Privitera v. Curran ( 2017 )

United States Court of Appeals
For the First Circuit
No. 16-9006
IN RE JOSEPH M. CURRAN,
Debtor.
____________________
CAROLYN PRIVITERA,
Plaintiff, Appellant,
v.
JOSEPH M. CURRAN,
Defendant, Appellee.
APPEAL FROM THE BANKRUPTCY APPELLATE PANEL
FOR THE FIRST CIRCUIT
Before
Howard, Chief Judge,
Selya and Lynch, Circuit Judges.
Paul W. Hughes, with whom Michael B. Kimberly, Karianne Jones,
Mayer Brown LLP, William C. Parks, and Parks Law Offices were on
brief, for appellant.
Louis S. Haskell, with whom Joy D. Hotchkiss and Law Office
of Louis S. Haskell were on brief, for appellee.
April 20, 2017
SELYA, Circuit Judge. In this bankruptcy appeal, the
parties ask us to resolve an issue that has divided our sister
circuits: whether the phrase "statement . . . respecting the
debtor's . . . financial condition," as used in 11 U.S.C.
§ 523(a)(2)(B), should be interpreted narrowly to refer only to
those documents that speak directly to the debtor's overall
financial condition or broadly to include those documents that
merely reference a single asset or liability. Compare, e.g., Bandi
v. Becnel (In re Bandi), 683 F.3d 671, 676 (5th Cir. 2012), and
Cadwell v. Joelson (In re Joelson), 427 F.3d 700, 714 (10th Cir.
2005) (employing narrow approach), with Appling v. Lamar, Archer
& Cofrin, LLP (In re Appling), 848 F.3d 953, 960 (11th Cir. 2017)
and Engler v. Van Steinburg (In re Van Steinburg), 744 F.2d 1060,
1061 (4th Cir. 1984) (employing broad approach). But courts should
not rush to decide unsettled issues when the exigencies of a
particular case do not require such definitive measures. Here, we
see no need to enter onto terra incognita but, rather, decide the
case on less controversial principles of pleading and materiality.
When all is said and done, we affirm.
I. BACKGROUND
We begin with a brief description of the legal foundation
on which this case rests. Chapter 7 liquidation proceedings enable
an individual debtor to gain a "fresh start" by granting him a
discharge that releases him from almost all debt previously
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incurred. Grogan v. Garner, 498 U.S. 279, 283 (1991); Harrington
v. Simmons (In re Simmons), 810 F.3d 852, 855 (1st Cir. 2016).
Such a discharge is available, though, only to the "honest but
unfortunate debtor." Premier Capital, LLC v. Crawford (In re
Crawford), 841 F.3d 1, 7 (1st Cir. 2016) (quoting Grogan, 498 U.S.
at 286-87). To this end, the bankruptcy code exempts some debts
— especially those rooted in fraud and deceit — from discharge.
See 11 U.S.C. § 523(a). These exemptions are construed stringently
and creditors must show that a debt "comes squarely" within a
particular exemption. McCrory v. Spigel (In re Spigel), 260 F.3d
27, 32 (1st Cir. 2001).
This case, which deals with a creditor's attempt to avail
herself of two such exemptions, was resolved on what amounts to a
motion for judgment on the pleadings. Accordingly, we rehearse
the facts as they appear in the plaintiff's complaint (and the
documents incorporated by reference therein) and draw all
reasonable inferences in the plaintiff's favor. See Shay v.
Walters, 702 F.3d 76, 78 (1st Cir. 2012).
In November of 2007, the debtor, Joseph M. Curran, and
the plaintiff, Carolyn Privitera, were romantically involved. In
need of funds, the debtor turned to the plaintiff, who promised to
loan him $30,000. During negotiations, the plaintiff (represented
by counsel) asked the unrepresented debtor to draw up a list of
his property. In response, the debtor gave her a list of property
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(the List), comprising property "belonging" to him "either by title
or by physical possession" and used in his landscaping business.
The plaintiff's attorney made only minor changes to the List before
converting it into what he unilaterally styled as a "List of
Collateral." The attorney then prepared a loan agreement (the
Agreement) and attached the List as an exhibit.
