Sierra Chemicals, L.C. v. Moseley (In re Moseley)

In re: MITCHELL L. MOSELEY, Debtor.SIERRA CHEMICALS, L.C., Plaintiff,

v.MITCHELL L. MOSELEY, Defendant.

No. 11-15299-j7

Adversary No. 12-1166 J

UNITED STATES BANKRUPTCY COURT DISTRICT OF NEW MEXICO

Date entered on docket: October 19, 2012

MEMORANDUM OPINION

THIS MATTER is before the Court on the Debtor's Motion to Dismiss Sierra Chemicals, L.C.'s ("Sierra Chemicals") Complaint for Objection to Discharge and Dischargeability ("Motion to Dismiss") filed by Defendant Mitchell L. Moseley. Mr. Moseley requests dismissal of Sierra Chemicals' Complaint Objecting to Discharge ("Complaint") under Rule 12(b)(6), Fed.R.Civ.P., made applicable to adversary proceedings by Rule 7012, Fed.R.Bankr.P., for failure to state a claim upon which relief can be granted.

Sierra Chemicals filed this adversary proceeding to seek a determination of non-dischargeability of a debt upon which a judgment was issued against Mr. Moseley in favor of Sierra Chemicals in an action in federal district court. Sierra Chemicals objects under 11 U.S.C. § 727 to Mr. Mosley being granted a discharge. Sierra Chemicals also alleges that the debt in question is non-dischargeable under one or more of the following non-dischargeability provisions: 1) 11 U.S.C 523 (a)(2)(A) as a debt procured by false pretenses, a false representation, or actual fraud; 2) 11 U.S.C. 523(a)(2)(B) as a debt procured by a false writingrelating to financial conditions; 3) 11 U.S.C. 523(a)(4) as a debt procured by fraud or defalcation while acting in a fiduciary capacity, embezzlement, or larceny; 4) 11 U.S.C. 523(a)(6) as a debt stemming from a willful and malicious injury; and 5) 11 U.S.C. 523(a)(11) as a debt arising from bank fraud.¹ Alternatively, Sierra Chemicals asks this Court to dismiss Mr. Moseley's Chapter 7 bankruptcy case due to his untruthfulness

After consideration of the Motion to Dismiss in light of the applicable sections of the United States Bankruptcy Code, 11 U.S.C. § 101 et al. ("Code") and case law, and being otherwise sufficiently informed, the Court concludes that the Complaint fails to state a claim under 11 U.S.C §§ 523(a)(2)(B) and 523(a)(11) but potentially states a claim under the remaining Code sections upon which Sierra Chemicals relies. The Court will, therefore, grant the Motion to Dismiss in part, and will deny the Motion to Dismiss as to Sierra Chemicals' claims under §§ 523(a)(2)(A), 523 (a)(4), 523(a)(6), and 727 provided that Sierra Chemicals amends its complaint by November 13, 2012 to plead its claims in accordance with the requirements of the applicable Federal Rules of Civil Procedure.

LEGAL STANDARD FOR EVALUATING A MOTION TO DISMISS

A motion to dismiss for failure to state a claim is governed by Rule 12(b)(6), Fed.R.Civ.P, made applicable to adversary proceedings by Rule 7012, Fed.R.Bankr.P. The purpose of a motion to dismiss under Rule 12(b)(6), Fed.R.Civ.P is to test "the sufficiency of the allegations within the four corners of the complaint after taking those allegations as true." Mobley v. McCormick, 40 F.3d 337, 340 (10th Cir.1994). In evaluating a motion to dismiss under Rule 12(b)(6), the Court accepts as true all well pleaded facts and evaluates those facts in the light most favorable to the plaintiff. Rosenfield v. HSBC Bank, USA, 681 F.3d 1172, 1178 (10th Cir. 2012). To survive a motion to dismiss under Rule 12(b)(6), Fed.R.Civ.P., thecomplaint must contain enough facts to state a cause of action that is "plausible on its face." Bell Atl. Corp. v. Twombly, 550 U.S. 544, 570, 127 S.Ct. 1955, 1974, 167 L.Ed.2d 929 (2007). In other words, the plaintiff must "nudge [his] claims across the line from conceivable to plausible." Id.

In applying this standard, the Court should look "to the specific allegations in the complaint to determine whether they plausibly support a legal claim for relief." Pace v. Swerdlow, 519 F.3d 1067, 1073 (10th Cir.2008) (internal quotations omitted). The Court must not "weigh the potential evidence that the parties might present at trial" in order to test the sufficiency of the complaint for purposes of Rule 12(b)(6). Sutton v. Utah State Sch. For the Deaf & Blind, 173 F.3d 1226, 1236 (10th Cir.1999) (internal citations omitted). Nevertheless, to withstand dismissal, the plaintiff must sufficiently allege all facts necessary to support the required elements under the legal theory proposed. Forest Guardians v. Forsgren, 478 F.3d 1149, 1160 (10th Cir.2007).

