Koos Enters., LLC v. Hughes (In re Hughes)

In Re: Marvin Earl Hughes and Kathleen Terry Bonnell, Debtors.

Koos Enterprises, LLC, a Nebraska Limited Liability Company; Treehouse Studio, LLC,a Nebraska Limited Liability Company; and Linda Kube, a/k/a/ My Sister's Closet, Plaintiffs, v. Marvin Earl Hughes and Kathleen Terry Bonnell, Defendants.

Bankruptcy No. 18-41582-SKH

Adversary No. 19-4013

UNITED STATES BANKRUPTCY COURT DISTRICT OF NEBRASKA

May 28, 2020

Chapter 7

ORDER

I. INTRODUCTION

On March 21, 2019, Plaintiffs Koos Enterprises, LLC, Treehouse Studio, LLC, and Linda Kube a/k/a My Sister's Closet initiated this adversary proceeding against Defendants/Debtors Marvin Hughes and Kathleen Bonnell. In their Complaint, Plaintiffs seek a determination that debts Debtors owe them are excepted from discharge under 11 U.S.C. § 523(a)(2). Plaintiffs claim debts arising from judgments they obtained against Debtors in a state court action for breach of contract should be excepted from discharge because Debtors used fraudulent statements to solicit Plaintiffs into entering an agreement relating to property in Hastings, Nebraska. Doc. 1 at 2-3; Doc.1, Ex. A. On April 12, 2019, Debtors filed a motion to dismiss this adversary proceeding as moot. Doc. 5. The Court ultimately concluded that Plaintiffs timely filed their Complaint, and it rejected Debtors' reasons for seeking to dismiss this case. See Doc. 18.

On March 27, 2020, Debtors filed a second Motion and Notice to Dismiss this adversary proceeding. Docs. 43. They also filed affidavits and a witness and exhibit list in support of their motion. Docs. 44, 45, 46. For the reasons stated below, Debtors' motion to dismiss is granted.

II. BACKGROUND

In their Complaint, Plaintiffs outline the procedural background related to the judgment they obtained in state court (CI 16-276), and Debtors' attempts to appeal or pursue remedies in a variety of forums. They also explained that they initiated a second lawsuit in state court on June 18, 2018 (CI 18-288), seeking an order voiding allegedly fraudulent conveyances. Doc. 1 at 2. This lawsuit (CI 18-288) was stayed when Debtors petitioned for bankruptcy relief on September 27, 2019.

In their Complaint, Plaintiffs cite to and rely on the factual allegations in their state court lawsuit (CI 16-276) to support their cause of action in this adversary proceeding, claiming these allegations support their request that Debtors should be denied a discharge of the debts they owe to Plaintiff. Doc. 1. They pray for relief as follows:

Plaintiffs pray for an Order of the court finding that the judgments rendered in the District Court of Adams County, Nebraska in case no. CI 16-276 are non-dischargeable debts pursuant to 15 [sic] U.S.C. § 523(a)(2) for the following reasons, to-wit:

1.The Defendants' use of fraudulent statements in soliciting tenants in the real estate located in Hastings, Nebraska using statements which were materially false, upon which the Plaintiff's relied, and said statements were made by Defendants or published by them with the intent to deceive.

WHEREFORE, Plaintiffs seek an Order of the court determining that the judgment rendered in the District Court of Adams County, Nebraska against the Defendants are non-dischargeable debts pursuant to 11 U.S.C. § 523.

Doc. 1 at ¶ 1; Prayer for Relief.

III. RULE 12 DISMISSAL STANDARDS

A. Failure to State a Claim

Rule 12(b)(6) of the Federal Rules of Civil Procedure, applicable in this adversary proceeding by Federal Rule of Bankruptcy Procedure 7012(b), specifies that a party may move to dismiss a complaint for "failure to state a claim upon which relief may be granted." Fed. R. Civ. P. 12(b)(6). A Rule 12(b)(6) dismissal "serves to eliminate actions which are fatally flawed in their legal premises and designed to fail, thereby sparing litigants the burden of unnecessary pretrial and trial activity." Stringer v. St. James R-1 Sch. Dist., 446 F.3d 799, 802 (8th Cir. 2006) (quotation omitted).

Under Rule 12(b)(6), the Court assumes all facts alleged in the complaint are true and makes reasonable inferences in favor of the nonmoving party. Ryan v. Ryan, 889 F.3d 499, 505 (8th Cir. 2018). Although courts primarily consider the allegations in the complaint in determining whether to grant a Rule 12(b)(6) motion, courts also consider "matters incorporated by reference or integral to the claim, items subject to judicial notice, matters of public record, orders, items appearing in the record of the case, and exhibits attached to the complaint whose authenticity is unquestioned; without converting the motion into one for summary judgment." Zean v. Fairview Health Servs., 858 F.3d 520, 526 (8th Cir. 2017) (quotation omitted). "To avoid dismissal, a complaint must plead 'enough facts to state a claim to relief that is plausible on its face.'" Ryan, 889 F.3d at 505 (quoting Bell Atlantic Corp. v. Twombly, 550 U.S. 544, 570 (2007)). "'A claim has facial plausibility when the plaintiff pleads factual content that allows the court to draw the reasonable inference that the defendant is liable for the misconduct alleged.'" Id. (quoting Ashcroft v. Iqbal, 556 U.S. 662, 678 (2009)).

