MEMORANDUM OPINION
J. WOODFIN JONES, Chief Justice.
Appellant Cedar Oak Mesa, Inc. ("Cedar Oak"), a property owners' association, filed suit against one of its residents, appellee Altemate Real Estate, LLC ("Altemate"), to prevent Altemate from operating a short-term, vacation-rental property within the Campfire No. 2 Subdivision in Hays County ("the Subdivision"). Cedar Oak asserted that the renting of property within the Subdivision for periods of less than six months constituted "commercial activity" prohibited by the Subdivision's restrictive covenants and Bylaws. The parties filed cross-motions for summary judgment. The trial court, finding that Altemate's use of the property was not restricted, granted Altemate's no-evidence motion for summary judgment and denied Cedar Oak's summary-judgment motion. Cedar Oak appeals, arguing that it was entitled to summary judgment because the restrictions at issue unambiguously prohibit the type of commercial activity in which Altemate is engaged. We will reverse the judgment of the trial court and remand the cause for further proceedings.
FACTUAL AND PROCEDURAL BACKGROUND
The facts of this case are largely undisputed. Cedar Oak is a non-profit corporation established for the purpose of administering and enforcing deed restrictions for a portion of the Subdivision. In 2007, Altemate purchased property in the Subdivision. Altemate's property is improved with a log cabin, which it rents on a temporary or transient basis for weekend and weekly rentals. Altemate reports receipts for these rentals and pays hotel taxes on them. Dan Meyers, president of Cedar Oak, averred that after Cedar Oak learned of Altemate's use of its property "for short term Bed Breakfast type rentals," it provided Altemate written notice that its use violated the Subdivision's deed restrictions and requested that Altemate discontinue all commercial uses of the property. When Altemate refused, Cedar Oak obtained a temporary injunction preventing Altemate from renting or leasing its property to the public for temporary or transient housing purposes in violation of the Subdivision's deed restrictions.
Cedar Oak then filed the present suit seeking declaratory and injunctive relief and civil penalties. Altemate answered and filed a no-evidence motion for summary judgment, alleging that Cedar Oak had produced no evidence that the deed restrictions prohibit Altemate from renting the property for short-term recreational purposes. Cedar Oak filed a response and counter-motion for summary judgment, asserting that the relevant restrictions permit only residential, not commercial, uses of property in the Subdivision.
The deed restrictions at issue are contained in the Subdivision's Covenants and Restrictions (the "Covenants") and its Bylaws. The first paragraph of the Covenants states that the deed restrictions apply to all lots in the Subdivision except lot 240 (which is designated "commercial"), another lot designated "reserve," and the water-well tract adjacent to the reserve. The Covenants further state, in pertinent part:
Since this Subdivision has been primarily designed as a haven for recreation vehicles, i.e., motor homes, travel trailers, and campers, it is anticipated that few permanent structures will be built or implaced on the property. However, in this event, Paragraphs 1 through 5 following will govern such installation.
. . . .
3. No more than one private dwelling house may be erected on any lot in the Subdivision and no more than one mobile home may be permanently parked on any lot.
. . . .
7. Each and every restriction and condition contained herein shall continue and remain in full force for the longest period allowed by law, unless one or more of said restrictions and conditions are sooner modified or abrogated by joint written agreement by the owners of record of 66-2/3% of the lots in said Campfire Subdivision.
8. Campfire Association [now known as Cedar Oak Mesa, Inc. Property Owners Association] shall be created and the owner or owners of Campfire lots shall be entitled to one voting membership per lot. . . . The purpose of said Association shall be for upkeep, promotion, and maintenance of [the Subdivision], and it may promulgate rules from time to time for the betterment of the community.
Paragraph 24 of the Covenants reiterates that any land designated as "commercial" is not subject to the above restrictions.
The Bylaws, which Cedar Oak purports to have adopted pursuant to paragraph eight of the Covenants, state that with respect to any Subdivision property that is rented or leased, "[t]he tenant occupancy period shall be for no less than 6 months, unless the Board approves extenuating circumstances." Altemate disputes the validity of the Bylaws, asserting that Cedar Oak "provide[d] no evidence that the Bylaws upon which it relies were agreed upon by any lot owners, let alone 66 2/3%, or that they were properly authorized by the owners. Therefore, the Court cannot rely on the Bylaws as deed restrictions in this case." Cedar Oak counters that, at a minimum, the validity of the Bylaws is a fact question precluding summary judgment for Altemate.
The trial court, after reviewing both parties' summary-judgment motions and responses, found that Altemate's property "is not restricted from use as a short-term vacation rental" and therefore granted Altemate's summary-judgment motion and denied Cedar Oak's motion. Cedar Oak appeals.
DISCUSSION
In its first issue, Cedar Oak argues that the trial court erred in granting Altemate's no-evidence motion for summary judgment because Cedar Oak produced more than a scintilla of evidence that short-term, commercial rentals on property within the Subdivision were prohibited by the Covenants and Bylaws. In its second issue, Cedar Oak argues that the trial court erred in denying its motion for summary judgment.
Summary-Judgment Standard of Review
We review the trial court's summary judgment de novo. Joe v. Two Thirty Nine Joint Venture, 145 S.W.3d 150, 156 (Tex. 2004). Under the no-evidence standard, a defendant may move for summary judgment after adequate time for discovery on the ground that there is no evidence of one or more essential elements of a claim on which the plaintiff would have the burden of proof at trial. See Tex. R. Civ. P. 166a(i). A no-evidence summary judgment is essentially a pre-trial directed verdict; therefore, we apply the same legal-sufficiency standard. King Ranch, Inc. v. Chapman, 118 S.W.3d 742, 750-51 (Tex. 2003). Under the "traditional" summary-judgment standard, a summary judgment should be granted only when the movant establishes that there is no genuine issue as to any material fact and that it is entitled to judgment as a matter of law. See Tex. R. Civ. P. 166a(c); Provident Life Accident Ins. Co. v. Knott, 128 S.W.3d 211, 215-16 (Tex. 2003). When, as here, both parties file motions for summary judgment and the court grants one and denies the other, we must decide all questions presented and render the judgment that the trial court should have rendered. City of Garland v. Dallas Morning News, 22 S.W.3d 351, 356 (Tex. 2000).
