MV Industries, Inc. et al v. Hernandez et al

1 The Court has subject matter and personal jurisdiction
pursuant to 28 U.S.C. §§1334 and 157(b); this is a core
proceeding pursuant to 28 U.S.C. §157(b)(2)(I); and these
are findings of fact and conclusions of law as may be required by
Rule 7052 F.R.B.P.
UNITED STATES BANKRUPTCY COURT
FOR THE DISTRICT OF NEW MEXICO
In re:
CHRISTOPHER C. HERNANDEZ and
ANGELICA A. HERNANDEZ,
Debtors. 	No. 7-10-12982 SS
MV INDUSTRIES, INC.,
A New Mexico Corporation,
and MICHAEL VIGIL,
Plaintiffs,
v. 	Adv. No. 10-1152 S
CHRISTOPHER C. HERNANDEZ and
ANGELICA A. HERNANDEZ,
Defendants.
MEMORANDUM OPINION ON DEFENDANTS’
MOTION TO DISMISS OR ALTERNATIVELY
FOR JUDGMENT ON THE PLEADINGS OR
ALTERNATIVELY FOR SUMMARY JUDGMENT
In this adversary proceeding, Plaintiffs (“MVI”) seek to
hold a debt non-dischargeable under 11 U.S.C. §§ 523(a)(2)(A),
(a)(4) and/or (a)(6). 	Defendants have filed a Motion to Dismiss
(doc 4) and then a Motion to Dismiss or Alternatively for
Judgment on the Pleadings or Alternatively for Summary Judgment
(doc 19 – “Motion”). 	For the reasons set forth below, the Court
will grant Defendants’ Motion for Summary Judgment. 1
BACKGROUND
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2 The caption lists both MV Industries, Inc. and Michael
Vigil as Plaintiffs. 	There is only one reference to Mr. Vigil in
the complaint at paragraph 53, stating that he was damaged.
Beyond that, the Court has no knowledge of who Mr. Vigil is or
how he is connected to this litigation.
3 The Memorandum does not make reference to the
jurisdictional or duplicative allegations.
4 HDR Enterprises (“HDR”) is a New Mexico corporation and a
licensed New Mexico contractor. 	(Defendants admit only that HDR
formerly held a license). 	(Doc. 1, ¶ 19). 	The complaint also
alleges: 	Christopher Hernandez is an “officer” of HDR and that
he may hold a legal interest in the company; (Id. ¶ 11)
Christopher Hernandez had the ability to bind HDR to contracts,
payment decisions and daily operations; (Id. ¶ 13); and
Christopher Hernandez held actual and apparent authority and
acted in his corporate as well as individual capacities. 	(Id. ¶
14).
Page -2-
MVI 2 filed this adversary proceeding on September 20, 2010
(doc 1). 	The adversary proceeding relates to a contract under
which MVI, a licensed contractor, was to build a project known as
the National Atomic History Museum in Albuquerque, New Mexico.
(Doc 1, ¶ 22). 	The complaint contains the following “general
allegations 3 ”, most of which were denied by the Defendants: 	MVI
issued subcontracts to HDR 4, Chris Hernandez (the Debtor), Steve
Aragon d/b/a Diversified Masonry, Angelica Romero and Shaun
Schmidt. (The last three are apparently third parties unrelated
to this litigation) (Id.; Id. at ¶ 6). 	There is pending in the
United States District Court for the District of New Mexico a
lawsuit filed in 2009 captioned United States of America, For the
Use of HDR Enterprises, LLC, ... Christopher Hernandez ... et
al., v. MV Industries, Inc. ... et al.. 	Debtors filed their
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5 Other than Romero, neither side has cited any statutory or
case authority to the Court in the Motion or any supporting or
(continued...)
Page -3-
Chapter 7 case on June 14, 2010 and listed a claim against MVI
for $400,000 on Schedule B and claimed a portion exempt on
Schedule C. 	(Id. ¶¶ 1, 2). 	Schedule B listed no ownership
interest in HDR. 	(Id. ¶ 12).
Paragraph 15 alleges: “For purposes of reference, MVI makes
its allegations against Christopher Hernandez and HDR
collectively, unless the context requires otherwise.” 	The
complaint also generally alleges that HDR and Hernandez failed to
perform their work (Id. ¶ 27); and that HDR failed to pay
suppliers for materials provided to the project despite the fact
that MVI paid HDR for materials, and that HDR assigned a portion
of its subcontract to another contractor in violation of the
contract and without notice to MVI and then failed to pay that
subcontractor (Id. ¶¶ 29, 30, 31); HDR invoiced MVI for the work
performed (Id. ¶ 32).
