Brown v. Johnson (In re Johnson)

In Re: David Eugene Johnson and Kathryn Linda Johnson, Debtors.

Austin Brown, Plaintiff, v. David Eugene Johnson, Defendant.

Bankruptcy Case No. 20-40365-JMM

Adv. Proceeding No. 20-08049-JMM

UNITED STATES BANKRUPTCY COURT DISTRICT OF IDAHO

February 10, 2021

MEMORANDUM OF DECISION

Appearances:

John C. Peterson, Twin Falls, Idaho, Attorney for Plaintiff.

Steven L. Taggart, Idaho Falls, Idaho, Attorney for Defendant.

Introduction

The plaintiff, Austin Brown ("Plaintiff") commenced this adversary proceeding on August 6, 2020. Dkt. No. 1. The defendant, David E. Johnson ("Defendant"), filed a motion to dismiss the case, Dkt. No. 9, which this Court granted with leave to allow the Plaintiff to amend the complaint. Dkt. No. 14. The Court also dismissed Kathryn Johnson, a codebtor in the underlying bankruptcy case and Defendant's wife, as a defendant. On October 16, 2021, Plaintiff filed an amended complaint and attached documents as exhibit "a", Dkt. No. 16, ("Amended Complaint"). Before the Court now is the Defendant's Amended Motion to Dismiss the Adversary Complaint ("Motion to Dismiss"), Dkt. No. 21, to which the Plaintiff objected. Dkt. No. 23. The Court heard oral argument on the matter on January 13, 3021, and thereafter took the motion under advisement. Dkt. No. 24.

The Court has considered the pleadings, the facts alleged in the Amended Complaint, the arguments submitted, and this Memorandum Decision sets forth the Court's findings, conclusions, and reasons for its disposition of the motion. Rules 7052; 9014.¹

Facts Alleged in the Complaint

Defendant is the manager of Car Biz Boyz LLC d/b/a Freedom Auto Finders ("FAF"). FAF markets and sells vehicles on behalf of private sellers and retains part of the sale proceeds for its services. Plaintiff is one such private seller. On January 11, 2020, Plaintiff visited FAF's place of business to have FAF market and sell his truck. Plaintiff signed a marketing agreement, whereby FAF agreed to utilize its marketing skills to market Plaintiff's truck, field inquiries from potential buyers, and make every reasonableeffort to protect Plaintiff's identify and personal information in FAF's possession. Dkt. No. 16, Ex. 1. The marketing agreement repeatedly refers to "Freedom Auto Finders" or "FAF" throughout the document. The marketing agreement is signed by Plaintiff and, on a line titled "Agent Signature," a person named Lisa Bennett. The only reference to Defendant on the marketing agreement is on the second page of that document. Under a line that reads, "Thanks again for hiring us" appears a stamped signature of Defendant's name, David E. Johnson.

The marketing agreement uses the words "we," "our," or "us" repeatedly. Among others, here are a few examples:

• "You just hired a team of professionals and can be assured we will go to work, marketing your vehicle Worldwide. While we can't guarantee a sale, you can feel comfortable in knowing we will work hard for you."

• "[W]e take charge of the agreed upon reconditioning. . . . [W]e take photos and upload your vehicle to the worldwide web. We field email and phone inquiries and . . . we will show the vehicle on your behalf."

• "We are licensed and bonded . . . We protect your identity and private information We never share your personal information with anyone . . . We guarantee funds due from the sale of your vehicle."

• "When we get an offer, we will contact you . . . Our goal is to keep you informed throughout the process."

• "Thanks again for hiring us."

Dkt. No. 16, Ex. a (emphasis added).

After Plaintiff gave permission to FAF to sell his truck, the truck was sold for $38,000. However, the funds were never remitted to Plaintiff. On March 27, 2020,Defendant filed a lawsuit against FAF and Defendant in Twin Falls County, Idaho alleging, among other claims, fraud, Idaho Consumer Protection Act violations, and breach of contract. On May 6, 2020, Defendant filed a voluntary bankruptcy petition.² On August 6, 2020, Plaintiff commenced this adversary proceeding seeking to have his debt declared nondischargeable pursuant to §§ 523(a)(2)(A), (a)(2)(B), (a)(4), and (a)(6). Defendant filed a motion to dismiss the adversary complaint, which this Court granted with leave to allow Plaintiff to file an amended complaint. Plaintiff amended his complaint on October 16, 2020, in which he seeks a declaration that the debt owed to him is nondischargeable pursuant to §§ 523(a)(2)(A) and (a)(4).³

