Stello et al v. White

UNITED STATES BANKRUPTCY COURT
FOR THE DISTRICT OF COLUMBIA
In re
KAY ELIZABETH AIKIN,
Debtor.
____________________________
CHESTER STELLO AND URSULA
STELLO,
Plaintiffs,
v.
KAY ELIZABETH AIKIN,
Defendant.
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Case No. 07-00121
(Chapter 7)
Adversary Proceeding No.
07-10017
Not for Publication in
West’s Bankruptcy Reporter
MEMORANDUM DECISION RE MOTION TO DISMISS
The plaintiffs commenced the above-captioned adversary
proceeding by the filing of a two-count non-dischargeability
complaint seeking a determination that a pre-petition judgment
entered in their favor against the defendant, Kay Elizabeth
Aikin, is nondischargeable pursuant to 11 U.S.C. § 523(a)(2)(A)
and § 523(a)(4). 	The defendant, Kay Elizabeth Aikin, has filed a
motion to dismiss for failure to state a claim upon which relief
The decision below is signed as a decision of
the court.
Signed: November 05, 2007.
_____________________________
S. Martin Teel, Jr.
United States Bankruptcy Judge
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can be granted (Docket Entry (“DE”) No. 8, filed June 29, 2007).
For reasons explained in more detail below, the court will grant
the motion with leave to file an amended complaint.
I
A. 	The plaintiffs’ § 523(a)(2)(A) claim fails to allege the
necessary elements of fraud and fails to comply with the
heightened pleading standards of Rule 9(b).
The plaintiffs have alleged that the judgment against the
debtor-defendant and in favor of the plaintiffs is
nondischargeable pursuant to 11 U.S.C. § 523(a)(2)(A), which
provides that a chapter 7 discharge:
(a) . . . does not discharge an individual debtor from 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 . . . .
To state an actionable claim for fraud under § 523(a)(2)(A), the
plaintiffs must allege, inter alia, “that the debt was incurred
as a proximate result of the claimant’s reasonable reliance on a
material misrepresentation of fact knowingly made by the debtor
with intent to deceive.” 	McCallion v. Lane (In re Lane), 937
F.2d 694, 698 (1st Cir. 1991).
The plaintiffs’ complaint alleges, in pertinent part, that
the defendant is an officer, director, and stockholder of Capital
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1 	Several of the complaint’s allegations refer simply to
the plaintiff without specifying which of the two plaintiffs is
intended, while others refer collectively to the plaintiffs. 	In
many instances it is impossible to reconcile the use of the
singular in one allegation with the use of the plural in another,
and the court suspects that the confusion is the result of a
drafting error. 	For ease of discussion, the court may refer to
certain allegations as applying equally to both plaintiffs, while
recognizing that the complaint is often unclear on this point.
2 	The complaint does not expressly allege that Capital
Custom Homes failed to timely complete the construction, but this
is reasonably inferred.
3
Custom Homes, Inc., a Maryland corporation that agreed to
construct a home for the plaintiffs in 180 days for the price of
$545,107.00. 	For every day beyond the 180 days that the house
was not completed, Capital Custom Homes agreed to pay the
plaintiffs $75.00 per day. 1 	Presumably because Capital Custom
Homes failed timely to complete construction of the house, 2 the
plaintiffs were forced to seek alternative housing and mitigated
their damages by obtaining the services of another contractor to
complete construction of their home at a significant additional
cost. 	The plaintiffs filed a lawsuit against the defendant in
the Circuit Court for Howard County, Maryland, and on February
15, 2007, that court entered judgment in favor of the plaintiffs
against the defendant in the amount of $351,238.44. 	Despite
promising in a letter to resolve the plaintiffs’ concerns, the
defendant did not work on the plaintiffs’ home nor has she paid
the plaintiffs what they are owed. 	The complaint then alleges as
follows:
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13. The Defendant knowingly made false statements to
the Plaintiffs regarding completing construction and
paying subcontractors for work which was completed
although construction was not completed and
subcontractors were not paid.
14. The Defendant acted to induce the Plaintiffs to
enter into the construction agreement for valuable
consideration, and in the absence of the said false
pretense, false representations, and/or actual fraud by
the Defendant, Plaintiffs would not have entered into
the construction agreement and incurred the losses
attributable to the Defendant.
15. The Defendant’s conduct violates 11 USC § 523(a)(2)
and, therefore, the Debtor’s indebtedness to the
Plaintiffs constitutes a nondischargeable debt.