The Tenth Circuit has observed that there is some disagreement among Circuit Courts as to whether the new standard enunciated by Twomblyresults in a minimal change, or whether the new standard, in fact, requires a significantly higher standard of pleading. Khalik v. United Air Lines, 671 F.3d 1188, 1191 (10th Cir. 2012) (comparing In re Travel Agent Comm'n Antitrust Litig., 583 F.3d 896, 911 (6th Cir. 2009) (finding that, to satisfy the Twombly standard, the plaintiff must plead enough specific facts "to raise a reasonable expectation that discovery will reveal evidence) with id. at 912 (Merritt, J., dissenting) and Tamayo v. Blagojevich, 526 F.3d 1074, 1083 (7th Cir. 2008) (stating that Twombly"did not . . . supplant the basic notice-pleading standard)). The Tenth Circuit instructs that the Twombly standard is "a middle ground between heightened fact pleading, which is expressly rejected, and allowing complaints that are no morethan labels and conclusions or a formulaic recitation of the elements of a cause of action, which the Court stated will not do." Robbins v. Oklahoma, 519 F.3d 1242, 1247 (10th Cir. 2008) (internal quotation marks and citations omitted). In short, within the Tenth Circuit, the notice pleading requirement under "Rule 8(a)(2) still lives." Khalik, 671 F.3d at 1191. With these principles in mind, the Court will evaluate the sufficiency of the Complaint in light of the Motion to Dismiss.

FACTUAL ALLEGATIONS CONTAINED IN THE COMPLAINT²

Sierra Chemicals operates an industrial cleaning business that removes dirt and debris from polluted aerial coolers called "fin-fans." See Complaint, ¶ 8. Sierra Chemicals employed Mr. Moseley between September 2005 and January 2009. Id. at ¶¶ 8 and 9. In January 2008, Mr. Moseley entered into an employment contract with Sierra Chemicals, under which Mr. Moseley agreed to refrain from competing in the fin-fan cleaning business within 75 miles of San Juan County, New Mexico for one year following his termination. Id. at ¶¶ 10-11. Sierra Chemicals alleges that roughly one year later, Mr. Moseley formed a competing industrial cleaning business and began soliciting fin-fan cleaning jobs in the San Juan County area. Id. at ¶ 13. On December 7, 2011, the United States District Court for the District of New Mexico entered a judgment (the "Judgment") pursuant to an arbitration award in favor of Sierra Chemicals and against Mr. Moseley in the amount of $352,997.19. Id. at ¶ 19. The Complaint does not include an explanation of the nature of the arbitrated dispute or the grounds upon which the arbitrator reached the decision.

Less than a week after the judgment was entered, Mr. Moseley filed a petition for relief under Chapter 7 of the Bankruptcy Code. Id. at ¶ 20. Sierra Chemicals alleges that Mr. Moseleylied to the Trustee at the Section 341(a) meeting of creditors and was dishonest in the completion of schedules and financial statements. Id. at ¶ 21. More specifically, Sierra Chemicals alleges that Mr. Moseley: (1) denied having any industrial cleaning equipment when he actually possessed equipment used by Sierra Chemicals, and (2) denied doing business under any other name while in fact he was doing business under the name of MACC Services. Id. at ¶¶ 21-25.

DISCUSSION

Sierra Chemicals asserts that the debt Mr. Moseley owes it is non-dischargeable under 11 U.S.C. §§ 523(a)(2)(A), 523(a)(2)(B), 523(a)(4), 523(a)(6), and 523(a)(11) and that Mr. Moseley should be denied a discharge under 11 U.S.C. § 727. The Complaint focuses on Mr. Moseley's behavior during three time periods: (1) after Mr. Moseley left Sierra Chemicals' employ; (2) during Mr. Moseley's Section 341(a) meeting of creditors; and (3) for pre-petition behavior surrounding the alleged disappearance of vehicles and work equipment used by Sierra Chemicals.

The Complaint contains a single set of operative facts to support all six counts under various subsections of §§727 and 523(a). Based on those allegations, the Court concludes that Sierra Chemicals may potentially state a claim under 11 U.S.C. § 727 and §§523(a)(2)(A), (a)(4), and (a)(6). Because "leave to amend should be freely given when justice so requires," Mr. Moseley's Motion to Dismiss will denied as to those counts, provided that Sierra Chemicals amends the Complaint in a manner consistent with this opinion and as required by the applicable Federal Rules of Civil Procedure. See Cohen v. Longshore, 621 F.3d 1311, 1313 (10th Cir. 2010) (internal citations omitted). Sierra Chemicals' remaining claims under 11 U.S.C. § 523(a)(2)(B) and 523 (a)(11) will be denied based on the alleged facts and well-established case law. The Court will separately address each of Sierra Chemicals' claims for relief.

1. Dismissal is not an appropriate remedy in this adversary proceeding.

Sierra Chemicals asserts that the Court should dismiss the underlying Chapter 7 case as a result of untruthfulness in the completion of schedules and testimony in the Section 341(a) meeting of creditors. Pursuant to 11 U.S.C. § 707(b)(1):

the [C]ourt, on its own motion or on a motion by the United States trustee, trustee (or bankruptcy administrator, if any), or any party in interest, may dismiss a case filed by an individual debtor under [Chapter 7 of the Bankruptcy Code] whose debts are primarily consumer debts, ... if it finds that the granting of relief would be an abuse of the provisions of this chapter.

§ 707(b)(1) (emphasis added).³

Dismissal of Mr. Moseley's bankruptcy case is not an appropriate remedy in this adversary...