Shelzi v. Foistner (In re Foistner), Bk. No. 17-10796 -BAH

2018 BNH 006

In re: Joseph A. Foistner, Debtor

Antonia Shelzi, Plaintiff v. Joseph A. Foistner, Defendant

Bk. No. 17-10796 -BAH

Adv. No. 17-1083-BAH

UNITED STATES BANKRUPTCY COURT DISTRICT OF NEW HAMPSHIRE

July 20, 2018

Note: This is an unreported opinion. Refer to LBR 1050-1 regarding citation.

Chapter 7

James F. Laboe, Esq.

Orr & Reno, P.A.

Concord, NH

Attorney for Antonia Shelzi

Joseph A. Foistner, Esq.

New Boston, NH

MEMORANDUM OPINION

I. INTRODUCTION

The matters before the Court are the "Motion to Dismiss Plaintiffs' [sic] Complaint"¹ (the "Motion to Dismiss") filed by the debtor-defendant Joseph A. Foistner ("Foistner") and the objection thereto² filed by the plaintiff Antonia Shelzi ("Shelzi"), as well as Foistner's "MotionFor Entry of Judgment, Dismissing Plaintiff's Complaint"³ (the "Motion for Judgment"). Shelzi commenced the present adversary proceeding seeking to except a debt owed to her from discharge pursuant to 11 U.S.C. §§ 523(a)(2)(A), (a)(2)(B), (a)(4), and/or (a)(6). Through the motions, Foistner seeks to dismiss all counts against him for failure to state a claim. For the reasons set forth below, the Court will grant the Motion to Dismiss in part, and deny the Motion for Judgment.

II. JURISDICTION

This Court has authority to exercise jurisdiction over the subject matter and the parties pursuant to 28 U.S.C. §§ 157(a), 1334, and U.S. District Court for the District of New Hampshire Local Rule 77.4(a). This is a core proceeding under 28 U.S.C. § 157(b)(2)(I).

III. FACTS

A. Procedural History

The Debtor filed a voluntary Chapter 7 petition on May 31, 2017. Shelzi commenced the present adversary proceeding on December 4, 2017.⁴ Foistner filed the Motion to Dismiss on March 29, 2018. Shelzi filed her objection on May 23, 2018. According to the certificate of service, the objection was not served on Foistner, who is pro se in this adversary proceeding, but mistakenly served on Attorney Petrillo, who represents him in the main case.

On May 30, 2018, the Court conducted a hearing on the Motion to Dismiss, and at its conclusion took the matter under advisement. The Court further ordered Shelzi to file asupplemental response regarding her argument under 11 U.S.C. § 523(a)(4) by June 8, 2018. On June 1, 2018, Foistner filed the Motion for Judgment, seeking dismissal of the complaint with prejudice on account of Shelzi's apparent failure to properly serve him with her objection to the Motion to Dismiss in accordance with the local rules. Shelzi filed her "Supplemental Response to Objection to Debtor's Motion to Dismiss Adversary Complaint"⁵ ("Shelzi's Supplement") on June 8, 2018. On June 22, 2018, Foistner filed a supplemental response in support of the Motion to Dismiss ("Foistner's Supplement").⁶

B. The Motion to Dismiss Standard and the Record Defined

In Ashcroft v. Iqbal, the Supreme Court of the United States explained the standard for dismissal under Fed. R. Civ. P. 12(b)(6) ("Rule 12(b)(6)"), made applicable in adversary proceedings by Fed. R. Bankr. P. 7012(b):

To survive a motion to dismiss, a complaint must contain sufficient factual matter, accepted as true, to "state a claim to relief that is plausible on its face." . . . 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. . . . The plausibility standard is not akin to a "probability requirement," but it asks for more than a sheer possibility that a defendant has acted unlawfully. . . . Where a complaint pleads facts that are "merely consistent with" a defendant's liability, it "stops short of the line between possibility and plausibility of 'entitlement to relief.'" . . .

Two working principles underlie our decision in Twombly. First, the tenet that a court must accept as true all of the allegations contained in a complaint is inapplicable to legal conclusions. . . . Second, only a complaint that states a plausible claim for relief survives a motion to dismiss.

Ashcroft v. Iqbal, 556 U.S. 662, 678-679 (2009) (quoting Bell Atlantic Corp. v. Twombly, 550 U.S. 544, 556-570 (2007)) (citations omitted). The Court need not, however, "accept as true alegal conclusion couched as a factual allegation." Bell Atlantic Corp. v. Twombly, 550 U.S. at 555). Put another way, the Court need not "swallow the plaintiff's invective hook, line, and sinker; bald assertions, unsupportable conclusions, periphrastic circumlocutions, and the like need not be credited." Aulson v. Blanchard, 83 F.3d 1, 3 (1st Cir. 1996).

