LeGrande Hospitality, LLC dba Juice Wine Purveyors v. Peel

UNITED STATES BANKRUPTCY COURT
EASTERN DISTRICT OF NORTH CAROLINA
RALEIGH DIVISION
IN RE:
ROBERT CHRISTIAN PEEL
DEBTOR
CASE NO.
09-04770-8-SWH
LEGRANDE HOSPITALITY, LLC d/b/a JUICE
WINE PURVEYORS,
Plaintiff,
v.
ROBERT CHRISTIAN PEEL,
Defendant.
ADVERSARY PROCEEDING NO.
H-09-00167-8-AP
ORDER ALLOWING MOTION TO DISMISS AMENDED COMPLAINT
The matter before the court is the defendant’s motion to dismiss the amended complaint
pursuant to Rule 12(b)(6) of the Federal Rules of Civil Procedure, made applicable in this adversary
proceeding by Rule 7012(b) of the Federal Rules of Bankruptcy Procedure, for failure to state a
claim pursuant to § 523(a)(2)(A). A hearing took place in Raleigh, North Carolina on May 12, 2010.
SO ORDERED.
SIGNED this 13 day of July, 2010.
________________________________________
Stephani W. Humrickhouse
United States Bankruptcy Judge
____________________________________________________________
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Statement of the Case
Robert Christian Peel filed a petition for relief under chapter 7 of the Bankruptcy Code on
June 9, 2009. On August 7, 2009, LeGrande Hospitality, LLC (d/b/a Juice Wine Purveyors) filed
a complaint initiating this adversary proceeding seeking to except certain obligations from discharge
pursuant to 11 U.S.C. §§ 523(a)(2)(A) and (a)(6). Mr. Peel filed an answer on September 10, 2009,
followed by a motion for judgment on the pleadings filed on December 8, 2009. On February 19,
2010, the court issued an order allowing judgment on the pleadings (the “February 19 Order”), but
reserving for LeGrande the opportunity to file an amended complaint by March 19, 2010. LeGrande
did file an amended complaint, seeking relief solely under 11 U.S.C. § 523(a)(2)(A). Mr. Peel filed
the present motion to dismiss on March 29, 2010, asserting that LeGrande failed to state a claim
upon which relief can be granted. LeGrande filed a response on April 16, 2010.
Statement of the Facts
LeGrande is a wine wholesaler who sold and delivered wine to Carolina Wine Company
(“CWC”), a North Carolina corporation owned by the debtor. 	Although the parties conducted
business with one another since December 2006, only two wine sale transactions form the basis for
LeGrande’s claim that its debt should not be discharged: the April 23, 2008 sale in the amount of
$93,720.48 (the “April Transaction”); and the May 28, 2008 sale in the amount of $9,261.84 (the
“May Transaction”).
The April Transaction involves the delivery of $93,720.48 worth of wine to CWC in
exchange for one check in the amount of $13,720.48 and eight checks in the amount of $10,000.00
each. The parties agreed that LeGrande would deposit one $10,000.00 check “approximately every
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week until the balance was paid in full.” The $13,720.48 check and only one of the $10,000.00
checks cleared the bank, leaving a balance owing on this transaction of $70,000.00.
The May Transaction involves the delivery of $9,261.84 worth of wine to CWC in exchange
for a $10,000.00 check from the debtor. That check did not clear the bank and the entire amount
owing from the May Transaction remains outstanding.
After several unsuccessful attempts at redepositing and replacing the checks that did not
clear from the April and May Transactions, the parties entered into a written payment agreement on
August 13, 2008 which provided that the debtor would pay LeGrande at least $10,000.00 per week,
by cashier's check, every week until the balance owed was paid in full. The debtor breached the
payment agreement.