Review of Restrictive Covenants
We also review the trial court's construction of a restrictive covenant de novo. Owens v. Ousey, 241 S.W.3d 124, 129 (Tex. App.-Austin 2007, pet. denied). The general rules for contract construction apply to restrictive covenants. Pilarcik v. Emmons, 966 S.W.2d 474, 478 (Tex. 1998). We construe restrictive covenants as a whole in light of the circumstances at the time the parties entered into the agreement, giving effect to every sentence, clause, and word of a covenant, and avoiding constructions that would render parts of the covenant superfluous or inoperative. Owens, 241 S.W.3d at 129-30. Our primary obligation in construing restrictive covenants is to give effect to the true intention of the parties as expressed in the instrument. Id. We focus not on their subjective intent but on their objective intent, as it is reflected in the written contract. See Lopez v. Munoz, Hockema Reed, 22 S.W.3d 857, 861 (Tex. 2000).
Covenants restricting the free use of land are not favored by the courts, but they will be enforced if they are clearly worded and confined to a lawful purpose. Wilmoth v. Wilcox, 734 S.W.2d 656, 657 (Tex. 1987). The property code requires that restrictive covenants be construed liberally in order to give effect to their purpose and intent. Tex. Prop. Code Ann. § 202.003(a) (West 2007).
This Court has previously determined that section 202.003 of the property code does not conflict with the long-standing common-law rule that, if there is ambiguity or doubt as to the drafter's intent, a covenant is to be strictly construed against the party seeking to enforce it and in favor of the free and unrestricted use of land. See Reagan Nat'l Adver. of Austin, Inc. v. Capital Outdoors, Inc., 96 S.W.3d 490, 493 n. 2 (Tex. App.-Austin 2002, pet. granted, judgm't vacated w.r.m.). Several other courts of appeals, however, have questioned whether the statutory and common-law rules can be reconciled. See City of Pasadena v. Gennedy, 125 S.W.3d 687, 693-95 (Tex. App.-Houston [1st] 2003, pet. denied) (collecting cases).
Altemate's Summary Judgment
Paragraph three of the Covenants states that "[n]o more than one private dwelling house may be erected on any lot in the Subdivision." Altemate sought and was granted summary judgment on the ground that the language of paragraph three does not prohibit the use of Subdivision property for short-term commercial rentals. While conceding that paragraph three applies to its property, Altemate urges that the provision itself places no restriction on the use of the property — be it residential, commercial, or otherwise. Altemate emphasizes that the words "use," "used," "residence," or "residential" do not appear anywhere in the Covenants. In Altemate's view, paragraph three limits only the number and "architectural form" of improvements that may be erected on a single lot, i.e., a lot may contain no more than one permanent structure and such structure shall be a dwelling house (such as a log cabin). Altemate urges that its interpretation best reflects the drafters' intent that the Subdivision be "transient friendly," as indicated by the preambular language stating that the Subdivision shall be a haven for mobile homes and travel trailers.
Cedar Oak, on the other hand, interprets this provision to mean that the Covenants' reference to "private dwelling houses" logically was intended to restrict owners to private, residential use. See, e.g., Webster's Third New Int'l Dictionary 706 (2002) (defining "dwelling" as "a building or construction used for residence: abode, habitation"); Black's Law Dictionary 582 (9th ed. 2009) (defining "dwelling-house," often shortened to "dwelling," as "the house or other structure in which a person lives; a residence or abode"). Cedar Oak argues that its interpretation harmonizes and gives effect to the entire instrument, which elsewhere exempts "commercial" lots from the Covenants — references that would be meaningless if the lots governed by paragraph three could also be used for commercial purposes.
For a court to be able to construe a restrictive covenant as a matter of law, the covenant must be unambiguous. TX Far West, Ltd. v. Texas Invs. Mgmt., 127 S.W.3d 295, 302 (Tex. App.-stin 2004, no pet.) (citing Columbia Gas Transmission Corp. v. New Ulm Gas, Ltd., 940 S.W.2d 587, 589 (Tex. 1996)); see Dynamic Publ'g Distrib. L.L.C. v. Unitec Indus. Ctr. Prop. Owners Ass'n, 167 S.W.3d 341, 345 (Tex. App.-San Antonio 2005, no pet.). "Like a contract, covenants are `unambiguous as a matter of law if [they] can be given a definite or certain legal meaning.'" Pilarcik, 966 S.W.2d at 478. By contrast, if a covenant is susceptible of more than one reasonable interpretation, it is ambiguous, which creates a fact issue as to the parties' intent. Id. Whether restrictive covenants are ambiguous is a question of law for the court to decide by reviewing the covenant as a whole in light of the circumstances present when the covenant was entered. Id.; Jennings v. Bindseil, 258 S.W.3d 190, 195 (Tex. App.-Austin 2008, no pet.).
