Brush v. Franco (In re Franco)

IN THE MATTER OF: CINTHIA FRANCO, Debtor.

WILLIAM and SAIRA BRUSH, Plaintiffs, v. CINTHIA FRANCO, Defendant.

BANKRUPTCY CASE 20-61262-LRC

ADVERSARY PROCEEDING NO. 20-06067-LRC

UNITED STATES BANKRUPTCY COURT NORTHERN DISTRICT OF GEORGIA ATLANTA DIVISION

August 3, 2020

IT IS ORDERED as set forth below:

IN PROCEEDINGS UNDER CHAPTER 7 OF THE BANKRUPTCY CODE

ORDER REGARDING MOTION TO DISMISS

Before the Court is a Motion to Dismiss Pursuant to 12(b)(1) & 12(b)(6) (Doc. 6) (the "Motion") filed by Cinthia Franco ("Defendant"). The Motion arises in connection with a complaint (Doc. 1) (the "Complaint") filed by William and Saira Brush (collectively referred to as "Plaintiffs") seeking a determination that a debt is nondischargeable pursuant to § 523(a)(2)¹ and objecting to Defendant's discharge under § 727(a)(5). Through the Motion, Defendant contends that the claims of William Brush should be dismissed pursuant to Rule 12(b)(1) for lack of subject matter jurisdiction and that the Complaint should be dismissed pursuant to Rule 12(b)(6) for failure to state a claim upon which relief can be granted. This matter constitutes a core proceeding, over which this Court has subject matter jurisdiction. See 28 U.S.C. §§ 157(b)(2)(I) and (J); 1334(b).

BACKGROUND

Defendant filed a voluntary petition for relief under Chapter 7 of the Bankruptcy Code on January 23, 2020 (the "Petition Date"). See Case No. 20-61262-LRC, Doc. 1 (the "Bankruptcy Case"). On April 24, 2020, Plaintiffs initiated this adversary proceeding by filing the Complaint. Through the Complaint, Plaintiffs allege that Defendant and Saira Brush entered into an oral agreement, which was later followed by a written Agreement and Funding Statement as well as a Financing Agreement (collectively referred to as the "Agreements"), whereby Saira Brush agreed to advance Defendant funds to cover payroll and other expenses of FGS Services, LLC, Defendant's cleaning services business. See Complaint, ¶¶ 6-10. Pursuant to these Agreements, Plaintiffs advanced $747,913.31 in principal payments to Defendant from August of 2015 through October of 2017. Id. at ¶ 14. Defendant, however, failed to pay Plaintiffs in accordance with the terms of theAgreements. Id. at ¶ 15. Plaintiffs further allege that "in the two years prior to the [Petition Date, Defendant] made over 1 million dollars in income in her business, FGS Services, LLC," and that Defendant has "not accounted for" this income and has "failed to explain satisfactorily" the loss of this income. Id. at ¶¶ 21-22, 24. Thus, Plaintiffs contend that Defendant's discharge should be denied pursuant to § 727(a)(5). Id. at ¶ 24. Additionally, Plaintiffs contend that Defendant "represented to and promised [] Plaintiffs that the borrowed monies would be used for the purposes of the operation of the business and payroll" but that "[t]hese statements were false" and Defendant "knew at the time she made these statements that they were false." Id. at ¶¶ 27-29. Accordingly, Plaintiffs contend that the debt owed to them by Defendant should be held as nondischargeable pursuant to § 523(a)(2). Id. at ¶ 30.

On May 23, 2020, Defendant filed the Motion seeking dismissal of the Complaint pursuant to Rule 12(b)(1) and (6) of the Federal Rules of Civil Procedure, made applicable to this adversary proceeding by Rule 7012 of the Federal Rules of Bankruptcy Procedure. On July 8, 2020, after the deadline to respond to the Motion had passed, Plaintiffs filed their Opposition to Motion to Dismiss (Doc. 7) (the "Response"). See BLR 7007-1(c) ("Any party opposing a motion must file and serve the party's response . . . not later than fourteen days after service of the motion . . . Failure to file a response indicates no opposition to the motion."). On July 16, 2020, Defendant filed a reply to the Response (Doc. 8) (the "Reply") contending that because the Response was not timely filed, the Motion should be deemed unopposed pursuant to BLR 7007-1(c). The Court has reviewed the Motion as well as the Response and finds that, for the reasons explained below, theMotion should be granted.

