MEMORANDUM OPINION
JAMES SPENCER, District Judge
This matter comes before the Court on Cooke-Bates's Motion for Certification pursuant to 28 U.S.C. § 1292(b) (Docket No. 30). Because Cooke-Bates does not raise an appealable issue on which there is substantial ground for disagreement, the Court DENIES the Motion.
I. Introduction
This motion arises out of a medical malpractice and product liability case involving the birth control drug Yaz. Plaintiff Tonji L. Cooke-Bates, ("Plaintiff") as Co-Administrator of the Estate of Gladys M. Coleman, is a Virginia resident. Plaintiff's decedent, Gladys Coleman, was also a Virginia resident. Cooke-Bates brings product liability claims against the Bayer Defendants for manufacturing and distributing Yaz. She also alleges a claim of medical malpractice against Dr. Michael D. Brooks ("Dr. Brooks").
Bayer Corporation, Bayer Healthcare Pharmaceuticals, Inc., and Bayer Healthcare, LLC ("Bayer Defendants") removed this action on April 21, 2010. Cooke-Bates objected to removal. She argued the case belonged in state court because two opposing parties — Dr. Brooks and Cooke-Bates — were Virginia residents and therefore not completely diverse.
Bayer Defendants intend to identify this action as a potential "tag along" to MDL No. 2100, In re Yazmin and YAZ (Drospirenone) Marketing, Sales Practices and Products Liability Litigation, in the Southern District of Illinois.
On August 2, 2010, the Court remanded the case to Richmond Circuit Court ("August 2 remand order"), on procedural grounds Plaintiff did not raise in her moving papers. The Court cited the "unanimity rule" in support of remand, concluding that Dr. Brooks's failure to consent to removal offended the widely-accepted rule that the failure of all defendants to consent was a procedural defect fatal to removal. See Payne v. Estate of Calzada, 439 F.3d 198, 203 (4th Cir. 2006) (describing lack of unanimous consent by defendants to removal as a procedural defect).
The Court reconsidered the August 2 remand order on October 8 ("October 8 order"). The Court concluded it committed clear error by remanding the case on procedural grounds in lieu of an objection by Cooke-Bates raising a procedural defect. First, the Court decided 28 U.S.C. § 1447(d) did not immunize the Court's August 2 remand order from review, because § 1447(d) immunizes only remands based on either a jurisdictional defect or a procedural defect raised by a party within thirty days of removal. Kircher v. Putnam Funds Trust, 547 U.S. 633, 640 (2006). Since Cooke-Bates made a jurisdictional objection to removal, and the Court remanded on procedural grounds, the Court concluded § 1447(d) did not prohibit it from revisiting the August 2 remand order.
"An order remanding a case to the State court from which it was removed is not reviewable on appeal or otherwise, except that an order remanding a case to the State court from which it was removed pursuant to section 1443 of this title [dealing with Civil Rights Cases] shall be reviewable[.]" 28 U.S.C. § 1447(d) (1996).
Second, the Court concluded remand was substantively erroneous. In this circuit, a court may not remand a case based on a procedural defect unless a party raises a procedural defect within thirty days of removal. Ellenburg v. Spartan Motors Chassis, Inc., 519 F.3d 192, 197 (4th Cir. 2008). See 28 U.S.C. § 1447(c). The Court's August 2 remand order ran afoul of Ellenburg, because the Court remanded due to a procedural defect in lieu of a procedural objection from Cooke-Bates. Hence the Court concluded the remand order required reversal.
"A motion to remand the case on the basis of any defect other than lack of subject matter jurisdiction must be made within 30 days after the filing of the notice of removal under section 1446(a)." 28 U.S.C. § 1447(c).
Accordingly, the Court abrogated the August 2 remand order as to Cooke-Bates's claims against the Bayer Defendants. The Court severed Cooke-Bates's claim against Dr. Brooks and remanded it to state court. Cooke-Bates now seeks a certificate permitting appeal of the October 8 remand order under 28 U.S.C. § 1292(b).
II. Analysis
Cooke-Bates requests a certificate to appeal pursuant to 28 U.S.C. § 1292(b), under which a district judge may state in writing that an order "(1) involves a controlling question of law (2) as to which there is substantial ground for difference of opinion and (3) that an immediate appeal from the order may advance the ultimate termination of the litigation[.]" 28 U.S.C. § 1292(b) (1992) (notations added). See Lovelace v. Rockingham Memorial Hosp., 299 F.Supp.2d 617, 623 (W.D. Va. 2004). Whether to certify a non-final order for interlocutory review lies within the discretion of the trial court. Terry v. June, 368 F.Supp.2d 538, 539 (W.D. Va. 2005).
The Court begins by emphasizing the gravity of the relief Cooke-Bates seeks. Certification for interlocutory review under § 1292(b) is an "extraordinary remedy" available only in "exceptional situations." Fannin v. CSX Transp., Inc., 1989 WL 42583 at *2 (4th Cir. Apr. 26, 1989). The Supreme Court describes a district court's discretion to certify an appeal under § 1292(b) as "circumscribed" and reserved for "pivotal and debatable" orders. Swint v. Chambers County Comm'n, 514 U.S. 35, 46 (1995). Since § 1292(b) contravenes the final judgment rule, § 1292(b) should be used sparingly and, accordingly, its requirements are strictly construed. Difelice v. U.S. Airways, Inc., 404 F.Supp.2d 907, 908 (E.D. Va. 2005). See Myles v. Laffitte, 881 F.2d 125, 127 (4th Cir. 1989) (refusing to hear an appeal certified under § 1292(b) because petitioner filed his petition with the court of appeals one day late). Because of its circumscribed authority, the Court will certify an issue for appeal only if the Court concludes the issue satisfies all three requirements provided in § 1292(b). KPMG Peat Marwick, L.L.P. v. Estate of Nelco, Ltd., Inc., 250 B.R. 74, 83 (E.D. Va. 2000).
Cooke-Bates does not satisfy all three requirements. She fails to bring to the Court's attention an issue upon which there is substantial ground for disagreement.
