Sandia Laboratory Federal Credit Union v. Torrez et al

UNITED STATES BANKRUPTCY COURT
FOR THE DISTRICT OF NEW MEXICO
In re:
ISAAC M. TORREZ and
MELISSA A. TORREZ,
Debtors. 	No. 7-08-13652 SA
SANDIA LABORATORY FEDERAL CREDIT UNION,
Plaintiff,
v. 	Adv. No. 09-1033 S
ISAAC M. TORREZ and
MELISSA A. TORREZ,
Defendants.
MEMORANDUM OPINION ON DEFENDANTS’
MOTION FOR JUDGMENT ON THE PLEADINGS
This matter is before the Court on Defendants’ Motion for
Judgment on the Pleadings (the “Motion”)(doc 4) in this adversary
complaint to determine the dischargeability of a debt pursuant to
11 U.S.C. § 523(a)(2). 	Plaintiff filed a response. 	(Doc 5).
This is a core proceeding. 	28 U.S.C. § 157(b)(2)(I).
The Motion is governed by Fed.R.Civ.P. 12(c). 	Courts review
a Rule 12(c) motion under the same standards that govern a Rule
12(b)(6) motion. 	Ward v. Utah, 321 F.3d 1263, 1266 (10th Cir.
2003) (“[w]e review a dismissal on the pleadings pursuant to
Fed.R.Civ.P. 12(c) under the same standard applicable to a
12(b)(6) dismissal.”) (citing Ramirez v. Dep't of Corr., 222 F.3d
1238, 1240 (10th Cir. 2000)). 	On a Rule 12(c) motion, the Court
is to accept as true all factual allegations in the Complaint and
draw all inferences in favor of the plaintiff. 	Ackerman v
Rubber2gold, Inc. (In re Coletta) 391 B.R. 691, 693 (Bankr. E.D.
N.Y. 2008)(citing Cleveland v. Caplaw Enterprises, 448 F.3d 518,
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521 (2d Cir.2006)). 	Plaintiff argues, doc 5 at p.2, that the
court may not grant a motion to dismiss under Rule 12(b)(6)
unless the plaintiff can prove no set of facts in support of the
claims that would entitle plaintiff to relief. 	This standard,
based on Conley v. Gibson, 355 U.S. 41 (1957), was abrogated by
Bell Atlantic Corp. v. Twombly, 550 U.S. 544, 562-63 (2007):
We could go on, but there is no need to pile up further
citations to show that Conley's “no set of facts”
language has been questioned, criticized, and explained
away long enough. To be fair to the Conley Court, the
passage should be understood in light of the opinion's
preceding summary of the complaint's concrete
allegations, which the Court quite reasonably
understood as amply stating a claim for relief. 	But
the passage so often quoted fails to mention this
understanding on the part of the Court, and after
puzzling the profession for 50 years, this famous
observation has earned its retirement. 	The phrase is
best forgotten as an incomplete, negative gloss on an
accepted pleading standard: once a claim has been
stated adequately, it may be supported by showing any
set of facts consistent with the allegations in the
complaint. 	See Sanjuan [v. American Bd. of Psychiatry
and Neurology, Inc.], 40 F.3d [247], at 251 [(7 th Cir.
1994)] (once a claim for relief has been stated, a
plaintiff “receives the benefit of imagination, so long
as the hypotheses are consistent with the complaint”);
accord, Swierkiewicz [v. Sorema N.A.], 534 U.S. [506],
at 514, 122 S.Ct. 992 [(2002)]; National Organization
for Women, Inc. v. Scheidler, 510 U.S. 249, 256, 114
S.Ct. 798, 127 L.Ed.2d 99 (1994); H.J. Inc. v.
Northwestern Bell Telephone Co., 492 U.S. 229, 249-250,
109 S.Ct. 2893, 106 L.Ed.2d 195 (1989); Hishon v. King
& Spalding, 467 U.S. 69, 73, 104 S.Ct. 2229, 81 L.Ed.2d
59 (1984). 	Conley, then, described the breadth of
opportunity to prove what an adequate complaint claims,
not the minimum standard of adequate pleading to govern
a complaint's survival.
Under the new standard of Twombly a plaintiff’s claim must be
“plausible on its face” in order to survive a motion to dismiss.
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Twombly, 550 U.S. at 570 (“[W]e do not require heightened fact
pleading of specifics, but only enough facts to state a claim to
relief that is plausible on its face.”) “The concept of
‘plausibility’ at the dismissal stage refers not to whether the
allegations are likely to be true; the court must assume them to
be true. 	The question is whether, if the allegations are true,
it is plausible and not merely possible that the plaintiff is
entitled to relief under the relevant law.” 	Christy Sports, LLC
v. Deer Valley Resort Co., Ltd., 555 F.3d 1188, 1191-92 (10 th
Cir. 2009)(citing Robbins v. Oklahoma, 519 F.3d 1242, 1247 (10th
Cir. 2008)).
