In re: DERRICK CLINTON DANIELL, Dba Mesquite Enterprises, Inc., Dba Mesquite Custom Carts, Dba Infinity Transport, Inc., Dba Derrick R ( 2013 )

FILED
NOV 6 2013
1
SUSAN M. SPRAUL, CLERK
2 U.S. BKCY. APP. PANEL
OF THE NINTH CIRCUIT
3 UNITED STATES BANKRUPTCY APPELLATE PANEL
4 OF THE NINTH CIRCUIT
5 In re: ) BAP No. EC-12-1506-PaJuKi
)
6 DERRICK CLINTON DANIELL, dba ) Bk. No. 11-62881
Mesquite Enterprises, Inc., )
7 dba Mesquite Custom Carts, ) Adv. No. 12-1045
dba Infinity Transport, Inc., )
8 dba Derrick Ranches, )
)
9 Debtor. )
______________________________)
10 )
FO-FARMER’S OUTLET, INC., )
11 )
Appellant, )
12 )
v. ) M E M O R A N D U M1
13 )
DERRICK CLINTON DANIELL, )
14 )
Appellee. )
15 ______________________________)
16 Argued and Submitted on October 18, 2013
at Sacramento, California
17
Filed - November 6, 2013
18
Appeal from the United States Bankruptcy Court
19 for the Eastern District of California
20 Honorable W. Richard Lee, Bankruptcy Judge, Presiding
21 Appearances: Effie F. Anastassiou of Anastassiou & Associates
argued for appellant FO-Farmer’s Outlet, Inc.
22 Justin D. Harris of Motschiedler, Michaelides,
Wishon, Brewer & Ryan, LLP argued for appellee
23 Derrick Clinton Daniell.
24
Before: PAPPAS, JURY and KIRSCHER, Bankruptcy Judges.
25
26 1
This disposition is not appropriate for publication.
27 Although it may be cited for whatever persuasive value it may
have (see Fed. R. App. P. 32.1), it has no precedential value.
28 See 9th Cir. BAP Rule 8013-1.
1 Appellant Fo-Farmers Outlet, Inc. (“FFO”) appeals the order
2 of the bankruptcy court dismissing its exception to discharge
3 complaint under Civil Rule 12(b)(6),2 as incorporated in
4 Rule 7012, and refusing to allow FFO to further amend its
5 complaint. We AFFIRM.
6 FACTS
7 FFO is a vegetable merchant wholesale supplier which
8 provides packaging materials for produce. Debtor Derrick Clinton
9 Daniell (“Daniell”)3 is a produce contractor. On August 8, 2008,
10 FFO entered into a credit agreement with Daniell. Although the
11 record is generally silent on the relations between Daniell and
12 FFO until 2010, FFO concedes that Daniell paid for all packaging
13 materials ordered on credit from FFO for the first two years of
14 the credit agreement, although “often” Daniell’s payments were
15 late.
16 On September 28, 2010, Daniell sent a memorandum to FFO
17 outlining Daniell’s anticipated packaging material requirements
18 for October 2010 (“Projection Memorandum”). The parties agree
19 that they communicated regarding Daniell’s produce contracts in
20 Mexico, after FFO received the Projection Memorandum, but before
21
2
22 Unless otherwise indicated, all chapter and section
references are to the Bankruptcy Code, 11 U.S.C. §§ 101-1532 and
23 "Rule" references are to the Federal Rules of Bankruptcy
24 Procedure. The Federal Rules of Civil Procedure are referred to
as “Civil Rules.”
25
3
Daniell did business as, and FFO entered into the credit
26 agreement with, Mesquite Enterprises, Inc., a business owned by
27 Daniell. Unless there is a need to distinguish among them, we
will refer to Daniell’s business enterprises collectively as
28 “Daniell.”
-2-
1 the materials were shipped to him. Between October 10, 2010, and
2 November 16, 2010, FFO shipped a large quantity of packaging
3 materials to Daniell.
4 On December 23, 2010, Daniell visited Mr. Angulo, FFO’s
5 representative, and informed him that Daniell’s Mexican contracts
6 were not meeting projections. Then, in January 2011, Daniell
7 sent several emails to FFO. A January 8, 2011 email reads:
8 Our melon program in Mexico has not worked out as
forecasted. All I can commit to you now is the
9 following: I will get you out at least $2500 each week
or more if I have it. If this will not work out for
10 you I will make arrangements with you to return the
remaining inventory to your yard in Holtville where
11 ever you want me to deliver them.
12 FFO alleges that in April 2011, it learned that Daniell’s
13 representations concerning his alleged contracts in Mexico were
14 false; that any contracts Daniell previously had in Mexico were
15 permanently disrupted or terminated; and that Daniell would not
16 be getting any proceeds from the sale of Mexican crops to pay for
17 the packaging materials. Sometime in April 2011, FFO inspected
18 Daniell’s remaining packaging inventory that had not been shipped
19 to Mexico at the Garayzar Yard in Nogales, Arizona. FFO
20 attempted to recover that inventory but was unsuccessful.
21 FFO filed a state court lawsuit against Daniell on April 21,
22 2011, alleging breach of contract, common counts, and breach of
23 oral guaranty against Daniell. FO-Farmer’s Outlet, Inc. v.
