Collins v. Leonard (In re Leonard)

In re: ADAM L. LEONARD, Debtor.

BART COLLINS and NITA COLLINS, Plaintiffs, v. ADAM L. LEONARD, Defendant.

Case No. 18-12476-JDL

Adv. No. 18-01081-JDL

UNITED STATES BANKRUPTCY COURT FOR THE WESTERN DISTRICT OF OKLAHOMA

March 6, 2019

The following is ORDERED:

Chapter 7

ORDER OVERRULING MOTION TO DISMISS

I. Introduction

This is an adversary proceeding brought by the purchasers of a home built by a Chapter 7 debtor-contractor. Plaintiffs, Bart and Nita Collins (collectively, "Collins"), seek to bar dischargeability of the Debtor's asserted debt to them under 11 U.S.C. § 523(a)(2) (A) (misrepresentation and false pretenses) and § 523(a)(6) (willful and malicious injury to person or property-conversion). This matter comes on for consideration upon the Motion to Dismiss Claims That Are Non-Core, Unrelated to the Bankruptcy filed by the Debtor-Defendant, Adam L. Leonard ("Leonard") [Doc. 4] and Plaintiff''s Response to Motion to Dismiss Claims filed by Collins [Doc. 6].

II. Jurisdiction

This Court has jurisdiction over this action pursuant to 28 U.S.C. § 1334(b) as a matter arising under 11 U.S.C. § 523(a). Pursuant to 28 U.S.C. § 157(b)(2)(I), this action is a core proceeding since it relates to the dischargeability of debts.

III. The Standards for a Motion to Dismiss

A motion to dismiss for "failure to state a claim upon which relief can be granted" is governed by Rule 12(b)(6) of the Fed.R.Civ P., made applicable to adversary proceedings by Fed.R.Bankr.P. 7012.¹ The purpose of a motion to dismiss under Rule 12(b)(6) is to test "the sufficiency of the allegations within the four corners of the complaint after taking those allegations as true." Mobley v. McCormick, 40 F.3d 337, 340 (10^th Cir. 1994). In considering a motion to dismiss, the Court must evaluate the facts alleged in the complaint in the light most favorable to the plaintiff. Moore v. Guthrie, 438 F.3d 1036, 1039 (10^th Cir. 2006). The Court must construe a complaint in the light most favorable to the plaintiff, taken as true all factual allegations and making all reasonable inferences in the plaintiff's favor that can be drawn from the pleadings. Casanova v. Ulibarri, 595 F.3d 1120, 1124 (10^th Cir. 2010). "That the Court excepts them as true, however, does not mean allegationsin the complaint are in fact true; a plaintiff is not required to prove his case at the pleading stage." Higginbottom v. Mid-Del School District, 2016 WL 951691 (W.D. Okla. 2016). The Court must not "weigh potential evidence that the parties might present at trial" in order to test the sufficiency of the complaint. Sutton v. Utah State School for the Deaf and Blind, 173 F.3d 1226, 1236 (10^th Cir. 1999). It is well recognized that "granting a motion to dismiss is a harsh remedy which must be cautiously studied, not only to effectuate the spirit of the liberal rules of pleadings but also to protect the interests of justice". Dias v. City and County of Denver, 567 F.3d 1169, 1178 (10^th Cir. 2009).

To survive a motion to dismiss under Rule 12(b)(6), the complaint must contain enough facts to state a cause of action that is "plausible on its face." Bell Atlantic Corp. v. Twombly, 550 U.S. 544, 570, 127 S.Ct. 1955 (2007). In Twombly, the Supreme Court ruled that a complaint "does not need detailed factual allegations," but must contain "enough facts to state a claim to relief that is plausible on its face." Id. (Emphasis added); In other words, the plaintiff must "nudge [his] claims across the line from conceivable to plausible." Id. Thus, in Twombly, the Supreme Court formulated a "plausibility standard" for evaluating whether a complaint survives a motion to dismiss. In re Ward, 589 B.R. 424, 427 (Bankr. W.D. Okla. 2018).

In applying Twombly's "plausibility standard", the Tenth Circuit has held that the standard lies as a middle ground between "heightened fact pleading" and "formulaic recitation of the elements of a cause of action." Robbins v. Oklahoma ex rel., Department of Human Services, 519 F.3d 1242, 1247 (10^th Cir. 2008). See also Ashcroft v. Iqbal, 556 U.S. 662, 678, 129 S.Ct. 1937 (2009) ("A claim has facial plausibility when the plaintiffpleads factual content that allows the court to draw the reasonable inference that the defendant is liable for the misconduct alleged."); Cook v. Baca, 512 Fed.Appx. 810, 821 (10^th Cir. 2013); Lamar v. Boyd, 508 Fed.Appx. 711, 713-14 (10^th Cir. 2013); Ridge at Red Hawk, L.L.C. v. Schneider, 493 F.3d 1174, 1177 (10^th Cir. 2007) (a complaint must give the court reason to believe the plaintiff has a reasonable likelihood of mustering factual support for the claims raised). A dismissal under Rule 12(b)(6) may be based on the lack of a cognizable legal theory or the absence of sufficient facts alleged under a cognizable legal theory. Bare legal conclusions and simple recitations of the elements of a cause of action do not satisfy this standard. Twombly, 550 U.S. at 555; In re AgFeed USA, LLC, 546 B.R. 318, 337 (Bankr. D. Del. 2016) (A complaint is insufficient when its allegations simply mirror the language of the applicable statutory section).