We conclude that the language of the Covenants themselves — setting aside for the moment the tenancy-limitation provision in the disputed Bylaws — can reasonably be read either as distinguishing between commercial uses of property and property that is used as a "dwelling" in the manner urged by Cedar Oak, or as simply limiting the number and type of improvements that may be erected on a lot to a single dwelling, as Altemate suggests. Because the Covenants cannot be given a definite or certain legal meaning, they are ambiguous. See TX Far West, 127 S.W.3d at 303. Because the ambiguous language of the Covenants cannot establish as a matter of law whether the original parties intended to allow commercial, non-residential uses of buildings constructed on the subject lots, the language of the Covenants alone is insufficient to support the trial court's summary judgment. See id. Accordingly, we sustain Cedar Oak's first issue and hold that summary judgment for Altemate was improper.
Cedar Oak's Summary Judgment
As to Cedar Oak, it too was not entitled to summary judgment on the basis that the Covenants are unambiguous in its favor. Cedar Oak further argues, however, that the Covenants must be read in conjunction with the Bylaws, which it claims unambiguously prohibit the lease of Subdivision properties for less than six months without approval from Cedar Oak's board of directors.
Altemate responds that this provision in the Bylaws is "unenforceable" for two reasons. First, Altemate asserts that this provision amounts to a modification of the Covenants, which would have required the agreement of 66 2/3% of the property owners in the Subdivision in accordance with paragraph seven of the Covenants, and, according to Altemate, Cedar Oak produced no evidence that the requisite number of property owners approved the modification. Second, Altemate contends that paragraph eight of the Covenants authorizes Cedar Oak to make rules regarding only upkeep, promotion, and maintenance of the Subdivision and does not allow Cedar Oak to enact "use restrictions" such as the one contained in the Bylaws. Cedar Oak counters that the Bylaws do not modify any of the restrictions contained in the Covenants and therefore it need not have complied the with 66 2/3% voting requirement in paragraph seven. Instead, Cedar Oak asserts, the Bylaws are rules that it is authorized to promulgate "for the betterment of the community" pursuant to paragraph eight.
"A developer generally has the unilateral right to impose on its Subdivision, in the first instance, any restrictions that it chooses, to alter or to cancel restrictions, or to abrogate restrictions entirely, so long as no Subdivision lots have been sold." City of Pasadena v. Gennedy, 125 S.W.3d 687, 698 (Tex. App.-Houston [1st] 2003, pet. denied) (citing Dyegard Land P'ship v. Hoover, 39 S.W.3d 300, 313 (Tex. App.-Fort Worth 2001, no pet.)). After any of the Subdivision's lots has been sold, the power to amend the deed restrictions may nonetheless continue if the dedicating instrument grants the developer the right to amend the restrictions and establishes a method of doing so. Id. Any amendment that the developer makes must be in the exact manner that the dedication provides. Id.; see Norwood v. Davis, 345 S.W.2d 944, 948 (Tex. Civ. App.-Austin 1961, no writ).
In this case, assuming arguendo that the Bylaws do indeed amend or modify the deed restrictions in the original Covenants, the record contains no evidence of when the Bylaws were first enacted, whether any lots had been sold in the Subdivision at that time, and whether they ever restricted short-term leases of Subdivision property. The copy of the Bylaws that the parties presented to the trial court simply recites that the Bylaws were amended in 1992, reaffirmed in 1996, revised in 2002, and revised and reaffirmed in 2003. On this record, the trial court lacked sufficient facts to determine as a matter of law whether the Bylaws are invalid for the reasons argued by Altemate.
In its brief, Altemate suggests that Cedar Oak "tried to amend its deed restrictions and filed purported `Bylaws'" only in 2003, an assertion that seems to be inconsistent with the recitations in the Bylaws themselves.
Nor can this Court conclude that the Bylaws are binding as a matter of law. The party seeking to enforce a deed restriction bears the burden of showing that the restriction is valid and enforceable. See Gennedy, 125 S.W.3d at 698; Dyegard, 39 S.W.3d at 308. Here, the summary-judgment evidence does not conclusively show the validity of the Bylaws. Therefore, we hold that Cedar Oak was not entitled to summary judgment and overrule its second issue.
CONCLUSION
Having held that neither party was entitled to summary judgment, we reverse the judgment of the trial court and remand the cause to that court for further proceedings consistent with this opinion.
Altemate asserts that if the Covenants are held to be ambiguous, we must resolve any ambiguities in its favor under the common-law principle that doubts about the meaning of the terms of a restrictive covenant must be resolved in favor of the free use of land. See, e.g., Travis Heights Improvement Ass'n v. Small, 662 S.W.2d 406, 409-10 (Tex. App.-Austin 1983, no writ). Consistent with the precedent of this Court, however, we conclude that because the restrictive covenant at issue is ambiguous and a fact dispute exists regarding the intent of the drafting parties, neither party is entitled to summary judgment. Remanding the cause for further proceedings is therefore proper. See TX Far West, Ltd. v. Texas Invs. Mgmt., 127 S.W.3d 295, 308-09 (Tex. App.-Austin 2004, no pet.).
joints between rooms.
(Id.)
In addition to the issues identified in McParlane's report, the complaint also alleges that scrap cement blocks left over from previous Brickyard jobs were used in the installation, rather than the new. premium-grade subfloor that the Defendant had promised. ( Id. ¶¶ 19 20.)
The complaint notes that the use of the scrap cement blocks is included in McParlane's report. (Compl. ¶ 19.) The report, however, contains no mention of the scrap blocks, nor does it indicate that the use of such blocks caused variations in the subfloor, as alleged in the complaint. (See id.)
The Plaintiff sent McParlane's report to the Defendant, but neither he nor Brickyard took any steps to rectify the problems discussed therein. ( See id. ¶¶ 21 22.) Rather, on November 20, 2003. Brickyard filed a notice of mechanic's lien against the Plaintiff in the amount of $4,505.00 plus interest. ( Id. ¶ 22.)
