Plikaytis v. Roth (In re Roth)

518 B.R. 63

In re James Marvin ROTH, Debtor.

Anice M. Plikaytis, Appellee

v.James M. Roth, Appellant.

No. 13–cv–2954 BAS WVG.

Bankruptcy No. 10–7659–MM11.

Adversary No. 10–90359.

United States District Court, S.D. California.

Signed Sept. 5, 2014.

Scott A. McMillan, The McMillan Law Firm, La Mesa, CA, for Appellee.

K. Todd Curry, Curry Advisors, a Professional Law Corporation, San Diego, CA, for Appellant.

OPINION

C. BASHANT, District Judge.

On December 9, 2014, Appellant James Marvin Roth appealed a bankruptcy court's determination that a portion of his debt owed to Appellee A nice M. Plikaytis' was excepted from discharge. After reviewing the parties' briefing and the bankruptcy court's judgment, this Court affirms the bankruptcy court.

I. Procedural Background

Plikaytis successfully sued Roth in California state court in 2009. She was awarded damages against Roth and other defendants. Roth filed for Chapter 11 bankruptcy on May 3, 2010. R. 4.

Plikaytis then filed a complaint, with attached exhibits, objecting to the dischargeability of the state court judgment. R. 3–18. Plikaytis alleged the judgment was nondischargeable because it was based on fraud under 11 U.S.C. § 523(a)(2), 11 U.S.C. § 523(a)(4), and 11 U.S.C. § 523(a)(6) (counts 1, 2, and 3, respectively). Compl. ¶ 4(a)–(c). Plikaytis prayed for the full amount of the judgment, $4,126,844.86, plus interest. R. 4, 18.

Her initial complaint was improperly served and failed to state a claim, so the bankruptcy court dismissed it with leave to amend. R 45–50, 55.

Plikaytis' amended complaint, filed March 3, 2011, set forth six claims for relief. R. 74–94. After an adversary proceeding, the court found a total of $2,997,000 of the debt was not dischargeable. R. 2890. Roth owed (1) a $2.8 million debt under 11 U.S.C. § 523(a)(2) because he made a fraudulent promise to convey a 25% interest in the Roth Montezuma Partnership, LLP (“RMP”); (2) a $90,000 debt under both defalcation pursuant to 11 U.S.C. § 523(a)(4) and willful and malicious injury under 11 U.S.C. § 523(a)(6) ; (3) a $50,000 debt for the willful and malicious intentional infliction of emotional distress under 11 U.S.C. § 523(a)(6) ; and (4) a $57,000 debt for his breach of fiduciary duty by defalcation under 11 U.S.C. § 523(a)(4).

Roth appealed the judgment. R. 2897. Roth makes eight claims. First, he argues Plikaytis' fraud claim under 11 U.S.C. § 523(a)(2) should have been barred by the statute of limitations because her amended complaint should not have related back to the original complaint. Second, he argues Plikaytis did not prove the material element of justifiable reliance required for her § 523(a)¹ claims. Third, he argues that the debt in question arising from his fraud should have been the out-of-pocket injury instead of the breach of contract judgment. Fourth, he again argues that the Amended Complaint does not relate back to the initial complaint. Fifth, he argues Plikaytis was required to prove the $57,000 defalcation was predicated on the same factual allegations underlying the state court judgment. Sixth, he argues his proffered evidence of the money he and his related parties paid into Talmadge East, LLC should have been considered by the bankruptcy court. Seventh, he argues the court improperly found fiduciary capacity in the claims under 11 U.S.C. § 523(a)(4). Eighth and lastly, he argues the intentional infliction of emotional distress claim should have been allocated among dischargeable and nondischargeable claims, and that such allocation evidence was Plikaytis' burden to prove.

The Court finds no merit in Roth's appeal. Therefore the Court affirms the judgment in its entirety.

II. Standard of Review

On appeal, a bankruptcy court's legal conclusions are reviewed de novo, factual findings are reviewed for clear error, and mixed questions of law and fact are reviewed de novo. See Murray v. Bammer (In re Bammer), 131 F.3d 788, 792 (9th Cir.1997).

III. Discussion

A. Relation Back of Plikaytis' Amended Complaint

In his first and fourth issues on appeal, Roth challenges the relation back of Plikaytis' Amended Complaint to her initial complaint. He concedes that the original complaint was timely filed. Appellant's Opening Br., ECF 7, 8:6–8. However, he argues that because the initial complaint only (1) includes the state court Judgment, an abstract of judgment, and writ of execution, (2) recites that the Judgment “includes awards for breach of fiduciary duties and intentional infliction of emotional distress,” and (3) alleges without factual support that the judgment was nondischargeable under § 523(a)(2)(A), (a)(4), and (a)(6), that it did not sufficiently allege its claims so that the Amended Complaint could relate back to it. ECF 7, 8:8–19. Accordingly, he argues the Amended Complaint was untimely, and claims under § 523(a)(2)(A), (a)(4), and (a)(6) should be barred.

