4820 & 4901, Ltd. v. Tesler (In re Tesler)

647 B.R. 710

IN RE: Ben TESLER, Debtor.

4820 & 4901, LTD., Plaintiff,

v.Ben Tesler, Defendant.

Case No. 21 B 472

Adv. No. 22 A 102

United States Bankruptcy Court, N.D. Illinois, Eastern Division.

Signed January 18, 2023

Attorney for Plaintiff: B. Lane Hasler, 33 North Dearborn, Suite 2330, Chicago, IL 60602

Attorney for Debtor/Defendant: Ben L Schneider, Matthew L Stone, Schneider & Stone, 8424 Skokie Blvd., Suite 200, Skokie, IL 60077

MEMORANDUM ORDER GRANTING IN PART AND DENYING IN PART MOTION TO DISMISS

DAVID D. CLEARY, United States Bankruptcy Judge

Plaintiff 4820 & 4901, Ltd. ("Plaintiff") filed a five-count complaint ("Complaint") against Ben Tesler ("Defendant"), objecting to Defendant's discharge under 11 U.S.C. §§ 727(a)(2), (a)(3), (a)(4)(A), (a)(4)(D) and (a)(6). Defendant filed a motion to dismiss ("Motion") all five counts of the Complaint.

After Defendant filed the Motion, the court entered a briefing schedule prior to the initial hearing. Plaintiff timely filed a response ("Response") and Defendant filed his reply ("Reply"). Having reviewed the papers, the court will grant the Motion as to Counts IV and V. The court will deny the Motion as to Counts I, II and III. Plaintiff will be granted leave to amend the Complaint, if possible, to replead Count IV.

I. JURISDICTION

The court has subject matter jurisdiction under 28 U.S.C. § 1334(b) and the district court's Internal Operating Procedure 15(a). This is a core proceeding under 28 U.S.C. § 157(b)(2)(J). Venue is proper under 28 U.S.C. § 1409(a).

II. BACKGROUND

In resolving a motion to dismiss, the court considers well-pleaded facts and the reasonable inferences drawn from them in the light most favorable to the plaintiff. See Reger Dev., LLC v. Nat'l City Bank , 592 F.3d 759, 763 (7th Cir. 2010). Every allegation that is well-pleaded by a plaintiff is taken as true in ruling on the motion. See Berger v. Nat'l Collegiate Athletic Ass'n , 843 F.3d 285, 289-90 (7th Cir. 2016). For purposes of deciding this motion, the court accepts certain well-pleaded facts as true, as well as statements in Defendant's schedules and SOFA:

Plaintiff filed a complaint against Defendant in the Circuit Court of Cook County. That complaint commenced a case assigned number 19L003740 ("State Court Action"). In the State Court Action, Plaintiff sought to collect on a $100,000 promissory note ("Note"). Defendant had executed the Note in payment for past due rent owed by one of his moving and trucking companies, Olympic Moving & Storage, Inc. ("Olympic Moving").

On January 22, 2020, Plaintiff obtained a judgment against Defendant in the State Court Action and began supplementary proceedings.

Defendant filed for relief under chapter 7 of the Bankruptcy Code on January 14, 2021. With his petition, Defendant filed schedules and the Statement of Financial Affairs.

Defendant did not list the following assets on his schedules:

• 100% of the equity of Olympic Moving;¹

• Membership interest in Unlimited Moving and Storage LLC ("Unlimited Moving"); and

• 100% of the equity of MV Moving.²

Defendant disclosed minimal personal property and valued it on Schedule B at amounts roughly equal to the statutory exemptions. Defendant did not explain the disposition of the undisclosed personal property located at his residence.

Defendant did not list any payments made by him during the 90-day period prior to the filing of this bankruptcy case to any creditor in the total amount of $6,825 or more, as required to respond to Question 6 on the Statement of Financial Affairs.

Defendant indicated on his petition that his debts are primarily business debts. Schedules D, E and F show that the only non-consumer debt is Plaintiff's judgment, scheduled in the amount of $117,000. Defendant listed no utilities as creditors on Schedule F. Debtor's nonpriority claims total $56,109.

Defendant listed only one payment on a debt owed to an insider during the year prior to the filing of this bankruptcy case as required to respond to Question 7 on the Statement of Financial Affairs.³

Plaintiff has expended significant time and effort in obtaining discovery from Debtor and third parties through citations in the State Court Action and this case through Bankruptcy Rule 2004 discovery. Defendant did not produce essential documents including credit card statements, asset transfer records and business records.