Although a motion under Rule 12(b)(6) generally tests the sufficiency of the allegations of the complaint, the Court may "augment those facts with facts extractable from documentation annexed to or incorporated by reference in the complaint and matters susceptible to judicial notice." Jorge v. Rumsfeld, 404 F.3d 556, 559 (1st Cir. 2005). Indeed, the United States Court of Appeals for the First Circuit has explained that "[w]hen . . . a complaint's factual allegations are expressly linked to—and admittedly dependent upon—a document (the authenticity of which is not challenged), that document effectively merges into the pleadings and the trial court can review it in deciding a motion to dismiss under Rule 12(b)(6)." Beddall v. State St. Bank & Tr. Co., 137 F.3d 12, 17 (1st Cir. 1998). This rule is premised on "the axiom that a writing is the best evidence of its contents." In re Colonial Mortg. Bankers Corp., 324 F.3d 12, 15 (1st Cir. 2003).

In the present case, Shelzi attached twelve exhibits to her complaint, consisting primarily of various pleadings and transcripts from the state court litigation between her and Foistner. Among the documents she expressly seeks to "incorporate by reference" into her adversary complaint is the amended complaint filed against Foistner in the state court.⁷ To be clear, however, incorporating a state court complaint would not have the effect of bolstering her adversary complaint with all the additional allegations contained therein. Instead, the state court complaint is merely evidence of what Shelzi alleged in that civil action and can only be viewed to augmentthe Court's understanding of that proceeding. Factual allegations supporting the relief sought in this adversary proceeding must be contained within the adversary complaint.

Similarly, Foistner attached fourteen exhibits of his own to the Motion to Dismiss to either refute or supplement Shelzi's factual allegations. These exhibits travel far beyond the scope of the adversary complaint and cannot be considered without first converting the Motion to Dismiss to one seeking summary judgment, which would be premature at this stage. Accordingly, the Court will not consider the facts alleged by Foistner in the Motion to Dismiss, nor any of his attached exhibits.

C. The Allegations of the Complaint

On August 30, 2000, Foistner filed a Certificate of Formation with the New Hampshire Secretary of State to create Seff Enterprises & Holdings, LLC ("Seff") for the purpose of developing a twenty lot subdivision in New Boston, New Hampshire known as Waldorf Estates.⁸ At all relevant times, Foistner was the manager of Seff, though not a member.⁹ Foistner's wife, Laurie, was a 50% member of Seff.

In 2002, Foistner needed financing for Waldorf Estates, and "promised Shelzi lucrative returns if she became a member of Seff."¹⁰ Based on Foistner's promises, Shelzi entered into purchase contract to acquire Louis A. Maynard's 50% interest of in Seff for $250,000.¹¹ On April 12, 2005, Shelzi, at Foistner's urging, personally guaranteed Seff's $1.8 million loan from ButlerBank.¹² From December 23, 2002 through August, 2005, Foistner repeatedly requested, in writing and via telephone, that she provide funding for Seff.¹³ As a result of these requests, Shelzi loaned or contributed funds in excess of $1.8 million to Foistner on behalf of Seff.¹⁴

Although Waldorf Estates received full subdivision approval from the Town of New Boston on December 18, 2002, Foistner had yet to build any houses as of September, 2005.¹⁵ At that point, Shelzi made multiple demands to Foistner for an accounting of Seff's books and records.¹⁶ After her demands were denied, on November 7, 2005, Shelzi filed a Verified Petition for An Accounting, Constructive Trust and Other Relief against Foistner, his wife Laurie, and Seff in the Hillsborough County Superior Court.¹⁷ Foistner filed an answer and counterclaim on January 5, 2006.¹⁸ To avoid a pre-judgment attachment, Foistner entered into a stipulated order in which he and his wife agreed to pay half of the monthly payment obligation to Butler Bank.¹⁹

Between April 10, 2006 and November 27, 2006, Foistner "clandestinely" recorded mortgages in favor of SSDD Resolution Trust Holdings, LLC secured by Seff's property at Waldorf Estates totaling $3,711,659.00.²⁰ According to the New Hampshire Secretary of State records, SSDD Resolution Trust Holdings, LLC was a New Hampshire limited liability company controlled by Foistner.²¹

Through discovery, Shelzi determined that Foistner had been freely depleting the funds of Seff, including those that she contributed, for his own personal benefit.²² At an evidentiary hearing held in the Superior Court on June 25, 2007, Foistner admitted that he used Seff's account as his personal bank account.²³ At a subsequent evidentiary hearing, Foistner also admitted to purchasing three Harley-Davidson motorcycles and installing an in-ground pool at his residence with funds from Seff's account.²⁴ Foistner also used Seff funds to pay his personal mortgage, multiple motor vehicles payments, dining out expenses, and personal clothing expenses.²⁵ Had Shelzi known that Foistner was using Seff's bank account as his personal bank account, she would not have agreed to loan or contribute any money or agreed to become a personal guarantor on the Butler Bank loan.²⁶

On January 31, 2007, Shelzi amended her verified petition to include...