The List included sixteen different landscaping-related
items ranging from a variety of clippers and trimmers to two
trucks. The purchase price of each item was listed beside the
item in a column labeled "cost." Excluding the trucks, the total
cost of the remaining items was slightly over $22,000. With the
trucks, the total cost of all the items ballooned to more than
$86,000. Unbeknownst to the plaintiff, the debtor was still making
installment payments on at least one of the trucks and that truck
remained titled to the lender.
Article II of the Agreement specified that the debtor
would execute and deliver a security agreement and financing
statements "covering" the property included in the List. It
further provided that the debtor would record and file all
documents necessary to "perfect and protect" the plaintiff's
security interest. To ensure this protection, Article II empowered
the plaintiff to sign and file financing statements on the debtor's
behalf.
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The Agreement was executed in November of 2007, and the
plaintiff transferred $30,000 to the debtor's bank account. Even
so, no security agreement or financing statement was presented,
and neither the plaintiff nor the debtor took any steps to perfect
the plaintiff's security interest in the property. The loan proved
to be a poor investment: the debtor repaid less than $5,000 before
defaulting in 2012.
The plaintiff sued the debtor in a Massachusetts state
court and, in March of 2014, secured a default judgment in the
amount of $137,030.78 (a sum that included damages, interest, and
costs). Later that year, the debtor — without making any payment
on the judgment — filed for Chapter 7 bankruptcy protection. See
11 U.S.C. §§ 701-784.
In due course, the plaintiff commenced an adversary
proceeding in the bankruptcy court seeking an order declaring the
debt non-dischargeable. She claimed that the List was a false
statement submitted to induce her to make the loan, thus bringing
the debt within the purview of 11 U.S.C. § 523(a)(2)(B), which
renders non-dischargeable debts obtained through "use of a
statement in writing — (i) that is materially false; (ii)
respecting the debtor's . . . financial condition; (iii) on which
the creditor . . . reasonably relied; and (iv) that the debtor
. . . published with intent to deceive."
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The debtor answered the complaint and then moved to
dismiss for failure to state a claim. The plaintiff not only
opposed this motion but also moved to amend her complaint to
include an alternative claim that the debt was non-dischargeable
under section 523(a)(2)(A). That section exempts from discharge
debts obtained through "false pretenses, a false representation,
or actual fraud, other than a statement respecting the debtor's
. . . financial condition." 11 U.S.C. § 523(a)(2)(A); see Field
v. Mans, 516 U.S. 59, 64-69 (1995) (comparing section 523(a)(2)(A)
and section 523(a)(2)(B) claims).
After a hearing, the bankruptcy court granted the
debtor's motion to dismiss. In a bench decision, the court
concluded that, with respect to the section 523(a)(2)(B) claim,
the plaintiff's failure to perfect any security interest in the
debtor's property rendered her reliance on the List unjustifiable.
At the same time, the court denied the plaintiff's motion to amend
as futile, noting that the proposed amended complaint did not
allege that the debtor had made any affirmative misrepresentations
and that the plaintiff's failure to perfect "would be fatal, in
any case."
The plaintiff took a first-tier appeal to the Bankruptcy
Appellate Panel for the First Circuit (the BAP). Because the
debtor had answered the complaint before moving to dismiss, the
BAP construed his motion as a motion for judgment on the pleadings.
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See Fed. R. Bankr. P. 7012(b) (incorporating Federal Rule of Civil
Procedure 12); Fed. R. Civ. P. 12(b) (stating that a motion to
dismiss for failure to state a claim must be filed before a
responsive pleading). It proceeded to hold that the List was not
a "statement . . . respecting the debtor's . . . financial
condition" within the meaning of section 523(a)(2)(B) and that,
even if it was, the plaintiff did not plead sufficient facts to
show that the List was materially false. See Privitera v. Curran
(In re Curran), 554 B.R. 272, 282-83 (B.A.P. 1st Cir. 2016). At
the same time, the BAP affirmed the denial of the plaintiff's
motion to amend. See id. at 287. This timely second-tier appeal
followed.
