In re Johnson

661 B.R. 844

IN RE: Andrew M. JOHNSON, Debtor Diana Cannon, Plaintiff, v. Andrew M. Johnson, Defendant.

Case No. 23-11365-rmb

Adversary No. 23-00041-rmb

United States Bankruptcy Court, W.D. Wisconsin

Signed July 25, 2024

Justin W. Peterson, Johns, Flaherty & Collins, S.C., La Crosse, WI, for Plaintiff.

Kristin J. Sederholm, Krekeler Law, S.C., Madison, WI, Carrie Sue Werle, Beck, Chaet, Bamberger & Polsky, S.C., Milwaukee, WI, for Defendant.

DECISION AND ORDER GRANTING IN PART AND DENYING IN PART DEFENDANT'S MOTION TO DISMISS

Rachel M. Blise, United States Bankruptcy Judge.

Plaintiff Diana Cannon filed an eight-count Amended Complaint against debtor Andrew Johnson. ECF No. 11 ("Am. Compl."). Cannon asks the Court to declare a debt nondischargeable under 11 U.S.C. § 523(a)(2)(A), (a)(4), (a)(6), and (a)(19). She also includes three state-law causes of action for intentional misrepresentation, breach of fiduciary duty, and Wisconsin securities fraud under § 551.501(2). Johnson filed a motion to dismiss the Amended Complaint, arguing that it does not state a claim. For the reasons explained below, the Court grants the motion to dismiss with respect to Count 3 (breach of fiduciary duty) and Count 5 (nondischargeability under § 523(a)(4)), and the Court denies the motion with respect to the remaining claims.

JURISDICTION

The Court has jurisdiction over the motion to dismiss pursuant to 28 U.S.C. § 1334 and the order of reference from the district court pursuant to 28 U.S.C. § 157(a). See General Order No. 161 (W.D. Wis. June 12, 1984) (available at https://www.wiwd.uscourts.gov/administrative-orders) (last visited July 25, 2024). Determination of the dischargeability of a debt is a core proceeding under 28 U.S.C. § 157(b)(2)(I). To the extent the determination of dischargeability requires consideration of issues impacted by the Supreme Court's decision in Stern v. Marshall, 564 U.S. 462, 131 S.Ct. 2594, 180 L.Ed.2d 475 (2011), Cannon expressly consented to adjudication of such issues by this Court. Am. Compl. ¶ 6. Johnson did not expressly consent, but he has consented by his silence on the matter in his motion to dismiss. See Fed. R. Bankr. P. 7008, 7012(b); see also Wellness Int'l Network, Ltd. v. Sharif, 575 U.S. 665, 683, 135 S.Ct. 1932, 191 L.Ed.2d 911 (2015) ("Nothing in the Constitution requires that consent to adjudication by a bankruptcy court be express.").

FACTS ALLEGED IN AMENDED COMPLAINT

For purposes of deciding the motion to dismiss, the Court accepts as true the following facts alleged in the Amended Complaint. Johnson owned and operated a Wisconsin corporation by the name of Ocooch Mountain Management Co. Am. Compl. ¶¶ 7-8. In early 2020, Johnson sought investors for Ocooch to fund the development of a restaurant and a bed and breakfast in Kendall, Wisconsin. Id. ¶ 10. At the time, Johnson was working as a liaison for Bio-Sunn Technologies, Inc., and Johnson believed that Bio-Sunn's planned development of a processing plant in Kendall would bring additional business opportunities to the area. Id. ¶¶ 11-12.

In February 2020, Johnson asked Cannon to lend Ocooch $26,000 and offered her a promissory note in exchange for the loan. Id. ¶¶ 19, 21. Johnson represented that the money would be used to prepare the restaurant and bed and breakfast to open for business. Id. ¶ 20. Johnson did not tell Cannon that any of the funds would be used to pay Johnson himself or his receptionist. Cannon relied on Johnson's representation, and omission, in making her investment. Id. ¶¶ 22, 40.

Ocooch borrowed a total of $36,000 from Cannon and her brother-in-law. Id. ¶ 36. Ocooch gave Cannon a promissory note for $26,000 with a term of three years at 20% interest to be paid in monthly installments. Id. ¶ 27 & Ex. A. Over the next few months, Cannon received four checks for monthly payments due under the note; one of the checks was returned for insufficient funds and all the payments were late. Id. ¶¶ 29-34.

Before Cannon and her brother-in-law lent funds to Ocooch, the balance in its bank account was $200. Id. ¶ 36. Cannon alleges that $12,814.12 of the borrowed money was paid directly to Johnson and his receptionist. Id. ¶ 38. The rest of the funds are unaccounted for, and by March 31, 2020, the company's bank account had a negative balance. Id. ¶¶ 37-38. Cannon made several requests for an accounting of the funds that Johnson never answered. Id. ¶¶ 31, 33.