Discussion
Until recently, the standard for determining a motion to dismiss pursuant to Rule 12(b)(6)
of the Federal Rules of Civil Procedure was governed by Conley v. Gibson, 355 U.S. 41, 45-46, 78
S. Ct. 99, 102 (1957), which provided that “a complaint should not be dismissed for failure to state
a claim unless it appears beyond doubt that the plaintiff can prove no set of facts in support of his
claim which would entitle him to relief.” Because the rules required only notice pleading, courts
construed a plaintiff’s allegations liberally, accepting the plaintiff’s factual allegations as true and
drawing all reasonable inferences in the plaintiff’s favor. Ibarra v. U.S., 120 F.3d 472, 474 (4th Cir.
1997).
In Bell Atlantic Corp. v. Twombly, 550 U.S. 544, 570, 127 S. Ct. 1955, 1974 (2007),
however, the Supreme Court rejected the Conley standard, and instead held that a complaint must
include “enough facts to state a claim to relief that is plausible on its face.” The Court recently
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fleshed out this standard in Ashcroft v. Iqbal, 129 S. Ct. 1937 (2009), holding first that “the tenet
that a court must accept as true all of the allegations contained in a complaint is inapplicable to legal
conclusions,” and second that “only a complaint that states a plausible claim for relief survives a
motion to dismiss.” 129 S. Ct. at 1949. The allegations must be more than a “formulaic recitation
of the elements” of a claim. 129 S. Ct. at 1951. “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. 	The plausibility standard is not akin to a ‘probability
requirement,’ but it asks for more than a sheer possibility that a defendant has acted unlawfully.”
129 S. Ct. at 1949; see also Angell v. BER CARE, Inc. (In re Caremerica, Inc.), Adv. Pro. No. L-08-
00174-8-AP (Bankr. E.D.N.C. July 23, 2009) (setting out a detailed analysis of Twombly and Iqbal).
With this new, more stringent pleading requirement in mind, we turn to § 523(a)(2), which
excepts from 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 . . .
11 U.S.C. § 523(a)(2)(A).
A creditor seeking to except a debt from discharge must establish all of the elements of
fraud: “(1) false representation, (2) knowledge that the representation was false, (3) intent to
deceive, (4) justifiable reliance on the representation, and (5) proximate cause of damages.”
Nunnery v. Rountree (In re Rountree), 478 F.3d 215, 218 (4th Cir. 2007). Rule 9(b) of the Federal
Rules of Civil Procedure requires that the circumstances constituting fraud be pled with
particularity;
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however, intent, knowledge and other conditions of a person’s mind may be alleged generally. See
United States ex rel. Wilson v. Kellogg Brown & Root, Inc., 525 F.3d 370 (4th Cir. 2008); United
States ex rel. Westwick v. Second Chance Body Armor, Inc., 685 F. Supp. 2d 129 (D.D.C. 2010).
It is well-understood that the issuance of a worthless check alone does not support
nondischargeability, but LeGrande argues that a worthless check coupled with a false or fraudulent
oral representation, made with the intent to deceive, may be sufficient. In Fulcher v. Cooper (In re
Cooper), Adv. Pro. No. L-09-00035-8-AP (Bankr. E.D.N.C. Dec. 3, 2009), the court held that “a
worthless check may form the basis of a nondischargeable debt if, at the time the check was issued,
the debtor orally represented that funds were available to honor the check, knowing this to be false.”
See also Designed Flooring Distribs., Inc. v. Wagenti (In re Wagenti), 110 B.R. 602, 604 (Bankr.
S.D. Fla. 1990) (finding that a debtor who knowingly issues a worthless check in conjunction with
oral representations that the check will be honored is guilty of making a false statement under
§ 523(a)(2)(A)); Tusco Grocers Inc. v. Coatney (In re Coatney), 185 B.R. 546, 550 (Bankr. N.D.
Ohio 1995) (“Any positive statement regarding the nature of the Defendant-Debtors’ bank balance
or their intent to pay the debt could only be actionable pursuant to § 523(a)(2)(A) if the statements
were made at the same time that the checks at issue were cut and transferred.”).
