.
were experiencing financial difficulties.

In October of 2001, the Debtor approached Abboit seeking a loan in the sum of
$100,000. Abbott informed the Debtor that he would not agree to a loan unless i: was
secured by real property located at 52 Ridge Street, Arlington, Massachusetts (the
“property”), title to which was in the name of the Debtor and his brother, Nathan Hanley.

The Debtor agreed to provide security for the loan. According to Abbott, “[iJn or
around October 2001, in reliance on Hanley’s representation that the loan would be secured.
by the real property at 52 Ridge Street, Abbott and Hanley agreed in principle to the yan,”
and “Hanley told Abbott that he would incur all legal fees.or other costs associated with
implementing the loan, and that he would filea mortgage deed on 52 Ridge Street, in “avor
of Abbott, with the Middlesex County Registry of Deeds.” Additionally, Abbot alleged
that the Debtor told him he had “retained legal counsel to draft the documents necessary
to memorialize the terms and conditions of the loan, including, but not limited to a
mortgage deed on 52 Ridge Street in favor of Abbot that would be recorded wit: the
Middlesex County Registry of Deeds.”

In early 2002, the Debtor informed Abbott that he was continuing to exper:ence
financial difficulties and that he and his brother would be forced to sell the property to

their sister, Jennifer Hanley, with whom he had discussed the loan from Abbott. Indeed,

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according to Abbott, the Debtor informed him that he had discussed his proposed loan
with his extended family.

In early March of 2002, the Debtor told Abbott that Jennifer Hanley had agread to
sign a note and mortgage on the property which she was acquiring from her brothers in
exchange for the $100,000 loan. According to Abbott, the Debtor also told him that his legal
counsel was in the process of drafting the documents necessary to memorialize the ‘oan.

On March 14, 2002, Hanley contacted Abbott urgently requesting $10,800 to
complete the sale of the property to Jennifer Hanley. Abbott alleged that he told Hanley
that the advance for the closing would not be part of the loan agreement, but that Hanley
promised him that “all loan monies, including this loan advance, would be secured by a
promissory note and mortgage deed on 52 Ridge Street, which his legal counsel was
drafting and which would be filed with the Middlesex Registry of Deeds.” Abbott also
alleged that Hanley promised him that his sister would signa secured promissory noteand
mortgage and that “he would personally record the secured promissory noteand mortgage
deed in the Middlesex County Registry of Deeds.”

On March 14, 2002, in reliance upon Hanley’s promises and based upon their Jong-
‘time friendship, Abbott alleged that he gave the Debtor an advance payment on the loan
in the amount of $10,800, as wellas.a document captioned “‘Promissory Note-Securec(” for
$50,000 [sic] which identified Jennifer Hanley as the borrower and which, by its terms and
conditions, gave Abbott a secured interest in 52 Ridge Street.” According te Abbott, during

his conversations with the Debtor on March 14, 2002, Hanley again promised Abbot! that

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his sister, Jennifer Hanley, who was about to purchase 52 Ridge Street, was aware if the
loan agreement, would sign the “Promissory Note-Secured” and that the mor:gage
referenced in that document would be filed in the Middlesex County Registry of Deeds.
According to Abbott, “Hanley further impressed upon Abbott to agree-to a promissory
note in the amount of $50,000, instead of the full loan amount: of $100,000, us an
accommodation to his sister and as a favor to his family friends.”

On March 18, 2002, Abbott alleged that Hanley and his brother transferred the
property to Jennifer Hanley and her partner, LisaGuglietta. According to Abbott, over one
month later, on April 23, 2002, Jennifer Hanley executed a promissory note in-the sium of
$50,000, in the presence of and witnessed by Hanley, and Hanley gave the note to At-bott,
Additionally, according to Abbott, “To]n or about April 23, 2002, Hanley promised hir1that
the mortgage deed referenced in the promissory note would be filed with the Midclesex
County Registry of Deeds.”

Abbott further alleged that on or about May 14, 2002, Hanley and Business Products
executed additional documents to memorialize the. terms of the loan agreement, and
Hanley again told Abbott the mortgage deed would be filed with the Middlesex County
Registry of Deeds. Between May. 20, 2002 and September 27, 2002, Abbott loaned Hinley
an additional $89,200.09."

According to Abbott, on or about June 25, 2004, Jennifer Hanley and Lisa Guglietta

* Abbott did not attach copies of these or any documents to his Amended
Complaint. It is thus unclear whether the Debtor ever executed a promissory note in
the amount of $100,000 in favor of Abbott.