On November 12, 2008. the Plaintiff filed suit against both Brickyard and the Defendant in the Eighteenth Judicial Circuit in DuPage County. Illinois, seeking both avoidance of the mechanic's lien and recovery of her asserted damages for deception and fraud. ( Id. ¶ 25.) The following day, the Defendant was served with process, but he failed to file an answer or to otherwise respond. ( Id. ¶¶ 26 27.) On May 5, 2009, the Circuit Court entered an order expunging the mechanic's lien and granting a default judgment for the Plaintiff and against Brickyard and the Defendant in the amount of $15,446.09. ( Id. ¶ 28 Ex. C.)
On March 30, 2009, the Defendant filed a voluntary petition for relief under chapter 7 of the Bankruptcy Code (the "Code"). Subsequently, on June 25, 2009, the Plaintiff, acting pro se, filed an adversary complaint in the bankruptcy, seeking relief under various provisions of the Code. On October 7, 2009, after retaining counsel, the Plaintiff amended her complaint, objecting to the dischargeability of the debt owed to her by the Defendant pursuant to sections 523(a)(2)(A) and (a)(6) of the Code. 11 U.S.C. §§ 523(a)(2)(A), (a)(6). About a month later, on November 4, 2009, the Defendant filed the instant motion to dismiss the first amended complaint. Apparently in response to that motion, the Plaintiff then filed a second amended complaint on December 9, 2009. The court now reviews the Plaintiff's second amended complaint for purposes of the instant motion to dismiss.
Prior to the filing of the second amended complaint, the Plaintiff, in contravention of the federal rules, obtained neither the Defendant's written consent nor the court's leave to amend her complaint. See Fed.R.Civ.P. 15(a)(2) (made applicable to adversary proceedings by Fed.R.Bankr.P. 7015). Accordingly, although the Defendant did not raise the issue, the second amended complaint should not be considered by the court. See, e.g., BancFlorida v. De Pasquale (In re De Pasquale), 166 B.R. 663, 672 (Bankr. N.D. Ill. 1994).
Pursuant to Rule 15(a)(2). however, courts "should freely give leave when justice so requires." Fed.R.Civ.P. 15(a)(2). Thus, barring any unusual circumstances, the court would have granted the Plaintiff's motion to amend, had such a motion been filed. Moreover, despite the fact that the Plaintiff failed to follow the federal rules, the Defendant's motion to dismiss was fully briefed following the filing of the Plaintiff's second amended complaint. Both the response and reply appear to generally address this most recent version of the complaint, and neither pleading acknowledges or differentiates between the first and second amended documents. Finally, considering the second amended complaint rather than the first will not alter the outcome in this matter. For all of these reasons, the court will review the second amended complaint for purposes of the Defendant's motion, and the facts as recited above come from that version of the document.
III. DISCUSSION
To survive a motion to dismiss under Rule 12(b)(6), a complaint must contain, inter alia. "a short and plain statement of the claim showing that the pleader is entitled to relief[.]" Fed.R.Civ.P. 8(a)(2) (made applicable to adversary proceedings by Fed.R.Bankr.P. 7008(a)). "While a complaint attacked by a Rule 12(b)(6) motion to dismiss does not need detailed factual allegations, a plaintiff's obligation to provide the `grounds' of his "entitle[ment] to relief requires more than labels and conclusions, and a formulaic recitation of the elements of a cause of action will not do[.]" Bell Atl. Corp. v. Twombly, 550 U.S. 544, 555 (2007) (internal citation omitted); see also Ashcroft v. Iqbal, 129 S. Ct. 1937, 1949 (2009) (finding that the plaintiff must include more than "unadorned, the defendant-unlawfully-harmed-me accusation[s]"). Legal conclusions may help to structure a complaint, but they must be supported by factual allegations. Iqbal, 129 S. Ct. at 1950.
The Seventh Circuit has explained that a complaint will be dismissed under Rule 12(b)(6) unless it clears "two casy-to-clear hurdles." E.E.O.C. v. Concentra Health Servs., Inc., 496 F.3d 773, 776 (7th Cir, 2007). First, the complaint must provide fair notice of the claim and the grounds upon which it rests so that a defendant can prepare his defense. Pratt v. Tarr, 464 F.3d 730. 733 (7th Cir. 2006). Second, the allegations must plausibly suggest that the plaintiff has a right to relief, raising that possibility above a "`speculative level.'" Concentra, 496 F.3d at 776 ( quoting Twombly); see also Killingsworth, 507 F.3d at 618 (noting that the plaintiff must plead "`enough facts to state a claim to relief that is plausible on its face'"). Plausibility means that the allegations in a complaint must permit "the court to draw the reasonable inference that the defendant is liable for the misconduct alleged." Iqbal, 129 S. Ct. at 1949. Accordingly, a plaintiff's complaint must include allegations about each element of the cause of action, or at least allegations from which a court can draw reasonable inferences about each element. Twombly, 550 U.S. at 562.
When a party alleges fraud, as the Plaintiff has done in her complaint, "the circumstances constituting fraud" must be stated "with particularity." Fed.R.Civ.P. 9(b) (made applicable to adversary proceedings by Fed.R.Bankr.P. 7009). Particularity under Rule 9(b) means "the who, what, when, where, and how: the first paragraph of any newspaper story." DiLeo v. Ernst Young, 901 F.2d 624, 627 (7th Cir. 1990); see also Windy City Metal Fabricators Supply, Inc. v. CIT Tech. Fin. Servs., Inc., 536 F.3d 663, 668 (7th Cir. 2008) ("The circumstances of fraud . . . include `the identity of the person who made the misrepresentation, the time, place and content of the misrepresentation, and the method by which the misrepresentation was communicated to the plaintiff.'") Despite this "heightened pleading standard," Goren v. New Vision Int'l, Inc., 156 F.3d 721, 726 (7th Cir. 1998). Rule 9(b)'s particularity requirement must be read in conjunction with Rule 8(a)'s "short and plain statement" notice-pleading requirement. Rezin v. Barr (In re Barr), 207 B.R. 168, 172 (Bankr. N.D. Ill. 1997). Thus, a plaintiff alleging fraud "need only set forth the basic outline of the scheme, who made what misrepresentations and the general time and place of such misrepresentations" in order to adequately alert the defendant of the purported fraud against which he is defending. Caliber Partners, Ltd. v. Affeld, 583 F. Supp. 1308, 1311 (N.D. Ill. 1984).
