In re Young, Bankruptcy No. 07-16194 (RTL).

384 B.R. 94

In re Steven and Barbara YOUNG, Debtors RANDS, LLC, Plaintiff, v. Steven and Barbara Young, Defendants.

Bankruptcy No. 07-16194 (RTL).

Adversary No. 07-2009 (RTL).

United States Bankruptcy Court, D. New Jersey.

February 14, 2008.

COPYRIGHT MATERIAL OMITTED

Arthur H. Miller, Esq., Miller, Miller & Tucker, P.A., (for the Plaintiff, RANDS, LLC).

Meaghan Tuohey-Kay, Esq., Trenk, DiPasquale, Webster, Della Fera & Sodono, P.C. (for the Defendants, Steven and Barbara Young).

OPINION

RAYMOND T. LYONS, Bankruptcy Judge.

INTRODUCTION

The Plaintiff, RANDS, LLC, seeks to have certain claims arising from a series of disbursements made to the Defendants from the LLC found non-dischargeable. The Defendants moved to dismiss arguing the majority of the Plaintiff's claims are time barred by a three-year statute of limitations which applies to distributions made to members of an LLC.

This court finds the Defendants' argument unpersuasive. The disbursements of funds at issue were not distributions but alleged misappropriations by a member of the LLC. Such transactions are of a different nature and character from one another, and the latter is not subject to the three-year statute of limitations. Alternatively, if the statute of limitations did apply, Plaintiff has argued that it has not run due to the discovery rule and that it is equitably tolled because Defendants concealed their actions. These arguments cannot be decided without resolving disputed material facts. Thus, the Defendants failed to meet their burden of showing no genuine issue of material fact exists; therefore, summary judgment is denied.

JURISDICTION

This court has jurisdiction of this adversary proceeding under 28 U.S.C. § 1334(b), 28 U.S.C. § 157(a), and the Standing Order of Reference by the United States District Court for the District of New Jersey dated July 23, 1984, referring all proceedings related to a case under title 11 of the United States Code to the bankruptcy court. This is a core proceeding under 28 U.S.C. § 157(b)(2)(I) because the Plaintiff seeks to have the court determine the dischargeability of particular debts, as well as 28 U.S.C. § 157(b)(2)(J) because the Plaintiff is objecting to the Debtors' discharge.

FINDINGS OF FACT AND PROCEDURAL HISTORY

In November 2000, Ronald Tedesco ("Tedesco") and Steven Young ("Young"), the debtor-defendant in this case, formed RANDS, LLC ("Rands") with the intention of purchasing vacant land, developing and building luxury homes on the property, and selling these homes for a profit.¹ A bare-bones operating agreement was signed by Tedesco and Young on November 6, 2000. This agreement gave each individual a fifty percent ownership interest in the limited liability company.²

While both men had an equal interest in Rands, their roles within the company were very different. Tedesco served primarily as an investor. Both Tedesco and Young provided initial capitalization during Rands' first year of operation, but Tedesco alone continued to make capital contributions to maintain the viability of the fledgling company. Tedesco's contributions eventually increased to over $800,000 with no additional contributions from Young. Young's role was more in the capacity of a managing member with respect to the operations and financial affairs of the company, controlling the books and records and supervising tax return preparation.

In June 2006, Tedesco filed a lawsuit in New Jersey Superior Court against Young, his wife Barbara, and their company Design Dynamics, LLC. Among the allegations in Tedesco's complaint was that Young misappropriated funds from Rands by withdrawing large sums of money to pay personal expenses and fund his other company. However, on May 3, 2007, prior to the entry of judgment in superior court, the Youngs filed a voluntary chapter 7 petition.³

On August 10, 2007, Rands initiated an adversary proceeding in this court. Rands objected to the Youngs' discharge and sought to determine the dischargeability of debts owed by the Youngs arising from alleged misappropriations of company funds between 2001 and 2005.⁴ The Youngs filed an answer on September 24, 2007, and a motion to dismiss as to Counts Three and Four of the complaint on December 11, 2007. The factual bases of these counts are essentially the same as the basis of the lawsuit in superior court. Rands claims Young misappropriated funds for the personal benefit of himself and his wife and argues such actions falls within the § 523(a)(4) exception to discharge for fraud or defalcation while acting in a fiduciary capacity, embezzlement, or larceny.

DISCUSSION

I. PROCEDURAL ISSUE

A. 12(b)(6) Motion to Dismiss Standard

Under Federal Rule of Civil Procedure 12(b)(6), a defendant may move to dismiss a complaint for "failure to state a claim upon which relief can be granted". FED. R.CIV.P. 12(b)(6). "The rule seeks to screen out claims for which there is clearly no remedy, or where the plaintiff has no right to assert." K.J. v. Div. of Youth & Family Servs., 363 F.Supp.2d 728, 737 (D.N.J.2005).