Plaintiff’s complaint is based on 11 U.S.C. § 523(a)(2).
That section reads in part:
§ 523. Exceptions to discharge
(a) A discharge under section 727, 1141, 1228(a),
1228(b), or 1328(b) 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 pretenses, a false representation,
or actual fraud, other than a statement
respecting the debtor's or an insider's
financial condition;
[or]
(B) use of a statement in writing--
(I) that is materially false;
(ii) respecting the debtor's or an
insider's financial condition;
(iii) on which the creditor to whom the
debtor is liable for such money,
property, services, or credit reasonably
relied; and
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(iv) that the debtor caused to be made
or published with intent to deceive[.]
Because the complaint does not reference a materially false
written financial statement, the Court assumes that Plaintiff’s
cause of action is under § 523(a)(2)(A). 	To state a cause of
action under that subsection, a plaintiff must show: “[t]he
debtor made a false representation; the debtor made the
representation with the intent to deceive the creditor; the
creditor relied on the representation; the creditor's reliance
was reasonable; and the debtor's representation caused the
creditor to sustain a loss.” 	Fowler Bros. v. Young (In re
Young), 91 F.3d 1367, 1373 (10 th Cir. 1996). 	Actually, the
creditor’s reliance need only have been justifiable. 	Field v.
Mans, 516 U.S. 59, 74-75 (1995).
THE COMPLAINT
The complaint is summarized as follows: ¶¶ 1-3 identify the
parties and the source of bankruptcy jurisdiction; ¶ 4 states
that the Defendants executed a $50,000 note payable to the
plaintiff and secured by a second lien on their residence; ¶ 5
states that in late July 2008 the Defendants reported that they
were having financial difficulties and they had placed or soon
would place their home for sale; ¶ 6 states that the Defendants
then reported that they lacked the ability to make the required
monthly payments and asked plaintiff to forbear from collecting
on the account until after the home was sold; ¶ 7 states that the
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1These specific representations are not identified, however.
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Defendants represented that the expected sale price for the home
would be insufficient to pay off both the first and second
mortgages; ¶ 8 states that Defendants asked Plaintiff to accept
the projected short sale and that they would then make repayment
to the Plaintiff on the deficiency; ¶ 9 alleges that the
Plaintiff agreed to, and in fact did, accommodate the defendants
by cooperating in allowing the house to be sold without paying
off the mortgage loan and in deferring any collection activity
when the loan went delinquent; ¶ 10 states that Defendants last
payment was on August 9, 2008; ¶ 11 states that on October 20,
2008, Plaintiff transmitted a facsimile to the first mortgage
holder, agreeing to the terms of the short sale; ¶ 12 states that
in the meantime Defendants met with and retained bankruptcy
counsel, notwithstanding their representations 1 to the contrary;
¶ 13 alleges that the Defendants executed a document for the
electronic filing of their bankruptcy on October 28, 2008; ¶ 14
states that on October 29, 2008, Defendants completed an
application to re-finance the deficiency on the mortgage loan as
an unsecured loan; ¶ 15 states that the closing on the residence
occurred on October 29, 2008; ¶ 16 states that on October 29,
2008 Defendants executed their bankruptcy schedules; ¶ 17 states
that on October 30, 2008 the defendants filed their bankruptcy
petition; ¶ 18 states that on October 31 st , 2008 the Plaintiff
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2Even if Defendants had warned Plaintiff about the
possibility of a bankruptcy filing, there is probably nothing
that Plaintiff could have done about it. 	Prepetition agreements
to waive discharge or to forego bankruptcy or its benefits are
unenforceable as against public policy. 	See, e.g., Hayhoe v.
Cole (In re Cole). 226 B.R. 647, 651 n.6 & 652 n.7 (9 th Cir.
B.A.P. 1998)(collecting cases.) and In re Madison, 184 B.R. 686,
690 (Bankr. E.D. Pa. 1995)(citing Fallick v. Kehr, 369 F.2d 899,
904 (2 nd Cir. 1966))(An agreement not to file bankruptcy is
unenforceable because it violates public policy.)
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received the title company check leaving a balance due and owing
of $46,551.00. 	Plaintiff seeks a judgment that the sum of
$46,551.00 plus interest at 5.6% from October 31, 2008 plus
attorneys fees is nondischargeable under 11 U.S.C. § 523(a)(2).