The particularity requirement of Rule 9(b) applies to all claims which are based on an underlying fraud, including all three prongs of section 523(a)(2)(A) (false pretenses, false representation, and actual fraud). See McCallion v. Lane (In re Lane), 937 F.2d 694, 698-99 (1st Cir. 1991). Although the circumstances of the fraud must be alleged with particularity, "[m]alice, intent, knowledge, and other conditions of a person's mind may be alleged generally." Fed.R.Civ.P. 9(b). The two-hurdle notice-plus-plausibility standard applies, however, to all allegations of mental state. See Iqbal, 129 S. Ct. at 1954.
A. Section 523(a)(2)(A) Claim
Count I of the complaint seeks a determination that the debt owed by the Defendant to the Plaintiff is nondischargeable pursuant to section 523(a)(2)(A) of the Code. That section excepts from discharge any debt "for money, property, services, or an extension, renewal, or refinancing of credit, to the extent obtained by . . . false pretenses, a false representation, or actual fraud, other than a statement respecting the debtor's or an insider's financial condition[.]" 11 U.S.C. § 523(a)(2)(A). Three separate grounds for dischargeability are included under section 523(a)(2)(A): false pretenses, false representation, and actual fraud. Id.
To except a debt from discharge based on false pretenses or false representation, a creditor must establish that: (1) the debtor made a false representation of fact, a representation (2) which the debtor (a) either knew was false or made with reckless disregard for its truth and (b) made with an intent to deceive and (3) on which the creditor justifiably relied. Ojeda v. Goldberg, 599 F.3d 712, 716-17 (7th Cir. 2010): In re Bero, 110 F.3d 462, 465 (7th Cir. 1997): Citibank (S.D.), N.A. v. Michel, 220 B.R. 603, 605 (N.D. Ill. 1998): Deady v. Hanson (In re Hanson), Nos. 09 B 04820, 09 A 00457. 2010 WL 2745785, at *6 (Bankr. N.D. Ill. July 13, 2010); Baermann v. Ryan (In re Ryan), 408 B.R. 143, 156 (Bankr. N.D. Ill. 2009).
Under section 523(a)(2)(A), 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); Rae v. Scarpello (In re Scarpello), 272 B.R. 691, 700 (Bankr. N.D. Ill. 2002). In contrast, false pretenses include "implied misrepresentations or conduct intended to create and foster a false impression." Mem'l Hosp. v. Sarama (In re Sarama), 192 B.R. 922, 927 (Bankr. N.D. Ill. 1996) (internal quotation omitted).
Unlike false pretenses and false representation, "actual fraud" requires neither a misrepresentation nor reliance. McClellan v. Cantrell, 217 F.3d 890, 893-94 (7th Cir. 2000). Encompassing a broad spectrum of circumstances, it consists of "any deceit, artifice, trick, or design involving direct and active operation of the mind, used to circumvent and cheat another[.]" Id. at 893 (internal quotation omitted). In order to establish a claim based on "actual fraud," a creditor must prove that: (1) "actual fraud" occurred; (2) the debtor intended to defraud the creditor; and (3) the debtor's actual fraud created the debt at issue. Bletnitsky v. Jairath (In re Jairath), 259 B.R. 308, 314 (Bankr. N.D. Ill. 2001).
Scienter is a required element of any cause of action under section 523(a)(2)(A). Ryan, 408 B.R. at 157-58. For purposes of the false pretenses and false representation prongs of the statutory exception, intent to deceive is measured by the debtor's subjective intention at the time the representation was made. Mercantile Bank v. Canovas, 237 B.R. 423, 428 (Bankr. N.D. Ill. 1998). Similarly, the focus of an "actual fraud" claim is on the defendant's state of mind at the time of his purportedly fraudulent conduct. Taylor v. Demopoulos (In re Demopoulos), Nos. 07-71355, 07-96062, 2008 WL 4489153. at * 11 (Bankr. N.D. Ill. Sept. 23, 2008). Accordingly, subsequent representations or acts do not establish that the debtor had the requisite intent at the time the representation was made or the act was carried out. Ryan, 408 B.R. at 158. Because direct proof of intent is rarely available, scienter may be established through circumstantial evidence. Rezin v. Barr (In re Barr), 194 B.R. 1009, 1020 (Bankr. N.D. Ill. 1996). Thus, where the debtor knowingly or recklessly made false representations that he knew or should have known would induce another to act, the court can infer an intent to deceive. Hickory Point Bank Trust, FSB v. Kucera (In re Kucera), 373 B.R. 878, 884 (Bankr. C.D. Ill. 2007); Glucona Am., Inc. v. Ardisson (In re Ardisson), 272 B.R. 346, 357 (Bankr. N.D. Ill. 2001). In the same way, fraud may be inferred if the totality of the circumstances suggests that the debtor intended to cheat or otherwise deceive the creditor. Ryan, 408 B.R. at 157.
