Paliotta v. Wade et al

OCR transcription for search; preserved printed pages are authoritative

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8 UNITED STATES BANKRUPTCY COURT

9 CENTRAL DISTRICT OF CALIFORNIA
10 SAN FERNANDO VALLEY DIVISION
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In re

131 JOHN M. WADE and JESSICA WADE, _| Case No. SV 05-11674 MT

14 Debtor. Chapter 7
IS Adv. No. 05-01397 MT
101 JUDY PALIOTTA, ORDER (1) GRANTING SUMMARY
17 ADJUDICATION ON PLAINTIFF’S

Plaintiff, 523(A)(2)(A) CLAIM; (2) GRANTING
18 PLAINTIFF’S DEEMED MOTION TO
Vv. AMEND COMPLAINT; AND (3)
19 SETTING FURTHER DEADLINES
JOHN M. WADE and JESSICA WADE,
0 Date: August 17, 2006
Defendant. Time: 2:00 p.m.

| Place: Courtroom 302
22 On June 8, 2006, Defendants John and Jessica Wade filed their Motion for
23 Summary Judgment or, in the Alternative, for Summary Adjudication of Issues. On July
24 12, Plaintiff filed a Response to Defendants’ Motion for Summary Judgment, a
25 Response to Defendant's Conclusions of Law, and a Response to the Answer to the
26 Amended Complaint. On July 25, 2006, Defendants filed an Objection to Plaintiff's

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Proffered Evidence. On July 26, 2006, Defendants filed an Objection to Plaintiff's
Response to the Answer to the Amended Complaint. On July 27, 2006, Defendants
filed their reply. A hearing was held on the Motion on August 17, 2006 at 2:00 p.m.
Tyson Takeuchi appeared for the Defendants and Plaintiff appeared pro se.
Background

Plaintiff and John Wade (“Debtor’) agreed, at minimum, to a loan in the amount
of $40,000, principally for the purchase of an auto body shop.’ Debtor was to make
payments in monthly $700 installments until the loan was repaid. Debtor made ten
consecutive payments, then stopped. Debtor only paid owner of the shop a $3,000.00
down payment and not the $30,000 plaintiff believed he would pay. At some point
Debtors closed the shop, sold the tools, and moved to Arizona. The pro se Plaintiff is
suing Debtors in this adversary proceeding to recover the remaining loan amount. She
has argued that Debtors defrauded her but has not identified any specific cause of
action under the Bankruptcy Code, despite opportunity to further amend the Complaint.

The Amended Complaint essentially states that Wade was a friend. Piaintiff
gave him $30,000 to purchase an auto shop and an additional $10,000 (upon request)
for licensing and other paperwork. Wade and Plaintiff were business partners. Wade
only paid $3,000 up front for the business and after a few months skipped town without
notice while Plaintiff was hospitalized. Plaintiff states: “Did he defraud me? The
answer is yes!" Plaintiff gave checks of $18,000, $12,000, and $10,000 to John Wade.
The balance due and owing is $36,000. The last payment was made October 2004.
Procedural Issues

Defendant argues that the Plaintiff has not complied with Local Bankruptcy

j This Court is specifically not making any finding at this point whether this

transaction was a traditional loan or was to purchase equity in the Debtor's business.

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Rules, the Federal Rules of Civil Procedure, or the Federal. Rules of Evidence. LBR
2090(g){3) states: “Compliance with Rules. Any person appearing without counsel shail
comply with the Local Bankruptcy Rules, the F.R.Civ.P., F.R.Evid., F.R.App.P., and
F.R.B.P. Failure to comply may be grounds for dismissal, conversion, appointment of a
trustee or an examiner, judgment by default, or other appropriate sanctions.” The
Reply does little to explain why the pleadings do not comply. Defendants cite to LBR
9013-1, which is the standard for summary judgment or partial summary adjudication. |
am not sure whether the Defendants are suggesting that Plaintiffs service was
insufficient, whether the pleadings were filed too late, or if there is no issue of material
fact. Plaintiff has not strictly complied with the focal rules, but it appears she has in
substance stated what she disputes in the defendant’s moving papers. She has not
ignored the rules to the extent that it is detrimental to the defendant's ability to defend
the case. The factuai nexus for these allegations is narrow and the legal theories are
fairly limited as well. The rule implies permissiveness, “may be grounds for dismissal”
(emphasis mine). Pro se pleadings are liberally construed. See Haines v. Kerner, 404
U.S. 519, 520-21 (1972). The parties are better served if the case is not decided on
this rules-based issue, but rather an attempt to sort out the merits is made.

