United States Court of Appeals,
Eleventh Circuit.
No. 95-2658.
In re Arthur L. JOHANNESSEN, Jr. & Claudette Johannessen, p/k/a
Claudette LaPointe, Debtors.
Jeffrey R. FULLER; Nancy L. Fuller, Plaintiffs-Appellants,
v.
Arthur L. JOHANNESSEN, Jr., Claudette Johannessen, p/k/a
Claudette LaPointe, Defendants-Appellees.
Feb. 28, 1996.
Appeal from the United States District Court for the Middle
District of Florida. (No. 94-1900-Civ-T-17B and 93-00839),
Elizabeth A. Kovachevich, Chief Judge.
Before ANDERSON and BLACK, Circuit Judges, and FAY, Senior Circuit
Judge.
FAY, Senior Circuit Judge:
This appeal arises from the District Court's order affirming
the Bankruptcy Court's decision to grant a motion to dismiss for
failure to state a claim upon which relief can be granted.
Appellants contend that the District Court erroneously affirmed the
Bankruptcy Court's dismissal by imposing upon them the burden of
proving facts in response to a motion addressing only the
sufficiency of the complaint. We VACATE the judgment of the
District Court with instructions that it VACATE the order of the
Bankruptcy Court and REMAND the matter to the Bankruptcy Court for
proceedings on the merits.
I. BACKGROUND
Arthur Johannessen, Inc., a corporation in which Arthur
Johannessen was the principal, constructed a home for creditors,
Jeffrey and Nancy Fuller ("Fullers"). The Fullers filed a
complaint in state court against Johannessen, individually,
alleging, inter alia, fraud and breach of contract in the
construction of the home. However, the parties entered into a
settlement agreement in which Johannessen agreed to pay the Fullers
the sum of $16,000 with $3500 due immediately and the remainder to
be paid pursuant to a promissory note. Judgement was then entered
in accordance with the settlement agreement.
The appellees subsequently filed a voluntary petition for
bankruptcy, under Chapter Seven, with the United States Bankruptcy
Court for the Middle District of Florida. Thereafter, appellees
filed their Schedule F disclosing the appellants as unsecured
creditors.
In response, the Fullers filed their original complaint to
determine dischargeability of debt. The Bankruptcy Court entered
an order of conditional dismissal for failure to include the
appropriate caption, appropriate copies of summons, and filing fee.
The appellants then filed an amended complaint to determine
dischargeability of debt. Appellees filed a motion to dismiss
pursuant to Rule 12(b)(6) of the Federal Rules of Civil Procedure
made applicable to adversary bankruptcy proceedings under Rule 7012
of the Federal Rules of Bankruptcy Procedure. The Bankruptcy Court
entered an order granting the motion to dismiss for failure to
state a claim which granted leave for the filing of a second
amended complaint.
Appellants filed a second amended complaint and in turn, the
appellees filed a motion to dismiss pursuant to the aforementioned
Federal Rules. The Bankruptcy Court granted the motion to dismiss
for failure to state a claim, whereby Counts I and II were
dismissed with prejudice, however, Count III was dismissed with
leave to amend. Appellants filed a third amended complaint and the
appellees again filed a motion to dismiss. After a hearing on the
matter, the Court entered its order granting the motion to dismiss
for failure to state a claim, thereby dismissing appellant's third
amended complaint with prejudice.
The appellants filed a notice of appeal to the District Court,
where that court affirmed the Bankruptcy Court's order dismissing
the second and third amended complaints with prejudice. Appellants
appeal the decision of the District Court affirming the order of
the Bankruptcy Court solely with regard to the dismissal of the
third amended complaint.
II. STANDARD OF REVIEW
Our review of a dismissal for failure to state a claim is de
novo. Hunnings v. Texaco, Inc., 29 F.3d 1480, 1484 (11th
Cir.1994).
III. DISCUSSION
Appellants assert that the District Court erroneously affirmed
the Bankruptcy Court's dismissal of appellants' third amended
complaint with prejudice by imposing upon them the burden of
proving facts while opposing a motion which solely addresses the
complaint's sufficiency. In the complaint appellants alleged that
the debt is excepted from discharge pursuant 11 U.S.C. §
523(a)(2)(A). As an exception to its discharge provisions, § 523
of the Bankruptcy Code provides:
(a) A discharge under section 727 ... of this title does not
discharge an individual debtor from any debt—
* * * * * *
(2) for money, property, services, or an extension, renewal,
or refinancing of credit, to the extent obtained by—
* * * * * *
(A) false pretense, a false representation, or actual fraud,
other than a statement respecting the debtor's or an
insider's financial condition;
