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In re Munson
Entered March 10, 2011.
MEMORANDUM OPINION
I.
Summary
This is a motion to dismiss the above-captioned adversary proceeding (the "Motion") filed by Debtors and Defendants Robert Leroy Munson and Kimberly Marie Munson ("Debtors" or "Defendants"). The adversary proceeding for nondischargeability of debt pursuant to 11 U.S.C. §§523(a)(2) and (a)(4) (the "Complaint") filed by Plaintiff SureTec Insurance Company, a Texas corporation ("Plaintiff" or "SureTec") alleges that the Debtors are the alter egos of their now defunct corporation which operated a commercial plumbing business which participated in certain public works projects for which Plaintiff issued bonds. After the commercial plumbing business defaulted on its obligations related to the bonded projects, Plaintiff was required to pay on claims submitted by third parties pursuant to the bonds. Plaintiff alleges that the agreement signed by the commercial plumbing business and Defendants created an express trust with respect to the funds received by the commercial plumbing business relative to the public works projects, and that, as a result, Defendants had a fiduciary relationship with Plaintiff, which was breached by the use of the bonded project funds for overhead expenses, personal payments and the failure to pay suppliers, subcontractors, and laborers.
Plaintiff also alleges that Defendants made misrepresentations in connection with the issuance of the bonds.
II.
Factual Background
Specifically, the Complaint alleges the following facts:
Robert Munson is the president and sole shareholder of a plumbing company, Munson Plumbing, Inc. ("MPI") [Complaint, ¶7]. Kimberly Munson was the office manager of MPI [Complaint, ¶8]. Plaintiff is an issuer of surety bonds.
Defendants approached Plaintiff for the issuance of four surety bonds, as follows:
a. Subcontract Performance Bond No.4372568 and Subcontract Labor and Material Payment Bond No. 4372568 ("Arcadia Science Building Bonds") on behalf of MPI for its performance of its subcontract with PW Construction, Inc. to provide plumbing labor and materials for the Arcadia High School New Science Building project.
b. Subcontract Performance Bond No. 4372568 and Subcontract Labor and Material Payment Bond No. 4372569 ("Arcadia Student Building Bonds") on behalf of MPI for its performance of its subcontract with PW Contruction, Inc. to provide plumbing labor and materials for the Arcadia High School Student Services Building project.
c. Subcontract Performance Bond No. 4375085 and Subcontract Labor and Material Payment Bond No. 4375085 ("Bauchet Storage Bonds") on behalf of MPI for its performance of its subcontract with S. J. Amoroso to provide plumbing labor and materials for the Bauchet Street Storance and Facilities Maintenance Structure project; and
d. Performance Bond No. 4369970 and Payment Bond No. 4369970 ("Middle School Bonds") on behalf of MPI for its performance of its subcontract with the Cucamonga School District of San Bernardino, CA to provide labor and materials for the Rancho Cucamonga Middle School Modernization project.
[Complaint, ¶14. Copies of the Bonds are attached to the Complaint as Ex. A].
As part of the consideration for the issuance of the above referenced bonds (the "Bonds"), the Defendants and MPI signed a General Agreement of Indemnity ("GAI") [Complaint, ¶15, See, Ex. B. to Complaint]. Pursuant to the GAI, Defendants agreed to jointly and severally indemnify Plaintiff and to deposit collateral with Plaintiff upon demand by Plaintiff. [Complaint ¶¶16-17]. The GAI contained language that all project funds received by MPI would be held in trust for the benefit of Plaintiff [Complaint, ¶19]:
All monies due and to become due under any contract or contracts covered by bonds issued by [SureTec] are trust funds, whether in the possession of [Defendants], or otherwise, for the benefit of and for payment of all obligations for which the Company would be liable under any of said bonds, which said trust also insures to the benefit of [SureTec] for any liability or loss it may have or sustain under any of said bonds, and this Agreement shall constitute notice of said trust.
See, also, Ex. A to Complaint, ¶24.
Plaintiff has alleged that the Defendants were the alter egos of MPI [Complaint, ¶¶11-13]. MPI failed to complete the four projects, failed to pay several subcontractors, and Plaintiff began receiving claims on the Bonds. [Complaint, ¶21]. Plaintiff believes that Defendants received payment funds of at least $95, 053 from S.J. Amoroso on the Bauchet Street Project which was not used for related payment obligations and asserts this is just one specific example of what appears to be the improper use of funds from the Projects by Defendants. [Complaint, ¶23]. Plaintiff believes that Defendants directed the funds from the Projects to be utilized for the payment of non-bonded obligations, including payments to themselves. [Complaint, ¶24].
SureTec has paid at least $436, 125.85 covering losses under the Bonds. [Complaint, ¶25].
III.
Standards for a Motion to Dismiss
Federal Rule of Civil Procedure Rule 12(b)(6) is made applicable to these proceedings pursuant to Federal Rule of Bankruptcy Procedure Rule 7012.