II. ANALYSIS
In this circuit, appeals in bankruptcy cases proceed
through a two-tiered framework. See In re Simmons, 810 F.3d at
856. A party who loses in the bankruptcy court has a choice: he
may take his initial appeal either to the district court or to the
BAP. See 28 U.S.C. § 158(a), (b). The court of appeals offers a
second tier of appellate review. See id. § 158(d)(1). We afford
no particular deference to decisions of the first-tier appellate
tribunal (be it the district court or the BAP) and focus instead
on the bankruptcy court's decision. See Wheeling & Lake Erie Ry.
Co. v. Keach (In re Montreal, Me. & Atl. Ry., Ltd.), 799 F.3d 1,
5 (1st Cir. 2015).
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Here, the plaintiff's challenge is twofold. First, she
asserts that the bankruptcy court erred when it dismissed her
complaint. Second, she asserts that the bankruptcy court
compounded this initial error by refusing to allow her to add a
section 523(a)(2)(A) claim to her complaint. We address these
assertions sequentially.
In litigating adversary proceedings in bankruptcy, the
standards embedded in Federal Rule of Civil Procedure 12 apply.
See Fed. R. Bankr. P. 7012; see also Rok Builders, LLC v. 2010-1
SFG Venture LLC (In re Moultonborough Hotel Grp., LLC), 726 F.3d
1, 4 (1st Cir. 2013) (explaining that "[t]he legal standards
traditionally applicable to . . . motions to dismiss apply without
change in bankruptcy proceedings"). The bankruptcy court and the
BAP expressed divergent views about whether the debtor's motion
should be treated as a motion to dismiss or a motion for judgment
on the pleadings. Here, however, those divergent views do not
matter: when — as in this instance — a motion for judgment on the
pleadings serves "as a vehicle to test the plausibility of a
complaint," it is treated like a motion to dismiss under Rule
12(b)(6). Shay, 702 F.3d at 82 (quoting Grajales v. P.R. Ports
Auth., 682 F.3d 40, 44 (1st Cir. 2012)). Regardless of the label,
we review the bankruptcy court's dismissal of the complaint de
novo, accepting all well-pleaded facts as true and drawing all
reasonable inferences in the pleader's favor. See id. at 79.
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In order to survive dismissal, a complaint need not set
forth "detailed factual allegations," Bell Atl. Corp. v. Twombly,
550 U.S. 544, 555 (2007), but it must "contain sufficient factual
matter . . . to state a claim to relief that is plausible on its
face," Ashcroft v. Iqbal, 556 U.S. 662, 678 (2009) (citation
omitted). If the facts articulated in the complaint are "too
meager, vague, or conclusory to remove the possibility of relief
from the realm of mere conjecture," the complaint is vulnerable to
a motion to dismiss. SEC v. Tambone, 597 F.3d 436, 442 (1st Cir.
2010) (en banc).
This sort of plausibility review requires courts to
undertake a two-step pavane. See Shay, 702 F.3d at 82. First,
the court must set aside the complaint's conclusory averments.
See id. Second, it must evaluate whether the remaining factual
content supports a "reasonable inference that the defendant is
liable for the misconduct alleged." Id. (quoting Grajales, 682
F.3d at 45); see Banco Santander de P.R. v. Lopez-Stubbe (In re
Colonial Mortg. Bankers Corp.), 324 F.3d 12, 15 (1st Cir. 2003)
(similar). In conducting this tamisage, the court "need not give
weight to bare conclusions, unembellished by pertinent facts."
Shay, 702 F.3d at 82-83.
Much of the briefing in this case focuses on whether the
List is a statement respecting the debtor's financial condition.
Here, though, that issue need not be resolved because — even if we
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assume, for argument's sake, that the List constitutes a statement
of financial condition — the judgment below must be affirmed. The
critical datum is that the plaintiff has failed plausibly to allege
that the List was materially false.1 We explain briefly.
Material falsity is an element of a claim under section
523(a)(2)(B). See 11 U.S.C. § 523(a)(2)(B)(i); Abramov v.