Analysis and Disposition

A. Standards on Motions to Dismiss

A motion to dismiss an adversary proceeding is governed by Rule 7012(b), which incorporates Civil Rule 12(b). Agarwal v. Pomona Valley Med. Grp., Inc. (In re Pomona Valley Med. Grp., Inc.), 476 F.3d 665, 671-72 (9th Cir. 2007). In this case, Defendant moved for dismissal pursuant to Civil Rule 12(b)(6). The standards for such motions are well established. A Civil Rule 12(b)(6) motion may be based on either a "lack of acognizable legal theory" or "the absence of sufficient facts alleged under a cognizable legal theory." Johnson v. Riverside Healthcare Sys., LP, 534 F.3d 1116, 1121-22 (9th Cir. 2008) (quoting Balistreri v. Pacifica Police Dep't, 901 F.2d 696, 699 (9th Cir. 1990)). To survive a Rule 12(b)(6) motion, the plaintiff must assert in the complaint "sufficient factual matter, accepted as true, to 'state a claim to relief that is plausible on its face.'" Ashcroft v. Iqbal, 556 U.S. 662, 678, 129 S. Ct. 1937, 173 L. Ed. 2d 868 (2009) (quoting Bell Atlantic Corp. v. Twombly, 550 U.S. 544, 570 127 S. Ct. 1955, 167 L. Ed. 2d 929 (2007)).

In ruling on a Civil Rule 12(b)(6) motion, this Court must accept as true all facts alleged in the complaint and draw all reasonable inferences in favor of the plaintiff, Maya v. Centex Corp., 658 F.3d 1060, 1067-68 (9th Cir. 2011), and may generally consider only allegations contained in the pleadings, exhibits attached to the complaint, and matters properly subject to judicial notice. Manzarek v. St. Paul Fire & Marine Ins. Co., 519 F.3d 1025, 1030-31 (9th Cir. 2008). Simply put, this Court, weighing whether dismissal at this stage in the proceeding is warranted, must regard the facts alleged by Plaintiff in the Amended Complaint as true, draw all reasonable inferences in favor of Plaintiff, and consider whether Plaintiff has alleged sufficient facts to state a facially plausible claim under §§ 523(a)(2)(A) and 523(a)(4).

The issue is not whether Plaintiff will ultimately prevail but, rather, whether Plaintiff is entitled to offer evidence in support of his claims. Schnieder v. California Dept. of Corrections, 151 F.3d 1194, 1196 (9th Cir. 1998). Although it may appear thatrecovery is remote and unlikely on the face of the pleading, this is not the test. Id. The Idaho Bankruptcy Court has previously emphasized that, under the governing authorities, "it is a rare case that calls for [Civil] Rule 12(b)(6) relief." Hillen v. Specialized Loan Servicing, Inc., LLC (In re Leatham), No. 16-00487-TLM, 2017 WL 3704512, at 2 (Bankr. D. Idaho 2017) (quoting Quad Cities Constr., Inc. v. Advanta Bus. Servs. Corp. (In re Quad-Cities Constr., Inc.), 254 B.R. 465-66 (Bankr. D. Idaho 2000)).

B. Piercing the Veil Standards

Generally, members or managers of an LLC are not liable for the misconduct of the company unless it is proven that the company is the alter ego of the member or manager. See Wandering Trails, LLC v. Big Bite Excavation, Inc., 156 Idaho 586, 594, 329 P.3d 368, 376 (2014) (equating the alter ego test to "piercing the corporate veil" in the context of a prior LLC statute). In other words, the formation of a limited liability company typically shields the managers from personal liability for the wrongful acts of the company. Here, Plaintiff seeks to pierce that veil, thereby breaking the shield and exposing Defendant, as the company's manager, to personal liability for claims against the company. Under this theory, Plaintiff's claims could be nondischargeable in Defendant's personal bankruptcy.

Plaintiff seeks to pierce the corporate veil of FAF to impose liability on Defendant for claims under § 523(a)(2)(A) and § 523(a)(4). Thus, before reaching the merits of Plaintiff's § 523 claims, the Court must first determine whether Plaintiff has assertedfacts that would render veil piercing appropriate. If the Court finds that piercing the veil of FAF's limited liability shield is inappropriate, Plaintiff's § 523 claims necessarily fail.

Idaho law provides limited liability to managers of an LLC based solely on a manager's position in the LLC. Idaho Code § 30-25-304.⁴ However, the protection afforded to managers of an LLC is not unbridled. Although the Idaho Supreme Court has not addressed whether the protections of Idaho Code § 30-25-304 extend to the individual misconduct of the manager,⁵ this Court has previously held that the Idaho Supreme Court would not extend the scope of the limited liability protection of Idaho Code § 30-25-304 beyond the protections expressly enumerated in the statute. T Street LLC v. Jaques (In re Jaques), 615 B.R. 608, 629 (Bankr. D. Idaho 2020).⁶ In other words, while Idaho Code §30-25-304 only affords protection to managers of an LLC because of that managerial status, such protection does not shield a manager from liability for his or her own tortious misconduct.

In his Amended Complaint, Plaintiff argues that piercing the veil here is appropriate because "FAF and Johnson failed to observe the proper formalities; for example he signs [FAF's] most recent annual report as 'President' but identifies himself as the 'manager.'" However, Idaho Code § 30-25-304 expressly rejects failure to follow proper formalities as a reason to pierce the veil of an LLC. Idaho Code § 30-25-304(b).⁷ Put another way, FAF's failure to observe formalities is not a consideration on which this Court can rely to pierce FAF's veil to hold Defendant personally liable. Accordingly, this Court can only pierce the FAF's veil and hold Defendant personally liable for his own...