24 Mesquite Enters., Inc., Case no. ECU06380 (Imperial County
25 Superior Court). FFO sought a judgment for $333,990.70, the past
26 due amount on the packaging materials. After the suit was filed,
27 Daniell authorized FFO to pickup some of the remaining inventory
28 of packaging materials, resulting in a credit against the amount
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1 owed of $105,548.17. On June 1, 2011, a default judgment was
2 entered by the state court against Daniell in the amount of
3 $238,341.26.
4 Thereafter, FFO collected $7,728.00 and $14,988.00 through
5 levy before Daniell filed a petition for relief under chapter 7
6 on November 30, 2011. Daniell’s Schedule F listed an undisputed,
7 liquidated, noncontingent claim in favor of FFO for $247,200.00,
8 and the Statement of Financial Affairs listed the state court
9 action and judgment in the amount of $238,000.00. FFO alleges
10 that the current balance due on the state court judgment is
11 $224,650.62.
12 FFO commenced an adversary proceeding against Daniell on
13 March 7, 2012, seeking an exception to discharge of the debt owed
14 to it by Daniell under § 523(a)(2) and (a)(6).4 Daniell filed an
15 answer on March 23, 2012, admitting that he was indebted to FFO,
16 but generally denying the allegations in the complaint.
17 The bankruptcy court conducted a status conference on
18 May 11, 2012. During the conference, the court sua sponte
19 dismissed FFO’s fraud claims under § 523(a)(2), with leave to
20 amend, because they had not been pled with particularity.
21 FFO filed a first Amended Complaint on May 24, 2012 (“FAC”).
22 The first claim of the FAC reasserted and provided additional
23 factual support for FFO’s claim against Daniell for actual fraud
24
4
25 There is very little information in the record concerning
the original and first amended complaints. Since this appeal
26 partly turns on the number of complaints filed, we have exercised
27 our discretion to consult the docket of the adversary proceeding
concerning those documents. O'Rourke v. Seabord Sur. Co.
28 (In re E.R. Fegert, Inc.), 887 F.2d 955, 957-58 (9th Cir. 1988).
-4-
1 under § 523(a)(2)(A). The FAC added a second fraud claim under
2 § 523(a)(2)(B), alleging that Daniell had made misrepresentations
3 to FFO about its finances in written documents (i.e., the emails)
4 on which FFO had relied to its detriment. A third claim was
5 asserted under § 523(a)(6).
6 Daniell filed a motion to dismiss the FAC under Civil
7 Rule 12(b)(6), incorporated by Rule 7012, on June 11, 2012.
8 Daniell argued that neither of the § 523(a)(2) fraud claims had
9 been pled with the requisite particularity, and that the
10 § 523(a)(6) was also pled in conclusory statements.
11 At the hearing on the motion to dismiss on July 11, 2012,
12 the bankruptcy court dismissed with prejudice FFO’s second claim
13 for relief under § 523(a)(2)(B) and dismissed the claims under
14 § 523(a)(2)(A) and (a)(6) with leave to amend. We do not have
15 access to a transcript of that hearing in the record or docket
16 and cannot determine why the bankruptcy court made its decisions.
17 FFO filed a Second Amended Complaint (“SAC”), the complaint
18 which is the focus of this appeal, on August 1, 2012. The SAC
19 appears to offer the same factual allegations and arguments
20 regarding § 523(a)(2)(A) and (a)(6) as in the original complaint
21 and FAC. However, the second claim was now presented as an
22 additional actual fraud claim under § 523(a)(2)(A).
23 On August 14, 2012, Daniell filed another motion to dismiss
24 the SAC under Civil Rules 12(b)(6). Daniell’s argument was that,
25 though FFO had three opportunities to do so, the SAC still failed
26 to allege its fraud claims with particularity as required by
27 Rule 9(b), as incorporated by Rule 7009, and that it failed to
28 adequately allege a claim for conversion, and thus, failed to
-5-
1 state a claim for relief under § 523(a)(6).
2 FFO submitted an opposition to the dismissal motion on
3 August 29, 2012. FFO asserted that it had pled sufficient facts
4 to establish fraud in its first two claims. As to § 523(a)(6),
5 FFO argued that the claim asserted all necessary elements to
6 establish the tort of conversion under California law.
7 The bankruptcy court hearing on Daniell’s motion to dismiss
8 the SAC took place on September 13, 2012. As to the § 523(a)(6)
9 claim, the court ruled that the SAC’s allegations did not
10 establish a conversion because it did not demonstrate that FFO
11 had a right to possession or ownership of the packaging materials
12 it alleged were converted by Daniell.
13 As to the first § 523(a)(2)(A) claim, the court found that
14 the pleadings “strongly suggested” that at the time the alleged
15 misrepresentations were made by Daniell, he did in fact have
16 contracts for the sale of the inventory in Mexico. And as to the
17 second § 523(a)(2)(A) claim, the court found that FFO’s assertion
18 that it was fraudulently induced not to enforce its remedies was
19 not correct, in that FFO did in fact effect repossession of what
20 inventory was still available. As to both fraud claims, the
21 court and counsel for FFO engaged in the following colloquy:
22 THE COURT: See, everything — the problem is, you didn’t
plead this complaint with specificity. It’s a rambling
23 novel of all the things your client’s unhappy about, and —
and you talk about those representations. I can’t tell from
24 this complaint which representations you’re talking about.
25 BEALS (counsel for FFO): All of the representations relating
to the projection memo and, immediately subsequent to that,
26 the confirmation of the contacts in Mexico, and the ability
to pay, that only relates to the first cause of action.