Defendant’s Objection to Proffered Evidence under FRE 408

Plaintiff, in ner opposition to the motion for summary judgment, cites to Debtor’s
declaration at paragraphs 10-15. (Plaintiff cites to “Exhibit A” but it is actually “C”.)
Assuming that the Declaration was produced in contemplation of a settlement, it
appears that Federal Rule of Evidence 408 precludes this declaration as evidence for
the purposes of this adversary. See RDM Holdings v. Equitex (in re Rdm Sports
Group), 277 B.R. 415, 432-33 (2002) (“rule [408] also excludes from admission

‘evidence of conduct or statements made in compromise negotiations.’”).

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This declaration was signed February 27, 2006 by Wade. He appears to have
opened the door Plaintiff's use of this document as he submitted it well after the
unsuccessful mediation took place on September 8, 2005. Wade likely waived his right
to object under this section by disclosing this information himself, but | will not reach
that issue. At most, only paragraph 9 should be stricken as that is the only part of the
declaration which refers to a statement made in a mediation. Other statements are
general and do not reference settlement. Thus, to be fair, no consideration of any
statements made in the mediation will be considered.

Defendant’s Motion for Summary Judgment
Defendants argue the following:

Plaintiff merely loaned Debtor money; the four corners of the promissory note
does not say what that the joan proceeds were for limited purposes. Plaintiff and
Defendants agree that the loan was for the purpose of purchasing the garage, but there
is no proof that the loan was intended only to purchase the garage in full.

Debtor tried to run the garage, but business declined. Plaintiff encouraged
Debtor to continue the business. Debtor spent the loan money on a $3,000 down
payment on the garage and the rest on purchasing parts for operating the business and
other operating expenses.

Debtor made ten payments of $700 pursuant to the terms of the note. Debtor
stopped paying only because it became financially impossible for him to do so. No
partnership existed between Debtor and Plaintiff.

While it is as unclear to Defendants as it is to the Court what Plaintiff's legal
theory is, Defendant argues that Plaintiff appears to be making a claim under 11 U.S.C,
§ 523(a)(2)(A) for fraud. Defendant argues that Plaintiff has not alleged any facts to

establish fraud against Debtor, that Plaintiff has not alleged any facts to establish fraud

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against Debtor-spouse and Defendant, Jessica Wade, and that there was no
partnership between Debtor and Plaintiff, and one is irrelevant to a fraud claim.

There is no issue of material fact present. The partnership issue is irrelevant to
a fraud claim. The elements to a fraud claim are:

1. Debtor made the representation;

2. The debtor knew the representations were faise at the time they were made;

3. The debtor made the representations with the intent to deceive the creditor:

4. The creditor relied on the representations; and

5. The creditor sustained loss as the proximate result of the debtor's
representations.

Household Credit Servs., inc. v. Ettell (in re Ettell) 188 F.3d 1141, 1144 (9th Cir. 1999).
Plaintiff has not made any of these allegations of Defendants. Even if the Court finds
that Debtor made representations, Plaintiff does not allege Wade knew they were false
at the time he made them.

There may have been a “misunderstanding between the parties as to how the
business was to be purchased, or how the loan proceeds were to be used,” but this
does not establish fraud. Wade’s declaration states that it was only because of Debtor's
financial inability to pay back the loan that he stopped making payments.

Defendant also argues that, even assuming the Debtor defrauded the Plaintiff,
there is no basis for including his wife, Jessica Wade, in this action. Plaintiff does not
allege any facts that would impute fraud upon the spouse. Marriage alone is not
sufficient to impute the fraud of one spouse upon the other. Tsurukawa v. Nikon
Precision, Inc. (in re Tsurukawa), 258 B.R. 192 (9th Cir. B.A.P. 2001).