The rest of the complaint, ¶¶ 33-55, contains a single count
called “Conversion, fraud, misrepresentation.” 	Paragraphs 34 and
35 allege that HDR and Hernandez received payment of all invoices
and did not pay all of the suppliers as required under the terms
of the subcontract. 	Paragraph 36 cites In re Romero, 535 F.2d
618 (10 th Cir. 1976) and quotes three paragraphs from the
opinion. 5 	Paragraph 37 claims that the failure of HDR and
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5(...continued)
opposing papers.
6No specific writing is mentioned as containing a false
statement anywhere in the complaint or Court record up to this
point. 	The only reference to anything written was the contract
identified in the complaint, but that has never been submitted as
an exhibit. And, the complaint does not state that the contract
contains a false statement.
Page -4-
Hernandez to pay suppliers was intentional and willful.
Paragraph 38 claims that under In re Romero, Hernandez’s debt
should be nondischargeable. 	Paragraph 39 alleges that the
failure to pay suppliers was not based on any lawful defense to
the contract. 	Paragraph 40 states that HDR and Hernandez did not
complete the work “it/they” were paid for in a manner consistent
with what was required. 	Paragraphs 41-43 allege only
shortcomings of HDR and makes reference to an unidentified
counterclaim, perhaps in the District Court litigation.
Paragraph 44 states that MVI suffered $186,115.14 in damages.
Paragraphs 45 and 46 allege that “HDR and Hernandez” failed to
pay subcontractors for work they did, and that MVI had to pay
them. 	Paragraphs 47 and 48 allege that Hernandez represented to
Plaintiffs that “he would handle the lack of payment(s)” and that
MVI relied on Hernandez’s written 6 and verbal misrepresentations.
Paragraph 49 claims damages to MVI’s business reputation by the
willful, wanton and malicious acts of HDR and Hernandez.
Paragraph 52 and 53 allege that the contract breaches and
omissions were willful, wanton, intentional and deliberate and
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7In ruling on a motion to dismiss, the court must assume the
allegations are true. 	Foxworth Gailbraith Lumber Co. v. Manelos
(In re Manelos), 337 B.R. 409, 412 (Bankr. D. N.M. 2006).
However, while a complaint attacked under Rule 12(b)(6) does not
need detailed factual allegations, it does need to provide the
grounds for relief, which requires more than labels and
conclusions or a formulaic recitation of the elements of the
cause of action. 	Bell Atlantic Corp. v. Twombly, 550 U.S. 544,
555 (2007)(citations omitted). 	And, the complaint must contain
enough factual allegations to raise the right to relief above the
speculative level. 	Id.
Page -5-
but for them, MVI and Vigil would not have suffered damages.
Paragraph 54 alleges that HDR and Hernandez’ failure to pay is
evidence of fraud, conversion and intentional misrepresentation.
Paragraph 55 asserts that Angelica Hernandez has the same
culpability as her spouse due to her active knowledge of the
commissions and omissions cited herein.
In lieu of an answer, Defendants filed a Motion to Dismiss
(doc 4). 	Defendants (gratuitously) admitted, for the purpose of
the motion only 7, that HDR is a New Mexico corporation (¶ 9 of
complaint), that Christopher Hernandez is an officer of HDR (¶
11), that HDR is a licensed New Mexico contractor (¶ 19), that
the dispute involves a subcontract (¶ 22), and that MVI entered
into a subcontract with HDR on July 29, 2008 which required HDR
to complete work within the scope of the contract (¶¶ 25, 26).
Defendants argue that there is no allegation that Christopher
Hernandez signed the contract in either a representative or
individual capacity, and that there is no allegation that
Christopher Hernandez had any obligation to perform under the
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Page -6-
contract. 	They also argue that there is no allegation that
Christopher Hernandez misused or ignored the corporate structure
of HDR, or committed any act sufficient to ignore the corporate
existence of HDR. 	Defendants claim that even if all allegations
in the complaint were true, all that it does is establish a claim
against HDR, not them. 	Because the complaint fails to establish
a claim against Hernandez, there is no nondischargeable claim,
they assert.