In 2022, the Wisconsin Department of Financial Institutions Division of Securities (DFI) opened an investigation into Johnson's business affairs. Id. ¶ 41. On August 16, 2022, DFI issued a Final Order by Consent to Cease and Desist (the "Consent Order"). Id. ¶ 42 & Ex. B. DFI concluded that the promissory note from Ocooch to Cannon was a security under Wis. Stat. § 551.102(28)(d)(1), and that Johnson violated Wis. Stat. § 551.501(2) by omitting material facts in connection with the promissory note. Id. ¶ 43 & Ex. B at 4-5, ¶¶ 33-34. Johnson signed a Waiver and Consent to Order on behalf of himself and Ocooch, in which he waived his right to a hearing on the matter and agreed to issuance of the Consent Order. Am. Compl. ¶ 44 & Ex B. The Consent Order prohibits Johnson from selling securities in Wisconsin, but DFI did not make any findings as to the amount, if any, of Cannon's damages and it did not award her any damages. Id.

Cannon filed an action in Wisconsin state court in early 2023 alleging misrepresentation, breach of contract, and securities fraud under Wis. Stat. § 551.501(2). Am. Compl. ¶ 51. Johnson filed a voluntary chapter 7 petition on August 7, 2023, which stayed the state court lawsuit before any decision on the merits of Cannon's claims. Id. ¶ 52. Cannon now seeks to have the debt owed to her declared not dischargeable.

DISCUSSION

Applicable Pleading Standard

Johnson moves to dismiss under Federal Rule of Civil Procedure 12(b)(6), made applicable to this adversary proceeding by Federal Rule of Bankruptcy Procedure 7012. The purpose of a Rule 12(b)(6) motion to dismiss is to test the sufficiency of the complaint, not to decide the merits of the case. Gibson v. City of Chicago, 910 F.2d 1510, 1520 (7th Cir. 1990). In reviewing a motion to dismiss under Rule 12(b)(6), the Court takes as true all well-pleaded factual allegations in the plaintiff's complaint and draws all reasonable inferences in the plaintiff's favor. Id. at 1520-21. Exhibits attached to the complaint are also considered as part of the pleadings. Bogie v. Rosenberg, 705 F.3d 603, 609 (7th Cir. 2013).

To survive a Rule 12(b)(6) motion, the Amended Complaint must meet the pleading standard under Federal Rule of Civil Procedure 8, made applicable to this proceeding by Federal Rule of Bankruptcy Procedure 7008. Rule 8 requires a complaint contain "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)). The factual allegations "must be enough to raise a right to relief above the speculative level," meaning that they are more than "merely consistent with" the defendant's liability. Twombly, 550 U.S. at 555-57, 127 S.Ct. 1955. Exactly how specific a complaint must be varies with the complexity of a plaintiff's claim, but "the plaintiff must give enough details about the subject-matter of the case to present a story that holds together." Swanson v. Citibank, N.A., 614 F.3d 400, 404 (7th Cir. 2010). "In other words, the court will ask itself could these things have happened, not did they happen." Id. (emphases in original).

To the extent the Amended Complaint alleges fraud, the facts alleged must meet the heightened pleading standard of Federal Rule of Civil Procedure 9(b), made applicable to this proceeding by Federal Rule of Bankruptcy Procedure 7009. Rule 9(b) provides: "In alleging fraud or mistake, a party must state with particularity the circumstances constituting fraud or mistake. Malice, intent, knowledge, and other conditions of a person's mind may be alleged generally." Fed. R. Civ. P. 9(b). That is, the plaintiff must allege the "'who, what, when, and where' of the alleged fraud." Uni*Quality, Inc. v. Infotronx, Inc., 974 F.2d 918, 923 (7th Cir. 1992).

State-Law Claims — Counts 1, 2, and 3

The first three claims in Cannon's Amended Complaint are for violation of Wis. Stat. § 551.501(2), intentional misrepresentation, and breach of fiduciary duty. Am. Compl. ¶¶ 54-71. Typically, state-law claims for damages are not permitted as standalone claims once a debtor files bankruptcy and receives a discharge. Presumably, Cannon brings the first three claims as a means to establish Johnson's liability for an underlying debt because a nondischargeability action under § 523(a) "involves two separate elements: (1) liability for a debt, and (2) the dischargeability of that debt." In re Hoven, 652 B.R. 531, 538 (Bankr. W.D. Wis. 2023). Cannon alleges in the last paragraph in each of Counts 4 through 8 that she is entitled to judgment against Johnson "finding all or a portion of the amounts owed to [Cannon] as a result of counts 1-3 ... to be non-dischargeable."

Johnson's liability for a debt may not be in dispute. On his Schedule E/F in the main bankruptcy case, Johnson listed an unsecured debt owed to Cannon in the amount of $38,342.40, and he did not characterize it as contingent, unliquidated, or disputed. See Case No. 23-11365, ECF No. 17 at 16 & ECF No. 27 at 13.¹ Any debt established under non-bankruptcy law will suffice as long as it also meets the elements of an exception to discharge under § 523(a). Grogan v. Garner, 498 U.S. 279, 284-85 n.12, 111 S.Ct. 654, 112 L.Ed.2d 755 (1991) (noting that a creditor can establish an underlying debt "by proving, for example, a breach of contract involving the same transaction"); see also In re McClure, 625 B.R. 733, 738-39 (...