Response to Motion

Plaintiff responded with a memorandum signed under penalty of perjury, which

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the court will deem the equivalent of a declaration or affidavit. She claims therein as
follows: Debtor told Plaintiff that loan was for the purchase of the business in full.
Debtor tried to get the $40,000 from Plaintiff without signing anything. Debtor finally
gave into signing the promissory note when Plaintiff told Debtor he would not get money
until he signed the note. The agreed to be partners and defendant would supply the
sweat equity. Debtor ran away to Arizona without telling Plaintiff. Debtor lied to the
Chapter 7 Trustee when he told her that Debtor and Debtor's wife lived in California
when they in fact were living in Arizona. She repeats the additional allegations that
were made in the verified amended complaint.

Plaintiff states that Defendants made all contracts with the garage owner and
Defendants knew that the loan was for purchase of the business in full. Defendants
entered into the agreement intending to deceive Plaintiff. Plaintiff was told by
[Defendants] one thing while they were doing something else. Defendants defrauded
Plaintiff. Plaintiff has sustained hardship as a result of their lies. There was never a
misunderstanding between the parties.

In support of her claim against Jessica Wade, plaintiff states: Jessica Wade's
name was on the $18,000 check and she worked at the store every day. That makes
her involved in the suit, “in fact, an equal partner.”

Summary Judqment

Summary judgment should be granted “if the pleadings, depositions, answers to
interrogatories, and admissions on file, together with the affidavits, if any, show that
there is no genuine issue as to any material fact and that the moving party is entitled to
a judgment as a matter of law.” FRCP 56(c) (incorporated by FRBP 7056). The
moving party has the burden of establishing the absence of a genuine issue of material

fact. Celotex Corp. v. Catrett, 477 U.S. 317, 323 (1986). If the moving party shows the

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absence of a genuine issue of material fact, the nonmoving party must go beyond the
pleadings and identify facts that show a genuine issue for trial. /d. at 324. The court
must view the evidence in the light most favorable to the nonmoving party. Bell v.
Cameron Meadows Land Co., 669 F.2d 1278, 1284 (9th Cir.1982). All reasonable
doubt as to the existence of a genuine issue of fact should be resolved against the
moving party. Hector v. Wiens, 533 F.2d 429, 432 (9th Cir.1976). The inference drawn
from the underlying facts must be viewed in the light most favorable to the party
opposing the motion. Valadingham v. Bojorquez, 886 F.2d 1135, 1137 (9th Cir.1989).
Where different ultimate inferences may be drawn, summary judgment is inappropriate.
Sankovich v. Insurance Co. of N. Am., 638 F.2d 136, 140 (9th Cir.1981).

The real issue is deciding what cause of action the Plaintiff has claimed. Though
it would seem she is claiming some form of fraud, it’s not clear what she is claiming.
The Court’s ability to help the Plaintiff is extremely limited. “While it is true that a court
must construe pro se pleadings liberally, the court may not act as counsel for either
litigant.” Bergman v. Webb (In re Webb), 212 B.R. 320, 321 (1997) citing Ouzts v.
Cummins, 825 F.2d 1276, 1277 (8th Cir. 1987); Burgs v. Sissel, 745 F.2d 526, 528 (8th

Cir. 1984); Schooley v. Kennedy, 712 F.2d 372, 373 (8th Cir. 1983). Where, as here, a
party is proceeding pro se, a court must read the papers liberally and interpret them “to
raise the strongest arguments they suggest.” Graham v. Henderson, 89 F.3d 75, 79 (2d
Cir. 1996) The application of this standard does not, however, “relieve plaintiff of his
duty to meet the requirements necessary to defeat a motion for summary judgment.”
Jorgensen v. Epic/Sony Records, 351 F.3d 46, 50 (2d Cir 2003), It is settled law that
the allegations of a pro se litigant, however inartfully pleaded, are held “to less stringent
standards than formal pleadings drafted by lawyers.” Haines v. Kerner, 404 U.S. 519,

520 (1972).