Movshovich (In re Movshovich), 521 B.R. 42, 61 (Bankr. D. Mass.
2014). To make out a claim that a statement is materially false
within the purview of section 523(a)(2)(B), a plaintiff must
plausibly allege that the statement misrepresented the kind of
information that "would normally affect the decision to grant
credit" and thus portrayed a substantially untruthful picture of
the debtor's financial condition. Bethpage Fed. Credit Union v.
Furio (In re Furio), 77 F.3d 622, 625 (2d Cir. 1996) (citation
omitted); see In re Movshovich, 521 B.R. at 61. A statement may
be rendered materially false either by an affirmative
misrepresentation, see, e.g., In re Movshovich, 521 B.R. at 62, or
by omission, see, e.g., Leominster Hous. Auth. v. Dunbar (In re
Dunbar), 474 B.R. 14, 21 (Bankr. D. Mass. 2012). To sink to the
level of a misstatement by omission, the party privy to the omitted
1 To be sure, we do not rely on the reasoning of either the
bankruptcy court or the BAP. But that shift in focus presents no
obstacle. We are not wed to a lower court's reasoning but, rather,
may affirm the dismissal of a claim on any ground made manifest by
the record. See MacDonald v. Town of Eastham, 745 F.3d 8, 11 (1st
Cir. 2014).
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information must have been obligated to furnish it. See id.
(collecting cases).
Viewed against this backdrop, the plaintiff's complaint
needed plausibly to plead either that the debtor affirmatively
misrepresented the status of the items enumerated in the List or
that he omitted information he was obligated to furnish. In this
case, the complaint does not identify any affirmative
misrepresentations. Instead, it alleges only that the plaintiff
expected the debtor to supply a list of property "belonging to
[him], either by title or by physical possession." In response,
the debtor gave her exactly what she had requested: a list of items
that he either owned or possessed. He added the cost (that is,
the purchase price) of each of the items. The plaintiff does not
claim that the substance of the List was in any way untrue, nor
does she claim that the debtor made any affirmative
misrepresentations about the nature of his interest in the
enumerated items.
Stripped to its essence, then, the plaintiff's case
rests on a claim that it is what the debtor did not say that
created a materially false impression. She points specifically to
his failure to disclose that at least one of the trucks was
encumbered. But a failure to speak becomes a misrepresentation by
omission only if the context requires the debtor to speak (that
is, to provide the missing information). See id. Here, however,
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the complaint contains no facts indicating that the debtor was
obliged to tell the plaintiff that the trucks were encumbered.
To begin, the plaintiff does not assert that the debtor
agreed to identify only unencumbered property when compiling the
List. As we already have explained, her complaint relates that
she asked him to prepare a list of property that he either owned
or possessed. Including encumbered property on the List was
entirely consistent with her request.
Moreover, when the debtor signed the Agreement, he
vouchsafed only that he would not further encumber the enumerated
items. In this respect, the Agreement states that the debtor would
not "create, incur, assume, or suffer to exist" any encumbrances
"upon the use of [his] property or assets." Giving these terms
their natural meaning, they refer only to future encumbrances, not
to preexisting ones. See LifeWise Master Funding v. Telebank, 374
F.3d 917, 920 & n.4 (10th Cir. 2004) (interpreting promise that
funding recipient would not "create, incur, assume or suffer to
exist any Lien" on described property as prohibiting recipient
from allowing any future liens).
By the same token, the plaintiff's complaint does not
aver that the debtor promised to provide a list of items sufficient
to secure the loan fully. Without such a promise, the debtor may
reasonably have believed that the unencumbered property on the
List (which cost around $22,000 when purchased), together with
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whatever equity he had in any encumbered property,2 was sufficient
for the plaintiff's purposes, so no further information was
required.
That the plaintiff's attorney subsequently titled the
list "List of Collateral," annexed it to the Agreement, and had
the debtor initial it did not — as the plaintiff suggests —
transmogrify the debtor's representations into misrepresentations.
