Privitera v. Curran

Citation:
1st Circuit BAP NO. MW 15-051, Massachusetts Main Bankruptcy Case No. 14-42811-CJP, Adversary Proceeding No. 15-04024-CJP
Tag(s):
Ruling:
AFFIRMED. Creditor's Complaint against Debtor objecting to dischargeability under 11 USC 523(a)(2)(A) was dismissed by the Bankruptcy Court under Fed. R. Civ. P. 12 (b)(6) standard. Creditor's motion to amend the Complaint was denied.
Procedural context:
Privitera filed a complaint seeking a determination that Curran’s debt to her was nondischargeable under § 523(a)(2)(B).3 In the complaint, Privitera asserted: (1) Curran had made a statement in writing regarding his financial condition, namely, that he “could offer two trucks as security” for the loan; (2) the statement was materially false because it “substantially misrepresented the amount of property that was available to secure” the loan, “failed to disclose pre-existing security interests in one or both trucks” and that “he did not have the title to one of the trucks,” and because the “cost” provided for the trucks had “almost no relationship to his amount of equity in them”; (3) she reasonably relied on Curran’s misrepresentation because she had no experience with business loans, had no reason to disbelieve him, had no knowledge of the truck loans, was grieving her brother’s death, and was advised by an attorney in the transaction; (4) Curran knew of the pre-existing security interests in the trucks and that one truck was not titled to him, and, therefore, made the statement with the intent to deceive; and (5) she “suffered a detriment due to her reliance, in the loss of the principal amount she loaned to Curran, plus interest, collections costs, and damage to her credit rating. Curran filed a motion to dismiss the complaint (“Motion to Dismiss”) for failure to state a claim under Rule 12(b)(6) and Bankruptcy Rule 7012(b), arguing, among other things, the List of Collateral did not constitute a statement regarding his financial condition as required under § 523(a)(2)(B). Privitera opposed the Motion to Dismiss and moved to amend her complaint to add a count under § 523(a)(2)(A). At a hearing on the motions, the Court stated that the failure of the plaintiff to have properly perfected her security interest in the trucks was the heart of the entire case and that the amendments did not cure that deficiency. The Court ruled that the creditor's reliance upon the Debtor's representations was not justifiable because she did not perfect her security interest which was part of the deal with the Debtor. STANDARD OF REVIEW: We review a bankruptcy court’s findings of fact for clear error and its conclusions of law de novo. See Castellanos Group Law Firm L.L.C. v. F.D.I.C. (In re MJS Las Croabas Prop., Inc.), 545 B.R. 401, 417 (B.A.P. 1st Cir. 2016). An order dismissing a complaint for failure to state a claim is subject to de novo review. See Juárez v. Select Portfolio Servicing, Inc., 708 F.3d 269, 276 (1st Cir. 2013) (citation omitted); Banco Santander de P.R. v. López-Stubbe (In re Colonial Mortg. Bankers Corp.), 324 F.3d 12, 15 (1st Cir. 2003) (citations omitted). An order denying a motion to amend a complaint is reviewed for an abuse of discretion. Zullo v. Lombardo (In re Lombardo), 755 F.3d 1, 3 (1st Cir. 2014) (citations omitted) (internal quotations omitted); Juárez, 708 F.3d at 276 (citing Hatch v. Dep’t for Children, 274 F.3d 12, 19 (1st Cir.2001)). A court’s exercise of discretion will be left untouched if “‘the record evinces an arguably adequate basis for the court’s decision,’ such as futility of the amendment.” Juárez, 708 F.3d at 276 (quoting Hatch, 274 F.3d at 19); see also In re Lombardo, 755 F.3d at 3. 523(a)(2)(B) ANALYSIS: In order to establish a debt is nondischargeable under § 523(a)(2)(B), a creditor must show that: (1) the debtor made a statement in writing; (2) the statement concerned the debtor’s or an insider’s financial condition; (3) the statement was materially false; (4) the creditor actually and reasonably relied on the false statement; and (5) the debtor made the false statement with the intent to deceive the creditor. Douglas v. Kosinski (In re Kosinski), 424 B.R. 599, 608 (B.A.P. 1st Cir. 2010) (citing 11 U.S.C. § 523(a)(2)(B)). The Court adopted a narrow interpretation of what constitutes a written statement of financial condition. See [Middlesex Sav. Bank. v. Flaherty (In re Flaherty)], 335 B.R. [481,] 489 [(Bankr. D. Mass. 2005)] (noting that financial statement need not “be a formal document produced by commercial or banking institutions,” but “[n]evertheless, it must describe the financial condition of the debtor”). Privitera argues that under the broad approach, the List of Collateral clearly constituted a statement regarding Curran’s financial condition, because it “falsely asserted that the collateral was