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While it is hard for the case to proceed if it is not clear what cause of action the
Plaintiff is pursuing, there are two causes of action that appear to be argued by Plaintiff.
Defendant construes her allegations as solely a claim under 11 U.S.C. § 523(a)(2\(A).
A discussion of a claim under 11 U.S.C. § 523(a)(4) also appears to be apparent from
the evidence proffered by Plaintiff.

Plaintiff is Precluded from a Fraud Claim under either 11 U.S.C. § 523(a)(2)(A) or

141 U.S.C. § 523(a)(4) for Failing to Plead or Factually Support Fraud with any

Specificity

Under section 523(a)(2)(A) or the first half of section 523(a)(4), the Plaintiff must
allege fraud. In her papers, Plaintiff pursues a fraud theory: “So basically, the question
is, ‘Did he defraud me?’ The answer is yes!” (Amended Compl. 7 5). “Plaintiff now
understands why Mr. Wade was reluctant to enter into a legal binding agreement, and
that reason is ‘fraud.”” (Plaintiff's Response to MSJ § 3). “Plaintiff now knows that Mr.
Wade never intended to repay this loan in full and was intending to defraud her from
the start!” (Plaintiff's Response to MSJ 6).

When fraud is a part of a cause of action, the Federal Rules of Bankruptcy
Procedure require that pleadings state the circumstances constituting fraud with
particularity. FRCP 9(b) (incorporated by FRBP 7009). “In all averments of fraud . . .
the circumstances constituting fraud .. . shall be stated with particularity.” fd. “Rule 9
F.R. Civ. P. applies in adversary proceedings.” FRBP 7009. Plaintiff must meet this
pleading requirement to charge fraud. “A complaint that merely recites statutory
language fails to state a claim under Rule 12(b)(6).” in re Kubick, 171 B.R. 658, 660
(9th Cir. B.A.P. 1994). A mere averment that Plaintiff was defrauded similarly does not
satisfy Rule 9.

Plaintiff was given an opportunity to amend her Complaint and the Court

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explained that she needed to provide more detail and not just allegations, but there is
simply no detail to support a fraud claim. Given the lack of specificity in either the
allegations or the factual support, this claim must fail.

11.U.S.C. § 523{a)(4) - Defalcation

Reading plaintiff's statements and allegations, she does appear to also argue a
theory of non-dischargability for defalcation while acting in a fiduciary capacity. If so,
there is an issue of material fact with respect to whether the parties were partners.

Assuming that Plaintiff may pursue a section 523(a)(4) cause of action, she may
prove either fraud or defalcation under this section. Under the defalcation prong of
section 523(a)(4), Plaintiff does not need to plead fraud with specificity in her complaint.

The Ninth Circuit ruled on the definition of defalcation in In re Lewis:

Under section 523(a)(4), defalcation "includes the innocent default of a

fiduciary who fails to account fully for money received.” In re Short, 818 F.2d

at 694 (citation omitted); In re Baird, 114 Bankr. 198, 204 (9th Cir. BAP

1990) ("In the context of section 523(a)(4), the term ‘defalcation' includes

innocent, as well as intentional or negligent defaults so as to reach the

conduct of all fiduciaries who were short in their accounts") .. .. An individual

may be liable for defalcation without having the intent to defraud.

In re Lewis, 97 F.3d 1182, 1186-7 (9th Cir. 1996). Plaintiff does allege that Debtor
defaulted, innocent or otherwise: “The last payment | received was October 2004. The
balance due and owing on this note is $26,000.” (Amended Compl. 7). Since even
an innocent default can be defalcation, the threshold question is whether Plaintiff

alleges and provides factual support that they were fiduciaries.

Fiduciary Relationship

“Whether a relationship is a ‘fiduciary’ one within the meaning of section
523{a)(4) is a question of federal law.” Lewis v. Scott (In re Lewis), 97 F.3d 1182, 1185
(9th Cir. 1996) citing Ragsdale v. Haller, 780 F.2d 794, 795 (9th Cir. 1986). “Although

the concept of fiduciary is to be narrowly defined as a matter of federal law, state law is

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to be consulted to determine when a trust in this strict sense exists.” Ragsdale v. Haller,
780 F.2d 794, 796 (9th Cir. 1986) citing Runnion v. Pedrazzini (in re Pedrazzini), 644
F.2d 756, 758 (9th Cir. 1981). The Ninth Circuit has held that, under California law, all
partners are fiduciaries, “California has made alt partners trustees over the assets of
the partnership. Accordingly, we hold that California partners are fiduciaries within the
meaning of § 523(a)(4) and that Haller's debt to Ragsdale is non-dischargeable.” /d. at
796-797.