As a preliminary matter, the plaintiffs have failed to
allege that the defendant intended to deceive the plaintiffs by
her false representations or conduct. 	Intent being a necessary
element of a § 523(a)(2)(A) claim, the plaintiffs’ § 523(a)(2)(A)
claim must be dismissed.
The court further determines that the plaintiffs’ §
523(a)(2)(A) claim fails to comply with Fed. R. Civ. Pro. 9(b),
made applicable to this adversary proceeding through Fed. R.
Bankr. P. 7009, which requires that fraud be alleged with
particularity. 	Rule 9(b)’s heightened pleading standard is
applicable to claims brought under § 523(a)(2)(A), and applies to
Count I of the complaint. 	See In re Colodner, 147 B.R. 90, 95
(Bankr. S.D.N.Y. 1992).
The purpose of Rule 9(b)’s heightened pleading standard “is
to ensure that the party accused of fraud, a matter implying some
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degree of moral turpitude and often involving a ‘wide variety of
potential conduct,’ is given adequate notice of the specific
activity that the plaintiff claims constituted the fraud so that
the accused party may file an effective responsive pleading.”
Johnson v. Long Beach Mortgage Loan Trust 2001-4, 451 F. Supp. 2d
16, 34-35 (D.D.C. 2006), quoting Lachmund v. ADM Investor Servs.,
Inc., 191 F.3d 777, 783 (7th Cir. 1999). 	Allegations of
fraudulent misrepresentations “ought to specify the time, place,
speaker, and content of the alleged misrepresentations.”
DiVittorio v. Equidyne Extractive Industries, Inc., 822 F.2d
1242, 1247 (2d Cir. 1987) (cited in In re Colodner, 147 B.R. 90,
95 (Bankr. S.D.N.Y. 1992)). 	The allegations by which the
plaintiffs here seek to state a claim for fraud are too vague,
confusing and conclusory to satisfy this standard.
The plaintiffs allege that the defendant knowingly made
false statements regarding completion of construction and payment
of subcontractors, yet the plaintiffs have failed to indicate
when and where these statements were made, have failed to
indicate what specifically was false about the statements, and
have failed to provide any additional information that would
allow the defendant to identify the specific statement or
statements upon which the plaintiffs now seek to predicate their
claim of fraud. 	Likewise, the plaintiffs allege that the
defendant “acted to induce” the plaintiffs to enter into the
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construction agreement, but fail to provide any specifics that
would put the defendant on notice as to what, precisely, the
defendant is alleged to have done to induce the plaintiffs to
enter into the construction agreement, and what about that
conduct was fraudulent in nature. 	This is a conclusory
allegation that is insufficient to support a claim of fraud.
Alleging a promise of future performance that is subsequently not
performed, without identifying any fraud, is insufficient to
establish a § 523(a)(2) claim. 	See Bohannon v. Horton (In re
Horton), 372 B.R. 349, 357 (Bankr. W.D. Ky. 2007).
B. 	The plaintiffs’ § 523(a)(2)(A) claim alleges a benefit
obtained by the defendant sufficient to survive a Rule
12(b)(6) motion to dismiss, but the claim should
nevertheless be amended for purposes of clarity and to be
consistent with the plaintiffs’ theory of liability.
The purpose of a Rule 12(b)(6) motion 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, – U.S.
—, 127 S. Ct. 1955, 1974 (2007), and “the court need not accept
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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). 	In deciding a 12(b)(6) 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.
A non-dischargeability complaint brought under 11 U.S.C. §
523(a)(2)(A) must allege not only fraud, but also that the
defendant obtained a benefit as a result of that alleged fraud.
In re Rountree, 478 F.3d 215, 222 (4th Cir. 2007) (discussing the
Supreme Court’s holding in Cohen v. De La Cruz, 523 U.S. 213
(1998), and explaining why it should not be read as abrogating
the Code’s express requirement that the debtor have actually
obtained something from his fraud in order for a creditor’s claim
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3 	The court is mindful that some courts permit a creditor
to establish the non-dischargeability of a claim under §
523(a)(2)(A) without showing that the debtor actually obtained a
benefit through his fraud, finding it sufficient if the creditor
establishes that the judgment it obtained against the debtor and
which it seeks to have declared nondischargeable was for fraud.
See Muegler v. Bening, 413 F.3d 980, 984 (9th Cir. 2005)(relying
on the Supreme Court’s holding in Cohen, 523 U.S. 213 (1998)).
The plaintiffs have not alleged that the judgment they obtained
against the defendant was for fraud, and they have alleged a
benefit to the defendant, thereby obviating the need for this
court to address this apparent split in authority.
