Ludwig & Robinson PLLC v. Yelverton

UNITED STATES BANKRUPTCY COURT
FOR THE DISTRICT OF COLUMBIA
In re
STEPHEN THOMAS YELVERTON,
Debtor.
____________________________
LUDWIG & ROBINSON, PLLC,
Plaintiff,
v.
STEPHEN THOMAS YELVERTON,
Defendant.
)
)
)
)
)
)
)
)
)
)
)
)
)
)
)
)
Case No. 09-00414
(Chapter 11)
Adversary Proceeding No.
09-10023
Not for Publication in
West’s Bankruptcy Reporter
MEMORANDUM DECISION AND ORDER RE MOTION TO DISMISS COMPLAINT
This addresses the defendant’s motion to dismiss the
complaint under Fed. R. Civ. Proc. 12(b)(6). 	For the reasons set
forth below, I will deny the motion.
I
On May 14, 2009, the debtor, Stephen Thomas Yelverton,
commenced in this court his case under chapter 11 of the
Bankruptcy Code (11 U.S.C.). 	Thereafter, the plaintiff
The document below is hereby signed.
Signed: November 16, 2009.
_____________________________
S. Martin Teel, Jr.
United States Bankruptcy Judge
Case 09-10023 Doc 15 Filed 11/16/09 Entered 11/16/09 10:42:53 Desc Main
Document Page 1 of 13

2
instituted the above-captioned adversary proceeding seeking to
have the court declare its claim non-dischargeable under §
523(a)(2)(A) of the Bankruptcy Code. 	The facts as alleged in the
plaintiff’s complaint are as follows.
On or about March 9, 2007, the debtor’s law firm, Yelverton
Law Firm (YLF), and the plaintiff, Ludwig & Robinson, PLLC (L&R),
entered into a sub-sublease agreement. 	Under the terms of that
agreement, the sub-sublease was to expire September 30, 2008.
The master lease underlying the sub-sublease, however, was set to
expire on February 28, 2008, seven months before the sub-sublease
was set to expire. 	From April 2008 through the end of the sub-
sublease, YLF failed to make payments as due. 	Also included in
the sub-sublease was an agreement by L&R to provide office
services to YLF. 	YLF did not make payments for these services
from April 2008 through the end of the sub-sublease.
YLF and L&R also entered into a second agreement to provide
health insurance to Yelverton’s wife under L&R’s group medical
insurance policy. 	YLF failed to make payments due under that
policy from March 2008 through September 2008.
After YLF first failed to make payments under the lease and
health insurance policy, Yelverton made a series of
representations to L&R regarding YLF’s and Yelverton’s purported
ability and intent to pay the amounts due. 	Based upon these
representations, L&R held off terminating the lease and medical
Case 09-10023 Doc 15 Filed 11/16/09 Entered 11/16/09 10:42:53 Desc Main
Document Page 2 of 13

3
coverage and continued to provide YLF and Yelverton with access
to the leased office space, with office services, and with
medical coverage. 	In its complaint, L&R alleges that when
Yelverton made these representations to L&R he, in fact, had no
intention of paying. 	In support of this, L&R points to
Yelverton’s withdrawal of significant personal and YLF funds for
the personal use of his wife.
II
The purpose of a Rule 12(b)(6) 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);
see also Ashcroft v. Iqbal, 129 S. Ct. 1937, 1949–50 (2009). 	In
Case 09-10023 Doc 15 Filed 11/16/09 Entered 11/16/09 10:42:53 Desc Main
Document Page 3 of 13

4
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
In his motion to dismiss, Yelverton sets out two general
bases for dismissal: the invalidity of L&R’s claim and L&R’s
failure to state a claim under § 523(a)(2)(A). 	I will address
each in turn.
A.
Yelverton’s first basis for dismissal centers on whether the
claims stemming from the YFL sub-sublease are enforceable against
him. 	In this regard, Yelverton makes two alternative arguments.
First, Yelverton states that dismissal of the complaint is proper
because L&R failed to either allege or demonstrate that he was
personally liable on the sub-sublease. 	Alternatively, Yelverton
argues that even if he is personally liable, there is no
liability for failure to pay the sub-sublease because the master
lease underlying the sub-sublease expired prior to the period in
which L&R claims damages.
Yelverton’s first basis for dismissal is without merit.
Under D.C. law, an individual who causes harm to another by
Case 09-10023 Doc 15 Filed 11/16/09 Entered 11/16/09 10:42:53 Desc Main
Document Page 4 of 13