"Since 1970 ... the issue of nondischargeability has been a
matter of federal law governed by the terms of the Bankruptcy
Code." Grogan v. Garner, 498 U.S. 279, 284, 111 S.Ct. 654, 658,
112 L.Ed.2d 755 (1995). Furthermore, the operative terms in §
523(a)(2)(A) of "false pretenses, a false representation, or actual
fraud" are common-law terms which intimate elements the common law
has defined them to comprise. Field v. Mans, --- U.S. ----, ----,
116 S.Ct. 437, 443, 133 L.Ed.2d 351 (1995).
The District Court properly relied on Conley v. Gibson, 355
U.S. 41, 78 S.Ct. 99, 2 L.Ed.2d 80 (1957), for the rule that "a
complaint should not be dismissed for failure to state a claim
unless it appears beyond doubt that the plaintiff can prove no set
of facts in support of his claim which would entitle him to
relief." Id. at 45-46, 78 S.Ct. at 102. However, the District
Court also cited Urbatek Systems, Inc. v. Lochrie (In re Lochrie),
78 B.R. 257 (Bankr. 9th Cir.1987), for the proposition that a
creditor is not entitled to assert a legal allegation in a
complaint with no substantial proof. The District Court continued
by stating: "... [A] mere allegation of a cause of action under §
523 is insufficient to render the claim dischargeable." Fuller v.
Johannessen, 180 B.R. 682, 686 (Bankr.M.D.Fla.1995) This is
followed by a discussion of the settlement in the state court
matter and the conclusion that: "Therefore, Appellants have not
met the preponderance of the evidence standard required in Section
523 determinations of dischargeability, and this Court affirms ..."
Id.
Most respectfully, we feel that the District Court has
misinterpreted these cases and imposed an improper burden on
appellants. Lochrie dealt with the availability to unlisted
creditors of the savings provisions of § 523(a)(3)(B) and 523(c).
As pointed out in Lochrie, after testing the sufficiency of the
allegations, there must be a trial on the merits. The problem in
Lochrie arose because of a summary ruling based upon the
allegations alone. The court there concluded: "We reverse the
bankruptcy court's ruling insofar as it finds that mere allegations
of a cause of action under § 523(a)(2), (4), or (6) are sufficient
for a finding of nondischargeability under § 523(a)(3)(B). This
matter is remanded to the bankruptcy court for a determination of
the merits of Urbatek's § 523(a)(2)(B) claim." Lochrie, 78 B.R. at
259.
There are two steps in handling these questions. The first
involves a review of the sufficiency of the allegations. If the
allegations are sufficient, the second step deals with the trial on
the merits under the appropriate burden of proof.
In reviewing the sufficiency of the allegations, we turn to
Conley. "The Federal Rules of Civil Procedure do not require a
claimant to set out in detail the facts upon which he bases his
claim ... all the Rules require is a "short and plain statement of
the claim' that will give the defendant fair notice of what the
plaintiff's claim is and the grounds upon which it rests." Conley,
355 U.S. at 47, 78 S.Ct. at 103. In addition, "the district court
must accept the allegations of the complaint as true and must
construe the facts alleged in the light most favorable to the
plaintiff." Hunnings, 29 F.3d at 1484.
The elements of a claim under § 523(a)(2)(A) are: the debtor
made a false statement with the purpose and intention of deceiving
the creditor; the creditor relied on such false statement; the
creditor's reliance on the false statement was justifiably founded;
and the creditor sustained damage as a result of the false
statement. See Schweig v. Hunter (In re Hunter), 780 F.2d 1577,
1579 (11th Cir.1986); City Bank & Trust Co. v. Vann (In re Vann),
67 F.3d 277 (11th Cir.1995).1
With regard to the first element, the Fullers alleged, inter
alia, that appellee Arthur Johannessen misrepresented that monies
delivered to him from the Fullers would be applied pursuant to
their contract and that upon each draw application made by the
appellee, he represented that subcontractors and materialman
providing services or materials to the construction of the
appellants' home were fully paid by the draws from the appellants.
Further, appellants alleged that at the time the appellee accepted
delivery of the monies, he intended to misappropriate the funds for
his own use and for some of the start-up costs for homes other than
their own.
With regard to the second element, the appellants alleged that
1
In Vann, this circuit clarified that the applicable
standard of reliance a creditor must establish is "justifiable"
reliance rather than "reasonable" reliance.
they relied on the appellee's misrepresentations to their detriment
by delivering monies to him. With regard to the third element,
under the circumstances, as alleged by appellants, they would be
justified in relying on the statements. And further, with regard
to the fourth element, appellants alleged that they sustained
monetary damages as a result of the misrepresentations. We find
that the allegations are sufficient to state a claim upon which
relief can be granted. That being so, there must now be a trial on
the merits.
Should Johannessen raise the contention on remand that the
settlement agreement nevertheless serves to extinguish appellants'
claim, the Bankruptcy court must consider this contention in light
of Greenberg v. Schools, 711 F.2d 152 (11th Cir.1983). In
Greenberg, this circuit held that "a debt which originates from the
debtor's fraud should not be discharged simply because the debtor
entered into a settlement agreement." Id. at 156. Rather, the
Bankruptcy Court should examine the factual circumstances behind
the settlement agreement to determine whether or not the debt
incurred stemmed from the alleged fraudulent conduct. Id. If the
court finds that the conduct was indeed fraudulent and resulted in
the debt at issue, the debt should be excepted from discharge. Id.
IV. CONCLUSION
We VACATE the judgment of the District Court with instructions
that it VACATE the judgment of the Bankruptcy Court and REMAND the
matter to the Bankruptcy Court for proceedings on the merits.