DEFENDANTS’ MOTION FOR JUDGMENT
Defendants argue that the facts alleged by Plaintiff, even
if proven, cannot justify an exception to discharge under 11
U.S.C. § 523(a)(2)(A). 	The only representations of fact alleged
concern Defendants’ dire financial condition which were true, and
their failure to warn the Plaintiff that they intended to file a
bankruptcy 2. 	Plaintiff alleges no intent to deceive, nor does it
allege it relied on any representations. 	Plaintiff fails to
allege it suffered damages as a proximate result of any
representation by Defendants. 	Defendants seek dismissal of the
complaint. 	Defendants also seek their fees and costs under 11
U.S.C. § 523(d).
PLAINTIFF’S RESPONSE
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Plaintiff argues that John Deere Co. v. Gerlach (In re
Gerlach), 897 F.2d 1048 (10 th Cir. 1990) teaches that the use of
fraud to obtain an extension of a debt originally procured
nonfraudulently renders the entire debt nondischargeable. 	Id. at
1051. 	Plaintiff’s citations to Wolf v. Campbell (In re
Campbell), 159 F.3d 963 (6 th Cir. 1998) and South Division Credit
Union v. McFarland (In re McFarland), 84 F.3d 943 (7 th Cir.),
cert. denied, 519 U.S. 931 (1996), hold that fraudulent
extensions and fraudulent refinancings render the entire debt
nondischargeable. 	Additionally, the cases indicate that
forbearances constitute either an extension of credit or a
refinancing and that no additional damages need to be proven.
Therefore, Plaintiff urges the Court to find that its allegations
of forbearance to collect on Defendants’ debt from July 2008
through October 29 are sufficient to state a claim for relief.
DISCUSSION
The complaint lists several representations in ¶¶ 5-8 . 	The
complaint does not directly allege they were false in any way.
Paragraph 12 states that “notwithstanding their representations
to the contrary” Defendants contacted a bankruptcy attorney,
indirectly implying that Defendants’ statement that they would
repay the deficiency was a misrepresentation. 	See ¶ 8. 	If this
is Plaintiff’s theory, the complaint should directly say so. 	If
a plaintiff’s case rests upon an assumption that a debtor
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intended to misrepresent facts and upon a theory of implied fraud
it is insufficient. 	Jack Master, Inc. v. Collins (In re
Collins), 28 B.R. 244, 246 (Bankr. W.D. Okla. 1983). 	Rather, the
proof must show affirmatively that the representations were made
knowingly and fraudulently. 	Id. (citations omitted; emphasis in
original.) 	Furthermore, cases have held that a mere promise to
be carried out in the future is not sufficient to bar discharge
of the debt, even though there is no excuse for the subsequent
breach. 	Id. (citations omitted.); see also Garza v. Baker (In re
Baker), 139 B.R. 692, 694 (Bankr. N.D. Ohio 1992)(same; citations
omitted.); Rowe v. Showalter (In re Showalter), 86 B.R. 877, 880
(Bankr. W.D. Va. 1988)(“To satisfy the representation element of
§ 523(a)(2), the [plaintiff] must demonstrate that the
representation was one of existing fact and not merely an
opinion, expectation or declaration of intention. 	A mere promise
to repay, and nothing more, does not rise to the level of a
representation under § 523(a)(2).”)(citation omitted.); Keeling
v. Roeder (In re Roeder), 61 B.R. 179, 181 (Bankr. W.D. Ky. 1986)
(“[F]alse representations and false pretenses encompass
statements that falsely purport to depict current or past facts.
[A debtor’s] promise ... related to [a] future action [which
does] not purport to depict current or past fact ... therefore
cannot be defined as a false representation or a false
pretense.”)(citation omitted; emphasis in original)(Holding that
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a promise to turn over an income tax refund as security for a
loan was a promise related to a future action; therefore, failure
to carry out the promise was not a false representation or false
pretense for purposes of section 523(a)(2)(A).)
The complaint does not allege that Defendants made any
representation with the intent to deceive Plaintiff. 	Plaintiff
does not allege reliance, either actual or justifiable. 	And, the
complaint does not allege that any representation caused it to
sustain a loss, or that the representation was the proximate
cause of that loss.
Plaintiff argues, basically, that this case is governed by
Gerlach. 	However, this Court disagrees that Gerlach is as
applicable as Plaintiff wishes. 	While it is true that the Court
of Appeals for the Tenth Circuit stated that “dischargeability is
an ‘all or nothing’ proposition”, 897 F.2d at 1051, it ultimately
remanded the case for a determination of the amount that the
creditor could reasonably estimate was obtained by fraud, id. at
1052. 	Despite the “all or nothing” language, its instructions on
remand were to “declare the debt nondischargeable in an amount
which it can reasonably estimate as obtained by the fraud.” 	Id.