8
to be found nondischargeable under § 523(a)(2)(A)). 3 	The
defendant urges that the plaintiffs’ § 523(a)(2)(A) claim must be
dismissed for failure to state a claim because the plaintiffs
fail to allege that the defendant obtained any money, property,
services or credit as a result of the alleged fraud or
misrepresentations, and instead merely allege that the plaintiffs
suffered damages as a result of Capital Custom Homes’ breach of
contract. 	Although the court finds that the plaintiffs have
adequately alleged a benefit obtained by the defendant such that
the § 523(a)(2)(A) claim shall not be dismissed on that basis,
the court will nonetheless address the defendant’s argument as it
is not entirely without merit and it raises legitimate concerns
regarding the adequacy of the plaintiffs’ complaint.
The plaintiffs have failed to expressly allege that they
made any payments to Capital Custom Homes or to the defendant,
but the court must address whether the allegations can
nevertheless be construed as alleging a benefit obtained by the
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defendant.
A benefit obtained by a corporation may, in some instances,
be considered a benefit to an officer, director or shareholder of
that corporation for purposes of § 523(a)(2)(A). 	See In re
Ashley, 903 F.2d 599 (9th Cir. 1990) (business relationship
between the debtor and the corporation that profited directly
from the fraud can satisfy the requirement that the debtor obtain
something for purposes of § 523(a)(2)(A)); In re Pontier, 165
B.R. 797, 799 (Bankr. D. Md. 1994) (for purposes of §
523(a)(2)(A), a corporate officer “may be personally liable for
his or her own fraudulent conduct committed on behalf of the
corporation which causes injury to another” even if he was not
the direct recipient of the money that gave rise to the claim
sought to be declared nondischargeable); In re Colodner, 147 B.R.
90. 95 (Bankr. S.D.N.Y 1992) (debt incurred by corporation of
which the debtor was 100 percent shareholder qualifies as money
obtained by the debtor for purposes of § 523(a)(2)(A)). 	Thus, to
the extent the allegations sufficiently allege a benefit obtained
by Capital Custom Homes, for purposes of a 12(b)(6) motion, they
can be fairly read as alleging a benefit obtained by the
defendant.
The plaintiffs allege that they incurred additional expense
finding alternative housing and hiring a substitute contractor to
complete the unfinished construction. 	This fails to allege a
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benefit to the defendant for purposes of § 523(a)(2)(A).
Construing the allegations of the complaint in the light most
favorable to the non-moving party, the court can reasonably read
the complaint as alleging that the plaintiffs’ alleged need to
obtain a new contractor and substitute housing at significant
additional cost was the result of Capital Custom Homes’ failure
to timely perform under the contract. 	Payment to a third party
for services that another party was obligated, but failed, to
provide, may in some instances constitute an indirect benefit
obtained by that originally obligated party for purposes of §
523(a)(2)(A). 	See In re Taylor, 195 B.R. 624, 627 (Bankr. M.D.
Pa. 1996). 	However, in such cases there is some connection
between the debtor and the third party from which it can be
inferred that the debtor intended to cause a benefit to flow to
the third party (as where the debtor acts on behalf of his own
corporation to cause benefits to flow to that corporation). 	The
instant complaint cannot be read as alleging that the debtor
acted with the intent of causing benefits to flow to a third
party. 	The new contractor and the provider of alternative
housing appear to be wholly unrelated to the debtor and to
Capital Custom Homes. 	Accordingly, the liability incurred by the
plaintiffs in seeking alternative housing and in hiring a new
contractor cannot be reasonably construed as an indirect benefit
obtained by the debtor through Capital Custom Homes, even though
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that corporation’s failure to meet its obligations necessitated
the additional expense.
However, the plaintiffs do allege a benefit obtained by the
defendant by alleging that the contract, that would not have been
entered into but for the defendant’s fraud, was entered into for
“valuable consideration.” 	Although the benefit in the form of
“valuable consideration” runs in the first instance to Capital
Custom Homes, the entity that is alleged to have entered into the
contract with the plaintiffs, for the reasons explained above,
that benefit can also be construed as a benefit obtained by the
defendant as an officer, director and shareholder of Capital
Custom Homes. 	For these reasons, the court will not dismiss the
claim based upon a failure to allege a benefit to the defendant
resulting from her alleged fraud.
Furthermore, although the court has already explained that
the plaintiffs’ failure to plead fraud with particularity is
fatal to their claim, for purposes of evaluating whether a link
of proximate causation has been adequately alleged between any
fraud and the benefits allegedly obtained by the defendant, the
court finds, in disposing of this motion, that the plaintiffs’
allegation that the contract itself would not have been entered
into but for the defendant’s alleged fraud (once fraud is
adequately pled) might satisfy the causation requirement of a
claim asserted under § 523(a)(2)(A) as to damages proximately
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4 	However, if any damages suffered by the plaintiffs were
not a reasonably foreseeable consequence of the false
representations, the debt owed by the debtor could not be said to
be a debt for property obtained by fraud. 	Compare Parker v.
