Albert v. Pacific Showrooms West, Inc et al

UNITED STATES BANKRUPTCY COURT
FOR THE DISTRICT OF COLUMBIA
In re
SPECTRUM, LTD,
Debtors.
____________________________
MARC E. ALBERT, TRUSTEE,
Plaintiff,
v.
PACIFIC SHOWROOMS WEST,
INC., et al.,
Defendants.
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Case No. 02-02463
(Chapter 7)
Adversary Proceeding No.
07-10006
Not for Publication in
West’s Bankruptcy Reporter
MEMORANDUM DECISION RE DEFENDANTS’ MOTION TO DISMISS
Marc E. Albert, the chapter 7 trustee of the Spectrum, LTD
bankruptcy case, commenced the instant adversary proceeding by
the filing of a three-count complaint alleging, inter alia, that
the defendants, Pacific Showrooms West, Inc., Les Bader and Dale
Mardiros, knowingly and fraudulently concealed and converted
assets of the estate for their own profit, use and enjoyment.
Count I of the complaint seeks a turnover and accounting of
The decision below is signed as a decision of
the court.
Signed: August 09, 2007.
_____________________________
S. Martin Teel, Jr.
United States Bankruptcy Judge
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estate assets, count II is a claim for conversion, and count III
is a claim for common-law fraud.
After filing an answer, the defendants filed what is styled
as a Rule 12(b) motion to dismiss, contending that Albert’s
conversion and fraud claims must, as a matter of law, be
dismissed because they are barred by the statute of limitations
and the doctrine of laches. 	The defendants further contend that
Albert’s fraud count must be dismissed because the complaint
fails to state a claim for fraud. 	Finally, Bader and Mardiros
contend that all counts against them must be dismissed because
Albert failed to state any claims against them in their
individual capacities. 	As discussed below, the court will
dismiss the trustee’s fraud claim because it fails to state a
claim. 	The court will deny the balance of the motion.
I
The defendants have filed a motion to dismiss pursuant to
Fed. R. Civ. P. 12(b). 	As observed by the trustee in his
response, however, the defendants answered the complaint before
filing their motion to dismiss and 12(b) motions are only
permitted before an answer is filed. 	Fed. R. Civ. P. 12(b)(“A
motion making any of these defenses shall be made before pleading
if a further pleading is permitted.”). 	Rather than dismiss the
motion based upon this defect, however, the court will treat the
motion as a Rule 12(c) motion for judgment on the pleadings,
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which may be filed any time “[a]fter the pleadings are closed but
within such time as not to delay the trial. . . .” 	Fed. R. Civ.
P. 12(c); United Parcel Serv., Inc., v. Int’l Bhd. of Teamsters,
AFL-CIO, 859 F. Supp. 590, 592 n.1 (D.D.C. 1994)(although
captioned as a motion to dismiss, defendant’s motion is actually
a motion for judgment on the pleadings because the defendant
filed an answer prior to filing its motion). 	No prejudice will
arise from the court treating the motion as a 12(c) motion rather
than a 12(b) motion as both motions are subject to the same
standard of review. 	See Jung v. Ass’n of Am. Med. Colleges, 339
F. Supp. 2d 26, 35-36 (D.D.C. 2004) (no prejudice results from
treating Rule 12(c) motion as a Rule 12(b) motion because the
standard of review is essentially the same).
II
The court will deny the defendants’ motion to the extent it
seeks dismissal of the conversion and fraud claims based upon the
statute of limitations or the doctrine of laches.
A.
Statute of Limitations
Under District of Columbia law, fraud claims must be brought
within three years from the time the fraud is either discovered
or reasonably should have been discovered. 	Riddell v. Riddell
Wash. Corp., 866 F.2d 1480, 1489-90 (D.C. Cir. 1989); Interdonato
v. Interdonato, 521 A.2d 1124, 1135 (D.C. 1987); Rothenberg v.
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1 	The defendants cite to Kuwait Airways Corp. v. Am. Sec.
Bank, 890 F.2d 456 (D.C. Cir. 1990) for the proposition that the
discovery rule does not apply to claims of conversion set in
commercial circumstances. 	Although the Kuwait Airways court held
the discovery rule inapplicable under the commercial
circumstances presented by that case, it did not hold that the
discovery rule is always unavailable in conversion cases, and it
does not preclude a finding that the discovery rule applies to
Albert’s conversion claim.
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Ralph D. Kaiser Co (In re Rothenberg), 173 B.R. 4, 12 (Bankr.
D.D.C. 1994). 	The court cannot, based merely on the pleadings,
determine when Albert’s fraud claim accrued because “what a
plaintiff knew and when he knew it, in the context of a statute
of limitations defense, are questions of fact for the jury.”
Riddell, 866 F.2d at 1484.
