Gallo v. Palmiter (In re Palmiter)

591 B.R. 208

IN RE: David J. PALMITER, Rosemary Palmiter, Debtor(s)

Joseph L. Gallo, Linda Gallo, Plaintiff(s)

v.David J. Palmiter, Defendant(s)

Case No.: 5-18-bk-00245 RNO

Adversary No.: 5-18-ap-00044 RNO

United States Bankruptcy Court, M.D. Pennsylvania.

Signed September 26, 2018

Jack M Seitz, Lesavoy Butz & Seitz LLC, Allentown, PA, for Plaintiff.

Mark J. Conway, Law Offices of Mark J Conway PC, Dunmore, PA, for Defendant.

OPINION¹

Robert N. Opel, II, Chief Bankruptcy Judge (bi)

This is a non-dischargeability Adversary Proceeding. One of the Plaintiffs purchased a number of weapons and collectibles from the Debtor/Defendant. The Complaint alleges that the provenance of the purchased items was misrepresented by the Debtor/Defendant. Count II of the Complaint alleges non-dischargeability under the fiduciary exception and Count III alleges non-dischargeability due to willful and malicious injury. On the Debtor's Motion, I will dismiss Count II, with prejudice. Count III will be dismissed, with leave to amend. Further, I will drop Linda Gallo as a party/Plaintiff, with leave to amend.

I. Jurisdiction

This Court has jurisdiction over this matter pursuant 28 U.S.C. §§ 157 and 1334. This is a core proceeding under 28 U.S.C. § 157(b)(2)(I).

II. Facts and Procedural History

On January 23, 2018, David J. Palmiter ("D. Palmiter") and his wife, Rosemary Palmiter ("R. Palmiter") filed a voluntary petition under Chapter 7 of the Bankruptcy Code. The required schedules and statements were filed with the bankruptcy petition.

On April 25, 2018, Joseph L. Gallo ("J. Gallo") and Linda Gallo ("L. Gallo") filed a three count non-dischargeability Complaint.

The Complaint alleges that over a period of years, J. Gallo purchased a number of items from D. Palmiter. The items generally consisted of antique firearms, knives, and other collectibles (collectively the "Purchased Items"). J. Gallo was listed in the bankruptcy schedules as holding a contingent and unliquidated claim. The schedules include, "Possible Claim Disputed – Amount Unknown."

Count I of the Complaint seeks a finding of non-dischargeability pursuant to 11 U.S.C. § 523(a)(2)(A)² . This provision is sometimes referred to as the fraud exception. Count II seeks a finding of non-dischargeability pursuant to § 523(a)(4). This provision is frequently referred to as the fiduciary exception. Count III seeks a finding of non-dischargeability pursuant to § 523(a)(6). This provision is commonly referred to as the willful and malicious injury exception.

On May 29, 2018, D. Palmiter filed a Motion to Dismiss Counts II and III of the Complaint, with prejudice ("Motion"). The Motion also seeks to drop L. Gallo as a party Plaintiff.

Briefs were filed in support of and in opposition to the Motion. A hearing on the Motion was held on September 13, 2018. During oral argument, counsel for D. Palmiter acknowledged that a plausible claim for non-dischargeability under § 523(a)(2)(A) had been pled in Count I of the Complaint. I will next consider the Motion as it relates to Counts II and III. Then I will consider the Motion to drop L. Gallo as a party Plaintiff.

III. Discussion

A. Non-Dischargeability Generally

In examining a discharge/exception claim under § 523, it is important to note that all alleged discharge exceptions are construed strictly against creditors and liberally in favor of debtors. In re Cohn , 54 F.3d 1108, 1113 (3d Cir. 1995) ; In re Gotwald , 488 B.R. 854, 865 (Bankr. E.D.Pa. 2013).

B. Standard to Decide Motions to Dismiss

Under F.R.B.P. 7012(b), to withstand a motion to dismiss, a complaint must state a plausible claim for relief. Generally, a complaint must contain "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 proceeding by Fed. R. Bankr. P. 7008. Also, certain matters, including fraud allegations, must be pled with particularity. Fed. R. Civ. P. 9(b) ; In re Adalian , 474 B.R. 150, 158-59 (Bankr. M.D.Pa. 2012).

Generally, detailed factual allegations are not required in a complaint in Federal court. However:

Plaintiff's obligation to provide the grounds of his entitlement to relief require more than labels and conclusions, and a formulaic recitation of the elements of a cause of action will not do.

Bell Atl. Corp. v. Twombly , 550 U.S. 544, 127 S.Ct. 1955, 1965, 167 L.Ed.2d 929 (2007).

To withstand a motion to dismiss, a complaint must contain enough factual content to allow the court to draw the reasonable inference that the defendant is liable for the misconduct alleged. The plausibility standard requires more than a sheer possibility the defendant acted unlawfully.

Ashcroft v. Iqbal , 556 U.S. 662, 129 S.Ct. 1937, 1949, 173 L.Ed.2d 868 (2009).

When considering a motion to dismiss, well-pled facts are viewed as being true. However, the same is not true with respect to pled legal conclusions.