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conveyed the property to themselves and Joan Hanley, the Debtor’s mother, for the
consideration of $10.00, although the Debtor continued to reside in the property.

In late 2004 and 2005, Abbott and the Debtor discussed repayment of the lan.
During those conversations, Abbott alleged that he reminded the Debtor abou: the
mortgage on the property and “expressed his belief that Jennifer Hanley was the title
owner of 52 Ridge Street and that he was the beneficiary of a mortgage deed filed with the
Middlesex County Registry of Deeds.” The Debtor never corrected or advised Abbot: that
his sister had conveyed the property, or that he had never recorded the mortgage. Aljbott
alleged that the Debtor has never repaid the principal or interest associated with the loan.

According to Abbott, Hanley obtained. the lean from Abbott by way of false
pretenses when he specifically misrepresented to Abbott that he would record a mortgage
securing, the loan; that he falsely represented to Abbott that he would file amortgage: that
he relied on Hanley’s false representations and would not have loaned any monies alssent
the recordation of a mortgage; that the Debtor never intended to record a mortgage and,
instead, intended Abbott to rely upon his misrepresentations regarding the filing of a
mortgage; that Abbott's reliance upon the Debtor’s promises was justified in view cf the
long-time friendship among Abbott, the Debtor and the Debtor's family; and that the
Debtor committed actual fraud upon Abbott in assisting or otherwise facilitating: the
transfer of ownership of the property from his sister to his mother, “thereby preventing
Abbott from enforcing the promissory note or otherwise perfecting his security interest in

the real property; and that Abbott was damaged as a result.

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IV. THE STANDARD FOR EVALUATING THE MOTION TO DISMISS

In Ashcroft v. Iqbal, __ U.S. ___, 129 S.Ct. 1937 (2009), the Supreme Court amplified

its discussion of the standard for dismissal contained in Bell Atlantic Corp. v. Twor bly,

550 U.S. 544 (2007), which modified the standard set forth in Conley v. Gibson, 355 US. 41

(1957), for evaluating whether a complaint is sufficient to survive a motion to dismiss. The
Court stated:

Under Federal Rule of Civil Procedure 8({a)(2), a pleading must contain a
“short and plain statement of the claim showing that the pleader is entitled
to relief.” As the Court held in Twombly, 550 U.S. 544, 127 S.Ct. 1955, 167
L.Ed.2d 929, the pleading standard Rule 8 announces does not require
“detailed factual allegations,” but it demands more than an unadorned,
the-defendant-unlawfully-harmed-me accusation. Id.,.at 555, 127 S.Ct. 1955
(citing Papasan v. Allain, 478 U.S. 265, 286, 106 S.Ct. 29382, 92 L.Ed.2d 209
(1986)). A pleading that offers “labels and conclusions” or “a formulaic
recitation of the elements of a cause of action will not do.” 550 U.S., at 555,
1275.Ct. 1955. Nor does:a complaint suffice if it tenders “naked assertion({s]”
devoid of “further factual enhancement.” Id., at 557, 127 S.Ct. 1955.

To survive a motion to dismiss, a complaint must contain sufficient factual
matter, accepted as true, to “state a claim to relief that is plausible on its
face.” Id., at 570, 127 S.Ct, 1955. A claim has facial plausibility. when the
plaintiff pleads factual content that allows the court to draw the reasonable
inference that the defendant is liable for the misconduct alleged. Id., at 556,
127 S.Ct. 1955. The plausibility standard is not akin to a “probability
requirement,” but it asks for mere than a sheer possibility that a defendant
has acted unlawfully. Ibid. Where a complaint pleads facts that are “merely
consistent with” a defendant's liability, it “stops short of the line between
possibility and plausibility of ‘entitlement to relief.’ ” Id_, at 557, 127 S.Ct.
1955 (brackets omitted).