"A Rule 12(b)(6) motion to dismiss tests the legal sufficiency of a claim." Navarro v. Block, 250 F.3d 729, 732 (9 Cir. 2001). "To survive a motion to dismiss, a complaint must contain sufficient factual matter, accepted as true, to 'state a claim to relief that is plausible on its face.'" Ascroft v. Iqbal, 129 S.Ct. 1937, 1949 (2009) (quoting Bell A. Corp. v. Twombly, 550 U.S. 544, 570 (2007)). A claim has facial plausibility when the plaintiff pleads factual content that allows the court to draw the reasonable inference that the defendant is liable for the misconduct alleged. "The plausibility standard is not akin to a 'probability requirement, ' but it asks for more than a sheer possibility that a defendant has acted unlawfully." Iqbal, 129 S.Ct. at 1949. "Where a complaint pleads facts that are 'merely consistent with' a defendant's liability, it 'stops short of the line between possibility and plausibility of entitlement to relief'" Id. (quoting Twombly, 550 U.S. at 557).
Cir. 2009). Here, other than conclusory allegations, which the Court is not required to accept as true, Plaintiff fails to allege facts supporting a claim pursuant to 11 U.S.C. §523(a)(2)(A). Accordingly, the Defendants' Motion to Dismiss is granted, with leave to amend.
For the purposes of a motion to dismiss, the Court must treat all factual allegations in the complaint as true, although the Court is "not bound to accept as true a legal conclusion couched as a factual allegation." Iqbal, 129 S.Ct. at 1950.
"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 entitlement to relief requires more than labels and conclusions, and a formulaic recitation of the elements of the cause of action will not do." Twombly, 550 U.S. at 545 (internal quotations omitted). "Determining whether a complaint states a plausible claim for relief… [is] a context-specific task that requires the reviewing court to draw on its judicial experiences and common sense. But where the well-pleaded facts do not permit the court to infer more than the mere possibility of misconduct, the complaint has alleged -- but it has not "shown" -- that the pleader is entitled to relief." Iqbal, 129 S.Ct. at 1950.
IV.
First Cause of Action - 11 U.S.C. § 523(a)(4).
Plaintiff has asserted a claim for nondischargeability of debt pursuant to 11 U.S.C. §523(a)(4) [Defalcation While Acting in a Fiduciary Capacity With Respect to Project Trust Funds].
Plaintiff alleges that (1) an express trust was created by GAI ¶24, which placed applicable fiduciary duties upon the Defendants and (2) applicable fiduciary duties upon the Defendants arose by California statutes (including Business & Professions Code §7108 and Penal Code §§§ 484b, 484c and 506.)
Under California law, an express trust is created by acts or words of the trustor which indicate (1) an intention to create a trust and (2) the subject, purpose, and beneficiary of the trust. Abrams v. Crocker-Citizens Nat'l Bank, 41 Cal.App.3d 55, 59, 114 Cal.Rptr. 913, 915 (1974). The parties' intent must be ascertained from their words and conduct in light of the circumstances surrounding the transaction. Petherbridge v. Prudential Savings & Loan Ass'n, 79 Cal.App.3d 509, 516, 145 Cal.Rptr. 87, 93 (1978) (citing Abrams, 41 Cal.App.3d at 59, 114 Cal.Rptr. at 915).
The Court has reviewed the allegations with respect to the GAI's ¶24, and the language of the GAI in its entirety, and finds that as a matter of law, the language contained in the GAI does not impose fiduciary duties upon the individual Defendants, even though they executed the GAI. The Complaint "bootstraps" those duties, if any, upon the individual Defendants by way of the alleged bad acts of the Defendants, the doctrine of alter ego or California statutes, all which arise ex maleficio. Indeed, this Court does not need to determine whether a "trust" was created in the GAI. If a trust was created, it imposed the fiduciary duty obligations on the corporation, the receiver and disburser of the project funds. The individuals signing the GAI were creating only a creditor-debtor relationship (and a contingent one at that) between the Plaintiff and the individuals. They were "indemnifying" the Plaintiff, as the Plaintiff accurately indicates in its Complaint.
With respect to the allegations contained in the Complaint's ¶¶ 34 to 38, inclusive, that California law imposes upon the Defendants "an obligation to be fiduciary and hold all funds from the Projects for the sole purpose of using and applying same to the Projects' obligations" (Complaint ¶ 34), during oral argument the Plaintiff has acknowledged that if any trusts or fiduciary responsibilities are created because of them, they arise ex maleficio, and are excluded from the application of §523(a)(4). The case law is certain on this result.