The Court does not decide whether Cooke-Bates raises a controlling question of law or whether resolution of the issues she raises will advance the ultimate termination of litigation. The Court need not decide whether the issues Cooke-Bates raises satisfy either of these requirements, since the Court concludes substantial grounds for disagreement do not exist with respect to any of the issues Cooke-Bates raises for appeal.
An issue presents a substantial ground for difference of opinion if courts, as opposed to parties, disagree on a controlling question of law. McDaniel v. Mehfoud, 708 F.Supp. 754, 756 (E.D. Va. 1989). As this Court has explained, when it comes to certifying an issue for interlocutory appeal, "it matters not whether the lower court simply got the law wrong . . . What matters is whether courts themselves disagree as to what the law is." KPMG Peat Marwick, 250 B.R. at 83. But just any simple disagreement between courts will not merit certification. A ground for dispute is "substantial" where, for example, the controlling circuit has made no comment on conflicting opinions among the various circuits, APCC Services, Inc. v. AT T Corp., 297 F.Supp.2d 101, 107 (D.D.C. 2003), or where the dispute raises a novel and difficult issue of first impression. Santiago v. Pinello, 647 F.Supp.2d 239, 243 (E.D.N.Y. 2009).
At oral argument, Cooke-Bates presented the Court with three issues she believes deserve certification. First, Cooke-Bates argues the Court lacked subject matter jurisdiction over the case, prohibiting the Court from severing Cooke-Bates's claim against Dr. Brooks and remanding it to state court. In its October 8 order, this Court severed and remanded Cooke-Bates's claim against Dr. Brooks under Rule 21, finding Dr. Brooks an unnecessary party under Rule 19. Though the issue was not presented with complete clarity, Cooke-Bates implies the Court was not allowed to sever Dr. Brooks from this removed case when the parties to the case were incompletely diverse.
As a general matter, Rule 21 permits the Court to sever a party from a case in order to achieve complete diversity and establish proper jurisdiction of a civil action. Newman-Green, Inc. v. Alfonzo-Larrain, 490 U.S. 826, 832 (1989); Caperton v. Beatrice Pocahontas Coal Co., 585 F.2d 683, 691 (4th Cir. 1978) ("[N]on-diverse parties whose presence is not essential under Rule 19 may be dropped to achieve diversity between the plaintiffs and defendants."). Courts do indeed differ on whether it is proper to sever a non-diverse defendant in a diversity case removed from federal court absent a finding of fraudulent joinder or fraudulent misjoinder. But the disagreement can hardly be characterized as "significant." 12 U.S.C. § 1292(b). The decision to sever a party under Rule 21 is largely within the Court's discretion. Caperton, 585 F.2d at 691. Cooke-Bates provides no authority suggesting an intense dispute among the circuits about the propriety of severing a non-diverse after removal, or an overwhelming consensus among non-controlling circuits that doing so is improper. Nor does she convincingly demonstrate that this issue is so "pivotal and debatable" to merit halting this litigation to petition the Fourth Circuit to settle it. Swint, 514 U.S. at 46. So while Cooke-Bates identifies a source of disagreement among federal courts, she falls short of meeting the exacting standard required in order to earn certification. See Difelice, 404 F.Supp.2d at 908 (noting § 1292(b)'s requirements should be strictly construed). Able v. Upjohn is less relevant on this point than Cooke-Bates insists. See 829 F.2d 1330 (4th Cir. 1987). There, the defendant removed under 28 U.S.C. § 1331(c), which permits a defendant to remove where a plaintiff brings "separate and independent claim[s]" against non-diverse parties. 829 F.2d at 1332. The Upjohn panel suggested the plaintiff should have pursued certification in order that the Fourth Circuit could decide whether plaintiff's claims were "separate and independent." Id. at 1334-35. Here, Cooke-Bates challenges the Court's decision to sever Dr. Brooks under Rule 21, a matter largely within the Court's discretion. Caperton, 585 F.2d at 691; Weaver v. Marcus, 165 F.2d 862, 864 (4th Cir. 1948).
Some district courts, faced with a removed diversity case in which the defendant alleges the plaintiff joined a non-diverse party solely to defeat complete diversity but fails to convincingly demonstrate fraudulent misjoinder, insist on remanding the case and refuse to sever the non-diverse party under Rule 21. See Ash v. Providence Hosp., 2009 WL 424586 at *9 n. 19 (S.D. Ala. Feb. 17, 2009). Several courts have acted differently, dropping a dispensable non-diverse party after removal of a case pursuant to Rule 21 even in lieu of a showing of fraudulent joinder or misjoinder. See Joseph v. Baxter Int'l Inc., 614 F.Supp.2d 868, 872-73 (N.D. Ohio 2009). Several local courts have done just that. See Linnin v. Michielsens 372 F.Supp.2d 811, 825-26 (E.D. Va. 2005) (expressly concluding a dispensable party should be severed under Rule 21); Bay Tobacco, LLC v. Bell Quality Tobacco Products, LLC, 261 F.Supp.2d 483 (E.D. Va. 2003); Hughes v. Sears, Roebuck and Co., 2009 WL 2877424 (N.D. W.Va. Sept. 2, 2009).
Cooke-Bates attempts to avoid the Court's conclusion by stating the appealable issue in a more general manner, asserting that the controlling question worthy of certification is whether the Court had subject matter jurisdiction to sever Dr. Brooks and decline to remand the claims against Bayer. This characterization of the issue is flawed. So phrased, the controlling question simply restates the Rule 21 issue Cooke-Bates raises and shifts it to different ground, but the issue is no more worthy of certification for its invocation of the paramount requirement of subject matter jurisdiction. It is true, as Cooke-Bates points out, that subject matter jurisdiction is the sine qua non of this Court's ability to hear this (and any other) case. But the assertion that this Court lacked subject matter jurisdiction to sever Dr. Brooks merely begs the question of why it lacks jurisdiction. To that end, the cases Cooke-Bates cites demonstrate that certification is proper where a party raises a specific, novel, and complex issue that casts doubt on the Court's subject matter jurisdiction. See, e.g., Sonoco Products Co. v. Physicians Health Plan, Inc., 338 F.3d 366 (4th Cir. 2003) (whether an employer has standing to assert claims under ERISA's civil enforcement provisions), Rosmer v. Pfizer Inc., 263 F.3d 110 (4th Cir. 2001) (whether the supplemental jurisdiction statute permits a federal court to assert jurisdiction over a diversity class action when fewer than all class members allege injury above the jurisdictional amount); Md. Stadium Auth. v. Ellerbe Becket Inc., 407 F.3d 255 (4th Cir. 2005) (whether a state university is a citizen for diversity purposes). The issue of whether the Court may sever a party under Rule 21 after removal is neither novel nor complex, and the Court has cited several cases demonstrating that the practice is accepted.