Two working principles underlie our decision in Twombly, First, the tenet
that a. court must accept as true all of the. allegations contained ina complaint
is inapplicable to legal conclusions. Threadbare recitals of the elements of a
cause of action, supported by mere conclusory statements, do not suffice. Id.,
at 555, 127:S.Ct. 1955 (Although for the purposes of a motion to dismiss we
must take all of the factual allegations in thé complaint as true, we “are not

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bound to accept as true a legal conclusion couched as.a factual allegation”
(internal quotation marks omitted)). Rule 8 marks a notable and generous
departure from the hyper-technical, code-pleading regime of a prior era, but
it does not unlock the doors of discovery for a plaintiff armed with nothing
more than conclusions: Second, only a complaint that states a plausible claim
for relief survives a motion to dismiss. Id,, at 556, 127 S.Ct. 1955. Determining
whether a complaint states a plausible claim for relief will, as the Court of
Appeals observed, bea context-specific task that requires.the reviewing court
to draw on its judicial experience and common sense. 490 F.3d, at 157-158.
But where the well-pleaded facts do not permit the court to infer more than
the mere possibility of misconduct, the complaint has alleged-but it has not
“show[n]*-“that the pleader is entitled to relief.” Fed. Rule Civ. Proc. 8(a)(2).

In keeping with these principles a court considering a motion to dismiss can
choose to begin by identifying pleadings that, because they are no more than
conclusions, are not entitled to the assumption of truth. While legal
conclusions can provide the framework of a complaint, they must be
Supported by factual allegations. When there are well-pleaded factual
allegations, acourt should assume their veracity and then determine whether
they plausibly give rise to an entitlement to relief,

Iqbal, 129 §.Ct. at 1949-50. See also. Courie v. Alcoa Wheel & Forged Products, F3d_,

2009 WL 2497928 (6th Cir. Aug. 18, 2009)(noting that “{t]he Supreme Court recently raised
the bar for pleading requirements beyond the old “no-set-of-facts” standard of Corley v:
Gibson” and now requires a complaint with “’sufficient factual matter, accepted as true,
to state a claim to relief that is plausible on its face’”).
V. ANALYSIS

Section 523(a)(2)(A) of the Bankruptcy Code excepts froma Chapter 7 discharge any
debt “(2) for money, property, services, or an extension, renewal, or refinancing of credit,
to the extent obtained by - (A) false pretenses, a false representation, or actual fraud. other
than a statement respecting the debtor's or an insider’s financial condition.” Thus, “under
the traditional common law rule, see Restatement (Second) of Torts § 525 (177), a

8.

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defendant will be liable if (1) he makes a false representation, (2) he does se. with
fraudulent intent, i.e., with “scienter,” (3) he intends to induce the plaintiff to rely 2n the

misrepresentation, and (4) the misrepresentation does induce reliance, (5) which is

justifiable, and (6) which causes damage (pecuniary loss).” Palmacci v. Umpierrez, 121 F.3d
781, 786 (1st Cir. 1997).

In McClellan v. Cantrell, 217 F.3d 890 (7th Cir. 2000), the United States Ccurt of

Appeals for the Seventh Circuit expanded the scope of section 523(a)(2)(A)’s exception to
discharge beyond the common law tort of misrepresentation. It observed that fraud is net
limited to misrepresentations and misleading omissions, 217 F.3d at 893, adding ““[‘Jraud
is a generic term, which embraces al] the multifarious means which human ingenuity can
devise and which are resorted to by one individual te gain an advantage over anotlier by
false suggestions or by the suppression of truth. No definite and invariable rule can he laid
down.as.a general proposition defining fraud, and it includes all surprise, trick, cunning,
dissembling, and any unfair way by which another is cheated.” Id. (quoting Stapleton v.
Holt, 207 Okla. 443, 250 P.2d 451, 453-54 (Okla.1952)).

In McCrory v. Spigel (In re Spigel), 260 F.3d 27 (1st Cir. 2001), the United States

Court of Appeals for the First Circuit declined to.adopt the McClellan approach. It stated,
however, that “McClellan is consistent with our existing precedent in that it also recjuires
a direct link between the alleged fraud and the creation of the debt.” 217 F.3d at 32 n. 7.

Turning to Abbott’s Amended Complaint, this Court notes that it is not devoid of

facts. Indeed, the Court finds that Abbott pleaded sufficient facts to'establish a plausible

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claim for relief under the Igbal/Twombly standard. The facts alleged by Abbott, however,

donot fitneatly within the traditional parameters of acomplaint under section 523(a)(2)(A)
because the Debtor neither signed a promissory note nor executed the mortgage as hand
his brother had transferred the property to his sister and her partner before the j:ister
executed a promissory note in the sum of $50,000 and the Debtor and Business Proiducts
executed additional loan documentation. The Debtor’s promise related to’an act tht his.
sister and her partner were required to perform, namely the execution of amortgage which
the Debtor agreed to provide as security for the loan from Abbott.