27 Everything else beyond that relates to the second cause of
action, and I’m sorry that I didn’t clearly articulate that.
28
-6-
1 THE COURT: This is the second amended complaint, counsel.
We’ve already talked about these issues when I dismissed the
2 prior two complaints.
3 BEALS: I understand that, Your Honor. But I — because I did
not sufficiently articulate these two things, I — I would
4 like the opportunity to come back and — and try to clear up
some of the issues that you’ve raised, at least as far as
5 the first and second cause of action.
6 THE COURT: Well, I’m going to dismiss the complaint without
leave to amend.
7
8 Hr’g Tr. 9:13—10:22, September 13, 2012.
9 The bankruptcy court entered an order dismissing the SAC
10 with prejudice on September 14, 2012. FFO filed a timely appeal
11 on September 28, 2012.
12 JURISDICTION
13 The bankruptcy court had jurisdiction under 28 U.S.C.
14 §§ 1334 and 157(b)(2)(I). We have jurisdiction under 28 U.S.C.
15 § 158.
16 ISSUES
17 Whether the bankruptcy court erred in dismissing FFO’s
18 complaint seeking exceptions to discharge under § 523(a)(2)(A)
19 and (a)(6) for its claim against Daniell.
20 Whether the bankruptcy court abused its discretion in
21 refusing to allow FFO to file a third amended complaint.
22 STANDARD OF REVIEW
23 The bankruptcy court’s dismissal of an adversary proceeding
24 under Civil Rule 12(b)(6) is reviewed de novo. Barnes v. Belice
25 (In re Belice), 461 B.R. 564, 572 (9th Cir. BAP 2011).
26 We review the bankruptcy court’s decision not to grant leave
27 to amend a complaint for abuse of discretion. Ditto v. McCurdy,
28 510 F.3d 1070, 1079 (9th Cir. 2007).
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1 A bankruptcy court abuses its discretion if it applies an
2 incorrect legal standard, or misapplies the correct legal
3 standard, or if its factual findings are illogical, implausible
4 or without support from evidence in the record.
5 TrafficSchool.com v. Edriver Inc., 653 F.3d 820, 832 (9th Cir.
6 2011) (citing United States v. Hinkson, 585 F.3d 1247, 1262 (9th
7 Cir. 2009)(en banc)).
8 DISCUSSION
9 Under Civil Rule 12(b)(6), made applicable in adversary
10 proceedings via Rule 7012, a bankruptcy court may dismiss a
11 complaint if it fails to “state a claim upon which relief can be
12 granted.” In reviewing a Civil Rule 12(b)(6) motion, the trial
13 court must accept as true all facts alleged in the complaint and
14 draw all reasonable inferences in favor of the plaintiff. Maya
15 v. Centex Corp., 658 F.3d 1060, 1068 (9th Cir. 2011); Newcal
16 Indus., Inc. v. Ikon Office Solutions, 513 F.3d 1038, 1043 n.2
17 (9th Cir. 2008). However, the trial court need not accept as
18 true conclusory allegations in a complaint, or legal
19 characterizations cast in the form of factual allegations. Bell
20 Atl. Corp. v. Twombly, 550 U.S. 544, 555-56 (2007); Warren v. Fox
21 Family Worldwide, Inc., 328 F.3d 1136, 1139 (9th Cir. 2003).
22 To avoid dismissal under Civil Rule 12(b)(6), a plaintiff
23 must aver in the complaint “sufficient factual matter, accepted
24 as true, to ‘state a claim to relief that is plausible on its
25 face.’” Ashcroft v. Iqbal, 556 U.S. 662, 678 (2009) (quoting
26 Twombly, 550 U.S. at 570). It is axiomatic that a claim cannot
27 be plausible when it has no legal basis. A dismissal under Civil
28 Rule 12(b)(6) may be based on either the lack of a cognizable
-8-
1 legal theory, or on the absence of sufficient facts alleged under
2 a cognizable legal theory. Johnson v. Riverside Healthcare Sys.,
3 534 F.3d 1116, 1121 (9th Cir. 2008).
4 I.
The bankruptcy court did not err in dismissing
5 FFO’s claims under § 523(a)(2)(A) and (a)(6).
6 A. The First Claim for Relief.
7 Section 523(a)(2)(A) provides that: “A discharge . . . does
8 not discharge an individual debtor from any debt . . . (2) for
9 money, property, services, or an extension, renewal, or
10 refinancing of credit, to the extent obtained, by — (A) false
11 pretenses, a false representation, or actual fraud[.]” To
12 demonstrate that a debt should be excepted from discharge under
13 § 523(a)(2)(A), a creditor must prove five elements: (1) a
14 misrepresentation, fraudulent omission or deceptive conduct by
15 the debtor; (2) debtor’s knowledge of the falsity or
16 deceptiveness of the statement or conduct at the time it
17 occurred; (3) debtor’s intent to deceive; (4) justifiable
18 reliance by the creditor on the debtor's statement or conduct;
19 and (5) damage to the creditor proximately caused by its reliance
20 on the debtor's statement or conduct. Ghomeshi v. Sabban
21 (In re Sabban), 600 F.3d 1219, 1222 (9th Cir. 2010); Oney v.
22 Weinberg (In re Weinberg), 410 B.R. 19, 35 (9th Cir. BAP 2009).
23 All five elements must be asserted in the creditor’s complaint
24 for an exception to discharge, and the creditor bears the burden
25 of proving each element by a preponderance of the evidence.