Finally, reliance on a false pretense or false representation under section 523(a)(2)(A) must be "justifiable." Field v. Mans, 516 U.S. 59, 70-71 (1995). Justifiable reliance is subjective; what is justifiable depends on the characteristics of the particular plaintiff and the circumstances of the particular case. Id. at 71; Bombardier Capital, Inc. v. Dobek (In re Dobek), 278 B.R. 496, 508 (Bankr. N.D. Ill. 2002). The requirement that reliance be justifiable imposes no affirmative duty to investigate unless "the falsity of the representation is easily detectible," Dobek, 278 B.R. at 508, but a creditor cannot bury her head in the sand and ignore obvious falsehoods, Jairath, 259 B.R. at 315.
In cases specifically involving contractor-debtors, there are usually two ways to establish misrepresentation or fraud under section 523(a)(2)(A): (1) to show that the contractor executed the contract never intending to comply with its terms, or (2) to demonstrate that the contractor intentionally misrepresented a material fact or qualification when soliciting the work. Scheidelman v. Henderson (In re Henderson). 423 B.R. 598, 622 (Bankr. N.D.N.Y. 2010) (collecting cases). As to the former, if a contractor misrepresented his intention to fulfill his contractual obligations-something that can be inferred if he did not begin to perform under the contract-a breach of contract may result in a nondischargeable debt. Spinoso v. Heilman (In re Heilman), 241 B.R. 137, 150 (Bankr. D. Md. 1999). With respect to the later, the pivotal question is whether the contractor, during negotiations, induced the property owner into signing the contract by making materially false representations, such as promising to get the necessary permits or overstating his qualifications. Henderson, 423 B.R. at 622.
Turning to the Plaintiff's complaint, of the nine numbered paragraphs under the heading "Count I," the six that provide facts addressing the elements required under section 523(a)(2)(A) read as follows:
32. Pursuant to the DuPage Judgment, the Defendant is individually indebted to the
Plaintiff in an amount not less than $15,794.09 based on the Plaintiff's claims of deliberate deception and fraud.
33. The Contract, which was signed by the Defendant, states that "All work to be completed in a professional manner according to standard practices."
34. Based upon the report prepared by David McParlane of Century Tile, the representation set forth in paragraph 22 above was false and materially misleading.
35. The Plaintiff reasonably relied upon the Defendant's representations in hiring Brickyard to perform construction services for the Plaintiff. In particular, the Plaintiff relied on the Defendant's statements that "new" and "upgraded" subflooring would be installed in the Plaintiff's residence — at a higher cost to the Plaintiff — in order to ensure that the Plaintiff's floors would be level.
36. Had the Defendant represented that he would use scraps of subfloor, and charge the Plaintiff extra for the scraps rather than new material, the Plaintiff would not have entered into the Contract with Brickyard.
37. The false and materially misleading representations made orally by the Defendant to the Plaintiff and set forth in the Contract, which was signed by the Defendant, caused the Plaintiff substantial monetary losses, which are reflected in the DuPage Judgment.
(Compl. ¶¶ 32-37.)
The Plaintiff claims that the Defendant made two specific "misrepresentations" for purposes of section 523(a)(2)(A). First, the Plaintiff alleges that one of the contract provisions stated: "[a]ll work to be completed in a professional manner according to standard practices." ( Id. ¶¶ 12, 33.) According to the complaint, that provision was "false and materially misleading." ( Id. ¶¶ 34, 37.) Second, the Plaintiff says, the Defendant represented that a new, upgraded subfloor was needed and would be installed — at a higher cost than originally estimated — in order to ensure a level surface throughout the Plaintiff's home. ( Id. ¶¶ 9, 35.) Rather than the upgraded materials, however, the complaint alleges that substandard scraps of subfloor were installed. ( Id. ¶¶ 20, 36.)
Paragraph 34 of the complaint states as follows: "Based upon the report prepared by David McParlane of Century Tile, the representation set forth in paragraph 22 above was false and materially misleading." (Compl. ¶ 34.) Paragraph 22. however, makes no reference to a representation — false or otherwise. Rather, paragraph 22 discusses the mechanic's lien filed by Brickyard against the Plaintiff. ( See id. ¶ 22.) The court suspects that the Plaintiff meant to reference paragraph 33, set forth above, instead of paragraph 22.
Neither of these statements constitutes a misrepresentation under section 523(a)(2)(A). As to the written provision in the contract, language in a sales agreement stating that a contractor will complete a construction project in a workmanlike manner according to specifications or industry standards does not amount to a misrepresentation just because the contractor breaks that promise. Barr, 194 B.R. at 1017. Similarly, the Defendant's oral representation that "new" and "upgraded" subflooring would be needed — and his subsequent failure to install that subflooring-constituted a broken promise, not a misrepresentation. See, e.g., Scarpello, 272 B.R. at 701.
Although the Defendant's failure to install the new subflooring and generally complete the work according to standard practices may amount to a breach of contract, more than mere nonperformance is required to show a misrepresentation under section 523(a)(2)(A). Milwaukee Auction Galleries, Ltd. v. Chalk, 13 F.3d 1107, 1109 (7th Cir. 1994); see also Henderson, 423 B.R. at 622 ("Substandard performance or a mere breach of the construction contract do[es] not rise to the level of fraud necessary to except the debt from discharge."); Little Family Farms Corp. v. Mortensen (in re Mortensen), 415 B.R. 383, 390 (Bankr. S.D. Iowa 2009) ("The breach of an agreement does not in itself establish that the promisor had no present intention to keep the promise."); Scarpello, 272 B.R. at 701 ("The Defendant admittedly breached her promise and the agreement . . . . While this conduct may amount to breach of promise, it does not rise to the level of fraud, false pretenses or a false representation."); Fuda v. D'Atria (In re D'Atria), 128 B.R. 71, 76 (Bankr. S.D.N.Y. 1991) ("A breach of contract is not tantamount to fraud."); Miller v. Krause (In re Krause), 114 B.R. 582, 606 (Bankr. N.D. Ind. 1988) ("A mere breach of contract by the debtor without more . . . does not imply existence of actual fraud. . . ."). Alleging a promise of future performance that is subsequently not performed is insufficient to establish a section 523(a)(2)(A) claim. See Scarpello, 272 B.R. at 701; Wittman v. Potter (In re Potter), 88 B.R. 851, 852-53 (Bankr. N.D. Ill. 1988). Were it otherwise, any debt resulting from a construction defect would be nondischargeable under the statutory exception, and that is certainly not the intention of the provision. Barr, 194 B.R. at 1019.