DISCUSSION

When considering whether to dismiss a complaint under Rule 12(b)(6) of the Federal Rules of Civil Procedure, for failure to state a claim upon which relief can be granted, the Court must accept as true all factual allegations set forth in the complaint and, on the basis of those facts, determine whether the plaintiff is entitled to the relief requested. Further, The Court must draw all reasonable inferences in the light most favorable to the non-moving party. See Bell Atl. Corp. v. Twombly, 550 U.S. 544, 554-56 (2007); Daewoo Motor America Inc. v. General Motors Corp., 459 F.3d 1249, 1271 (11th Cir. 2007); Hill v. White, 321 F.3d 1334, 1335 (11th Cir. 2003); Grossman v. Nationsbank, Nat'l Ass's, 225 F.3d 1228, 1231 (11th Cir. 2000); Bryant v. Avado Brands, Inc., 187 F.3d 1271, 1273, n.1 (11th Cir. 1999). Additionally, "[f]or purposes of ruling on a motion to dismiss for want of standing, [the Court] must accept as true all material allegations of the complaint, and construe the complaint in favor of the complaining party." Warth v. Seldin, 422 U.S. 490, 501 (1975).

Through the Motion, Defendant contends that the Complaint fails to establish that William Brush was a party to any agreement with Defendant, and therefore fails to show that William Brush has standing to bring claims against Defendant under §§ 523(a)(2) and 727(a)(5). "A plaintiff seeking to invoke a federal court's jurisdiction bears the burden of establishing standing." Koziara v. City of Casselberry, 392 F.3d 1302, 1304 (11th Cir. 2004). "If a plaintiff lacks standing, the 'case' or 'controversy' requirement of Article III, § 2 of the U.S. Constitution is not satisfied, and the case must be dismissed." Id. There arethree constitutional elements of standing:

(1) [the plaintiff] has suffered an "injury in fact" that is (a) concrete and particularized and (b) actual or imminent, not conjectural or hypothetical; (2) the injury is fairly traceable to the challenged action of the defendant; and (3) it is likely, as opposed to merely speculative, that the injury will be redressed by a favorable decision.

Id. (quoting Friends of the Earth, Inc. v. Laidlaw Envtl. Serves. (TOC), Inc., 528 U.S. 167, 180-81 (2000)). All three [of these] elements are an 'irreducible constitutional minimum,' and failure to show any one results in a failure to show standing." Id. at 1305 (quoting Lujan v. Defenders of Wildlife, 504 U.S. 555, 560 (1992)). Here, the Complaint does not allege that William Brush was a party to the Agreements. Instead, the Complaint contends that only Saira Brush and Defendant executed the Agreements. See Complaint, ¶¶ 9, 10 (stating that only "Plaintiff Saira Brush and Defendant [] executed" the Agreements). Thus, the Complaint fails to establish that William Brush has suffered an "injury in fact."

The Eleventh Circuit has stated that "the injury in fact test requires more than an injury to a cognizable interest. It requires that the party seeking review be himself among the injured. The plaintiff must be 'directly' affected apart from her 'special interest in the subject.'" Id. at 1305 (internal citations omitted) (quoting Lujan, 504 U.S. at 561). Further, for an injury to be "particularized" the Eleventh Circuit has stated that the "injury must affect the plaintiff in a personal and individual way" and that "if the plaintiff is merely a 'concerned bystander,' then an injury in fact has not occurred." Id. (citations omitted). Thus, without William Brush's being a party to the Agreements, no debt arising from the Agreements is owed to him and he, therefore, is not affected "in a personal and individual way" by whether the debt arising from the Agreements is determined to benondischargeable.² Similarly, because the Complaint does not allege that any pre-petition debt is owed to William Brush by Defendant, William Brush is also not affected by Defendant's receiving a discharge. See § 727(c)(1) (stating that "[t]he trustee, a creditor, or the United States trustee may object to the granting of a discharge under subsection (a) of this section."); § 101(10) (defining a "creditor" as "an entity that has a claim against the debtor that arose [pre-petition]"); see also In re Cestaro, 598 B.R. 520, 529 (Bankr. D. Conn. 2019) ("'Courts uniformly hold that a plaintiff that is not a creditor lacks standing to object to discharge under § 727(a).'"). Accordingly, the Complaint fails to establish that William Brush has standing to bring an action against Defendant under §§ 523(a)(2) or 727(a)(5) and, therefore, William Brush "must be dismissed" from the Complaint.

Defendant also contends that the Complaint fails to state a claim under either § 523(a)(2) or § 727(a)(5). Regarding the count under § 523(a)(2), Defendant argues that the Complaint fails to state a claim because it does not allege that Saira Brush relied upon any false pretenses, false representations, or actual fraud in agreeing to advance Defendant funds pursuant to the Agreements. "In order to except a debt from discharge under the false pretenses or false representation prongs of § 523(a)(2)(A), 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 withan intent to deceive; and (3) the creditor justifiably relied on the false representation." In re Hanson, 432 B.R. 758, 771 (Bankr. N.D. Ill. 2010) (citing Ojeda v. Goldberg, 599 F.3d 712, 716-17 (7th Cir. 2010)). However, if a creditor alleges actual fraud, "a different analysis . . . must be utilized" and "the creditor must establish [that]: (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. at 772 (citing McClellan v. Cantrell, 217 F.3d 890, 964 (7th Cir....