LeGrande maintains that the amended complaint supports its claim under § 523(a)(2)(A) in
that it identifies instances where the debtor coupled the delivery of a check which did not clear with
oral representations that the checks would be honored by the bank. 	Under Cooper, LeGrande
argues, oral statements or representations of “pending” funds, accompanied by NSF checks, may
be the basis for a finding of nondischargeability. Mr. Peel contends that any representations made
by him, or on his behalf, related only to his financial condition and therefore, because they were not
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in writing, cannot form the basis for nondischargeability. He additionally states that any checks
tendered to LeGrande after delivery of the wine do not support a finding of nondischargeability, thus
removing any replacement checks from the analysis. Finally, Peel contends that there has been
insufficient pleading of any intent to deceive.
The amended complaint must, under Iqbal, plead sufficient factual content to allow the court
to “draw the reasonable inference that the defendant is liable for the misconduct alleged,” i.e., that
each of the essential elements of the claim is present. Iqbal, 129 S. Ct. at 1949. The representation
at issue with regard to the April Transaction is set forth in paragraph 17 of the amended complaint:
17. 	At the time of the exchange on April 23, 2008 [sic], Defendant represented
to the [sic] Mr. Marvin that a series of checks was necessary because he was
making daily deposits and while $93,720.48 may not be available for a single
payment, funds would be available to make the smaller payments and the
outstanding balance would be paid. 	Defendant made such assertions
knowing the same to be false or with reckless disregard as to their truth.
The amended complaint sets forth no other alleged representation made at the time the series
of checks was issued for the April Transaction and, therefore, the court must evaluate whether
paragraph 17 adequately pleads the first two essential elements of fraud under the Twombly/Iqbal
standard, i.e., does paragraph 17 contain sufficient facts to allow the court to draw a reasonable
inference that the defendant made a false representation knowing that it was false. 	Paragraph 17
contains no allegation that Mr. Peel ever represented that the nine checks delivered at the time of
the sale were backed by sufficient funds in the bank at that time. 	To the contrary, plaintiff’s
amended complaint states that Mr. Peel acknowledged that the amount due was not presently
available. He requested that LeGrande deposit the checks in installments, and wrote the checks in
incremental amounts for that purpose. In fact, two of the checks tendered cleared the bank. The
inquiry must then be whether the representation that “funds would be available to make the smaller
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payments and the outstanding balance would be paid” is sufficient to support a § 523(a)(2)(A) claim.
In In re Cooper, this court found, after a trial on the merits, that the issuance of a bad check
coupled with the representation that “funds were pending that would be available in a short time or
in two or three days,” where the debtor asked the creditor to “wait for the funds to clear before
depositing the checks” supported a finding of nondischargeability under § 523(a)(2)(A). 	The
evidence in that case showed that there was, in fact, no pending transaction. The facts alleged by
the plaintiff here are distinguishable. The plaintiff does not allege the debtor represented that any
specific transaction which was “pending” would fund one or more of the checks issued and that
plaintiff merely had to wait for those specific funds to clear. 	Instead, the debtor allegedly
represented that the checks would clear in the regular operation of its business over time. In fact,
one of the checks did so clear. During the two previous years of business with one another, the
debtor had paid for wine shipments using a series of checks and, on many occasions, delivered
checks which were returned for insufficient funds. 	On those previous occasions, the checks
ultimately were paid either through redeposit or replacement. In light of that past experience, there
is no reasonable inference that the representation alleged regarding the April Transaction was
knowingly false.