Rather. to be actionable under section 523(a)(2)(A), a complaint must allege that the contractor had no intention of honoring the obligations imposed under the contract at the time it was signed or intentionally misrepresented a material fact or qualification. Henderson, 423 B.R. at 622. Here, the Plaintiff has altogether failed to plead any facts to suggest that the Defendant did not intend to perform under the contract when the agreement was executed or that he intentionally made any material representations with knowledge of their falsity at the time they were made. Instead, the allegations in the complaint describe a commercial venture under which the Defendant performed in a substandard way. None of the pleaded facts suggest that the Defendant made any representations intending to defraud the Plaintiff. Without allegations of intent, mere breach of contract by the Defendant does not establish a claim under section 523(a)(2)(A). See Scarpello, 272 B.R. at 701 (finding that there was "no sufficient showing that the Debtor had the proscribed subjective fraudulent intention" at the time she signed the contract); see also Mortensen, 415 B.R. at 390 ("A promise to perform a future act is an actionable representation only when made with an existing real intention not to perform."); Barr, 194 B.R. at 1018 ("Without proof of intent, mere breach . . . does not establish misrepresentation at the time that [the parties] entered into the contract.").
Finally, the Plaintiff's allegations of justifiable reliance barely pass muster. According to the complaint, the Plaintiff relied on the Defendant's "false and materially misleading representation" that "new" and "upgraded" subflooring would be installed in executing the contract and would not have entered into the agreement had the Defendant represented that he would use scraps instead of the premium-grade materials. (Compl. ¶¶ 35 36.) Other than these insufficient allegations, the Plaintiff simply pleads no facts to suggest that the Defendant's representation influenced her to execute the agreement. In fact, she was apparently ready to contract with the Defendant prior to both his representation and the revision of the estimate. The fact that the Defendant failed to honor his obligations under the written contract does not mean that the Plaintiff justifiably relied on his representation or was fraudulently induced to enter into the agreement.
In short, the facts in the complaint do not paint a picture of deceptive or fraudulent conduct by the Defendant that indicates an intent to deceive the Plaintiff. Rather, the allegations support only the notion that the work actually completed by the Defendant was of poor quality. The damages claimed by the Plaintiff representing the cost to repair the work confirm that this is, at its core, an action for breach of contract, not fraud. Because the complaint does not plead "enough facts to state a claim to relief that is plausible on its face." Twombly, 550 U.S. at 570, and because the court "need not accept inferences drawn by [the Plaintiff] if such inferences are unsupported by the facts set out in the complaint[,]" see Kowal v. MCI Commc'ns Corp., 16 F.3d 1271, 1276 (D.C. Cir. 1994), the court finds that the Plaintiff has failed to state a cause of action which can be maintained under section 523(a)(2)(A).
B. Section 523(a)(6) Claim
In Count II of the complaint, the Plaintiff seeks relief under section 523(a)(6) of the Code. which excepts from discharge debts "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). To give rise to a claim under section 523(a)(6), the Plaintiff must plead factual allegations that allow the court to draw the reasonable inference that the Defendant: (1) intended to and caused an injury; (2) acted willfully: and (3) acted maliciously. See Mut. Mgmt. Srvs., Inc. v. Fairgrieves (In re Fairgrieves), 426 B.R. 748, 756 (Bankr. N.D. Ill. 2010); Koplin v. Ginsberg (In re Ginsberg). Nos. 08 B 30836, 09 A 188, 2009 WL 4891815, at *5 (Bankr. M.D. Ill. Dec. 16, 2009); Baker Dev. Corp. v. Mulder (In re Mulder), 307 B.R. 637, 641 (Bankr. N.D. Ill. 2004); Scarpello, 272 B.R. at 704.
The United States Supreme Court has stated that "[t]he word `willful' in [section 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). In other words. "willful" means intent to cause injury, not simply the commission of an intentional act that results in injury, Ginsberg, 2009 WL 4891815. at *5 ( citing Geiger); Scarpello, 272 B.R. at 704 (same). Under Geiger's rigorous standard, the Plaintiff here must plead that the Defendant actually intended to harm her and not merely that the Defendant acted intentionally and she was thus harmed. See Vozella v. Basel-Johnson (In re Basel-Johnson), 366 B.R. 831, 849 (Bankr. N.D. Ill. 2007); Prairie Eye Ctr. v. Butler (In re Butler), 297 B.R. 741, 747 (Bankr. C.D. Ill. 2003). That is, the facts alleged must establish that the Defendant intended the tortious consequences of his actions. See Geiger, 523 U.S. at 61-62; see also Berkson v. Gulevsky (In re Gulevsky), 362 F.3d 961, 964 (7th Cir. 2004). Negligently or recklessly inflicted injuries do not fall within the ambit of section 523(a)(6). Geiger, 523 U.S. at 64.