Importantly, the plaintiff's complaint presents no facts
indicating that the parties reached a meeting of the minds
regarding either the purpose of the List or the implications of
its recharacterization. Nor does the complaint supply facts
suggesting that the plaintiff believed the listed items to be
unencumbered. After all, encumbered property can serve as
collateral up to the value of the debtor's retained equity. See,
e.g., Prudential Ins. Co. v. SW Bos. Hotel Venture, LLC (In re SW
Bos. Hotel Venture, LLC), 748 F.3d 393, 398 (1st Cir. 2014);
Harley-Davidson Motor Co. v. Bank of New Eng.-Old Colony, N.A.,
897 F.2d 611, 613 (1st Cir. 1990). In the absence of facts
indicating that the parties had reached a different understanding,
the plaintiff's assertion that the debtor misled her gains no
traction.
2The complaint is silent as to what equity, if any, the
debtor had in one of the trucks. As to the other, it alleges that
his equity was only $100.
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Striving to blunt the force of this reasoning, the
plaintiff insists that it should have been clear to the debtor
that he was expected to disclose any preexisting encumbrances. In
support, she cites a compendium of cases acknowledging that the
existence of encumbrances is often salient information. See, e.g.,
In re Van Steinburg, 744 F.2d at 1061. But she cites no case
holding that a debtor is required to disclose prior encumbrances
simply because he has been asked to provide a list of property
that he owns and/or possesses,3 and we are aware of none.
The short of it is that, without pleaded facts adequate
to support a reasonable inference of material falsity, the
plaintiff's section 523(a)(2)(B) claim does not cross the line
from possible to plausible. The plausibility requirement demands
something more than facts showing that a claim is conceivable.
See Iqbal, 556 U.S. at 678; Schatz v. Repub. State Leadership
3Many of the cases cited by the plaintiff consider the
discharge of debts incurred through affirmatively false
representations regarding a particular item's true ownership
status. See, e.g., Voyatzoglou v. Hambley (In re Hambley), 329
B.R. 382, 390-91, 399 (Bankr. E.D.N.Y. 2005); Hudson Valley Water
Res., Inc. v. Boice (In re Boice), 149 B.R. 40, 43, 45 (Bankr.
S.D.N.Y. 1992). As we already have explained, the plaintiff
alleges no facts indicating that the debtor made affirmatively
false statements about his ownership interest in the listed
property.
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Comm., 669 F.3d 50, 55 (1st Cir. 2012). The section 523(a)(2)(B)
claim was, therefore, properly dismissed.4
This leaves only the plaintiff's claim that the
bankruptcy court abused its discretion when it denied her motion
to amend her complaint to add a section 523(a)(2)(A) claim.
Federal Rule of Bankruptcy Procedure 7015 incorporates Federal
Rule of Civil Procedure 15 as the mechanism for adjudicating
motions to amend a pleading in the bankruptcy context. Rule 15
specifies that, with exceptions not relevant here, a party may
amend her complaint only by leave of court. See Fed. R. Civ. P.
15(a)(2).
Courts are instructed to "freely give leave when justice
so requires." Id. This permissiveness, though, extends only so
far. See Aponte-Torres v. Univ. of P.R., 445 F.3d 50, 58 (1st
Cir. 2006) (observing that courts need not "mindlessly grant every
request for leave to amend"). A court may deny leave to amend for
4
In a last-ditch attempt to snatch victory from the jaws of
defeat, the plaintiff invokes the tenet that a party to a
transaction must disclose "matters known to him that he knows to
be necessary to prevent his partial or ambiguous statement of the
facts from being misleading." Restatement (Second) of Torts
§ 551(2)(b). No argument premised on section 551(2)(b) was raised
below — and arguments advanced for the first time on appeal are
deemed waived. See B&T Masonry Constr. Co. v. Pub. Serv. Mutual
Ins. Co., 382 F.3d 36, 40 (1st Cir. 2004); see also Teamsters,
Chauffeurs, Warehousemen & Helpers Union v. Superline Transp. Co.,
953 F.2d 17, 21 (1st Cir. 1992) ("If any principle is settled in
this circuit, it is that, absent the most extraordinary
circumstances, legal theories not raised squarely in the lower
court cannot be broached for the first time on appeal.").