The Debtor argues, inter alia, that “even assuming that the plaintiff could prove a
promise by the debtor to grant a mortgage, that promise is not in writing, or at least not
attached to the complaint, and a promise to convey real property must be in writing to be
enforceable.” The Debtor also argues that Abbott’s reliance was not justifiable.
Referencing paragraphs 17, 24 and 29 of the Amended Compiaint, the Debtor adds. that
Abbott was. represented by counsel and, thus, was unjustified in relying upon the Det-tar’s
promise to record the mortgage. This latter argument is a misreading of the Amended
Complaint, however, because it was the Debtor who obtained the services of legal co:insel
to draft documents, not Abbott.

The Debtor also points to Abbott's failure to attach to his Amended Complaint
documents which he referenced in it, including the documents executed on or about May

14, 2002. Citing Gilmore v. Citigroup, Inc, (In re Citigroup, Inc.), 535 F.3d 45, 52 (1st Cir.

2008), he maintains that this Court is “free to disregard “bald assertions, unsupportable

10.

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conclusions, and opprobrious epithets.’” He suggests that the Plaintiff's reference to
additional documents is a bald assertion which this Court can disregard and which
warrants an inference that the documents do not plausibly support a cause of action under
section 523(a)(2).?

The Court rejects the Debtor's arguments for several reasons. The Amended
Complaint does not concern the enforceability of a mortgage, but the promise to record a
mortgage. Additionally, Abbott alleged that he justifiably relied upon Henley’s
representations because of their long-term friendship and that he was damaged asa “esult.
The justifiable reliance standard articulated by the Supreme Court in Field v. Mays, 516

U.S. 59, 71 (1995), requires an evaluation of “‘the qualities and characteristics of the

* The First Circuit stated the following:

On the district court's grant of appellees’ motion to dismiss, we must
affirm unless Gilmore’s complaint alleges “a plausible entitlement to
relief,” Bell Atl. Corp. v. Twombly, 550U.S, 544, 127 S.Ct. 1955, 1967-69,
‘167 L,Ed.2d 929 (2007); ACA Fin. Guar. Corp. v. Advest, Inc,, 512 F.3d 46
(ist Cir.2008), taking all well-pleaded facts contained in the complaint as
true and drawing all reasonable inferences therefrom in the plaintiff's
favor, Marrero-Gutierrez v. Molina, 491 F.3d 1, 5 (1st Cir. 2007).
Nevertheless, we are free to disregard “bald assertions, unsupportable
conclusions, and opprobrious epithets.” Ruiz v. Bally Total Fitness
Holding Corp., 496 F.3d 1, 4 (1st Cir. 2007) (internal quotation marks
omitted). In assessing the motions under Fed. R. Civ. P. 12(b)(6), we may
also review documents outside of the pleadings where they are
undisputed, central to plaintiffs’ claims, and sufficiently referred to in the
complaint or incorporated into the movant’s pleadings, as the relevant
CAP documents are here. Curran v. Cousins, 509 F.3d 36, 44 (1st Cir.
2007).

Citigroup, Inc, 545 F.3d at 52.

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particular plaintiff, and the circumstances of the particular case, rather than of the
application of acommunity standard of conduct to all cases.” The Court finds that bevause
Abbott alleged that he relied upon a long-term friendship he did more than make a
conclusory statement in support of his claim under section 523(a)(2)(A). See Sanford Inst.

for Sav. v. Gallo, 156 F.3d 71, 74 (1st Cir. 1998) (“A party may justifiably rely on a

misrepresentation even when he could have ascertained its falsity by conductir'g an
investigation.”). Because of the long-term friendship, Abbott was-not required to allege
that he performed the type of due diligence required of a stranger to a transaction before
advancing funds to establish justifiable reliance. Id. at75. Accordingly, viewing the facts
in the light most favorable to Abbott, this Court rules that Abbott's Amended-Complaint
cannot be dismissed on the ground that it fails to contain facts sufficient to state a plausible
claim for rélief due to lack of justifiable reliance under section 523(a)(2)(A).

Generally, a promise of future action, in this case the Debtor's representatior. that
he would have his sister (and presumably her partner) execute a mortgage which he w ould
record, is insufficient to support a claim under section 523(a)(2)(A). See, e.g., Allison v.