(emphasis added.) 	Therefore, the “all or nothing” language would
seem to be dicta because that is not in fact what the Court held
or did. 	See also Wingate v. Attalla (In re Attalla), 176 B.R.
650, 664 n.7 (Bankr. D. N.H. 1994)(discussing Gerlach’s
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3Section 454(a)(1)(B) added the words “to the extent
obtained” to 11 U.S.C. § 523(a).
Page -10-
contradictory language.); Siriani v. Northwestern Nat’l Ins. Co.,
of Milwaukee, Wisc. (In re Siriani), 967 F.2d 302, 304 n.2 (9 th
Cir. 1992)(also discussing Gerlach’s contradictory language, but
suggesting that the “in an amount” language suggested a proximate
cause element.) 	Furthermore, the “all or nothing” language in
Gerlach was taken directly from Birmingham Trust Nat’l. Bank v.
Case (In re Case), 755 F.2d 1474, 1477 (11 th Cir. 1985). 	The
Court of Appeals for the Eleventh Circuit subsequently recognized
that Case was superceded by Pub.L. No. 98-353, 98 Stat. 333
(1984) 3
, some six years before Gerlach was decided. 	Griffith v.
United States (In re Griffith), 206 F.3d 1389, 1394 (11 th Cir.),
cert. denied, 531 U.S. 826 (2000). 	Therefore, if the Tenth
Circuit were faced with the identical issue today, it might not
decide the case differently but it probably would not use the
conflicting “all or nothing” language.
Another distinguishing characteristic of this case compared
to Gerlach is that in this case no new advances were made after
the alleged misrepresentations. 	In Gerlach there were regular
additional monthly advances made after each different
misrepresentation. 	The entire debt was not declared
nondischargeable; rather, only the additional monthly advances of
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unsecured credit given after the Debtor had given phony contracts
to John Deere were at issue.
Gerlach also defined when a debt was “obtained by” fraud,
holding that it is “obtained by” fraud if the fraud is a
substantial factor in the creditor’s decision. 	897 F.2d at 1052.
Nothing in the complaint alleges that the Plaintiff actually did
anything or decided anything after the alleged
misrepresentations. 	There are no allegations of a formal
forbearance or new terms for the second mortgage; it appears that
there was only some paperwork being circulated regarding a
refinancing of the deficiency as an unsecured note. 	It appears
that Plaintiff was free to file a foreclosure at any time during
the two month period.
Plaintiff’s cites to In re Campbell, 159 F.3d 963 and In re
McFarland, 84 F.3d 943 are not really on point either because
they both deal with 11 U.S.C. § 523(a)(2)(B) matters which are
fundamentally different. 	See Field, 516 U.S. at 68-69.
Finally, the Court finds that the relief sought in this case
is not “plausible.” 	It appears to the Court that Debtors
honestly obtained a second mortgage and then later were unable to
pay it. 	They missed two or three payments after informing
Plaintiff that they were in financial trouble. 	They were trying
to sell the house to salvage some equity for Plaintiff by doing a
short sale. 	Plaintiff’s money was out the door a long time ago.
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No new money was advanced as a result of the representations.
All the damage had been done by the time Defendants notified
Plaintiff of their troubles. 	The alleged misrepresentations did
not “cause” anything; rather, it was Defendants’ overall
financial condition coupled with a declining real estate market
that caused all the damages. 	It seems that Plaintiff is urging
the Court to rule that if a debtor misses a few payments before
filing a bankruptcy that the debt is automatically not discharged
because the creditor extended credit beyond the original terms
and was harmed when the debtor filed bankruptcy. 	This is bad
policy and in any event is clearly contrary to the Code.
Therefore, for the reasons set forth above, the Court finds
that the Motion to Dismiss is well taken and should be granted.
Plaintiff’s response asks as alternative relief that it be
granted leave to amend its complaint in the event the Motion to
Dismiss is granted. 	The Court will allow Plaintiff one
opportunity to amend the complaint to state a cause of action.
Plaintiff shall file its amended complaint within 14 days of the
Order accompanying this Memorandum Opinion if it intends to
pursue nondischargeability. 	Due to the confusing language of
Gerlach, Defendants’ motion under 11 U.S.C. § 523(d) will be
denied.
Honorable James S. Starzynski
United States Bankruptcy Judge
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Date Entered on Docket: 	October 14, 2009
Copies to:
Kevin D Hammar
Attorney for Plaintiff
1212 Pennsylvania St NE
Albuquerque, NM 87110-7410
Michael K Daniels
Attorney for Defendants
PO Box 1640
Albuquerque, NM 87103-1640
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