B. Lack of Jurisdiction

Rule 12(b)(1) of the Federal Rules of Civil Procedure governs challenges to subject matter jurisdiction. Fed. R. Civ. P. 12(b)(1). On a Rule 12(b)(1) motion, unlike a Rule 12(b)(6) motion, courts may consider matters outside the pleadings. Osborn v. United States, 918 F.2d 724, 729-30 & n.6 (8th Cir. 1990).

A motion to dismiss under Rule 12(b)(1) may be supported with affidavits or other documents, and this Court may hold a hearing at which witnesses may testify, if necessary. Id. at 730. This is due to the unique nature of the jurisdictional question. Id. at 729. "Jurisdictional issues, whether they involve questions of law or of fact, are for the court to decide." Id. Thus, a court has "'broader power to decide its own right to hear the case than it has when the merits of the case are reached.'" Id. (citations omitted).

A Rule 12(b)(1) motion is also distinguishable from a summary judgment motion under Rule 56. For instance, the plaintiff has the threshold burden of proving that jurisdiction exists. Id. at 730. Further, "no presumptive truthfulness attaches to the plaintiff's allegations, and the existence of disputed material facts will not preclude the trial court from evaluating for itself the merits of jurisdictional claims." Id. Additionally, after the evidence is submitted to this Court, it "must decide the jurisdictional issue, not simply rule that there is or is not enough evidence to have a trial on the issue." Id.

IV. ANALYSIS

Pro se Debtors list several reasons they claim justify dismissal of this adversary proceeding. Although the legal basis of their claims is not entirely clear, it appears that Debtors are asserting the following arguments: (1) Debtors claim Plaintiffs are asking this Court to convey property Debtors claim they no longer own. To the extent Plaintiffs seek this remedy, Debtors claim they must join the "real party in interest"—an irrevocable trust. (2) Debtors claim this Court lacks jurisdiction to "enter a ruling that the conveyance of the property to the Irrevocable Trust amounts to fraudulent conveyance." Doc. 43 at 2. (3) Plaintiffs did not show sufficient facts to justify the judgment they received in state court and have not alleged facts sufficient to prevail on their claims in this adversary proceeding. See Doc. 43. Plaintiffs filed an objection to the Motion to Dismiss, claiming there is no authority in the motion that supports a dismissal. Doc. 48.

On April 28, 2020, the Court heard oral argument on the motion. At the hearing, the Court raised the issue of collateral estoppel and invited the parties to address whether Plaintiffs were estopped from relitigating the fraudulent misrepresentation issue that the Nebraska state court decided. At the hearing, Debtors asserted that collateral estoppel barred Plaintiffs' claim, and they also argued that the Rooker-Feldman doctrine precludes this Court from hearing the fraudulent misrepresentation claim decided by the Nebraska state court. Plaintiffs maintained these doctrines do not apply to this case. The Court granted the parties several weeks to brief these issues.

A. Arguments Debtors Asserted in their Motion

One of the primary purposes of bankruptcy is a fresh start for "the honest but unfortunate debtor" through the discharge of his or her debts. Local Loan Co. v. Hunt, 292 U.S. 234, 244 (1934). In a case filed under Chapter 7, a debtor is discharged from all debts that arose before he or she files a case, except those excepted from discharge. 11 U.S.C. § 727(b). Section 523(a) of the Bankruptcy Code provides nineteen exceptions for specific types of debts that are not discharged in bankruptcy. See 11 U.S.C. § 523(a). Pursuant to these exceptions, debtors remain liable for these debts even after receiving an Order of Discharge. Debts for money obtained by false pretenses, a false representation or actual fraud are among the debts excepted from discharge. 11 U.S.C. § 523(a)(2).

Debtors argue that Plaintiffs are "asking the Bankruptcy Court to enter a ruling that the conveyance of the property to the Irrevocable Trust amounts to fraudulent conveyance," and argue that this Court does not have jurisdiction over this claim. Doc. 43 at 3. Debtors confuse this adversary proceeding with other claims alleged by Plaintiffs in state court. Plaintiffs have not alleged a fraudulent conveyance cause of action in this adversary proceeding or any other pleading in the Bankruptcy Court. The only cause of action they alleged in this adversary proceeding is their claim that Debtors' debt to them should be excepted from discharge under section 523(a)(2).

An action to determine the dischargeability of a debt under section 523(a)(2) of the Bankruptcy Code is a core proceeding. 28 U.S.C. § 157(b)(2)(I). The Court has jurisdiction over adversary proceedings pursuant to 28 U.S.C. §...