Grant (In re Grant), 237 B.R. 97, 119 (Bankr. E.D. Va. 1999)
(false representation that debtor was married, relied upon by
landlord in entering into lease with debtor, could not reasonably
have been expected to result in the debt for nonpayment of rent)
with McCain v. Fuselier (In re Fuselier), 211 B.R. 540 (Bankr.
W.D. La. 1997) (false representations that the debtor-contractor
was a licensed contractor, and that payments made by the
homeowners to him would be used for the costs of construction);
McDaniel v. Border (In re McDaniel), 181 B.R. 883 (Bankr. S.D.
Tex. 1994); Peterson v. Bozzano (In re Bozzano), 173 B.R. 990
(Bankr. M.D.N.C. 1994); Bottari v. Baiata (In re Baiata), 12 B.R.
813, 820 (Bankr. E.D.N.Y. 1981).
12
caused by the fraud of procuring the contract. 	See In re Creta,
271 B.R. 214, 220 (1st Cir. BAP 2002) (debtor obtained a contract
by false representations that were of importance to the
plaintiff's entering into the contract and of essence to the
performance of the contract, and his debt for damages arising
from procuring that contract were nondischargeable); Lee-Benner
v. Gergely (In re Gergely), 110 F.3d 1448, 1453 (9th Cir. 1997);
Kendrick v. Pleasants (In re Pleasants), 231 B.R. 893 (Bankr.
E.D. Va. 1999) (debtor misrepresented that he was an architect);
Kadlecek v. Ferguson (In re Ferguson), 222 B.R. 576, 585-86
(Bankr. N.D. Ill. 1998). 4
Notwithstanding that the complaint has alleged a benefit
that can be construed as having been obtained by the defendant,
the plaintiffs’ amended opposition to the motion to dismiss
suggests that, at trial, the plaintiffs would seek to
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demonstrate, inter alia, that the defendant obtained a benefit in
the form of monetary disbursements made by the plaintiffs
directly to the defendant, and that the debt should be declared
nondischargeable in part because the defendant’s alleged fraud
caused the plaintiffs to continue to make such payments to the
defendant. 	This is at odds with the indirect benefit alleged to
have been obtained by the defendant in the complaint, and the
plaintiffs are cautioned that their amended complaint should be
consistent with the theories of liability they intend to advance
at trial.
The complaint is generally confusing, vague and replete with
factual gaps, and although the plaintiffs’ amended opposition to
the motion to dismiss attempts to supply missing context and
content to the allegations of the complaint, the court is not
permitted to consider that filing for purposes of disposing of
this motion. 	For all of these reasons, the court will dismiss
the plaintiffs’ § 523(a)(2)(A) count with leave to amend in order
to address the deficiencies identified above.
II
In the second count of the complaint, the plaintiffs allege
that their claim is nondischargeable as a debt “for fraud or
defalcation while acting in a fiduciary capacity, embezzlement,
or larceny” under 11 U.S.C. § 523(a)(4). 	Incorporating the
previous paragraphs of the complaint by reference, this count
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adds only two new allegations, both of which are conclusory in
nature and inadequate to support the plaintiffs’ § 523(a)(4)
claim.
First, the plaintiffs have failed to allege the defendant’s
intent to deceive the plaintiffs or conduct amounting to
defalcation or larceny, and thus have not pled a necessary
element of a claim under § 523(a)(4). 	See In re Davis, 2007 WL
2815990 at *2 (Bankr. D. Mass., Sept. 27, 2007). 	Accordingly,
the plaintiffs’ § 523(a)(4) claim must be dismissed. 	Likewise,
the plaintiffs have failed to satisfy Rule 9(b)’s heightened
pleading standard, which is applicable to claims brought under §
523(a)(4) and is applicable to Count II of the complaint to the
extent it alleges fraud. 	See In re Halverson, 330 B.R. 291, 301
(Bankr. M.D. Fla. 2005). 	Relying on its earlier analysis of Rule
9(b)’s heightened pleading requirements, and given that Count II
adds no further factual allegations to support a claim for fraud,
the court must dismiss the plaintiffs’ § 523(a)(4) claim for
failure to allege fraud with particularity as required under Rule
9(b).