5
engaging in fraud can be held liable for the harm arising from
that fraud, here, a sub-sublease of property to YLF for which
rent was not paid. 	Section 523(a)(2)(A) excludes from discharge
a debt for property obtained by fraud. 	Historically, there were
three views as to whether the debtor must personally receive the
property in order for the debt to be excepted from discharge:
The 	first 	view 	. 	. 	. 	requires 	that 	the 	debtor
personally receive the fruits of the fraud. 	The second
view 	. 	. 	. 	is 	termed 	the 	“receipt 	of 	benefits” 	theory.
This theory requires that the debtor gain a benefit from
the [property] that was obtained by fraudulent means. 	A
third view, which is the broadest, requires simply that
a debtor obtain [property] by fraudulent means such that
a debtor does not necessarily have to receive [property]
personally or receive any benefit at all.
HSSM #7 Limited P’ship v. Bilzerian (In re Bilzerian), 100 F.3d
886, 890 (11th Cir. 1996). 	Most courts to confront the issue
agreed that an indirect benefit to the debtor was sufficient.
See, e.g., Brady v. McAllister (In re Brady), 101 F.3d 1165, 1172
(6th Cir. 1996); HSSM #7 Limited P’ship v. Bilzerian (In re
Bilzerian), 100 F.3d 886 (11th Cir 1996); Ashley v. Church (In re
Ashley), 903 F.2d 599, 604 (9th Cir. 1990). 	In 1998, however,
the Supreme Court provided a more expansive view of
§ 523(a)(2)(A) and arguably did away with the indirect benefits
theory.
In Cohen v. de la Cruz, 523 U.S. 213 (1998), the Supreme
Court addressed the issue of whether treble damages awarded in a
state court fraud action were non-dischargeable under
Case 09-10023 Doc 15 Filed 11/16/09 Entered 11/16/09 10:42:53 Desc Main
Document Page 5 of 13

6
§ 523(a)(2)(A) or whether the exception only encompassed the
money or property the debtor actually obtained through the fraud.
Id. at 215. 	The Cohen Court held that Ҥ 523(a)(2)(A) prevents
the discharge of all liability from fraud, and that an award of
treble damages therefore falls within the scope of the
exception.” 	Id. (emphasis added). 	Important to the Court’s
reasoning was that the phrase “to the extent obtained by” did not
relate to benefit, but instead meant causation:
Moreover, the phrase “to the extent obtained by” in
§ 	523(a)(2)(A) 	. 	. 	. 	does 	not 	impose 	any 	limitation 	on
the 	extent 	to 	which 	“any 	debt” 	arising 	from 	fraud 	is
excepted 	from 	discharge. 	“[T]o 	the 	extent 	obtained 	by”
modifies 	“money, 	property, 	services, 	or 	. 	. 	.
credit”——not 	“any 	debt”——so 	that 	the 	exception
encompasses 	“any 	debt 	. 	. 	. 	for 	money, 	property,
services, or . . . credit, to the extent [that the money,
property, 	services, 	or 	. 	. 	. 	credit 	is] 	obtained 	by”
fraud. The phrase thereby makes clear that the share of
money, 	property, 	etc., 	that 	is 	obtained 	by 	fraud 	gives
rise to a nondischargeable debt. Once it is established
that 	specific 	money 	or 	property 	has 	been 	obtained 	by
fraud, however, “any debt” arising therefrom is excepted
from discharge.
Id. at 218–19; see also Nat’l Dev. Servs., Inc. v. Denbleyker,
251 B.R. 891, 896 (Bankr. D. Colo. 2000). 	At least three circuit
courts to address the issue post-Cohen have abandoned the
direct/indirect benefit framework and found that as long as
someone or something received property on account of the debtor’s
fraud, the claim arising from that fraud was non-dischargeable.
See Muegler v. Bennings, 413 F.3d 980, 983-84 (9th Cir. 2005);
Deodati v. M.M. Winkler & Assoc., 239 F.3d 746, 749 (5th Cir.
Case 09-10023 Doc 15 Filed 11/16/09 Entered 11/16/09 10:42:53 Desc Main
Document Page 6 of 13