The second and third issues Cooke-Bates argues merit certification are intertwined. The Court decided Cooke-Bates waived her procedural objection to removal by failing to make a procedural objection within thirty days. The Court also decided Cooke-Bates's failure to make a procedural objection permitted it to reconsider the remand order. Cooke-Bates argues both of these conclusions merit certification.
Substantial ground for disagreement over these issues does not exist. Several courts have concluded that § 1447(d) immunizes a remand order from reconsideration when a party raises some objection to remand procedure within thirty days, even if the Court remands because of a procedural defect other than one the party raised. See Schexnayder v. Entergy Louisiana, Inc., 394 F.3d 280, 285 (5th Cir. 2004); Loftis v. United Parcel Service, Inc., 342 F.3d 509, 516 (6th Cir. 2003); Velchez v. Carnival Corp., 331 F.3d 1207, 1209 (11th Cir. 2003). As far as the Court can tell, though, no courts have concluded that jurisdictional and procedural objections equally suffice to satisfy § 1447(c). Perhaps this dearth of authority lies in the fact that the statute speaks clearly of a motion to remand "on the basis of any defect other than lack of subject matter jurisdiction." 28 U.S.C. § 1447(c). Cooke-Bates assumes it best to read cases like Schexnayder to blur the line between an objection to removal on procedural and jurisdictional grounds. That reading is incorrect. The pertinent cases distinguish between procedural and jurisdictional objections, and they treat a remand order as unreviewable under § 1447(d) when preceded by a procedural objection. So Cooke-Bates's claim that case law demonstrates significant disagreement on this issue is incorrect. Disagreement on this issue is isolated to the parties to this case.
To the extent Cooke-Bates raises an issue of first impression in this circuit, the issue still does not present "substantial" ground for disagreement. 28 U.S.C. § 1292(b). Some courts have certified issues of first impression, but only where the issue is "particularly difficult." Santiago, 647 F.Supp.2d at 243. Otherwise, the fact that the parties happen upon an issue never before decided by a controlling authority is insufficient to merit certification. Wyeth v. Sandoz, Inc., 703 F.Supp.2d 508, 527 (E.D.N.C. 2010). The validity of Cooke-Bates's jurisdictional objection under § 1447(c), and its according effect under § 1447(d), are just such issues. These issues fall short of the level of complexity or difficulty necessary to merit certification. In the Court's view, the plain language of § 1447(c) resolves the issues.
Cooke-Bates cites several Fourth Circuit cases in support of certification that turn out to be unhelpful. Marshall v. Manville Sales Corp. supports the Court's argument. 6 F.3d 229 (4th Cir. 1993). Cooke-Bates asserts Marshall came to the Fourth Circuit on interlocutory review, but the plaintiff actually appealed the district court's grant of summary judgment. Only after the panel reversed summary judgment did it reverse the district court's remand denial and remand the case to state court. 6 F.3d at 231-32. King v. Flinn Dreffein Eng'g Co. involved an issue arising from an ambiguous statute over which district courts within this circuit disagreed and on which over half the circuit courts had ruled. 675 F.Supp.2d 642, 644 (W.D. Va. 2009). None of the issues Cooke-Bates finds deserving of certification have generated that level of controversy.
III. Conclusion
Because Cooke-Bates fails to raise an issue on which substantial ground for difference of opinion exists, the Court DENIES her Motion and declines to certify the issues she raises.
An appropriate Order shall issue.
ENTERED this 15th day of November 2010
er#p1380957 F.2d 1375, 1380 (7th Cir. 1992).
1. False pretenses or false representation
In order to except a debt from discharge based on false pretenses or false representation, the creditor must establish the following elements: (1) the debtor made a false representation of fact; (2) which the debtor (a) either knew to be false or made with reckless disregard for its truth and (b) made with an intent to deceive; and (3) the creditor justifiably relied on the false representation. Ojeda v. Goldberg, 599 F.3d 712, 716-17 (7th Cir. 2010); Wallner v. Liebl (In re Liebl), 434 B.R. 529, 538-39 (Bankr. N.D. Ill. 2010); Baker Dev. Corp. v. Mulder (In re Mulder), 307 B.R. 637, 643 (Bankr. N.D. Ill. 2004). To prevail on a § 523(a)(2)(A) complaint, all three elements must be established. Glucona Am., Inc. v. Ardisson (In re Ardisson), 272 B.R. 346, 357 (Bankr. N.D. Ill. 2001). Failure to establish any one fact is outcome determinative. Bletnitsky v. Jairath (In re Jairath), 259 B.R. 308, 314 (Bankr N.D. Ill. 2001).
False pretenses in the context of § 523(a)(2)(A) include implied misrepresentations or conduct intended to create or foster a false impression. Mem'l Hosp. v. Sarama (In re Sarama), 192 B.R. 922, 927 (Bankr. N.D. Ill. 1996). The Court has defined false pretenses as follows:
[A] series of events, activities or communications which, when considered collectively, create a false and misleading set of circumstances, or false and misleading understanding of a transaction, in which a creditor is wrongfully induced by the debtor to transfer property or extend credit to the debtor. . . .
A false pretense is usually, but not always, the product of multiple events, acts or representations undertaken by a debtor which purposely create a contrived and misleading understanding of a transaction that, in turn, wrongfully induces the creditor to extend credit to the debtor. A "false pretense" is established or fostered willfully, knowingly and by design; it is not the result of inadvertence.
Sterna v. Paneras (In re Paneras), 195 B.R. 395, 406 (Bankr. N.D. Ill. 1996) (
quoting Evans v. Dunston (In re Dunston), 117 B.R. 632, 641 (Bankr. D. Colo. 1990),
aff'd in part, rev'd in part, 146 B.R. 269 (D. Colo. 1992)).
