Schaul v. Ludwig (In re Ludwig)

508 B.R. 48

In re Kimberly Gail LUDWIG, Debtor.Nancy Schaul, as Administrator for the Estate of Gary Crawford, Plaintiff,

v.Kimberly Gail Ludwig, Defendant.

Bankruptcy No. 13 B 32960.

Adversary No. 13 A 1345.

United States Bankruptcy Court,

N.D. Illinois,

Eastern Division.

Signed April 2, 2014.

Konstantine Sparagis, Morgan Marcus, Law Offices of Konstantine Sparagis, P.C., Chicago, IL, for Nancy Schaul, as Administrator for the Estate of Gary Crawford.

David E. Cohen, Fisher Cohen Waldman Shapiro, LLP, Glenview, IL, for Kimberly Gail Ludwig.

MEMORANDUM OPINION

A. BENJAMIN GOLDGAR, Bankruptcy Judge.

Gary Crawford and his wife, Kimberly Gail Ludwig, owned a house as joint tenants. When they divorced, they agreed that the house would stay in joint tenancy, but Crawford could sell it and keep most of the sale proceeds. Crawford died without ever selling the house. After he died, Ludwig sold it herself, and Nancy Schaul, as administrator of Crawford's probate estate, sought the proceeds from Ludwig in state court. Ludwig then filed a chapter 7 bankruptcy case. Schaul responded with an adversary proceeding in which she alleges that Ludwig owes the probate estate a debt nondischargeable under section 523(a) of the Bankruptcy Code.

Before the court for ruling is Ludwig's motion under Rule 12(b)(6), Fed.R.Civ.P. 12(b)(6) (made applicable by Fed. R. Bankr.P. 7012(b)), to dismiss the complaint for failure to state a claim. For the reasons that follow, the motion will be granted.

1. Jurisdiction

The court has subject matter jurisdiction of this case under 28 U.S.C. § 1334(a) and the district court's Internal Operating Procedure 15(a). This is a core proceeding under 28 U.S.C. § 157(b)(2)(I).

2. Facts

On a Rule 12(b)(6) motion to dismiss, all well-pleaded factual allegations in the complaint are taken as true, and all reasonable inferences from the facts are drawn in favor of the non-movant. White v. Marshall & Ilsley Corp., 714 F.3d 980, 985 (7th Cir.2013). Facts evident from exhibits attached to the complaint are also considered. Bogie v. Rosenberg, 705 F.3d 603, 609 (7th Cir.2013); seeFed.R.Civ.P. 10(c) (made applicable by Fed. R. Bankr.P. 7010). If the complaint's allegations and the exhibits conflict, the exhibits trump the allegations. Abcarian v. McDonald, 617 F.3d 931, 933 (7th Cir.2010).

The complaint and exhibits here disclose the following facts. Gary Crawford and Kimberly Gail Ludwig married in 1973. They owned residential property in Highland Park, Illinois, that they held in joint tenancy.

In 1980, Crawford and Ludwig divorced. The judgment in their divorce case included a stipulation and property settlement agreement (the “PSA”). The PSA provided that the Highland Park property would “remain in joint tenancy between the parties.” Crawford, however, was given the right to exclusive occupancy, sole responsibility for payment of the mortgage and any other indebtedness, and the right to contract for the sale of the property. In the event of a sale “by the husband,” the PSA entitled Ludwig to “the first $10,000 of proceeds” and said that this “equity entitlement” would “stand as a lien” on the property. The balance of the sale proceeds after the $10,000 would belong to Crawford.

Crawford never sold the Highland Park property. At some point before March 12, 2012 (the precise date is not alleged), he died, and Schaul was appointed administrator of his estate. Crawford had a disabled son who is his sole heir.

On March 12, 2012, after Crawford's death, Ludwig sold the Highland Park property to DRH Cambridge Homes, Inc., for $257,000, giving DRH a warranty deed. According to Schaul, Ludwig set the price below the property's fair market value to facilitate a quick sale. Ludwig kept all of the proceeds from the sale and either used them herself or transferred them to others.

In July 2013, an Illinois state court hearing Crawford's probate case entered an order requiring Ludwig to account for all of the sale proceeds and pay them to Schaul as administrator no later than August 19, 2013. That same day, Ludwig filed a chapter 7 bankruptcy case.

Schaul then commenced an adversary proceeding against Ludwig seeking to have Ludwig's debt in connection with the Highland Park property declared nondischargeable. The complaint has three counts. Count I alleges that the debt is one for money obtained by false representation, false pretenses, or actual fraud and is nondischargeable under section 523(a)(2)(A) of the Code, 11 U.S.C. § 523(a)(2)(A). Count II alleges that the debt is the result of fraud or defalcation while acting in a fiduciary capacity and is nondischargeable under section 523(a)(4), 11 U.S.C. § 523(a)(4). Count III alleges that the debt is the result of a willful and malicious injury and is nondischargeable under section 523(a)(6), 11 U.S.C. § 523(a)(6).

Ludwig has moved to dismiss all three counts of the complaint under Rule 12(b)(6) on the ground that they fail to state a claim.