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a variety of reasons, including "futility, bad faith, undue delay,
or a dilatory motive on the movant's part." Hatch v. Dep't for
Children, Youth & Their Families, 274 F.3d 12, 19 (1st Cir. 2001).
We review a bankruptcy court's denial of leave to amend
for abuse of discretion. See Zullo v. Lombardo (In re Lombardo),
755 F.3d 1, 3 (1st Cir. 2014). That review is satisfied if we
discern some "arguably adequate basis" for the district court's
decision. Hatch, 274 F.3d at 19.
In the case at hand, the bankruptcy court denied the
plaintiff's motion for leave to amend on futility grounds. Where,
as here, a party seeks leave to amend before any discovery has
occurred, a reviewing court assays futility with reference to the
Rule 12(b)(6) pleading criteria. See id. An attempt to amend is
regarded as futile if the proposed amended complaint fails to state
a plausible claim for relief. See id.; see also Tambone, 597 F.3d
at 442.
In her proposed amended complaint, the plaintiff claims
that the debt is exempt from discharge under section 523(a)(2)(A),
as well as section 523(a)(2)(B). The former section exempts from
discharge debts obtained by "false pretenses, a false
representation, or actual fraud." 11 U.S.C. § 523(a)(2)(A). The
plaintiff appears to contend that because the debtor did not
disclose that at least one of the trucks was encumbered, he
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obtained the loan through either false pretenses or a false
representation. This contention lacks force.
Unlike section 523(a)(2)(B) — which delineates every
element of a claim under it — section 523(a)(2)(A) incorporates
common law principles. See Field, 516 U.S. at 69. To state a
plausible section 523(a)(2)(A) claim, a complaint must include
facts reasonably indicating that:
1) the debtor made a knowingly false
representation or one made in reckless
disregard of the truth, 2) the debtor intended
to deceive, 3) the debtor intended to induce
the creditor to rely upon the false statement,
4) the creditor actually relied upon the false
statement, 5) the creditor's reliance was
justifiable, and 6) the reliance upon the
false statement caused damage.
Sharfarz v. Goguen (In re Goguen), 691 F.3d 62, 66 (1st Cir. 2012)
(quoting In re Spigel, 260 F.3d at 32). The first element includes
false pretenses, which arise when the circumstances "imply a
particular set of facts, and one party knows the facts to be
otherwise" but does not correct the counter-party's false
impression. Old Republic Nat'l Title Ins. Co. v. Levasseur (In re
Levasseur), 737 F.3d 814, 818 (1st Cir. 2013) (citation omitted).
The circumstances here do not imply a particular set of
facts that the debtor knew to be untrue. The debtor was never
asked about whether or to what extent the listed items were
encumbered, and the mere fact of an encumbrance was not
inconsistent with their use as collateral. See, e.g., In re SW
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Bos. Hotel Venture, 748 F.3d at 398; Harley-Davidson, 897 F.2d at
613. Seen in this light, the plaintiff's section 523(a)(2)(A)
claim fails for much the same reason that her section 523(a)(2)(B)
claim fails: she has not pleaded facts sufficient to make out a
plausible claim that the debtor either operated under false
pretenses or made a false representation. Indeed, she relies on
the same facts she provided to support her section 523(a)(2)(B)
claim, insisting that because the debtor did not tell her about
the encumbrances, the List was false or, at least, actionably
misleading. These facts did not bear the weight of her section
523(a)(2)(B) claim, and they are likewise too flimsy to bear the
weight of her section 523(a)(2)(A) claim. The List was exactly
what it purported to be: a description of items that the debtor
used in the course of his business and their cost when he purchased
them.
To say more would be to paint the lily. We conclude, as
did the BAP, that an adequate basis existed for the bankruptcy
court's denial of the plaintiff's motion to amend: the new claim,
like the old claim, would have been futile. It follows that the
bankruptcy court did not abuse its discretion in denying the motion
for leave to amend.
III. CONCLUSION
We need go no further. For the reasons elucidated above,
the judgment is
Affirmed.
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