Federal Rule of Civil Procedure 15(c)(1)(B) permits amendments to a complaint to relate back to the time of filing of the original complaint if the amendment “asserts a claim or defense that arose out of the conduct, transaction, or occurrence set out—or attempted to be set out—in the original pleading[.]” It is designed to prevent surprising defendants with new charges they believe are no longer “alive” because the statute of limitations has run. See Hughes v. Colorado Dep't of Corr., 594 F.Supp.2d 1226, 1236 (D.Colo.2009). Relation back is “liberally construed” so long as there is a “factual nexus[.]” See id. (quoting Grattan v. Burnett, 710 F.2d 160, 163 (4th Cir.1983) ). The relation back of an amended complaint is reviewed de novo. Slayton v. American Express Co., 460 F.3d 215 (2nd Cir.2006) ; See Krupski v. Costa Crociere S.p. A., 560 U.S. 538, 553, 130 S.Ct. 2485, 177 L.Ed.2d 48 (2010).

Federal Rule of Civil Procedure 8(a)(2) requires only “a short and plain statement of the claim showing that the pleader is entitled to relief.” Hughes, 594 F.Supp.2d at 1236 (citing Erickson v. Pardus, 551 U.S. 89, 127 S.Ct. 2197, 167 L.Ed.2d 1081 (2007) (per curiam)). “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.’ ” Id. (quoting Erickson, 551 U.S. at 89, 127 S.Ct. 2197 ). This standard is not displaced by the Supreme Court's ruling in Bell Atlantic Corp. v. Twombly, 550 U.S. 544, 570–72, 127 S.Ct. 1955, 167 L.Ed.2d 929. Hughes, 594 F.Supp.2d at 1236.

Roth relies on Walsh Securities Inc. v. Cristo Property, 2008 WL 4792544 (D.N.J. October 31, 2008), amended on another point, 2009 WL 1883988 (D.N.J. June 30, 2009), an unpublished case inapplicable here. Unlike Plikaytis' initial complaint, the allegations of fraud in Walsh went unpled in the initial complaint.

Here, the court can first look to the causes of action alleged in the original and amended complaints. Roth challenges the causes of action under § 523(a)(2)(A), (a)(4), and (a)(6). All three were initially pled. It is also clear the amended causes of action arise from the same factual nexus because they are in fact the same causes of action initially pled based on identical material elements. Moreover, Roth was on notice of the underlying factual basis for the state court's judgment because he was a party in the state court litigation.

Roth relies on Plikaytis' failure to plead specific facts of fraud in her initial complaint as grounds for barring relation back. Relation back is construed liberally, and the doctrine prohibiting it is designed to protect defendants from unfair surprise. The initial complaint did actually and adequately put Roth on notice of the claims. The initial complaint included the state court judgment. While the judgment itself did not include the factual basis or causal relationships necessary to properly state a claim, it limited the scope of relevant facts to those relating to Roth's conduct underlying the state court liability. This put Roth on notice of the claims against him and had a sufficient factual nexus to the assertions in the amended pleadings. Accordingly, the bankruptcy court's decision to permit amendment and relation back of the complaint is affirmed.

B. Waiver of “Justifiable Reliance” Under § 523(a)(2)(A)

Roth argues Plikaytis failed to prove she justifiably relied on his promise to convey a 25% interest in RMP to her, which is a required element under § 523(a)(2)(A). ECF 7, 13:10–25.

Federal Rule of Civil Procedure 16 governs the conduct in pretrial conferences and the substance of pretrial orders in bankruptcy adversary proceedings, placing “a substantial responsibility for assisting the court in identifying the factual issues worthy of trial.” Fed R. Civ. P. 16 advisory committee note to 1983 amendment; Fed. R. Bankr.P. 7016. At the pretrial conference, the court may take action on (among other things): “formulating and simplifying the issues, and eliminating frivolous claims or defenses ... [and] avoiding unnecessary proof and cumulative evidence....” Fed. R. Civ. P. 16(c)(2).

The “purpose of a pretrial conference is to sift the discovered and discoverable facts to determine the triable issues, both factual and legal, and to chart the course of the lawsuit accordingly.” Lynch v. Call, 261 F.2d 130, 132 (10th Cir.1958) (quoted by MacArthur v. San Juan Cnty., 416 F.Supp.2d 1098, 1112–14 (D.Utah 2005) ). At the pretrial conference “the parties have an unflagging obligation to spell out squarely and distinctly those claims they desire to advance at the trial proper. Good-faith compliance with Civil Rule 16 plays an important role in this process.” Veranda Beach Club Limited Partnership v. Western Surety Co., 936 F.2d 1364, 1371 (1st Cir.1991) (citation omitted).

“Attorneys at a pre-trial conference must make a full and fair disclosure of their views as to what the real issues of the trial will be.” MarkHon Industries, Inc., 781 F.2d 613, 617 (7th Cir.1986). “[C]ounsel bear a substantial responsibility in formulating the triable issues in that the...