The Supreme Court has not articulated the state of mind necessary to establish the intent to cause injury for purposes of section 523(a)(6). Fairgrieves, 426 B.R. at 757; Zamora v. Jacobs (In re Jacobs), 403 B.R. 565, 581 (Bankr. N.D. Ill. 2009); Basel-Johnson, 366 B.R. at 849; Butler, 297 B.R. at 747; Scarpello, 272 B.R. at 704. However, recent decisions have generally found that a creditor can demonstrate the requisite intent by showing that either the debtor subjectively intended to injure the creditor or knew that the injury was substantially certain to result from his acts. Id.
As to the malice element, conduct is "malicious" if it is undertaken "in conscious disregard of one's duties or without just cause or excuse." In re Thirtyacre, 36 F.3d 697, 700 (7th Cir. 1994) (internal quotation omitted); see also Fairgrieves, 426 B.R. at 757; Basel-Johnson, 366 B.R. at 850. Accordingly, to establish malice under section 523(a)(6), the Plaintiff must plead that the Defendant (1) intentionally committed a wrongful act; (2) which caused injury to the Plaintiff, and (3) which was done without just cause or excuse. See Basel-Johnson. 366 B.R. at 850. The Defendant need not have acted with ill will or a specific intent to harm the Plaintiff in order for his conduct to be considered malicious. See id.
Of the seven numbered paragraphs under the heading "Count II" of the complaint, the three that provide facts concerning the elements that must be satisfied for a claim under section 523(a)(6) read as follows:
42. As a result of Brickyard's intentional failure to comply with manufacturer and industry standards in the installation of tile flooring in the Plaintiff's residence, which failure was willful and malicious, despite Brickyard's and the Defendant's promises to the contrary in the Contract, the Plaintiff suffered substantial monetary damages, which are reflected in the DuPage Judgment.
43. As a contractor and owner of a contracting business, the Defendant knew or should have known that using liquid nails as a mastic was improper and not to code. The Defendant knew or should have known that using scraps of cement block for the Plaintiff's subfloor rather than new material — particularly in light of the fact that new, upgraded subflooring had been promised to the Plaintiff — could not have been a mere accident or oversight. A special effort to collect and bring all the below-standard pieces to the Plaintiff's house had to be undertaken, underscoring the maliciousness and willfulness of the Defendant's actions.
44. Furthermore, the malicious filing of the Mechanics' Lien, which was done despite a pending dispute raised by the Plaintiff as to the quality of Brickyard's and the Defendant's services, and was done without the Plaintiff's knowledge, caused substantial damage to the Plaintiff and her property.
(Compl. ¶¶ 42-44.)
The Plaintiff alleges that the Defendant's failure to comply with manufacturer and industry standards in the installation of the flooring was intentional. willful, and malicious. ( Id. ¶ 42.) In support of that contention, the Plaintiff claims that the Defendant knew or should have known that using Liquid Nails* as a mastic was improper. ( Id. ¶ 43.) In addition, she says that the Defendant knew or should have known that the use of scrap cement blocks for the subfloor "could not have been a mere accident or oversight." (Id.) According to the complaint, the fact that a "special effort" had to be taken to bring all of those scrap pieces to the Plaintiff's residence emphasizes the willfulness and maliciousness of the Defendant's conduct. (Id.) Finally, the Plaintiff alleges that the Defendant's filing of the mechanic's lien was malicious and caused "substantial damage" to her and her property. ( Id. ¶ 44.)
The Plaintiff has pled facts that clearly establish that the Defendant's conduct was intentional. Additionally, the complaint sufficiently alleges that the Defendant's conduct was malicious, as it was undertaken in conscious disregard of his duties and "without just cause or excuse." See Thirtyacre, 36 F.3d at 700. There are simply no facts, however, alleging that the Defendant had the requisite state of mind to satisfy the willfulness prong of section 523(a)(6). That is, the Plaintiff has failed to provide factual allegations to allow the court to draw the reasonable inference that the Defendant actually intended to harm the Plaintiff or knew that his conduct was substantially certain to injure her. Although the Plaintiff states that the Defendant knew or should have known that using Liquid Nails" and scrap cement blocks was improper, she stops short of alleging that the Defendant intended to harm her and provides only a general and conclusory statement, a "formulaic recitation," against which the United States Supreme Court has cautioned.
Rather than providing facts to establish the willful conduct element required under section 523(a)(6), the Plaintiffs allegations suggest a tortious injury caused by a breach of contract. An intentional breach of contract is excepted from discharge under section 523(a)(6) only when it is accompanied by both malicious and willful conduct. Wish Acquisition, LLC v. Salvino. No. 07 C 4756. 2008 WL 182241. at *4 (N.D. Ill. Jan. 18, 2008) (finding that "a debt arising from an intentional breach of contract standing alone is insufficient to except a debt from discharge for willful and malicious injury"); see also Petralia v. Jercich (In re Jercich), 238 F.3d 1202, 1206 (9th Cir. 2001); Caniglia v. Rodriguez (In re Rodriguez), Nos. 08-B-09210, 09-A-00568, 2010 WL 2342452, at *9 (Bankr. N.D. Ill. June 3, 2010); Ginsberg, 2009 WL 4891815, at *3; Cutler v. Lazzara (In re Lazzara), 287 B.R. 714, 722 (Bankr. N.D. Ill. 2002).
Because the complaint does not include allegations supporting all elements for a cause of action under section 523(a)(6), the Plaintiff has failed to clear the plausibility hurdle required by Twombly and Iqbal. Accordingly, Count II of the complaint is dismissed.
IV. CONCLUSION
For the foregoing reasons, the motion of debtor-defendant Leszek D. Wiszniewski to dismiss the complaint of plaintiff Valerie Merritt will be granted.
Dated: Aug. 31, 2010