Accord John Deere Co. v. Broholm (In re Broholm),
310 B.R. 864, 872 (Bankr. N.D. Ill. 2004) (
quoting Paneras).
False pretenses do not necessarily require overt misrepresentations. Sarama, 192 B.R. at 928. "Instead, omissions or a failure to disclose on the part of the debtor can constitute misrepresentations where the circumstances are such that omissions or failure to disclose create a false impression which is known by the debtor." Id. Silence or concealment may constitute false pretenses. Shelby Shore Drugs, Inc. v. Sielschott (In re Sielschott), 332 B.R. 570, 573 (Bankr. C.D. Ill. 2005); Fosco v. Fosco (In re Fosco), 289 B.R. 78, 86 (Bankr. N.D. Ill. 2002).
In contrast, a false representation is an express misrepresentation that can be demonstrated either by a spoken or written statement or through conduct. New Austin Roosevelt Currency Exch. v. Sanchez (In re Sanchez), 277 B.R. 904, 908 (Bankr. N.D. Ill. 2002). "A debtor's silence regarding a material fact can constitute a false representation under § 523(a)(2)(A)." Health Benefit Plan v. Westfall (In re Westfall), 379 B.R. 798, 803 (Bankr. C.D. Ill. 2007). The failure to disclose pertinent information may be a false representation where the circumstances imply a specific set of facts and disclosure is necessary to correct what would otherwise be a false impression. Trizna Lepri v. Malcolm (In re Malcolm), 145 B.R. 259, 263 (Bankr. N.D. Ill. 1992).
2. Actual fraud
The Seventh Circuit Court of Appeals has defined the term "fraud" for purposes of § 523(a)(2)(A) as follows:
`Fraud is a generic term, which embraces all the multifarious means which human ingenuity can devise and which are resorted to by one individual to gain an advantage over another by false suggestions or by the suppression of truth. No definite and invariable rule can be laid down as a general proposition defining fraud, and it includes all surprise, trick, cunning, dissembling, and any unfair way by which another is cheated.'
McClellan v. Cantrell, 217 F.3d 890, 893 (7th Cir. 2000) (
quoting Stapleton v. Holt, 250 P.2d 451, 453-54 (Okla. 1952)). "Actual fraud" is not limited to misrepresentation, but may encompass "any deceit, artifice, trick, or design involving direct and active operation of the mind, used to circumvent and cheat another[.]"
Id. (internal quotation omitted). Hence, a different analysis must be utilized when a creditor alleges actual fraud.
Id. The
McClellan court opined that because common law fraud does not always take the form of a misrepresentation, a creditor need not allege misrepresentation and reliance thereon to state a cause of action for actual fraud under § 523(a)(2)(A).
Id. at 894. Rather, the creditor must establish the following: (1) a fraud occurred; (2) the debtor intended to defraud the creditor; and (3) the fraud created the debt that is the subject of the discharge dispute.
Id.; Liebl, 434 B.R. at 538. The fraud exception under § 523(a)(2)(A) does not reach constructive frauds, only actual ones.
McClellan, 217 F.3d at 894. The existence of fraud may be inferred if the totality of the circumstances presents a picture of deceptive conduct by the debtor that indicates he intended to deceive or cheat the creditor.
Cripe v. Mathis (In re Mathis), 360 B.R. 662, 666 (Bankr. C.D. Ill. 2006);
Sielschott, 332 B.R. at 572.
3. Intent
Any cause of action under § 523(a)(2)(A) — false pretenses, false representation, or actual fraud-requires proof that the debtor acted with intent to deceive. Pearson v. Howard (In re Howard), 339 B.R. 913, 919 (Bankr. N.D. Ill. 2006). Proof of intent to deceive is measured by the debtor's subjective intention at the time the representation was made. CFC Wireforms, Inc. v. Monroe (In re Monroe), 304 B.R. 349, 356 (Bankr. N.D. Ill. 2004); Mega Marts, Inc. v. Trevisan (In re Trevisan), 300 B.R. 708, 717 (Bankr. E.D. Wis. 2003). It is well established, however, that courts can consider subsequent conduct as long as that conduct provides an indication of the debtor's state of mind at the time of the actionable representations. 6050 Grant, LLC v. Hanson (In re Hanson), 437 B.R. 322, 327-28 (Bankr. N.D. Ill. 2010) (collecting cases).
Determining whether a debtor had the requisite intent under § 523(a)(2)(A) is, therefore, a factual, subjective inquiry decided by examining all of the relevant circumstances, including those that took place after the debt was incurred. Id. at 328; see also Howard, 339 B.R. at 919; Sears, Roebuck Co. v. Green (In re Green), 296 B.R. 173, 179 (Bankr. C.D. Ill. 2003). Because a debtor will rarely, if ever, admit to acting with an intent to defraud, the scienter element may be inferred from the surrounding circumstances. Hickory Point Bank Trust, FSB v. Kucera (In re Kucera), 373 B.R. 878, 884 (Bankr. C.D. Ill. 2007); Rezin v. Barr (In re Barr), 194 B.R. 1009, 1020 (Bankr. N.D. Ill. 1996). "Where a person knowingly or recklessly makes false representations which the person knows or should know will induce another to act, the finder of fact may logically infer an intent to deceive." Jairath, 259 B.R. at 315. After all of the evidence has been produced, the court must then determine whether the circumstances, viewed in the aggregate, present "a picture of deceptive conduct" by the debtor, indicating an intent to defraud the creditor. See Mathis, 360 B.R. at 666; Sielschott, 332 B.R. at 572.
4. Justifiable reliance
The final element under § 523(a)(2)(A) requires a finding of causation. Reliance on a false pretense, false representation, or actual fraud under § 523(a)(2)(A) must be "justifiable." Field v. Mans, 516 U.S. 59, 74-75 (1995). Justifiable reliance is a less demanding standard than reasonable reliance and requires only that the creditor did not "blindly [rely] upon a misrepresentation the falsity of which would be patent to him if he had utilized his opportunity to make a cursory examination or investigation." Id. at 71 (internal quotation omitted). Justifiable reliance is an intermediate level of reliance that falls somewhere between the stringent "reasonable reliance" guidepost and the lenient "reliance in fact." Id. at 74-75.