26 Grogan v. Garner, 498 U.S. 279, 291 (1991); In re Weinberg,
27 410 B.R. at 35.
28 In FFO’s first claim in the SAC, it asserts that Daniell
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1 made fraudulent representations to FFO in connection with his
2 purchase of the packaging materials and the delivery of those
3 materials to Daniell. The SAC alleges that those fraudulent
4 representations were, generally, that Daniell had contracted with
5 various Mexican farmers to sell him a very large quantity of
6 watermelons and honeydew melons, and that those contracts would
7 continue into 2011. Daniell allegedly made these false
8 representations in the Projections Memorandum, and in his
9 conversations with FFO representatives thereafter.
10 Within the first claim, FFO alleged that “Debtor further
11 represented in the winter of 2010-2011, both orally and in
12 writing, that he had contracted to sell the Mexico Crops through
13 the middle of 2011 from specific regions in Mexico” and that
14 “[i]n reliance on these representations, FFO shipped packaging
15 materials, on credit, between 10/14/10 — 11/19/10. At the time
16 Debtor made these representations, they were false. During this
17 time period, Debtor in fact ceased to have active operations in
18 Mexico and no ability to pay for the packaging materials he
19 ordered.”
20 In reviewing Daniell’s motion to dismiss this claim, the
21 bankruptcy court highlighted a fundamental problem with FFO’s
22 complaint:
23 How do you reconcile [] the reference to “at the time”
and then say “during this time period,” because the
24 time period you’re complaining about took place over
six months. . . . You didn’t plead this complaint with
25 specificity. It’s a rambling novel of all the things
your client’s unhappy about, and — and you talk about
26 those representations. I can’t tell from this
complaint which representations you’re talking about.
27
28 Hr’g Tr. 8:21—9:21.
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1 We understand why the bankruptcy court was perplexed by the
2 inconsistences in the facts alleged by FFO regarding when Daniell
3 made the allegedly false representation on which FFO relied.
4 At paragraph 14 of the SAC, FFO asserts:
5 In April 2011 . . . FFO learned that although Mesquite
and/or Debtor had previously entered into contracts
6 with growers in Mexico, they had not properly accounted
for the sale of the produce to the Mexican growers and
7 had not fully paid the growers for the produce. As a
result, the growers had prematurely terminated their
8 contracts with Debtor, but Debtor failed to disclose
these premature terminations of the contracts to FFO.
9
10 In paragraph 14, FFO concedes that there were contracts in place
11 between Daniell and the Mexican growers at some time. Neither in
12 paragraph 14 nor at any point in the SAC does FFO state with
13 specificity the date(s) when those contracts were “prematurely
14 terminated.”
15 Then, in paragraph 25 of the SAC, FFO recites:
16 On September 28, 2010, when Debtor sent the Projection
Memo, Debtor represented to FFO that he had contracted
17 to sell a very large quantity of watermelons and
honeydews being produced in numerous regions in Mexico,
18 and that these contracts for production of crops would
extend into 2011. As set forth above, Debtor further
19 represented in the winter of 2010-2011, both orally and
in writing, that he had contracted to sell the Mexico
20 Crops through the middle of 2011, from specified
regions in Mexico.5
21
22 And at paragraph 27, FFO concludes its argument on the first
23 claim for relief:
24
5
25 It is not clear in the complaint whether FFO is arguing
that the Projection Memorandum is itself fraudulent. We have
26 examined the Projection Memorandum. It simply states an estimate
27 of needed goods with delivery instructions to an American
address. There is no reference to the purpose of the order or
28 for whom the order is placed.
-11-
1 At the time Debtor made these representations, they
were false. During this time period, Debtor in fact
2 ceased to have active operations in Mexico and no
ability to pay for the packaging materials he
3 ordered. . . . These facts clearly establish that
Debtor ordered the packaging materials from FFO and
4 never intended to pay for them.
5 Examining the complaint, with particular reference to
6 paragraphs 14, 25, and 27, the bankruptcy court observed,
7 The first claim for relief still doesn’t state a claim
for fraud with regard to the September 28th
8 communications that initiated the purchase. In fact,
it’s strongly suggested from the pleadings that at the
9 time those representations were made, that there really
were contracts for the sale in Mexico. . . . What
10 evolved later is irrelevant to the issue of fraud
because the fraud has to have happened at the time of
11 the transaction.
12 The bankruptcy court is correct that a representation made
13 by Daniell in the “winter of 2011" could not have induced FFO to
14 ship goods in September and October of 2010. We also agree with
15 the court that the pleadings “strongly suggest” that there were
16 contracts between Daniell and the Mexican growers. The only
17 unsettled — but essential — question is if and when the contracts
18 were “prematurely terminated.”
19 As the bankruptcy court noted, the critical debtor
20 misrepresentation must occur at or before the point where “the
21 money [or goods] was obtained.” Campos v. Beck (In re Beck),
22 2012 WL 2127751, at *3 (Bankr. D. Ariz. June 11, 2012) (“The
23 plaintiff must make an ‘initial showing that the alleged fraud
24 existed at the time of, and has been the methodology by which,
25 the money, property or services were obtained.’”) (quoting Conn.