7
2001); Pleasants v. Kendrick, 219 F.3d 372, 375 (4th Cir. 2000).
Regardless of which view prevails, L&R has stated a claim
notwithstanding that Yelverton is not a signatory to the sub-
sublease.
First, L&R has alleged that Yelverton indirectly benefitted
from the sub-sublease from L&R to YLF. 	In its complaint, L&R
states that Yelverton is the founder and principal officer in
YLF, and that Yelverton and his wife used the office space
provided by L&R. 	In situations analogous to this, other courts
have found an indirect benefit to a debtor when financing was
extended to a corporation that the debtor controlled. 	See
Church, 903 F.2d at 604; Simmons v. Wade (In re Wade), 43 B.R.
976, 981–82 (Bankr. D. Colo. 1984). 	Such is the case here.
Yelverton is the founder and principal officer of YLF. 	L&R has
alleged that both he and his wife used the office space. 	This is
enough of an indirect benefit to fall within the purview of the
indirect benefit view of § 523(a)(2)(A). 	Moreover, under Cohen’s
reasoning, it does not matter whether Yelverton received any
benefit at all. 	All that matters is that some property was
obtained because of his misrepresentations. 	In their complaint,
L&R has sufficiently alleged that they opted to forbear evicting
YLF based on Yelverton’s alleged misrepresentations, thereby
giving YLF the benefit of using the leased premises for a longer
period.
Case 09-10023 Doc 15 Filed 11/16/09 Entered 11/16/09 10:42:53 Desc Main
Document Page 7 of 13

1 	Moreover, L&R could continue to sub-sublease the premises
even if L&R did not renew its lease with the master landlord. 	If
L&R had not renewed the lease, then it would have been a tenant
at sufferance under the master lease, subject to the master
landlord’s right to immediate possession under District law. 	See
D.C. Code § 42-3201. 	But there is no right of self-help to evict
a tenant, and until evicted, a tenant has a right of possession.
So long as L&R continued in possession, even without an actual
renewal of the master lease, its possessory rights deriving from
having entered into the master lease (to obtain possession in the
first instance) would permit its sub-sublease to Yelverton to
remain effective during such possession.
8
Yelverton’s second basis for dismissal——that even if he is
personally liable, there is no liability for failure to pay the
sub-sublease because the master lease underlying the sub-sublease
expired prior to the period in which L&R claims damages——is also
without merit. 	Under D.C. Code § 42-3229, if a lease is
surrendered to be renewed, any sublease of that lease remains
enforceable as if it had been renewed at the time the master
lease was renewed. 	L&R’s complaint does not explicitly state
that L&R renewed its lease with the master landlord. 	But if such
renewal was required for L&R to comply with its agreement with
YLF, the complaint implicitly alleges there was such a renewal,
as its paragraph 9 alleges that “L&R provided YLF with the
demised premises under the terms of the Agreement” (emphasis
added). 1
B.
Yelverton’s next basis for dismissal is that L&R has failed
to state a claim under § 523(a)(2)(A) in its complaint.
Case 09-10023 Doc 15 Filed 11/16/09 Entered 11/16/09 10:42:53 Desc Main
Document Page 8 of 13

9
Yelverton’s first argues that no action lies under
§ 523(a)(2)(A) because all the statements L&R alleges violate
this provision are statements of financial condition, excluded
from its reach. 	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.
In its complaint, L&R argues that its claim is non-
dischargeable because Yelverton’s representations that “YLF or
[Yelverton] individually would pay the rent, medical coverage
and/or services fees owed, and that YLF was capable of
substantially performing under the [sub-sublease] and medical
coverage agreement,” and that Yelverton knew these
representations to be false, or made them with reckless
indifference as to their truth and with no present intention to
perform. 	While the statement as to YLF’s ability to perform
under the sub-sublease speaks to financial condition and,
therefore, is properly excluded from consideration in determining
Case 09-10023 Doc 15 Filed 11/16/09 Entered 11/16/09 10:42:53 Desc Main
Document Page 9 of 13