The justifiable reliance standard imposes no duty to investigate unless the falsity of the representation is readily apparent. Id. at 70-72. Whether a party justifiably relies on a misrepresentation is determined by looking at the circumstances of a particular case and the characteristics of a particular plaintiff, not by an objective standard. Id. at 71; Bombardier Capital, Inc. v. Dobek (In re Dobek), 278 B.R. 496, 508 (Bankr. N.D. Ill. 2002). "[A] person is justified in relying on a representation of fact `although he might have ascertained the falsity of the representation had he made an investigation.'" Mercantile Bank v. Canovas, 237 B.R. 423, 429 (Bankr. N.D. Ill. 1998) ( quoting Field v. Mans, 516 U.S. at 70). "However, a `plaintiff may not bury his head in the sand and willfully ignore obvious falsehoods.'" Johnston v. Campbell (In re Campbell), 372 B.R. 886, 892 (Bankr. C.D. Ill. 2007) ( quoting Zirkel v. Tomlinson (In re Tomlinson), Nos. 96 B 27172, 96 1539, 1999 WL 294879, at *12 (Bankr. N.D. Ill. May 10, 1999)).
To satisfy the reliance element of § 523(a)(2)(A), the creditor must show that the debtor made a material misrepresentation that was the cause-in-fact of the debt that the creditor wants excepted from discharge. Mayer v. Spanel Int'l Ltd. (In re Mayer), 51 F.3d 670, 676 (7th Cir. 1995) ("Reliance means the conjunction of a material misrepresentation with causation in fact."). See also Westfall, 379 B.R. at 805 ( citing Mayer). C. 11 U.S.C. § 523(a)(6)
Section § 523(a)(6) of the Bankruptcy Code provides as follows:
(a) A discharge under section 727 . . . does not discharge an individual debtor from any debt —
. . .
(6) for willful and malicious injury by the debtor to another entity or to the property of another entity[.]
11 U.S.C. § 523(a)(6).
For a finding of non-dischargeability of a debt under § 523(a)(6), a creditor must prove three elements by a preponderance of the evidence: (1) that the debtor intended to and caused an injury to the creditor's person or property interest; (2) that the debtor's actions were willful; and (3) that the debtor's actions were malicious. Birriel v. Odeh (In re Odeh), 431 B.R. 807, 817 (Bankr. N.D. Ill. 2010); Mut. Mgmt. Servs., Inc. v. Fairgrieves (In re Fairgrieves), 426 B.R. 748, 756 (Bankr. N.D. Ill. 2010); Mulder, 307 B.R. at 641.
"Injury" has been defined as "the violation of another's legal right or the infliction of an actionable wrong." Fairgrieves, 426 B.R. at 757. Injuries contemplated by § 523(a)(6) are not confined to physical damage. Id. An injury to intangible personal or property rights will suffice. Id.
"The word `willful' in [§ 523](a)(6) modifies the word `injury,' indicating that nondischargeability takes a deliberate or intentional injury, not merely a deliberate or intentional act that leads to injury." Kawaauhau v. Geiger, 523 U.S. 57, 61 (1998) (emphasis in original). Under Geiger and its stringent standards, to satisfy the requirements of § 523(a)(6), a creditor must plead and prove that the debtor actually intended to harm him and not merely that the debtor acted intentionally and he was thus harmed. See id. at 61-62. In other words, the debtor must have intended the tortious consequences of his act. See id.; see also Berkson v. Gulevsky (In re Gulevsky), 362 F.3d 961, 964 (7th Cir. 2004). Injuries either negligently or recklessly inflicted do not fall within the ambit of § 523(a)(6). Geiger, 523 U.S. at 64.
The Supreme Court has not defined the scope of the term "intent" utilized to describe willful conduct. Fairgrieves, 426 B.R. at 757; Zamora v. Jacobs (In re Jacobs), 403 B.R. 565, 581 (Bankr. N.D. Ill. 2009). Recent decisions, however, have generally found that either a showing of subjective intent to injure the creditor or a showing of subjective knowledge by the debtor that injury is substantially certain to result from his acts can establish the requisite intent required by Geiger. Fairgrieves, 426 B.R. at 757 (collecting cases).
As to the malice element, conduct is "malicious" if it is taken "in conscious disregard of one's duties or without just cause or excuse. . . ." Thirtyacre, 36 F.3d at 700 (internal quotation omitted). The test for maliciousness under § 523(a)(6) is: (1) a wrongful act, (2) done intentionally, (3) which causes injury to the creditor, and (4) is done without just cause and excuse. Paul, 266 B.R. at 696. A debtor does not have to act with ill will or a specific intent to do harm to the creditor for the conduct to be malicious. Thirtyacre, 36 F.3d at 700. The key to maliciousness is consciousness of wrongdoing. Centier Bank v. Young (In re Young), 428 B.R. 804, 818 (Bankr. N.D. Ind. 2010). Whether an actor behaved willfully and maliciously is ultimately a question of fact reserved for the trier of fact. Thirtyacre, 36 F.3d at 700. Because a person will rarely admit to acting in a willful and malicious manner, those requirements must be inferred from the circumstances surrounding the injury. Cutler v. Lazzara (In re Lazzara), 287 B.R. 714, 723 (Bankr. N.D. Ill. 2002).
IV. DISCUSSION
A. Section 523(a)(2)(A)
The Creditor alleges in the amended complaint that prior to making the loans to Rose Motors, the Debtor made the following express or implied representations that were false: (1) the money that the Creditor was to lend to the company would be used to purchase cars and expand the business; (2) there were two owners of the business-the Debtor and Michael; (3) Rose Motors operated as a corporation utilizing ordinary corporate practices; and (4) the loans were secured by the assets of Rose Motors. According to the Creditor, these representations were false for the following reasons: (1) some of the money loaned by the Creditor was used to pay penalties that the Debtor had incurred as a result of improper collection of sales taxes on automobile sales; (2) there were three owners of Rose Motors-the Debtor, James, and Michael; (3) the Debtor intentionally diverted large sums of money and personal property of Rose Motors to himself and James; (4) the Debtor failed to properly perfect the Creditor's security interest by recording a UCC-1 financing statement with the Illinois Secretary of State; and (5) the Debtor failed to inform the Creditor that he was closing Rose Motors so that the Creditor could recover assets of the corporation on which he was supposed to have a lien.