unencumbered (or failed to disclose that the collateral was encumbered. The Court agreed with the Debtor that because the List of Collateral was not a written financial statement and did not otherwise represent his financial condition, it did not constitute a statement concerning his financial condition. The list of personal property Curran provided included a description of the property and the “cost” of each item, which represented the item’s purchase price. Privitera’sattorney turned Curran’s list into the List of Collateral. The List of Collateral also had a column titled “cost” (the term was undefined) but did not provide any type of valuation for the property, nor did it affirmatively represent he held title to each piece of property or the property was unencumbered. Clearly, the List of Collateral did not establish Curran’s net worth, overall financial health, or ability to generate income, as required under the narrow approach. Nor did the List of Collateral contain an assertion he owned the property free and clear of other liens, as discussed in Van Steinburg, supra (holding debtor’s false assertion that property he pledged as collateral was unencumbered was a statement regarding his financial condition). Thus, the Listof Collateral, on its face, simply indicated the Debtor’s ownership, possession, or control of property, and did not have any bearing on his financial position. See, e.g., Bandi v. Becnel (In re Bandi), 683 F.3d 671, 676 (5th Cir. 2012) (“A representation that one owns . . . property says nothing about the overall financial condition of the person making the representation or the ability to repay debt.”); In re Joelson, 427 F.3d at 715 (“Ownership Representations do not qualify as ‘respecting the debtor’s . . . financial condition.’”) (citations omitted). DENIAL OF MOTION TO AMEND: The bankruptcy court should freely give a party leave to amend the complaint “when justice so requires.” See Fed. R. Civ. P. 15(a)(2). Leave to amend “should be granted unless the amendment would be futile or reward undue delay.” Abraham v. Woods Hole Oceanographic Inst., 553 F.3d 114, 117 (1st Cir. 2009) (citation omitted). A proposed amendment is futile if the complaint, as amended, still fails to state a claim upon which relief may be granted. See id.; Glassman v. Computervision Corp., 90 F.3d 617, 623 (1st Cir. 1996) (citations omitted). 523(a)(2)(A) ANALYSIS: Section 523(a)(2)(A) excepts from discharge debts obtained by “false pretenses, a false representation, or actual fraud, other than a statement respecting the debtor’s or an insider’s financial condition. An action under § 523(a)(2)(A) involves three distinct categories of misconduct—false pretenses, false representation, or actual fraud—albeit with elements that overlap. See Diamond v. Vickery (In re Vickery), 488 B.R. 680, 686-91 (B.A.P. 10th Cir. 2013). In order to establish a debt is nondischargeable under § 523(a)(2)(A) due to a false representation, the plaintiff must show that: (1) the debtor made a knowingly false representation or one made in reckless disregard of the truth; (2) the debtor intended to deceive; (3) the debtor intended to induce the creditor to rely upon the false statement; (4) the creditor actually relied upon the misrepresentation; (5) the creditor’s reliance was justifiable; and (6) the reliance upon the false statement caused damage. In re Kosinski, 424 B.R. at 615 (citing McCrory v. Spigel (In re Spigel), 260 F.3d 27, 32 (1st Cir. 2001); Palmacci, 121 F.3d at 786). The bankruptcy court determined Privitera’s characterization of a misrepresentation was unavailing as, although she claimed Curran failed to reveal an encumbrance, she did not allege in the complaint that he had an obligation to do so or that he stated otherwise. It also determined her reliance was not justifiable because even if Curran misrepresented the existence of encumbrances, she did not obtain a lien herself. The bankruptcy court concluded, therefore, that Privitera’s failure to obtain a perfected security interest in the trucks doomed her causes of action under § 523(a) and it denied the request to amend.
Facts:
The creditor loaned the Debtor, pre-bankruptcy, $30,000 to support his landscaping business pursuant to a Loan Agreement and Promissory Note which included a collateral list. Pursuant to the transaction documents, the parties were to file a security agreement that would be duly recorded. Although a UCC was filed, no security agreement was done which granted the creditor a security interest in various trucks. The trucks were already subject to a pre-existing lien in favor of another creditor and that fact was stated as a purpose (refinance) of the new $30,000 loan.
Judge(s):
Trial Judge: Hon. Melvin S. Hoffman. BAP Judges: Lamoutte, Deasy and Cary.

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