10
liability under § 523(a)(2)(A), Yelverton’s representation that
he would pay speaks to intent to repay, which is a proper
consideration under § 523(a)(2)(A).
When a debtor misrepresents his intent to repay a debt that
conduct falls within § 523(a)(2)(A). 	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)). 	Because L&R alleges more than misrepresentation
of a financial condition——namely, misrepresentation of intent to
repay——the motion to dismiss on this basis fails.
Case 09-10023 Doc 15 Filed 11/16/09 Entered 11/16/09 10:42:53 Desc Main
Document Page 10 of 13

11
Yelverton next contends, citing to In re Spar, 176 B.R. 321,
327 (Bankr. S.D.N.Y. 1994), that no claim lies under
§ 523(a)(2)(A) because “false representations as to opinion,
expectation or intention do not give rise to non-dischargeable
debt.” 	The debtor, however, takes this line out of context.
The line quoted above refers to a statement by the debtor to
an investor about potential benefits of coming in on the ground
floor of a business. 	Id. 	The Court, importantly, pointed out
that the representations actionable under § 523(a)(2)(A) must
“encompass statements that falsely purport to depict current or
past facts.” Id. (citations omitted). 	The court then went on to
find that speculation about the future prosperity of a company
was not actionable under § 523.
What Yelverton conveniently fails to note is that in the
same case the court went on to find that the debtor’s statement
that he would execute a promissory note when he had no intention
of doing so, was actionable under § 523(a)(2)(A), a situation
analogous to the one alleged by the plaintiff here. 	If Yelverton
represented an intention to repay while not intending to do so,
such representation is actionable under § 523(a)(2)(A), and L&R
has properly pled it in its complaint. 	Consequently, Yelverton’s
motion to dismiss on this basis also fails
Yelverton next argues that L&R’s claims of fraud based on
his allegedly diverting funds to his wife fail to allege fraud as
Case 09-10023 Doc 15 Filed 11/16/09 Entered 11/16/09 10:42:53 Desc Main
Document Page 11 of 13

12
a matter of law. 	Yelverton, however, misreads the complaint. 	By
alleging that Yelverton diverted funds, L&R was not alleging that
the diversion itself was the fraud. 	Rather, L&R was alleging
evidence in support of its position that Yelverton never intended
to pay. 	L&R’s argument is, in essence, if Yelverton’s
representation that he intended to pay the rent, supply, and
medical expenses was true, why did he divert funds to his wife
before defaulting further on those obligations? 	L&R properly
pled fraud under § 523(a)(2)(A) by alleging Yelverton had no
intention to pay. 	Allegations about diverting funds were merely
evidence to support that allegation.
Yelverton’s final basis for dismissal is that L&R
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 its complaint, L&R alleges that Yelverton’s statements
were “actuated by wantonness, gross fraud, and willful disregard
of L&R . . . .” 	This (or any allegation of actual fraud) is
sufficient as a matter of law to meet the requirement of
§ 523(a)(2)(A) that the debtor’s conduct involve moral turpitude
or intentional wrong.
Case 09-10023 Doc 15 Filed 11/16/09 Entered 11/16/09 10:42:53 Desc Main
Document Page 12 of 13

13	O:\TEEL\Garrett\Decisions\Yelverton (Ludwig) v3.wpd
CONCLUSION
Because L&R has pled facts under which Yelverton could be
liable for fraud on the lease and because L&R has stated a claim
upon which relief can be granted, it is
ORDERED that Yelverton’s motion to dismiss is DENIED.
[Signed and dated above.]
Copies to: All counsel of record; Office of United States
Trustee.
Case 09-10023 Doc 15 Filed 11/16/09 Entered 11/16/09 10:42:53 Desc Main
Document Page 13 of 13