26 Attys. Title Ins. Co. v Budnick (In re Budnick), 469 B.R. 158,
27 174 (Bankr. D. Conn. 2012)). In other words, misrepresentations
28 made by a debtor to a creditor after the credit has been extended
-12-
1 have no effect upon the discharge of the debt. As the Panel has
2 explained,
3 For purposes of [§] 523(a)(2), however, the timing of
the fraud and the elements to prove fraud focus on the
4 time when the lender . . . made the extension of credit
to the Debtor. . . . In other words, . . . the inquiry
5 of whether a creditor justifiably relied on Debtor's
alleged misrepresentations is focused on the moment in
6 time when that creditor extended the funds to Debtor.
See McClellan v. Cantrell, 217 F.3d 890, 896 (7th Cir.
7 2000)(Ripple, Circuit Judge, concurring) (noting
Congress's use of "obtained by" in § 523(a)(2) "clearly
8 indicates that fraudulent conduct occurred at the
inception of the debt, i.e. the debtor committed a
9 fraudulent act to induce the creditor to part with his
money or property.").
10
11 New Falls Corp. v. Boyajian (In re Boyajian), 367 B.R. 138, 147
12 (9th Cir. BAP 2007) (citing Bombardier Capital, Inc. v. Dobek
13 (In re Dobek), 278 B.R. 496, 508 (Bankr. N.D. Ill. 2002)); see
14 also 4 COLLIER ON BANKRUPTCY ¶ 523.08[1] (Alan N. Resnick & Henry J.
15 Sommer, eds., 16th ed., 2012) (noting that “if the property and
16 services were obtained before the making of any false
17 representation, subsequent misrepresentations will have no effect
18 on dischargeability.”).
19 The bankruptcy court correctly applied this rule when it
20 observed that, “What evolved later [after the goods were shipped]
21 is irrelevant to the issue of fraud because the fraud has to have
22 happened at the time of the transaction.” Hr’g Tr. 3:15-18,
23 September 13, 2012.
24 No facts are alleged in the complaint with any specificity
25 to show that Daniell’s allegedly fraudulent representations
26 occurred before FFO relied on them and shipped him the packaging
27 materials. Because FFO is alleging fraud, Civil Rule 9(b), as
28 incorporated by Rule 7009, applies to his claim: “In alleging
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1 fraud or mistake, a party must state with particularity the
2 circumstances constituting fraud or mistake.” A pleading is
3 sufficient under Civil Rule 9(b) if it “identifies the
4 circumstances constituting fraud so a defendant can prepare an
5 adequate answer from the allegations." In re Van Wagoner Funds,
6 Inc. Sec. Litig., 382 F. Supp. 2d 1173, 1180 (N.D. Cal 2004).
7 "The plaintiff must state precisely the time, place, and nature
8 of misleading statements, misrepresentations, and specific acts
9 of fraud " Kaplan v Rose, 49 F.3d 1363, 1370 (9th Cir 1994)
10 (emphasis added). The first claim in the SAC simply did not
11 identify the time, place and nature of the allegedly misleading
12 representations.
13 As discussed above, the time of the alleged representations
14 is the most critical; that is, the precise point in time when
15 Daniell made representations to FFO that he had contracted with
16 various Mexican farmers to sell him a very large quantity of
17 watermelons and honeydew melons, and that those contracts would
18 continue into 2011. Further, it must be averred that, at that
19 point in time, Daniell knew those representations to be false and
20 made them to induce FFO to sell him the goods.
21 Simply stated, FFO did not allege in the complaint that
22 precise point in time. At most, and viewing the complaint in the
23 most favorable light to FFO, it alleges that at some time before
24 December 2011 Daniell knew of the falsity of his representations.
25 It asks the court and this Panel to infer that a
26 misrepresentation took place before FFO shipped the goods. But
27 as the Supreme Court has instructed us, where the complaint does
28 “not permit the court to infer more than the mere possibility of
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1 misconduct, the complaint has alleged – but it has not ‘show[n]’
2 — that the pleader is entitled to relief. Fed. R. Civ.
3 Proc. 8(a)(2).” Iqbal, 556 U.S. at 679.
4 In addition, at oral argument before the Panel, because it
5 is not evident from the allegations in the SAC, counsel for FFO
6 was also questioned regarding the dates when Daniell’s contracts
7 with the Mexican growers were supposedly terminated. After some
8 hesitation, counsel conceded that FFO intended to rely upon
9 discovery to determine the precise dates and, consequently, the
10 point in time that Daniell would have made a false representation
11 that the contracts were in place. However, the Ninth Circuit and
12 other courts have cautioned that, when pleading fraud, Civil
13 Rule 9(b) precludes the use of discovery to supply the facts
14 necessary to state a basic claim for relief:
15 In most cases, the Federal Rules of Civil Procedure
require only that pleadings contain a short and plain
16 statement of the claim. Fed. R. Civ. P. 8. Federal
Rule of Civil Procedure 9(b), however, requires that
17 "in all averments of fraud or mistake, the
circumstances constituting fraud or mistake shall be
18 stated with particularity." Fed. R. Civ. P. 9(b).