The defendants contend that the discovery rule is
inapplicable to this and all conversion actions set in commercial
circumstances. 1 	The court rejects that argument and concludes
that Albert has alleged facts from which it can be inferred that
the discovery rule should apply. 	Factors relevant to a
determination of whether the discovery rule should apply in a
particular case include: “(1) the justifiable reliance of a
plaintiff on the professional skills of those hired to perform
their work; (2) the latency of the deficiency; (3) the balance
between the plaintiff’s interest in having the protection of the
law and the possible prejudice to the defendant; and (4) the
interest in judicial economy.” 	Kuwait Airways Corp. v. Am. Sec.
Bank, 890 F.2d 456, 462 (D.C. Cir. 1990) (citing Woodruff v.
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McConkey, 524 A.2d 722, 727-28 (D.C. 1987)). 	Albert was faced
with the potentially onerous task of marshaling an unspecified
quantity of estate assets that were believed, but not known, to
be in the possession of various retail distributors throughout
the country. 	The court can fairly infer that, without the
cooperation of those retail distributors, Albert might be unable
to verify the existence of certain estate assets and might
likewise be unable to detect any injury arising from the wrongful
retention and conversion of such assets. 	As such, the injury may
properly be characterized as latent, which would warrant
application of the discovery rule. 	As to the other factors, such
as a balancing between prejudice to the defendants versus the
interests of the plaintiff and judicial economy, it would be pure
speculation at this juncture for the court to decide whether
those factors weigh in favor of applying the discovery rule or
not. 	Thus, although Albert has alleged sufficient facts to
permit the court to infer that the discovery rule may apply, the
court is unable on this limited record to determine whether the
discovery rule should actually apply, and if so, whether the
complaint was timely under the tolled limitations period.
Moreover, even if the discovery rule is found not to apply, it is
unclear exactly when some of the offending acts are alleged to
have occurred, and it may be that the trustee’s complaint is
timely even if the limitations period is not subject to tolling.
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Accordingly, to the extent the defendants seek dismissal based
upon the statute of limitations, the defendants’ motion is
denied.
B.
Laches
The court will deny the defendants’ motion to dismiss based
on laches because it calls for a fact-intensive inquiry into the
relative equities of the parties’ conduct and is therefore not
properly addressed on a 12(c) motion for judgment on the
pleadings.
III
Albert has failed to state a claim for fraud and to the
extent the defendants seek dismissal on that basis, the motion is
granted.
The essential elements of a claim for common law fraud under
District of Columbia law are: “(1) a false representation (2) in
reference to material fact, (3) made with knowledge of its
falsity, (4) with the intent to deceive, and (5) action is taken
on reliance upon the representation.” 	Bennet v. Kiggins, 377
A.2d 57, 59 (D.C. 1977), quoted in Brown v. Dorsey & Whitney,
LLP, 267 F. Supp. 2d 61, 79 (D.D.C. 2003). 	When pleading fraud,
one “must allege such facts as will reveal the existence of all
the requisite elements of fraud. 	Facts which will enable the
court to draw an inference of fraud must be alleged, and
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allegations in the form of conclusions on the part of the pleader
as to the existence of fraud are insufficient.” 	Bennet, 377 A.2d
at 59-60. 	In the instant case, Albert alleges that the
defendants’ intentional failure to respond to the trustee’s
letter of inquiry, coupled with the defendants’ intent that such
non-responsiveness cause the trustee to cease his investigation,
constitutes a representation sufficient to support Albert’s fraud
claim. 	It is well-established, however, that under District of
Columbia law “mere silence does not constitute fraud unless there
is a duty to speak.” 	Kapiloff v. Abington Plaza Corp., 59 A.2d
516, 517 (D.C. 1948); see also Brown, 267 F. Supp. 2d at 79;
Searl v. Earll, 221 F.2d 24, 28 (D.C. Cir. 1954)(concealment of
facts when there was a duty to speak constituted fraud); Pyne v.
Jamaica Nutrition Holdings, Ltd., 497 A.2d 118, 131 (D.C.
1985)(failure to disclose material information may constitute
fraud where there is a duty to disclose); Rothenberg v. Aero
Mayflower Transit Co., 495 F. Supp. 399, 406 (D.D.C. 1980) (“[a]
false representation may be either an affirmative
misrepresentation or a failure to disclose a material fact when a
duty to disclose that fact has arisen”); Justice v. Anderson
County, 955 S.W.2d 613, 616-17 (Tenn. Ct. App. 1997) (discussing
Tennessee law, and finding that in “[a]ll the instances in which
the duty to disclose exists and in which a concealment is
therefore fraudulent, may be reduced to three distinct classes:
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1. 	Where there is a previous definite fiduciary relation between
the parties. 	2. Where it appears one or each of the parties to
the contract expressly reposes a trust and confidence in the
other. 	3. 	Where the contract or transaction is intrinsically
fiduciary and calls for perfect good faith.”) (internal citations
and quotations omitted). 	Albert’s complaint fails to allege the
existence of a special or fiduciary relationship between Albert
and the defendants or other circumstances that would give rise to
a duty to disclose. 	Albert having made no allegations from which
the court can infer that the defendants had a duty to respond,
the defendants’ failure to respond to Albert’s letter does not
constitute a “representation” and cannot serve as a the predicate
for Albert’s fraud claim.