Roberts (In re Allison), 960 F.2d 481, 484 (5th Cir. 1992) (“[A] promise to perform acts in the

future is not considered a qualifying misrepresentation merely because the promise

subsequently is breached.”); James Cape & Sons Co, v. Bowles {In re Bowles), 318 B.R. 129,

144 (Bankr. E.D; Wis. 2004) (“[A] cause of action for fraud dees not exis: for

misrepresentations as to future promises or facts... . .”); New Austin Roosevelt Currency

Exch, Inc, y. Sanchez (In re Sanchez), 277 B.R. 904, 908 (Bankr. N.D. Ill. 2002) (observing

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that a check is a promise of future payment and holding debt for NSF check dischargzable

absent evidence of present intent not to honor it); Carroll & Sain v. Vernon (In re Ver 10n),

192 B.R.165, 171-72 (Bankr. N.D. Hl. 1996) (holding debt for legal fees dischargeable where

plaintiff law firm had not demonstrated intent not to pay); Kuper v. Spar (In re Spar., 176

B.R. 321, 327 (Bankr. S.D.N.Y. 1994) (“A promise to perform in the future is insufficient.”);

Rowe v. Showalter (In re Showalter), 86 B.R. 877, 880 (Bankr. W-D. Va. 1988) (“A mere

promise to repay, and nothing more, does not rise to the level of a representation under §

523(a)(2).”); Lisk v. Criswell (In re Criswell), 52 B:R. 184, 196-97 (Bankr. E.D. Va. 1985) (The

“representation” must be “one of existing fact” and not “merely an opinion, expectation

or declaration of intent.”). See.also Randle v. Highfill (In re Highfill), 336 B:R. 701, 70:5-707

(Bankr. M.D.N.C. 2006). Similarly, “[a] promise, by its nature, is a representation of i1tent
to do: that which is. promised, to keep or honor the promise. A promise can constitute a
false represéntation, but only if it is made without intent to honor it: the operative

misrepresentation is one of intert to honor the promise.” DCFS Trust v. Goldstein (In re

Goldstein), 345 B.R. 412, 422 (Bankr. D. Mass: 2006) (citing Palmacci, 121 F.3d at 786-787).

In the instant case, the Debtor’s repeated promises to record a mortgage ‘o be
executed by his. sister in conjunction with both a promissory note which she executed
obligating repayment of monies advanced by Abbott, as well as monies lent to the Debtor
for his business on and after May 14, 2002 were unquestionably promises to perform acts
in the future. The issues of whether the Debtor’s statements to that effect were false: and

whether he had no intention of honoring the promises or recording the mortgage despite

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his repeated promises to do so, either at the time of the initial advance or at the time of
subsequent advances, are ultimately issues of fact which must be proven at trial. .Abbott
alleged that the Debtor actively solicited him for money because of personal and business
probiems and never intended to record-a mortgage. The ultimate resolution of the issue
of whether the Debtor had no intention of recording a mortgage will depend.upon the
credibility of the Debtor when he is called to testify at trial. The record, when viewec. in the
light most favorable to Abbott, however, permits the inférences that the Debtor mede the
promises to record the mortgage with the intention of inducing Abbott to make tke lean
and that he never had any intention of recording the mortgage as he remained silent
during the parties’ discussions in 2004 and 2005, not only about the existence of a recorded
mortgage but also about the conveyance of the property in September of 2004. The facts
alleged by Abbott also may permit the inference that the Debtor, with the participation of

family members, obtained monies from Abbott by actual fraud. See McClellan v. Centrell,

217 F.3d 890 (7th Cir. 2000). As noted by the Bankruptcy Appellate Panel in Mellon: Bank

N.A. v. Vitanovich, 259 B.R. 873 (B.A.P. 6th Cir. 2001), “[w]hen a debtor intentionally

engages in a scheme to deprive or cheat another of property or a legal right, that debtor has
engaged in actual fraud and is not entitled to the fresh start provided by the Bank:uptcy
Code.” Id, at 877.
VI. CONCLUSION

In view of the foregoing, the Court finds that Abbott’s Amended Complaint states

a plausible claim for relief. The Court shall enter an order denying the Debtor’s Motion to

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Dismiss.

By the Court,

Ge Binsa

Joan N. Feeney
. . United States Bankruptcy Judge
Dated: September 1, 2009
ce: William ©. Monahan, Esq., David G. Baker, Esq.

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