In the instant case, Plaintiff contends that she and Debtor “decided we would
become partners. | would be the silent partner (putting up the money for purchase) and
he would run the business.” (Amended Complaint J 3). The Debtor states that they
were never partners, “Defendants deny that any partnership was ever contemplated or
entered into between Plaintiff and Defendants.” (Answer §[ 3). This is a central issue of
material fact that cannot be determined at summary judgment.

Defendants accurately point out that the Court deemed this a § 523(a)(2)(A)
claim at an earlier hearing. It is, therefore, understandable why Defendants have
proceeded to defend against only that claim. In fairness, Defendants should be given
an opportunity to file a summary judgment motion relating to the § 523(a)(4) cause of
action Plaintiff now appears to be claiming, should they chose to do so.

Jessica Wade

With respect to Jessica Wade, Plaintiff claims that she should be a defendant
because her name was on the $18,000.00 check. She did not, however, sign the
promissory note. There are no averments or no evidence she made any fraudulent
representations, was a fiduciary, or committed any wrongful or egregious conduct. The
fact that Jessica may have worked at the shop means nothing. There is no averment

that she was a partner. At most, the fact the check was made in Jessica’s name can

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only suggest a constructive transfer to John Wade. Plaintiff herself states in the
Amended Complaint that she gave the $18,000 check to John Wade. The Amended
Complaint simply alleges no facts against Jessica, and the papers do not suggest much
more. She may not stay in the case simply by association. Defendant is correct that
the case should be dismissed against Jessica Wade in its entirety.
Disposition

Defendants are granted summary adjudication with respect to Plaintiff's claim
under 11 U.S.C. § 523(a)(2)(A). In addition, summary judgment is granted in favor of
Jessica Wade. However, this does not end this matter. As Defendants noted in their
opposition, Plaintiff's papers effectively are a motion to amend. FRCP 15({a)
(incorporated by FRBP 7015) provides, in pertinent part, that leave to amend “shail be
freely given when justice so requires.” Here, considering that Plaintiff is pro se and has,
in her subsequent papers, outlined a possible cause of action against Defendant John
Wade, justice requires that Plaintiff be permitted to amend her complaint. For the sake
of judicial economy, Plaintiffs Amended Complaint, together with the documents she
filed in response to Defendant's motion for summary judgment shall collectively be
deemed Plaintiff's Second Amended Complaint. Leave to amend should be granted if
the underlying facts provide proper grounds for relief or if the compiaint can be saved
by amendment. Edwards v. Occidental Chemical Corp., 892 F.2d 1442, 1446 (Sth Cir.
1990). This is particularly so where, as here, there is no undue delay, bad faith, futility
of amendment, or prejudice to the opposing party. id. This Second Amended
Complaint makes out a claim against John Wade only and only under § 523(a)(4).
Defendants’ response to such documents shall be deemed an answer thereto.

The parties shall have until October 23, 2006 to complete discovery. Defendant

John Wade shall bring a motion for summary judgment, if any, by no later than October

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1 |] 30, 2006. January 5, 2007 at 9:00 a.m. shall be reserved for trial.

am Lf Lie

4 | DATED: August Z ‘", 2005 [lew
li TIGHE
5 United States Bankruptcy Judge

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1 CERTIFICATE OF SERVICE BY MAIL su
2 | certify that a true copy of this ORDER was served on i Oly
to the parties listed below: ,

4 | Judy Paliotta
8541 Foothill Blvd., #201
5 | Sunland, CA 91040

6 || Tyson Takeuchi
3699 Wilshire Blvd, Ste. 1260
7 || Los Angeles, CA 90010

& || John and Jessica Wade
38719 10th E., Apt. 23
9 || Palmdale, CA 93550-2920

10 || Office of the U.S. Trustee
21051 Warner Center Lane, Ste. 115
11 | Woodland Hills, CA 91367

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