Since a motion to dismiss is judged on the well-pled allegations of a complaint being accepted as true, the substantive allegations of Plaintiffs' Amended Complaint, [Doc. 3], need be examined, and the Court must determine whether the complaint alleges sufficient facts supporting all the elements necessary to establish an entitlement to relief under the claims raised. Lane v. Simon, 495 F.3d 1182, 1186 (10^th Cir. 2007).

IV. The Allegations of the Complaint

In November 2013, Collins, as buyers, entered into a written contract with Leonard and his wholly owned limited liability company, Mustard Seed Construction, LLC ("MSC"), for the construction of a custom-built home located in Yukon, Oklahoma, for a fixed price of $264,524.00, plus an upward adjustment for an additional sidewalk and upgraded sanitary system bringing the total purchase price to $272,349.00. [Doc. 3, ¶ 5]. Collinsallege that Leonard made numerous false representations in writing to induce them to enter into the contract including, but not limited to, that MSC was "licensed, insured and experienced"; that it was backed by a million-dollar insurance policy; and that it had an A+ rating with the Better Business Bureau. [Doc. 3, ¶ 6-7]. The contract the Collins executed stated that Leonard would construct the home in accordance with the requirements of the building code, the neighborhood covenants and the plans for a pre-negotiated fixed price. [Doc. 3, ¶ 11]. Collins allege that Leonard failed to construct the residence in the manner consistent with the requirements of the building code, the neighborhood covenants, and the plans for structures of the fixed price cost agreement. [Doc. 3, ¶ 11]. Collins allege MSC and Leonard knew that the one-year limited home warranty applicable to the homes construction was not honored, that Leonard "knew that he did not intend to honor the Warranty and he never made any attempt to correct any of the defects in material or workmanship in the Home that were brought to his attention during the warranty period." [Doc. 3, ¶ 12].

Collins further allege that Leonard "knowingly and intentionally constructed the home in a way that allowed him to appropriate a large percentage of the Collins' money to himself while allowing the construction to suffer from serious defects in quality, including numerous building code violations, safety violations ... and major deviations from the contract plans, all the while continually increasing the price to the Collins and padding his own pockets by violating the terms of the fixed price Contract." [Doc. 3, ¶ 13]. Collins spend several pages detailing the "Building Code Violations" which they allege cost them substantial amounts of money to correct. They also detail eleven (11) pages of "Contract Violations" setting forth how Leonard deviated from the plans and specifications by omittingcertain features and materials or using inferior materials while charging the Collins for the features and materials as per the Contract in order to increase his profit.

Another section of the Collins Amended Complaint entitled "Fraudulent Billing Practices" consists of sixteen (16) paragraphs detailing how Leonard "knowingly, intentionally and fraudulently over-billed and double-billed the Collins for certain costs throughout the construction of their home." [Doc. 3, ¶ 34-50]. In other instances, the Collins allege that they were charged for work that Leonard never performed, materials that were never used or charged extra for services and materials that should have been included within the fixed price Contract.

Based upon the factual allegations which, in extremely abbreviated form set forth above, the Collins seek to have Leonard's debt to them to be determine non-dischargeable upon four Claims for Relief: (1) false pretenses under § 523(a)(2)(A) with damages in the amount of $301,401.00;² (2) conversion under § 523(a)(6) with damages in the amount of $198,068.00; (3) false representations under § 523(a)(2)(A) with damages in the amount of $301,401.00 and (4) slander of title-willful and intentional injury to property-under § 523(a)(6) with the court granting injunctive relief by ordering the mechanic's lien which Leonard placed on their property be released and damages determined by the court.³

1. Plaintiffs' Section 523(a)(2)(A) Claims

Section 523(a)(2)(A) is phrased in the disjunctive, meaning that false pretenses, false representation and actual fraud are three separate grounds for non-dischargeability, and these independent causes of action require proof of different elements. Bank of Cordell v. Sturgeon (In re Sturgeon), 496 B.R. 215, 222-23 (10^th Cir. BAP 2013); In re Munoz, 536 B.R. 879, 884 (Bankr. D. Colo. 2015); In re Call, 560 B.R 814, 821 (Bankr. D. Utah 2016). While the elements for each theory under § 523(a)(2)(A) differ, the common thread is a debtor's intent to defraud a creditor. Munoz, ...