A pleading is deemed sufficient if it contains "a short and plain statement of the claim showing that the pleader is entitled to relief". FED.R.CIV.P. 8(a)(2). "Specific facts are not necessary;" the statement need only "give the defendant fair notice of what the . . . claim is and the grounds upon which it rests." Erickson v. Pardus, ___ U.S. ___, 127 S.Ct. 2197, 2200, 167 L.Ed.2d 1081 (2007) (quoting Bell Atl. Corp. v. Twombly, ___ U.S. ___, 127 S.Ct. 1955, 1965, 167 L.Ed.2d 929 (2007) (quoting Conley v. Gibson, 355 U.S. 41, 47, 78 S.Ct. 99, 2 L.Ed.2d 80 (1957))). "[A] judge must accept as true all the factual allegations contained in the complaint." Id. (quoting Twombly, 127 S.Ct. at 1965). To determine whether this requirement is met, the court must decide whether the complaint plead "enough facts to state a claim to relief that is plausible on its face." Twombly, 127 S.Ct. at 1974. This requires the plaintiff to do more than provide "a formulaic recitation of the elements of a cause of action." Id. at 1965. In order to meet the standard, the "[f]actual allegations must be enough to raise a right to relief above the speculative level." Id.

All well-pleaded allegations must be accepted by the court as true and should be viewed in the light most favorable to the non-moving party. Evancho v. Fisher, 423 F.3d 347, 351 (3d Cir.2005). The burden falls on the moving party to show no claim was presented. Hedges v. United States, 404 F.3d 744, 750 (3d Cir.2005). In making a determination, the court may consider all facts in the pleadings, exhibits, and matters of judicial notice, such as public records. S. Cross Overseas Agencies, Inc. v. Wah Kwong Shipping Group, Ltd., 181 F.3d 410, 426 (3d Cir.1999).

B. Conversion of 12(b)(6) Motion to Dismiss to Summary Judgment

Federal Rule of Civil Procedure 12(b)(6) states if "matters outside the pleadings are presented to and not excluded by the court, the motion shall be treated as one for summary judgment and disposed of as provided by Rule 56, and all parties shall be given reasonable opportunity to present all material made pertinent to such a motion by Rule 56." FED. R.Civ.P. 12(b)(6). "Generally, in ruling on a motion to dismiss, a . . . court relies on the complaint, attached exhibits, and matters of public record." Sands v. McCormick, 502 F.3d 263, 268 (3d Cir.2007). Therefore, if the moving party presents or uses materials not contained in the four corners of the plaintiff's complaint, and the court relies on such materials, the summary judgment standard should be used. Garlanger v. Verbeke, 223 F.Supp.2d 596, 606 n. 4 (D.N.J.2002). Such a determination is left to the discretion of the court, but the parties must be given adequate notice of the conversion. Id.

Additionally, courts typically finds affirmative defenses, such as a statute of limitations defense, must be asserted in an answer and are not permitted to be raised by a Rule 12(b) motion. Robinson v. Johnson, 313 F.3d 128, 135 (3d Cir.2002). However, the Third Circuit has held a limitations defense may be raised by a Rule 12(b) motion "but only if the time alleged in the statement of a claim shows that the cause of action has not been brought within the statute of limitations.'" Id. (quoting Hanna v. U.S. Veterans' Admin. Hosp., 514 F.2d 1092, 1094 (3d Cir. 1975)). See also, e.g., Oshiver v. Levin, Fishbein, Sedran & Berman, 38 F.3d 1380, 1385 n. 1 (3d Cir.1994) ("While the language of Fed.R.Civ.P. 8(c) indicates that a statute of limitations defense cannot be used in the context of Rule 12(b)(6) motion to dismiss, an exception is made where the complaint facially shows noncompliance with the limitations period and the affirmative defense clearly appears on the face of the pleading."). The bar date must be apparent from the face of the complaint in order for Rule 12(b)(6) dismissal to be permitted. Id.

The basis of the Youngs' motion is that Rands' claims are time barred by the expiration of the three-year statute of limitations in N.J.S.A. 42:2B-42(c). Thus, the motion to dismiss arises from an affirmative defense based on the alleged expiration of this statute of limitations.

As discussed, such determinations can only be made on a motion to dismiss if the expiration of the limitations period is apparent from the face of the pleadings. While it may be possible to determine the present case based solely on the pleadings this court finds the summary judgment standard is a more appropriate mechanism for making the determination. The applicability of N.J.S.A. 42:2B-42(c) is a matter of law but requires the court to consider the character of the transactions at issue and the relationships of the parties. The court finds the determination of the validity of such a defense, where the issues related to the time bar are not cut and dry, would be more effectively adjudicated pursuant to the heightened summary judgment standard. The...