III. LEGAL DISCUSSION

To defeat a motion to dismiss, a complaint must describe the claim in enough detail to give fair notice to the defendant. See Bell Atlantic Corp. v. Twombly , 550 U.S. 544, 555, 127 S.Ct. 1955, 167 L.Ed.2d 929 (2007). In addition, it must be "plausible on its face." Id. at 570, 127 S.Ct. 1955. "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." Ashcroft v. Iqbal , 556 U.S. 662, 678, 129 S.Ct. 1937, 173 L.Ed.2d 868 (2009).

A complaint need only offer "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 ), unless the subject matter of that pleading implicates a heightened standard, see Fed. R. Civ. P. 9. The circumstances supporting an action sounding in fraud or mistake must be articulated with particularity under Rule 9. According to Rule 9 (made applicable to adversary proceedings by Fed. R. Bankr. P. 7009 ), "[i]n alleging fraud or mistake, a party must state with particularity the circumstances constituting fraud or mistake."

Our Circuit has instructed its lower courts that when alleging fraud, a complaint must contain "the identity of the person making the misrepresentation, the time, place, and content of the misrepresentation, and the method by which the misrepresentation was communicated to the plaintiff." Rocha v. Rudd , 826 F.3d 905, 911 (7th Cir. 2016) (quotation omitted).

But Rule 9 is read in conjunction with Rule 8, which requires only a "short and plain statement of the claim[.]" Therefore, a complaint need not describe the details of the fraudulent conduct "as a journalist

would hope to relate them to [the] general public. It is only necessary to set forth a basic outline of fraud in order to alert the defendant of the purported fraud he is defending against." Gasunas v. Yotis (In re Yotis ), 521 B.R. 625, 634 (Bankr. N.D. Ill. 2014) (quotation omitted). Allegations of intent, however, need only be set forth generally. See Fed. R. Civ. P. 9(b).

A. Count I: 11 U.S.C. § 727(a)(2) – Transferring, Removing or Concealing Assets

The first count of the complaint is brought under 11 U.S.C. § 727(a)(2) :

(a) The court shall grant the debtor a discharge, unless-- ...

(2) the debtor, with intent to hinder, delay, or defraud a creditor or an officer of the estate charged with custody of property under this title, has transferred, removed, destroyed, mutilated, or concealed, or has permitted to be transferred, removed, destroyed, mutilated, or concealed--

(A) property of the debtor, within one year before the date of the filing of the petition; or

(B) property of the estate, after the date of the filing of the petition[.]

For its claim for relief under § 727(a)(2) to survive a motion to dismiss, Plaintiff must plausibly allege that Defendant acted with actual intent to hinder, delay, or defraud it, and that his act consisted of transferring, removing, destroying or concealing any of his property. See Village of San Jose v. McWilliams , 284 F.3d 785, 791 (7th Cir. 2002). The timing of the Defendant's act determines whether § 727(a)(2)(A) or (B) applies.

1. The Complaint plausibly alleges an act of concealment

The court will begin its review of Count I with the second element, asking whether it contains an act that constitutes transfer, removal, destruction or concealment. In its Complaint, Plaintiff alleged that the act in question was Defendant's failure to list certain assets on his bankruptcy schedules. "The deliberate withholding of information about assets from a debtor's schedules or testimony at a 341 meeting can constitute concealment of those assets." PNC Bank, N.A. v. Leongas (In re Leongas ), 628 B.R. 71, 91 (Bankr. N.D. Ill. 2021).

Defendant argues in the Motion that in cases like Leongas , "the failure to schedule assets has only been peripheral to other conduct evidencing concealment." Motion, p. 5 (quotation omitted). See Ruter v. Schryver (In re Schryver) , 558 B.R. 856 (Bankr. N.D. Ill. 2016) ; Layng v. Urbonas (In re Urbonas) , 539 B.R. 533 (Bankr. N.D. Ill. 2015). Since the Complaint does not allege any concealment other than omissions in the schedules, Defendant asserts that these allegations are insufficient to state a claim under § 727(a)(2).

The Seventh Circuit has instructed its lower courts that "[c]oncealment ... includes preventing discovery, fraudulently transferring or withholding knowledge or information required by law to be made known ." In re Scott , 172 F.3d 959, 967 (7th Cir. 1999) (quotation omitted) (emphasis added). Whether Defendant's omission of information from his schedules rises to the level of concealment that requires denial of his discharge will be an issue for trial. Leongas , Schryver and Urbonas were all written after a trial. For purposes of deciding a motion to dismiss, however, the Complaint sufficiently alleged that Defendant withheld information that the Bankruptcy Code required him to disclose. This is all that is required at this stage of the adversary proceeding.

Defendant also argues that the allegations in the Complaint that he improperly valued his household goods, clothing and electronics, or that he incorrectly checked the box that his debts are primarily non-consumer, cannot support a claim under § 727(a)(2).

Motions to dismiss cannot be used to excise redundant or superfluous allegations or to craft an ideal complaint. Perhaps they are additional allegations Plaintiff will submit...