"Whether a person is a fiduciary under § 523(a)(4) is a question of federal law . Lewis v. Scott (In re Lewis), 97 F.3d 1182, 1185 (9th Cir. 1996) ( citing Ragsdale v. Haller (In re Haller), 780 F.2d 794, 795 (9th Cir. 1986)). The origins of the fiduciary capacity discharge exception date to the Bankruptcy Act of 1841. 5 Stat 440. From 1884 to the present, courts have construed "fiduciary" in the bankruptcy discharge context as including express trusts, but excluding trusts ex maleficio, i.e., trusts that arose by operation of law upon a wrongful act. Davis v. Aetna Corp., 293 U.S. 328, 333, 79 L.Ed. 393, 55 S.Ct. 151 (1934); Chapman v. Forsyth, 43 U.S. 202, 2 HOW 202, 208, 11 L.Ed. 236 (1844). We have adhered to this construction in interpreting the scope of 11 U.S.C. § 523(a)(4), refusing to deny discharge to those whose fiduciary duties were established by constructive, resulting and implied trusts. Runnion v. Pedrazzini (In re Padrazzini), 644 F.2d 756, 758 (9th Cir. 1981); Schlecht v. Thornton (In re Thornton), 544 F.2d 1005, 1007 (9th Cir. 1976)." The core requirements are that the relationship exhibit characteristics of the traditional trust relationship, and that the fiduciary duties be created before the act of wrongdoing and not as a result of the act of wrongdoing." Runnion, 644 F.2d at 758.
Blyler v. Hemmeter (In re Hemmeter), 242 F.3d 1186, 1189-1190 (9th Cir. Cal. 2001).
With respect to the Plaintiff's allegations of alter ego, even if ¶24 created fiduciary duties on the corporation, it is irrelevant. Notwithstanding allegations of alter ego which may create personal liability of corporate debt onto an officer of a corporation, fiduciary duties of a corporation do not flow to corporate officers simply because of imposition of liability of corporate debt based on the doctrine of alter ego. The general purpose of the doctrine of alter ego is to look through the fiction of the corporation and to hold the individuals doing business in the name of the corporation liable for its debts in those cases where it should be so held in order to avoid fraud or injustice. D. N. & E. Walter & Co. v. Zuckerman, 214 Cal. 418 (6 P.2d 251, 79 A.L.R. 329). Sequoia Prop. & Equip. Ltd. Pshp. v. United States, 1998 U.S. Dist. LEXIS 7877 (E.D. Cal. 1998). The doctrine of alter ego, at least in California, is a device imposed by courts to disregard the corporate entity and hold individuals responsible for acts knowingly and intentionally done in the name of the corporation. Ivy v. Plyler, 246 Cal.App. 2d 678, 682 (Cal. App. 5th Dist. 1966). If a finding of alter ego were to be considered as imposing fiduciary duties, any such imposition would be ex maleficio, i.e., trusts that arose by operation of law upon a wrongful act. Davis v. Aetna Corp., 293 U.S. 328, 333, 79 L.Ed. 393, 55 S.Ct. 151 (1934).
Accordingly, the Defendants' Motion to Dismiss is granted as to the First Cause of Action, without leave to amend.
V.
The Second Cause of Action - 11 U.S.C. §523(a)(2)(A)
Plaintiff has asserted a claim for nondischargeability of debt pursuant to 11 U.S.C. §523(a)(2)(A) [Fraud].
With respect to this Claim, Plaintiff has alleged as follows: Defendants agreed in ¶24 of the GAI to hold and properly use the bonded project funds, to use all funds for the projects' obligations and to hold the funds in trust. [Complaint, ¶54]. SureTec issued the Bonds in reliance of these representations [Complaint, ¶55] and believes that at the time the GAI was executed, Defendants had "no intention of having payments for the projects used to obligations under the projects". [Complaint, ¶57]. Defendants "made a knowing decision to conspire and use the funds from the projects for their personal expenses and other non-project uses." [Complaint, ¶59]. The extent of the diversion was hidden. [Complaint, ¶60].
Based upon the amount of claims and loses experienced by SureTec, it is informed that Defendants embezzled, defalcated, misappropriated, converted or diverted a sum, subject to proof, in funds such that they were not used to pay the projects' obligations, but personal and other non-project expenses. [Complaint, ¶56].
Plaintiff argues that it has sufficiently stated a claim under 523(a)(2) because it has alleged (1) misrepresentations (2) which the debtor knew at the time were false; (3) made with the intent of deceiving the plaintiff; (4) which plaintiff reasonably relied upon; and (5) plaintiff sustained losses.
Plaintiff argues that pursuant to Rule 9(b) it has placed the debtor on notice of the precise misconduct he allegedly committed.
Plaintiffs allegations, however, do not meet the standards articulated in Ascroft v. Iqbal, 129 S.Ct. 1937, 1949 (2009), above.
FRCP 9(b) requires fraud to be pled with sufficient particularity to meet the heightened pleading standard for a fraud claim. See FRCP (9)(b) ("in all averments of fraud . . . the circumstances constituting fraud . . . shall be stated with particularity."). Moreover, in addition to pleading requirements pertaining to the "time, place and content of the alleged misrepresentation [or concealment], " the plaintiff's complaint "must set forth what is false or misleading about a statement and . . . an explanation as to why the statement or omission complained of was false or misleading." Yourish v. Cal. Amplifier, 191 F.3d 983, 993 n.10 (9th Cir. 1999); Rubke v. Capitol Bancorp, Ltd., 551 F.3d 1156 (9
The Court shall enter an Order consistent with its determinations herein.
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