Albert argues that his fraud claim should not be dismissed
because his allegations are not limited to the defendants’
failure to respond to the trustee’s letter, but also include
allegations that the defendants met and agreed to purposely not
write back, to conceal the estate’s property, to sell the
property for their own benefit, and that all of this was done
with the understanding that Albert would not pursue his inquiry
further if he did not receive a response. 	Although such
allegations may support Albert’s theory that the discovery rule
should toll the limitations period, and may likewise support
Albert’s request for punitive damages, they do not provide any
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2 	Several allegations in the complaint address Albert’s
relationship of trust with Peter Ross, the principal of the
debtor, who is alleged to have contributed to the defendants’
decision to conceal estate assets. 	See Compl. ¶¶ 12, 13, 15, 24,
25, 26, 29. 	Ross, as the principal of the debtor, had a
statutory duty to cooperate with Albert and would have had an
affirmative duty to disclose estate assets. 	Ross, however, is
not named as a defendant in this proceeding, and the trustee has
not made any allegations from which the court can infer that the
special relationship existing between Ross and Albert should
extend to the defendants such that they had a duty to respond to
the trustee’s letter.
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basis for the court to infer the existence of a special
relationship between the parties such that the defendants
had a legal duty to respond to the trustee’s letter. 2
The court is mindful that some jurisdictions have
articulated a more liberal standard for establishing fraud by
silence. 	For example, under Michigan law, “the rule generally is
that silence alone is not enough, but in addition there must
exist a violation of some duty to disclose, arising for example,
from a fiduciary relationship, or possibly in rare cases where
special facts and circumstances give rise to an equitable duty of
disclosure such as might, along with other facts, be involved in
a situation where one party has superior knowledge that is not
within the fair and reasonable reach of (or could not in the
exercise of reasonable diligence be obtained by) the other party
to the transaction.” 	Rochester Hills Chrysler Plymouth v.
Phillips (In re Phillips), 153 B.R. 758, 761 (Bankr. E.D. Mich.
1993)(finding no fiduciary relationship and concluding that a
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finding of a duty to disclose under the circumstances would in
effect convert most breaches of contract into fraudulent
actions). 	Even when viewed under this broader standard, which
permits a plaintiff to show an equitable duty to disclose based
upon special facts and circumstances, Albert’s fraud claim must
be dismissed. 	Although Albert’s complaint paints the defendants
in an unflattering light, and contends that their conversion of
estate assets was undertaken deliberately and surreptitiously,
the only “duty” that one might infer from such allegations is
that the defendants had a duty to not secretly retain and convert
estate assets. 	The trustee’s remedy in that regard is to pursue
the defendants for turnover and conversion. 	The allegations in
the trustee’s complaint are simply not enough to permit the court
to infer that the defendants had an affirmative legal or
equitable duty to disclose their possession of estate assets in
response to the trustee’s letter. 	To find otherwise would be
tantamount to holding that all defendants who knowingly and
wrongfully retain and dispose of estate property such that they
are liable to the trustee for conversion are also liable for
fraud.
As a matter of law, the court determines that the trustee’s
unilateral action of sending a letter requesting information from
the defendants was insufficient to trigger an affirmative duty on
the part of the defendants to respond. 	Accordingly, Albert has
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failed to state a claim for fraud and count III of the complaint
must be dismissed.
IV
The court rejects the argument that the complaint fails to
state any cause of action against defendants Bader and Mardiros
in their individual capacities. 	In Count I for conversion and
turnover, for example, Albert alleges:
18. 	Pacific, Bader, and Mardiros . . . were
custodians of property of Spectrum.
19. 	The Defendants possessed knowledge of the
commencement of the case, and knew of the
appointment of the Trustee for Spectrum.
20. 	Notwithstanding the above, the Defendants
administered, disbursed, sold, retained
possession of, and otherwise alienated or
disposed of property belonging to Spectrum in
a manner not authorized by law, and in a
manner which deprived the estate of its
value.
Likewise, as to Count II for Conversion, Albert alleges:
22. 	As in the manner described above, the
Defednants, Bader and Mardiros, acting
individually and on behalf of Pacific,
intentionally concealed property of the
estate from the Trustee with the intent and
with the effect of converting the same for
their own profit, use, and enjoyment.
Although earlier paragraphs of the complaint reflect that certain
actions were undertaken by the individual defendants on behalf of
the defendant Pacific Showrooms West, under the liberal notice
pleading standards of the Federal Rules of Civil Procedure,
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Albert has sufficiently alleged that the defendants acted and are
thus liable both individually and in a representative capacity.
Accordingly, the defendants’ motion to dismiss on this basis is
without merit and will be denied.
An order follows.
[Signed and dated above.]
Copies to:
All counsel of record.
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