3. Discussion

Ludwig's motion will be granted. As she correctly argues, none of the counts states a claim to have the debt alleged declared nondischargeable under section 523(a). The complaint will therefore be dismissed. Schaul will be given an opportunity to amend.

a. Rule 12(b)(6) Standards

Under Rule 12(b)(6), a complaint will be dismissed unless it clears two hurdles. EEOC v. Concentra Health Servs., Inc., 496 F.3d 773, 776 (7th Cir.2007). First, the complaint must contain enough factual detail to give the defendant “fair notice” of the claim. Reger Dev. LLC v. National City Bank, 592 F.3d 759, 764 (7th Cir.2010). Second, the complaint must state a plausible claim, meaning the allegations must raise the plaintiff's right to relief above a “speculative level.” Bell Atl. Corp. v. Twombly, 550 U.S. 544, 555, 127 S.Ct. 1955, 167 L.Ed.2d 929 (2007); see also Gogos v. AMS Mech. Sys., Inc., 737 F.3d 1170, 1172 (7th Cir.2013).

Even if the complaint gives fair notice and the facts are plausible, a complaint will be dismissed when the facts alleged state no claim as a matter of law. Rule 12(b)(6) “authorizes a court to dismiss a claim on the basis of a dispositive issue of law.” Neitzke v. Williams, 490 U.S. 319, 326, 109 S.Ct. 1827, 104 L.Ed.2d 338 (1989). If “as a matter of law it is clear no relief could be granted under any set of facts that could be proved consistent with the allegations, a claim must be dismissed.” Id. at 327, 109 S.Ct. 1827 (internal quotation and citation omitted); see also Jacobs v. City of Chicago, 215 F.3d 758, 765 n. 3 (7th Cir.2000); Quinones ex rel. Quinones v. Ariezaga, No. 07–CV–0004, 2008 WL 907442, at *3 (N.D.Ill. Mar. 31, 2008).

b. Count I—Section 523(a)(2)(A)

Count I fails to state a claim under section 523(a)(2)(A) as a matter of law. The facts alleged describe no fraud of any kind.

Section 523(a)(2)(A) excepts from discharge any debt “for money, property, services, or an extension, renewal, or refinancing of credit, to the extent obtained by ... false pretenses, a false representation, or actual fraud, other than a statement respecting the debtor's or an insider's financial condition.” Although some courts have applied a single test for determining nondischargeability under section 523(a)(2)(A), that section describes three separate grounds for holding a debt nondischargeable: false pretenses, false representation, and actual fraud. First Am. Title Ins. Co. v. Speisman ( In re Speisman ), 495 B.R. 398, 402 (Bankr.N.D.Ill.2013); Wachovia Sec., LLC v. Jahelka ( In re Jahelka ), 442 B.R. 663, 668 (Bankr.N.D.Ill.2010).

All three grounds in section 523(a)(2)(A), however, share a basic requirement: some form of fraud. See First Bankers Trust Co., N.A. v. Dade ( In re Dade ), Nos. 11–71024, 11–7090, 2012 WL 1556510, at *8 (Bankr.C.D.Ill. May 1, 2012) (noting that a section 523(a)(2)(A) will be successful only with “proof of a debtor's fraudulent conduct”). A simple breach of contract, one involving no element of deceit, does not produce a debt nondischargeable under section 523(a)(2)(A). Reeves v. Davis ( In re Davis ), 638 F.3d 549, 553–54 (7th Cir.2011); Berger Schatz, LLP v. Livermore ( In re Livermore ), Nos. 12 B 30720, 12 A 1689, 2013 WL 1316549, at *4 (Bankr.N.D.Ill. Apr. 13, 2013); Condon Oil Co. v. Wood ( In re Wood ), 503 B.R. 705, 710 (Bankr.W.D.Wis.2013).

In her complaint, Schaul alleges at most that Ludwig breached a contract. In the 1980 divorce proceedings, the complaint says, Ludwig entered into an agreement, the PSA, under which she agreed that Crawford would receive all but $10,000 of the proceeds from a sale of the Highland Park property. The right to receive those proceeds became the right of Crawford's probate estate on his death. Sondin v. Bernstein, 126 Ill.App.3d 703, 708–09, 81 Ill.Dec. 804, 467 N.E.2d 926, 931 (1st Dist.1984) (holding that rights under a property settlement agreement in which divorcing spouses agreed to divide proceeds from sale of property in joint tenancy survived the death of one spouse). After his death, Ludwig sold the house and kept all of the proceeds for herself. But even if keeping the proceeds was a breach of Ludwig's obligations under the PSA, she did not commit any sort of fraud in keeping them. There was nothing deceitful—no “false suggestions” or “suppression of truth,” McClellan v. Cantrell, 217 F.3d 890, 893 (7th Cir.2000)—in what she did. The complaint alleges nothing.

Schaul argues that Ludwig's fraud consisted of her misrepresentation to DRH, the buyer, that she had the right to sell the property. That misrepresentation, Schaul suggests, was made in the warranty deed Ludwig gave DRH and was one on which DRH relied.

Schaul is mistaken. To be sure, the warranty deed represented that Ludwig had the right to sell the property. See765 ILCS 5/9 (2012) (stating that a warranty deed represents that the grantor is “the lawful owner of an indefeasible estate in fee simple” and has “good right and full power to convey the same”). But that...