Although the Creditor argues that some of the money he loaned was used to pay penalties and that the Debtor failed to inform him that Rose Motors would be closing, these allegations were neither discussed nor developed. In any event, as discussed infra, the Debtor and Creditor had no discussions about anything other than the amount of monthly interest on the loans.
The Court finds that the Creditor has failed to establish that the Debtor made a false representation of fact for purposes of § 523(a)(2)(A). The Creditor candidly testified that he did not discuss the loans he made to Rose Motors with the Debtor. Michael corroborated the Creditor's testimony on this point. Rather, all discussions regarding the loans were between Michael and the Creditor. The evidence showed that there was a meeting at Rose Motors in May 2005, after the Creditor agreed to extend the second loan. The Creditor, the Debtor, and Michael were present at this meeting. The Creditor admitted that the only topic he discussed with the Debtor at the meeting was the amount of monthly interest he was to be paid on the two loans. The Creditor stated that the Debtor did not make any representations to him regarding the company or the loans.
Despite the Creditor's testimony, he alleges that the Debtor made a false representation to him regarding the ownership of Rose Motors. Specifically, the Creditor testified that he thought Michael and the Debtor were the sole owners of Rose Motors. According to the Creditor, if he had known that James was also involved with the company, he would not have made the loans to Rose Motors. The Creditor admitted, however, that his understanding of the ownership interests in Rose Motors came from Michael, not the Debtor. In fact, the Creditor acknowledged that the Debtor did not make any representations to him regarding the ownership of the company. The Creditor simply failed to produce any evidence to show that the Debtor somehow promoted the Creditor's misunderstanding that Michael and the Debtor were the sole shareholders of Rose Motors. Thus, the Court finds that the Debtor did not make an implied or express misrepresentation to the Creditor regarding the ownership of the company.
The Creditor also argues that the Debtor promoted the false impressions that the money from the Creditor's loans would be used to purchase inventory and that Rose Motors utilized ordinary corporate practices. For the same reasons articulated above, the Court finds that the Creditor failed to adduce any evidence to show that the Debtor made any representation, either express or implied, to the Creditor regarding either the use of the loan proceeds or the business practices of Rose Motors.
Finally, the Creditor maintains that the Debtor willingly promoted the false impression that the loans were secured by Rose Motors' assets. The Debtor signed the $60,000 note (Creditor Ex. E) but refused to sign either the $30,000 note ( see Creditor Ex. C) or the two security agreements ( see Creditor Exs. D F). All of those documents were signed by Michael in his capacity as president of Rose Motors. Further, that the Creditor did not perfect those security interests in Rose Motors' assets was no fault of the Debtor's. The Creditor testified that he did not know he was required to file UCC-1 financing statements in order to perfect his lien. There was no evidence to show that the Debtor made any representations to the Creditor regarding those security agreements. Hence, the Court finds that the Creditor's failure to properly perfect his liens did not result from any false representation made by the Debtor.
Further, the Court finds that the Creditor failed to establish that the Debtor intended to deceive him. There was no direct proof of the Debtor's fraudulent intent, and the Court cannot infer such intent from the surrounding circumstances. The Debtor himself did not take the stand; the Creditor testified that he had only one conversation with the Debtor with respect to interest payments; and Michael's testimony, which was clearly biased in favor of the Creditor, failed to shed any light whatsoever on the Debtor's intent. In particular, that the Debtor told Michael he was not going to pay the Creditor any more funds after the bank refused to honor the interest check in December 2005, does not prove by a preponderance of the evidence that the Debtor possessed the requisite intent to deceive. In sum, the evidence, and the lack thereof, failed to present "a picture of deceptive conduct" by the Debtor, thereby indicating an intent to defraud the Creditor. See Mathis, 360 B.R. at 666.
Moreover, the Creditor failed to establish justifiable reliance or, in fact, any reliance on the Debtor whatsoever. Because the Debtor did not make any express or implied representations to the Creditor, there could be no reliance, justifiable or otherwise.
The Court further finds that the Creditor failed to establish that the Debtor's conduct constituted actual fraud. The Creditor alleges that the transfer of corporate funds to the Debtor and James, the use of cash in operating the business, the gambling on company time, and the sale of Rose Motors' assets clearly constitute deliberate actions that the Debtor knew would result in the Creditor being cheated. Notwithstanding these allegations, the Creditor did not introduce any evidence to show that the Debtor used surprise, trick, cunning, dissembling, or any deceit, artifice, or design to cheat him. Furthermore, there was no evidence to prove that the Debtor attempted to gain an advantage over the Creditor. As stated above, the Debtor did not make any representations to the Creditor. Moreover, as previously noted, there was no evidence to show that the Debtor somehow suppressed the truth about the ownership of Rose Motors, its business practices, how the loan proceeds were to be utilized, or which corporate assets secured the Creditor's loans. All that the evidence really proved is that Rose Motors and the Debtor failed to repay the Creditor's loans and instead paid other creditors of the business. Alleged preferential payments under 11 U.S.C. § 547(b) to the Debtor, James, and others are not the functional equivalent of or synonymous with fraud for purposes of § 523(a)(2)(A).
The Creditor argues that the state court judgment order supports a finding that the debt should be found non-dischargeable under § 523(a)(2)(A). According to the Creditor, to allow the Debtor to "avoid [the Creditor's] debt by filing bankruptcy would make this bankruptcy action an engine of fraud and injustice, which the state court decision would not allow." (Creditor Closing Argument at p. 10 (Docket No. 53).) Ostensibly, the Creditor contends the state court judgment order should be give preclusive effect under the doctrine of collateral estoppel and that this Court must give full faith and credit to that judgment order.