Rule 9(b) serves not only to give notice to defendants
19 of the specific fraudulent conduct against which they
must defend, but also "to deter the filing of
20 complaints as a pretext for the discovery of unknown
wrongs, to protect [defendants ] from the harm that
21 comes from being subject to fraud charges, and to
prohibit plaintiffs from unilaterally imposing upon the
22 court, the parties and society enormous social and
economic costs absent some factual basis." In re Stac
23 Elec. Sec. Litig. 89 F.3d 1399, 1405 (9th Cir. 1996);
see also Rolo v. City Invest. Co. Liquidating Tr.,
24 155 F.3d 644, 658 (3d Cir. 1998) ("The purpose of
Rule 9(b) is to provide notice of the 'precise
25 misconduct' with which defendants are charged and to
prevent false or unsubstantiated charges."); IUE
26 AFL-CIO Pension Fund v. Herrmann, 9 F.3d 1049, 1057
(2d Cir. 1993) (Rule 9(b)'s heightened pleading
27 requirement alerts defendants to specific facts upon
which a fraud claim is based and safeguards a
28 "defendant's reputation and goodwill from improvident
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1 charges of wrongdoing").
2 Bly-Magee v. Cal., 236 F.3d 1014, 1018 (9th Cir. 2001). As the
3 Fifth Circuit stated even more strongly,
4 In cases of fraud, Rule 9(b) has long played that
screening function, standing as a gatekeeper to
5 discovery, a tool to weed out meritless fraud claims
sooner than later. We apply Rule 9(b) to fraud
6 complaints with "bite" and "without apology."
7 United States ex rel. Grubbs v. Kanneganti, 565 F.3d 180, 186
8 (5th Cir. 2009).
9 In short, FFO has not alleged the requisite facts in the SAC
10 concerning the point in time at which Daniell allegedly made
11 fraudulent representations, or when he was aware that the
12 contracts with his growers in Mexico had been terminated.
13 Without these dates, FFO cannot allege that Daniell made
14 knowingly false representations on which FFO relied to sell goods
15 to him on credit.
16 To avoid dismissal under Civil Rule 12(b)(6), a plaintiff
17 must aver in his complaint “sufficient factual matter, accepted
18 as true, to ‘state a claim to relief that is plausible on its
19 face.’” Iqbal, 556 U.S. 662 (quoting Twombly, 550 U.S. at 570).
20 Here, the first claim of the SAC is not plausible on its face
21 because it does not state sufficient facts to establish a claim
22 for relief under § 523(a)(2)(A). The first claim also runs afoul
23 of Civil Rule 9(b) because it does not clearly identify the time,
24 place, and nature of Daniell’s alleged misleading
25 representations. We therefore conclude that the bankruptcy court
26 did not err in dismissing the first claim under Civil
27 Rules 12(b)(6) and 9(b).
28 / / /
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1 B. The Second Claim for Relief.
2 FFO’s second claim for relief also does not clearly identify
3 the time, place, and nature of Daniell’s alleged misleading
4 representations and therefore suffers from the same infirmities
5 as the first claim. But of greater concern to us is that the
6 second claim does not even plausibly state facts justifying
7 relief under the rigors of § 523(a)(2)(A).
8 The second claim alleges that Daniell engaged in a
9 continuing pattern of fraudulent representations to FFO
10 representatives, which caused FFO to forego or postpone the
11 exercise of its collection rights. By not pursuing collection
12 from him, FFO alleges that it effectively made a “further
13 extension of credit” to Daniell. In this respect, FFO insists
14 that “other courts have consistently held that debts are
15 non-dischargeable under [§] 523 (a)(2)(A) when an ‘extension’ of
16 credit is fraudulently induced. No new money needs to be lent.”
17 FFO’s Op. Br. at 19. However, we disagree with this argument and
18 conclude that FFO’s decision not to pursue its collection
19 remedies against Daniell did not amount to an “extension of
20 credit” as that term is understood, even in the cases cited by
21 FFO.
22 For example, in Cho-Hung Bank v. Kim (In re Kim), 62 F.3d
23 1511 (9th Cir. 1995), the Ninth Circuit adopted the opinion of
24 the BAP in Cho-Hung Bank v. Kim (In re Kim), 163 B.R. 157 (9th
25 Cir. BAP 1994) (“Kim I”). In Kim I, Mrs. Kim received a loan of
26 $150,000 from Cho-Hung Bank to purchase a property and executed a
27 promissory note for that amount to be repaid in 180 days. She
28 purchased the property but was unable to resell it to recoup the
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1 funds within the 180-day period. By letter, she requested an
2 extension of time to repay the note. The bank granted the
3 extension and Mrs. Kim executed a second promissory note on the
4 same terms as the original note. No new funds were advanced.
5 The bankruptcy court found numerous frauds in the inducement of
6 both the original transaction and the extension of credit.
7 FFO argues that, in Kim I, “the court found that in order to
8 prevail on a claim that a forbearance is fraudulently induced,
9 the creditor must prove that at the time of the ‘extension of
10 credit’ that it had valuable collection remedies, that it did not
11 exercise those collection remedies in reliance on the debtor’s
12 false representations, and that those remedies lost value during
13 the extension period.” FFO’s Op. Br. at 19, citing Kim I,
14 162 B.R. at 160.
15 FFO suggests that the facts in this case are similar to
16 those in Kim I. They are not. In Kim I, the bank granted an
17 extension of credit and forbearance of its collection remedies on
18 the basis of an identifiable, formal request by the debtor, and
19 evidenced by debtor’s execution of a new promissory note. The
20 debtor fraudulently induced the extension of credit by false
21 statements made in the request. In this appeal, Daniell made no
22 specific request to FFO, nor did he otherwise induce FFO to
23 forbear on its collection activities. Indeed, Daniell merely
24 continued to promise payment on his account with FFO, and FFO
25 unilaterally decided to forego or postpone taking legal actions
26 against him.