Alternatively, because the plaintiffs’ § 523(a)(4) claim
offers little more than a recitation of the statutory language of
11 U.S.C. § 523(a)(4), and fails to supply any factual
allegations to support the assertion that the defendant was
serving in a fiduciary capacity, Count II of the complaint must
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5 	Until recently, courts were bound by the standard for
12(b)(6) dismissal articulated by the Supreme Court in Conley v.
Gibson, 355 U.S. 41, 45-46 (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.” 	In Bell Atlantic, 127 S. Ct. 1955 (2007), however, the
Supreme Court adopted a new standard for testing the sufficiency
of a complaint, holding that a court may dismiss a complaint
under Rule 12(b)(6) if the plaintiff’s factual allegations are
not sufficient “to state a claim to relief that is plausible on
its face.” 	Id. at 1960. 	By failing to allege any facts that
could be read as even implying the existence of a fiduciary duty
running from the defendant to the plaintiffs, the plaintiffs have
failed to state a claim to relief under § 523(a)(4) that is
plausible on its face.
6 	The plaintiffs are cautioned that, to the extent they
ultimately intend to rely upon the Maryland Construction Trust
statute in prosecuting their § 523(a)(4) claim, there is a
division of authority as to whether that statute creates a
fiduciary relationship between a debtor and creditor within the
meaning of 11 U.S.C. § 523(a)(4). 	Lawrence Steel Erection Co. v.
Piercy (In re Piercy), 140 B.R. 108, 114 (Bankr. D. Md. 1992).
15
be dismissed for failure to state a claim that is plausible on
its face. 5 	Bell Atlantic, 127 S. Ct. 1955 (2007). 	In their
amended opposition to the defendant’s motion to dismiss, the
plaintiffs attempt to explain that their § 523(a)(4) claim is
based upon a fiduciary relationship that they contend arose under
the Maryland Construction Trust statute by virtue of the
defendant’s role as general contractor and her obligation to pay
subcontractors. 6 	The complaint itself, however, makes only one
reference to subcontractors as follows:
13. 	The Defendant knowingly made false
statements to the Plaintiffs regarding completing
construction and paying subcontractors for work which
was completed although construction was not completed
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and subcontractors were not paid.
Nowhere does the complaint state that the defendant as opposed to
Capital Custom Homes, Inc. (or any other entity) served as a
general contractor, and nowhere does the complaint purport to
establish a link between any alleged harm suffered by the
plaintiffs and any conduct of the defendant vis-à-vis
subcontractors. 	Although the plaintiffs’ amended opposition
attempts to clarify this point, the court is not permitted to
rely on counsel’s argument and explanations, but must instead
rely solely upon the allegations found within the four corners of
the complaint. 	There being no allegations in the complaint from
which the court can reasonably infer that the defendant was at
any time acting in a fiduciary capacity, the plaintiffs’ §
523(a)(4) claim must be dismissed.
III
When “dismissing for failure to state a claim under Rule
12(b)(6), a district court should grant leave to amend even if no
request to amend the pleadings was made, unless it determines
that the pleading could not possibly be cured by the allegation
of other facts.” 	Lopez v. Smith, 203 F.3d 1122, 1127 (9th Cir.
2000) (internal quotations and citations omitted), cited to in
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7 	Even after Bell Atlantic, 127 S. Ct. 1955 (2007), courts
continue to embrace this liberal standard when deciding whether
to grant leave to amend. 	See Mitan v. Feeney, 497 F. Supp. 2d
1113, 1127 (C.D. Cal. 2007) (applying the standard for 12(b)(6)
dismissal articulated in Bell Atlantic and granting leave to
amend based upon a determination that it was at least possible
that the plaintiff could amend his complaint to state a claim).
17	O:\Laura\OPINIONS\Stello v White\Decision re Motion to Dismiss - Stello v White v2.wpd
Mitan v. Feeney, 497 F. Supp. 2d 1113, 1127 (C.D. Cal. 2007). 7
The plaintiffs’ amended opposition to the motion to dismiss
suggests the possibility that the plaintiffs can cure the
deficiencies of the complaint by alleging additional facts.
Allowing leave to amend is further warranted given that leave to
amend is almost always allowed to cure deficiencies in pleading
fraud. 	See Shekoyan v. Sibley Intern., 409 F.3d 414, 418 (D.C.
Cir. 2005). 	Accordingly, and as previously indicated, the court
will permit the plaintiffs to file an amended complaint.
IV
For all of these reasons, the court will dismiss Count I and
Count II of the complaint, with leave to amend. 	An order
follows.
[Signed and dated above.]
Copies to:
All counsel and parties of record; Office of United States
Trustee.
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