Under Illinois law, the essential elements for application of collateral estoppel are: (1) the issue decided in the prior adjudication must be identical to the issue in the current action; (2) the party against whom the estoppel is asserted must have been a party or in privity with a party to the prior case; and (3) there must have been a final judgment on the merits in the prior action. Nowak v. St. Rita High Sch., 757 N.E.2d 471, 478 (Ill. 2001); DuPage Forklift Serv., Inc. v. Material Handling Servs., Inc., 744 N.E.2d 845, 849 (Ill. 2001). "Detailed findings of fact from the earlier proceeding are necessary to enable the bankruptcy court to determine which issues were actually litigated in the earlier proceeding." Union Nat'l Bank of Marseilles v. Leigh (In re Leigh), 165 B.R. 203, 218 (Bankr. N.D. Ill. 1993). "In order for a previous judgment to be conclusive, it must appear clearly and certainly that the identical and precise issue was decided in the previous action. The party asserting collateral estoppel bears the burden of showing with clarity and certainty what was determined by the prior judgment. This is a heavy burden of proof." Benton v. Smith, 510 N.E.2d 952, 956 (Ill. App. Ct. 1987).
The Court rejects the Creditor's argument. The Court was furnished with only a copy of the state court judgment order (Creditor Ex. A), not a transcript of the evidence offered in those proceedings. The state court found that the Debtor breached the terms of the promissory note and that Rose Motors was the alter ego of the Debtor. ( Id.) The fact that the state court pierced the corporate veil and held that Rose Motors was the alter ego of the Debtor, however, does not mean that the Creditor has demonstrated by a preponderance of the evidence the requisite elements under § 523(a)(2)(A). Consequently, the Court cannot give preclusive effect to the judgment order, and that order by itself cannot serve as a basis to except the Creditor's debt from discharge under § 523(a)(2)(A).
In sum, the Court finds that the Creditor's claim under § 523(a)(2)(A) fails because he has not established that the debt at issue resulted from false pretenses, false representation, or actual fraud.
B. Section 523(a)(6)
Next, the Creditor alleges that the debt should be found non-dischargeable under § 523(a)(6). The Creditor contends in the amended complaint that the Debtor's use of Rose Motors' money for purposes other than repayment of the loans to the Creditor was a wrongful violation of the terms evidenced by the promissory notes and security agreements. Further, the Creditor argues that to the extent that monies were diverted to the Debtor, he violated his duties as an officer and director of Rose Motors. According to the Creditor, the fact that the Debtor knew of the security agreements when he sold the company's assets and retained the money instead of paying the Creditor demonstrates that the Debtor intended to cause the Creditor harm, and such actions were without just cause.
First, the Creditor argues that because the Debtor was aware of the security agreements when he sold the assets of Rose Motors, he must have known that when he failed to pay the Creditor, he was causing injury to the Creditor, and, in fact, intended to harm him. The Court agrees that the Debtor was aware of the security agreements and promissory notes. In fact, the Debtor signed the $60,000 note (Creditor Ex. E) but refused to sign the $30,000 note or the two security agreements (Creditor Exs. C, D, F). The Debtor's argument that he did not know of the existence of the security agreements or understand that the Creditor was claiming a security interest in the assets of Rose Motors is disingenuous. The fact that the Debtor was aware of these documents, however, does not mean that his act of paying other creditors while failing to pay this Creditor was both "willful" and "malicious" under § 523(a)(6).
The Court finds that the Creditor suffered an injury. The Creditor acquired a lien-albeit an unperfected one-on the assets of Rose Motors via the promissory notes and security agreements. When the Debtor paid other creditors prior to this Creditor and sold assets of Rose Motors on which the Creditor had a lien, an injury to property in which the Creditor had an interest resulted. See Hi-Qual Roofing Siding Materials, Inc. v. Ridsdale (In re Ridsdale), 286 B.R. 225, 233 (Bankr. W.D.N.Y. 2002), aff'd sub nom. Collins v. Hi-Qual Roofing Siding Materials, Inc., Nos. 02-CV-0921E(F), 02-CV-0922E(F), 2003 WL 23350125 (W.D.N.Y. Dec. 18, 2003).
A wrongful violation of a promissory note or security agreement constitutes a breach of contract. See Trane Fed. Credit Union v. Conder (In re Conder), 196 B.R. 104, 112 (Bankr. W.D. Wis. 1995). Generally, debts for breach of contract, even for a debtor's intentional breach, are not excepted from discharge under § 523(a)(6). Koplin v. Ginsberg (In re Ginsberg), Nos. 08 B 30836, 09 A 188, 2009 WL 2166688, at *3 (Bankr. N.D. Ill. July 15, 2009); Neiman v. Irmen (In re Irmen), 379 B.R. 299, 312-13 (Bankr. N.D. Ill. 2007); Lazzara, 287 B.R. at 722. The Supreme Court in Geiger, however, did not preclude a breach of contract claim from rising to the level of willful and malicious conduct. Rather, more is required than just a "knowing breach of contract." Geiger, 523 U.S. at 62. The breach must be both "willful" and "malicious." Wish Acquisition, LLC v. Salvino (In re Salvino), 373 B.R. 578, 591 (Bankr. N.D. Ill. 2007) (noting that a breach of contract not involving tortious conduct is outside the scope of § 523(a)(6)), aff'd, No. 07 C 4756, 2008 WL 182241 (N.D. Ill. Jan. 18, 2008). "`Debtors who willfully break security agreements are testing the outer bounds of their right to a fresh start, but unless they act with malice by intending or fully expecting to harm the economic interests of the creditor, such a breach of contract does not, in and of itself,'" preclude the discharge of the debt. Conder, 196 B.R. at 112 ( quoting Barclays Am./Bus. Credit, Inc. v. Long (In re Long), 774 F.2d 875, 882 (8th Cir. 1985)) (emphasis added).
The evidence showed that the Debtor paid other creditors, including, among others, himself, James, Sherry, and AFC, prior to paying the Creditor, a secured but unperfected lien claimant. The Creditor argues that when the Debtor made these payments to other creditors and to himself, he was willfully injuring the Creditor because he had a superior claim to Rose Motors' assets by virtue of the security agreements. This, however, establishes only the "willful" element of § 523(a)(6).