27 Similarly in the other case cited by FFO, Ojeda v. Goldberg,
28 599 F.3d 712, 719 (7th Cir. 2010), the debtor requested
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1 forbearance on enforcement of a loan and made false
2 representations to the creditor to obtain that forbearance. In
3 short, in both these cases cited by FFO, there was an
4 identifiable act and misrepresentation: the debtor approached the
5 creditor, requested an extension of credit, and made false
6 representations on which the creditor relied in granting that
7 request. Here, FFO has not alleged in the SAC that Daniell
8 approached FFO with a request for an extension of credit, nor has
9 FFO even suggested that any particular misrepresentation or group
10 of misrepresentations were made to it by Daniell with the intent
11 to induce forbearance. Thus, FFO’s decision to forego collection
12 was a unilateral decision, not one induced by any act of Daniell.
13 If FFO’s argument were correct, any creditor could overcome the
14 requirement that an alleged misrepresentation occur before the
15 credit transaction by simply recharacterizing its later decision
16 not to pursue collection remedies as another “extension of
17 credit” transaction that occurred after some unidentified
18 misrepresentations. Simply put, a creditor’s unilateral
19 forbearance of collection efforts does not necessarily constitute
20 “an extension of credit” within the meaning of § 523(a)(2). Gore
21 v. Kressner (In re Kressner), 206 B.R. 303, 311 (Bankr. S.D.N.Y.
22 1997), aff’d 152 F.3d 919 (2d Cir. 1998); In re Bacher, 47 B.R.
23 825, 829 (Bankr. E.D. Pa. 1985); cf. In re Kucera, 373 B.R. 878,
24 885 (Bankr. C.D. Ill. 2007) (finding that fraudulently induced
25 forbearance may constitute an extension of credit for the
26 purposes of § 523(a)(2)(A) but the plaintiff must prove that a
27 particular misrepresentation induced the plaintiff to forbear).
28 We conclude that the bankruptcy court did not err in
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1 dismissing FFO’s second claim for an exception to discharge under
2 § 523(a)(2)(A) simply because FFO decided not to pursue
3 collection remedies and to believe instead Daniell’s continuing
4 promises of payment.
5 C. The Third Claim for Relief.
6 FFO’s third claim for relief sought an exception to
7 discharge under § 523(a)(6). This Code provision excepts from
8 discharge debts for willful and malicious injuries by the debtor
9 to another entity. Ormsby v. First Am. Title Co. of Nev.
10 (In re Ormsby), 591 F.3d 1199, 1206 (9th Cir. 2010). To succeed
11 on its claim, FFO must separately plead and prove that Daniell
12 acted both willfully and maliciously. Albarran v. New Form. Inc.
13 (In re Barboza), 545 F.3d 702, 706 (9th Cir. 2008).
14 In particular, a § 523(a)(6) "‘willful' injury is a
15 ‘deliberate or intentional injury, not merely a deliberate or
16 intentional act that leads to injury.'" Id. (quoting Kawaauhau
17 v. Geiger, 523 U.S. 57, 61, 118 S.Ct. 974, 140 L.Ed.2d 9018 (1998)). In order to establish a willful injury, a creditor must
19 show that the debtor had a "subjective motive to inflict injury"
20 or a subjective belief that injury was "substantially certain to
21 result" from the debtor's conduct. In re Ormsby, 591 F.3d at22 1206 (citing Carrillo v. Su (In re Su), 290 F.3d 1140, 1146 (9th
23 Cir. 2002)).
24 None of the facts alleged in the SAC would show that Daniell
25 inflicted a willful and malicious injury on FFO, and for that
26 reason alone, the Panel would be justified in affirming the
27 bankruptcy court’s decision to dismiss FFO’s claim under
28 § 523(a)(6). However, we conclude FFO’s SAC fails for another
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1 important reason.
2 Apparently, the bankruptcy court relied on case law deciding
3 that if a debtor commits a conversion of property under
4 California law, that conduct is sufficient to meet the willful
5 and malicious requirements for an exception to discharge under
6 § 523(a)(6). See Transamerica Comm. Fin. Corp. v. Littleton,
7 942 F.2d 551, 554 (9th Cir. 1994) (“The conversion of another's
8 property without his knowledge or consent, done intentionally and
9 without justification and excuse, to the other's injury,
10 constitutes a willful and malicious injury within the meaning of
11 § 523(a)(6).").6 We doubt the continuing vitality of Littleton
12 in light of more recent case law discussed above requiring
13 separate findings of the willful and malicious prongs of
14 § 523(a)(6). In its complaint, FFO did not discuss the two
15 prongs separately.
16 However, this failure to deal with the separate prongs of
17 § 523(a)(6) is of no moment in this appeal because FFO cannot
18 establish under the pled facts that there was conversion under
19 California law. In California, the tort of conversion requires
20 “the wrongful exercise of dominion over the property of another.
21 The elements of conversion are: (1) the plaintiff’s ownership or
22
23 6
See Peklar v. Ikerd (In re Peklar), 260 F.3d 1035, 1039
(9th Cir. 2001) (“A judgment for conversion under California
24
substantive law decides only that the defendant has engaged in
25 the "wrongful exercise of dominion" over the personal property of
the plaintiff. It does not necessarily decide that the defendant
26 has caused "willful and malicious injury" within the meaning of
27 § 523(a)(6). A judgment for conversion under California law
therefore does not, without more, establish that a debt arising
28 out of that judgment is non-dischargeable under § 523(a)(6).”