Although failure to adequately plead any one of essential elements is fatal to plaintiff’s cause
of action, the court finds that the amended complaint fails as to the third and fourth essential
elements, as well. The facts alleged in the amended complaint do not support a reasonable inference
as to either intent to deceive or justifiable reliance. It is significant that bounced checks between
these parties was a common practice in their business dealings. 	The transactions on which the
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amended complaint are based appear to be representative of these parties’ business practices, which
frequently involved LeGrande providing wine, accepting late payment, and often contending with
bounced checks because Mr. Peel could not cover checks as they came due. The only difference
between the ordinary business dealings of the parties in the past and the April Transaction is that,
this time, 	Mr. Peel could not ultimately make good on the checks that were written. 	That
conclusion to their business dealings was to LeGrande’s detriment and to the detriment of many
other creditors as well, but that does not in and of itself indicate an intent to deceive and defraud
LeGrande. It is significant that over a year passed between the April Transaction and the filing of
the petition. Based on past experience, a reasonable inference would be that the debtor intended
time to resolve the issue not that he intended never to pay for the wine. As to justifiable reliance:
reliance upon the collection of any one check tendered by the debtor to the plaintiff would appear
to be misplaced and, more importantly, unexpected. 	No reasonable inference can, therefore, be
made from the facts alleged by the plaintiff that the debtor intended to deceive the plaintiff1 or that
the plaintiff could have reasonably relied upon any statement regarding the collectibility of the
checks tendered on April 23, 2008.
Turning now to the claim arising out of the May Transaction, the court notes that the
amended complaint indicates that at the time the second delivery of wine was made, all but two of
the checks tendered by the debtor for the first wine delivery had been returned for insufficient funds,
and several replacement checks had been similarly returned. LeGrande was clearly and indisputably
on notice of the precarious financial condition of the debtor and its reliance upon any representations
1 The court recognizes that intent may be pled generally pursuant to Fed. R. Civ. P. 9(b), but
determines that 	the amended complaint fails as to this essential element even under the less
stringent pleading standard.
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of the debtor to the contrary, and as to any specific check, cannot be justifiable. 	Any pleading
asserting such reliance is not plausible.
Although neither party has argued the effect of the payment agreement on LeGrande’s claim
of nondischargeability, it does provide an additional basis for dismissal of the amended complaint.
After it became apparent that the checks tendered for the April and May Transactions, as well as
several replacement checks, would not clear the bank, the parties reached a new agreement
concerning the debt. The payment agreement entered into on August 13, 2008, provided that the
debtor would deliver cashier's checks to LeGrande on a weekly basis, in an amount not less than
$10,000.00, until the entire balance of the debt was paid. The novation of the parties replaces the
original agreement and attendant representations, and therefore, LeGrande cannot now rely upon any
of the terms of its original arrangement to support its quest for a finding of nondischargeability of
its debt. See Medical Staffing Network, Inc. v. Ridgway, 194 N.C. App. 649, 653 (N.C. Ct. App.
2009) (holding that the substitution of a new contract constitutes a novation)
Section 523(a)(2)(A) provides that “extensions” of credit obtained by fraud may also form
the basis for a claim of nondischargeability. Paragraph 34 of the amended complaint asserts that
LeGrande agreed not to immediately file suit on the indebtedness and to extend the credit in
exchange for executing the payment agreement. 	The payment agreement qualifies as an extension
of credit as that term is defined in this circuit. See Foley & Lardner v. Biondo (In re Biondo), 180
F.3d 126 (4th Cir. 1999) (defining “extension” as an indulgence by a creditor giving his debtor
further time to pay an existing debt). Paragraphs 34-37 of the amended complaint, which contain
all allegations regarding the alleged fraud surrounding the August 13, 2008 contract, fail to allege
justifiable reliance upon any representations made at the time the parties entered into the payment
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agreement. Even if the amended complaint had contained such a representation, the past experience
of LeGrande with the debtor would make such reliance not only unjustified, but implausible.
The court finds that the plaintiff has failed to plead sufficient factual content for the court
to draw the reasonable inference that the debt represented by either the April or May Transaction
is nondischargeable under § 523(a)(2), as required by Iqbal. Additionally, the novation entered into
by the parties supercedes any of the terms of, or representations made ancillary to, the original
contract of the parties, and reliance upon any representations made in conjunction with the payment
agreement cannot have been justified. Based on the foregoing, the motion to dismiss the amended
complaint is GRANTED.
SO ORDERED.
END OF DOCUMENT
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