The District Court must accept all of the complaint's well-pleaded facts as true, but may disregard any legal conclusions. Second, a District Court must then determine whether the facts alleged in the complaint are sufficient to show that the plaintiff has a plausible claim for relief. In other words, a complaint must do more than allege the plaintiff's entitlement to relief. A complaint has to "show" such an entitlement with its facts.

Fowler v. UPMC Shadyside , 210-11 (3d Cir. 2009) (internal citations omitted); In re EP Liquidation, LLC , 583 B.R. 304, 314 (Bankr. D.Del. 2018).

C. Count II – Non-Dischargeability Under § 523(a)(4)

The fiduciary exception to discharge provides that a claim is non-dischargeable where it is, "for fraud or defalcation while acting in a fiduciary capacity, embezzlement or larceny." 11 U.S.C. § 523(a)(4). The instant Complaint alleges that, over a period of time, D. Palmiter misrepresented to J. Gallo the age and authenticity of many of the Purchased Items. Paragraph 19 of the Complaint alleges, "[t]he Purchased Items Plaintiffs bought from Defendant [D. Palmiter] are counterfeits and fakes and are mere replicas and/or facsimiles lacking the historical significance Defendant attributed to them." Compl., ¶ 19, ECF No. 1.

Further, the Complaint alleges "Defendant [D. Palmiter] owed Plaintiffs [J. Gallo and L. Gallo] a fiduciary duty due to Defendant's assertion of a superior position based on his expertise and experience in military artifacts and the Purchased Items Plaintiffs actually bought from Defendant." Compl., ¶ 32, ECF No. 1. It is also alleged, "[f]urther, Defendant owed a fiduciary duty to Plaintiffs due to Defendant's assumption of a position of trust and influence in guiding Plaintiffs to certain items and controlling their decision regarding which items to purchase." Compl., ¶ 33, ECF No. 1.

Federal law generally controls who is considered a fiduciary for purposes of § 523(a)(4), although state law is relevant to determining whether a trust relationship exists. LSP Investment Partnership v. Bennett (Matter of Bennett) , 989 F.2d 779, 784 (5th Cir. 1993), cert denied , 510 U.S. 1011, 114 S.Ct. 601, 126 L.Ed.2d 566 (1993) ; also see Tudor Oaks Ltd. Partnership v. Cochrane (In re Cochrane) , 124 F.3d 978, 984 (8th Cir. 1997) ; In re Bartlett , 397 B.R. 610 (Bankr. D.Mass. 2008).

While the Complaint alleges a fiduciary duty was owed, nowhere does it allege the creation of a trust with D. Palmiter serving as a trustee. The Complaint's allegations concentrate on an alleged "confidential relationship" between D. Palmiter and J. Gallo.

In opposing the Motion, the Plaintiffs cite the decision in Reese v. Pook & Pook, LLC , 2017 WL 6497340 (E.D.Pa., Dec. 19, 2017). This is not a non-dischargeability action. In that case, District Judge Stengel considered an action brought by Chapter 11 debtors against an auctioneer who had sold a portion of their antique toy collection as part of the bankruptcy reorganization process. The debtors sought damages and injunctive relief in the action. Federal jurisdiction was based upon diversity of citizenship, so the district court applied state substantive law. In Reese , one of the complaint's counts alleged a breach of fiduciary duty by the defendant/auctioneer.

The district court considered state law to determine whether a confidential relationship had been plausibly pled.

J. Gallo's argument conflates the state law standards for a finding of confidential relationship with the Bankruptcy Code's more stringent requirements to state a plausible claim based upon the fiduciary discharge exception.

The fiduciary fraud exception is triggered by an express or technical trust, not by a constructive trust which a court may impose as an equitable remedy. In re Patel , 565 F.3d 963, 968 (6th Cir. 2009) ; In re Blaszak , 397 F.3d 386, 391 (6th Cir. 2005) ; In re Halversen , 330 B.R. 291, 296 (Bankr. M.D.Fla. 2005) ; In re Kaczynski , 188 B.R. 770, 773-74 (Bankr. D.N.J. 1995).

In the court's view, the seller/buyer relationship generally starts as, more or less, a competitive enterprise. The seller seeks to sell to the buyer what he has for the highest attainable price. The buyer, on the other hand, seeks to purchase the best quality goods for the lowest price. It is difficult to imagine, absent compelling special circumstances, how a series of sales and purchases could be transformed into an express or technical trust.

An express trust is created only if the settlor manifests an intention to create it, either by words or conduct. Gray v. Leibert , 357 Pa. 130, 53 A.2d 132, 135 (1947) ; In re Vincent J. Fumo Irrevocable Children's Trust, ex rel., Fumo , 104 A.3d 535, 546 (Pa.Super. 2014). Generally, the settlor's intent is determined by considering the trust document as a whole. In re Estate of Warden , 2 A.3d 565, 572 (Pa.Super. 2010).

Mere contractual relationships are less than what is required to establish the existence of a fiduciary relationship for purposes of a fiduciary discharge exception. Werner v. Hofmann , 5 F.3d 1170, 1172 (8th Cir. 1993) ;...