Given the record and the testimony presented, the Court cannot infer that the Debtor intended to injure the property interests of the Creditor and cause him harm at the time he paid these creditors. That the Debtor preferred certain creditors by paying them before he paid this Creditor does not rise to the level of maliciously injury to the Creditor's property interests as required by Geiger. The Court finds that the Creditor failed to produce evidence to show that the Debtor's actions rose to the level of both "willful" and "malicious."
Next, the Creditor argues that the Debtor wrongfully diverted funds from Rose Motors to himself and James. ( See Creditor Exs. S T.) The evidence showed that from January 2005 through March 2006, Rose Motors transferred approximately $1,300,000 via check or wire transfer to the Debtor and James. ( Id.) According to the Creditor, these transfers demonstrate willful and malicious conduct by the Debtor that harmed the Creditor. The Court finds that the Creditor failed to prove by a preponderance of the evidence a malicious injury to the Creditor intentionally committed by the Debtor.
The evidence showed that the $1,300,000 transferred from Rose Motors' accounts was used for corporate purposes and payment of corporate expenses. James explained in his uncontroverted testimony that the wire transfers went to AFC and MAFS, Rose Motors' floorplan finance companies, both of whom were perfected secured creditors, in order to ensure full payment of the monthly audit and to keep the line of credit open. Further, James testified that all checks written to "cash" were for corporate purposes. James and Kelly both testified that Rose Motors paid cash to many of its creditors because those creditors would no longer accept checks from the company. In particular, Kelly testified that she took approximately $2,000 in cash per week with her to register titles and obtain licenses plates for the vehicles. In sum, the unrefutted testimony indicated that the checks made payable to James and the Debtor, the wire transfers, and the cash transactions were all for legitimate corporate purposes.
The Creditor failed to introduce evidence to show that the Debtor wrongfully diverted the corporate assets of Rose Motors for his personal use. While the Creditor pointed to certain transactions that he argues demonstrate a wrongful diversion of corporate funds, the Court finds that the evidence showed otherwise. Michael testified that the payments of $2,872 to the State Disbursement Unit (Creditor Ex. V) were not made for any legitimate business purpose of Rose Motors. He stated, however, that the Debtor had an ex-wife and children and was required to pay child support. These checks could have been the result of an order requiring Rose Motors, the Debtor's employer, to make the child support payments owed by the Debtor. Further, James testified that the March 2005 payment to Upland Mortgage in the sum of $690.60 (Creditor Ex. U) was the result of a second mortgage he took on his home in order to infuse more capital into Rose Motors. James testified that there was an agreement that Rose Motors would pay that mortgage. Finally, James testified that the 2005 payments made to Bank of America were for the cash advances that Sherry took on her credit card for Rose Motors. According to James, Rose Motors did not pay his or the Debtor's personal credit card debt. The Creditor did not refute any of this testimony.
Further, James testified that when Rose Motors closed its doors, AFC took possession of the remaining vehicles and sold them. Those proceeds were applied to the debt owed to AFC by Rose Motors. James also testified that the funds from the sale of Rose Motors' lease were used to process the sales transactions for the vehicles that Rose Motors sold. James explained that Rose Motors borrowed money from his sister to pay the taxes and fees in order to process the vehicle sales. Moreover, James stated that the "buy here-pay here" contract revenues were used to repay his sister for her loan to the company.
Based upon this evidence, the Court finds that the Creditor did not establish that the Debtor diverted corporate funds to himself or to James. Rather, the uncontro verted evidence showed that corporate funds were used to pay legitimate corporate expenses. Again, possible preferential payments under § 547(b) from the company to the Debtor and others are not the equivalent of the requisite elements for a willful and malicious injury excepted from discharge under § 523(a)(6).
According to the Creditor, the Debtor acted maliciously and with ill will toward him because Michael left Rose Motors. The Creditor states that the Debtor's maliciousness is evidenced by the fact that the Debtor stopped payment on the last interest check to him in March 2006. The mere fact that the Debtor stopped payment on this check does not indicate malice. The Creditor did not adduce any evidence to show why the Debtor stopped payment on the check. Rather, the Creditor argues that the Debtor did so because he was upset with Michael for leaving Rose Motors and selling automobiles elsewhere. Argument is not evidence, Deady v. Hanson (In re Hanson), Nos. 09 B 04820, 09 A 00457, 2010 WL 4027743, at *3 (Bankr. N.D. Ill. Oct. 14, 2010), and the lack of any evidence here precludes the Court from finding that the Debtor's actions were malicious.
Additionally, the Creditor argues that the Debtor clearly intended to cause injury to him based on the way the Debtor handled the finances of Rose Motors. The Creditor points to the fact that Rose Motors was experiencing financial problems. Early in its business, the company was bouncing checks and had to borrow money from, among others, the Debtor, James, and Sherry. Further, there was testimony that the Debtor often gambled at work. While all of this may be true, the Creditor did not offer any evidence to show that the Debtor specifically intended to cause injury to him by not repaying him and by repaying other creditors of the company.
In sum, the Court cannot make the requisite findings under Geiger based on the evidence presented. Even though the Debtor's acts caused injury to the Creditor, there is no evidence to suggest that the Debtor acted with malice to cause injury. The Court can infer that the Debtor's actions were intentional, and thus willful, because Michael testified that the Debtor refused to pay the Creditor more than the interest he received. The Court finds, however, that the evidence failed to show that the Debtor intended the injury that resulted from his failure to repay the loans to the Creditor. Therefore, the Creditor has failed to demonstrate that his injury arose from both a "willful" and "malicious" act of the Debtor. See Geiger, 523 U.S. at 61-62. Accordingly, the Creditor's claim under § 523(a)(6) is hereby denied.
V. CONCLUSION
For the foregoing reasons, the Court finds that the Creditor has failed to establish by a preponderance of the evidence that the debt should be found non-dischargeable under § 523(a)(2)(A) or § 523(a)(6).
This Opinion constitutes the Court's findings of fact and conclusions of law in accordance with Federal Rule of Bankruptcy Procedure 7052. A separate order shall be entered pursuant to Federal Rules of Bankruptcy Procedure 5003 and 9021.
DATE: 11/16/10