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1 right of possession of the property; (2) the defendant’s
2 conversion by wrongful act or disposition of property rights; and
3 (3) damages.” Burlesci v. Peterson, 68 Cal. App.4th 1062, 1066
4 (Cal. Ct. App. 1998). FFO did not allege in the SAC, nor could
5 it prove, that it had either ownership or the right to possession
6 of the packaging materials it asserts that Daniell converted. To
7 the contrary, under California’s version of the Uniform
8 Commercial Code, title and ownership of goods “passes to the
9 buyer at the time and place at which the seller completes his
10 performance with reference to the physical delivery of the goods,
11 despite any reservation of a security interest[.]” CAL. U. COMM.
12 CODE § 2-401 (2); Cal. State Elect. Ass’n v. Zeos Int’l Ltd.,
13 41 Cal. App.4th 1270, 1276 (Cal. Ct. App. 1996) (title passes on
14 delivery of goods to a designated destination). It is undisputed
15 in this case that the packaging materials in question were
16 delivered by FFO to Daniell in September and October 2010. At
17 that point ownership of the packaging materials passed to
18 Daniell. Daniell retained ownership of the packaging materials
19 until he returned the goods to FFO. CAL. U. COMM.
20 CODE § 2-401 (4). Thus, FFO cannot claim that it “owned” the
21 packaging materials while they were in Daniell’s possession.
22 In addition, as the bankruptcy court correctly observed, FFO
23 has cited no authority or reasoned argument as to how it could
24 take lawful possession of the packaging materials from Daniell.
25 The mere fact that it was a creditor with a contractual right to
26 payment from Daniell was insufficient to support a claim against
27 him for conversion. Farmers Ins. Exchange v. Zerin, 53 Cal.
28 App.4th 445, 451-52 (Cal. Ct. App. 1997).
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1 Based on the facts as alleged in the SAC, FFO has not shown
2 how it was deprived of ownership or lawful possession of the
3 packaging materials by Daniell. As a result, FFO cannot satisfy
4 the elements for a conversion under California law. Since FFO’s
5 claim under § 523(a)(6) lacks support under applicable law, the
6 bankruptcy court properly dismissed it under Civil Rule 12(b)(6).
7 Riverside Healthcare Sys., 534 F.3d at 1121.
8 II.
The bankruptcy court did not abuse its discretion
9 in dismissing the SAC without leave to amend.
10 Under Civil Rule 15(a)(2), incorporated by Rule 7015, FFO
11 could amend its complaint only with Daniell’s consent, or with
12 leave of the bankruptcy court. However, the bankruptcy court
13 “should freely give leave when justice so requires.” Civil
14 Rule 15(a)(2). The Ninth Circuit recently revisited the
15 conditions under which trial courts should grant or deny leave to
16 amend complaints:
17 Normally, when a viable case may be pled, a district
court should freely grant leave to amend. Lipton v.
18 Pathogenesis Corp., 284 F.3d 1027, 1039 (9th Cir.
2002). However, "liberality in granting leave to amend
19 is subject to several limitations." Ascon Props., Inc.
v. Mobil Oil Co., 866 F.2d 1149, 1160 (9th Cir. 1989)
20 (citing DCD Programs, Ltd. v. Leighton, 833 F.2d 183,
186 (9th Cir. 1987)). Those limitations include undue
21 prejudice to the opposing party, bad faith by the
movant, futility, and undue delay. Id. Further,
22 "[t]he district court's discretion to deny leave to
amend is particularly broad where plaintiff has
23 previously amended the complaint." Id. (citing
Leighton, 833 F.2d at 186; Mir v. Fosburg, 646 F.2d
24 342, 347 (9th Cir. 1980)).
25 Calasso v. Gen. Dynamics C4 Sys., 637 F.3d 1047, 1059 (9th Cir.
26 2011).
27 In this case, FFO filed three complaints, failing twice
28 to cure the bankruptcy court’s recurring instructions that the
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1 relevant facts establishing FFO’s fraud claims against Daniell be
2 pled with particularity. At the last hearing, in response to the
3 bankruptcy court’s continuing concern for the adequacy of the
4 SAC, counsel for FFO conceded that it “did not sufficiently
5 articulate these two things.” Hr’g Tr. 10:16-17. Counsel then
6 asked the bankruptcy for yet another (i.e., a fourth) opportunity
7 to do what should have been done months earlier. In addition to
8 the burden placed on the bankruptcy court by FFO’s approach to
9 pleading, the bankruptcy court was obviously aware that Daniell
10 would be prejudiced by subjecting him to yet another
11 complaint/answer/possible dismissal motion scenario. See Rose,
12 49 F.3d at 1370 ("Expense, delay, and wear and tear on
13 individuals . . . count toward prejudice.").
14 FFO was given ample opportunity to adequately plead its
15 claims against Daniell. We conclude that, in exercising the
16 “particularly broad” judgment granted trial courts in this
17 context, the bankruptcy court did not abuse its discretion in
18 concluding that, in effect, enough was enough, and dismissing
19 FFO’s SAC with prejudice.
20 CONCLUSION
21 We AFFIRM the order of the bankruptcy court.
22
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24
25
26
27
28
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