Plaintiffs responded. 	(Doc 13). 	First, Plaintiffs refer to
paragraphs 13 and 14 of the complaint which state that Hernandez
had the ability to bind HDR to contracts, and the ability to make
payment decisions, and that he acted in both his corporate and
individual capacities. 	They also refer to paragraph 35 which
alleges that HDR and Hernandez did not pay the suppliers.
Finally, they claim that under In re Romero persons other than
the licensed general contractor risk individual liability.
Second, Plaintiffs dispute that the complaint does not
allege sufficient acts to disregard the corporate existence of
HDR. 	They claim that: the fact that Hernandez was an officer,
that he had actual and apparent authority, that he made false
representations, that Plaintiffs dealt with him in both his
representative and individual capacities, and that they relied on
statements and representations, and were harmed as a result of
his individual acts and omissions, is enough.
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8Bankruptcy Rule 7056 incorporates Fed.R.Civ.P. 56. 	That
Rule provides, in part:
(a) Motion for Summary Judgment or Partial Summary
Judgment. 	A party may move for summary judgment,
identifying each claim or defense--or the part of each
claim or defense--on which summary judgment is sought.
The court shall grant summary judgment if the movant
shows that there is no genuine dispute as to any
material fact and the movant is entitled to judgment as
a matter of law. 	The court should state on the record
the reasons for granting or denying the motion.
...
(c) Procedures.
(1) Supporting Factual Positions. 	A party asserting
that a fact cannot be or is genuinely disputed must
support the assertion by:
(A) citing to particular parts of materials in the
record, including depositions, documents,
(continued...)
Page -7-
The Court heard arguments on the motion to dismiss and
denied it without prejudice and ordered that Defendants had until
June 15, 2011 to re-file the Motion to Dismiss and/or a Motion
for Summary Judgment that specifically addressed issues raised in
Plaintiffs’ response. 	(Order, doc 17).
Defendants filed an Answer (doc 18) and timely filed the
Motion to Dismiss or Alternatively for Judgment on the Pleadings
or Alternatively for Summary Judgment (“Motion”)(doc 19), which
is the subject of this Memorandum. 	Plaintiffs did not file a
response.
SUMMARY JUDGMENT
Summary judgment is proper when there is no genuine issue as
to any material fact and the moving party is entitled to a
judgment as a matter of law. 	Bankruptcy Rule 7056(a) 8. 	In
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8(...continued)
electronically stored information, affidavits or
declarations, stipulations (including those made
for purposes of the motion only), admissions,
interrogatory answers, or other materials; or
(B) showing that the materials cited do not
establish the absence or presence of a genuine
dispute, or that an adverse party cannot produce
admissible evidence to support the fact.
(2) Objection That a Fact Is Not Supported by
Admissible evidence. 	A party may object that the
material cited to support or dispute a fact cannot be
presented in a form that would be admissible in
evidence.
(3) Materials Not Cited. 	The court need consider only
the cited materials, but it may consider other
materials in the record.
(4) Affidavits or Declarations. 	An affidavit or
declaration used to support or oppose a motion must be
made on personal knowledge, set out facts that would be
admissible in evidence, and show that the affiant or
declarant is competent to testify on the matters
stated.
...
(e) Failing to Properly Support or Address a Fact. 	If
a party fails to properly support an assertion of fact
or fails to properly address another party's assertion
of fact as required by Rule 56(c), the court may:
(1) give an opportunity to properly support or address
the fact;
(2) consider the fact undisputed for purposes of the
motion;
(3) grant summary judgment if the motion and supporting
materials--including the facts considered
undisputed--show that the movant is entitled to it; or
(4) issue any other appropriate order.
Page -8-
determining the facts for summary judgment purposes, the Court
may rely on affidavits made with personal knowledge that set
forth specific facts otherwise admissible in evidence and sworn
or certified copies of papers attached to the affidavits.
Fed.R.Civ.P. 56(c)(1). 	When a motion for summary judgment is
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Page -9-
made and supported by affidavits or other evidence, an adverse
party may not rest upon mere allegations or denials. 	Id.
Rather, 	“Rule 56(e) ... requires the nonmoving party to go
beyond the pleadings and by her own affidavits, or by the
‘depositions, answers to interrogatories, and admissions on
file,’ designate ‘specific facts showing that there is a genuine
issue for trial.’” 	Celotex Corp. v. Catrett, 477 U.S. 317, 324
(1986). 	“Rule 56(e) permits a proper summary judgment motion to
be opposed by any of the kinds of evidentiary materials listed in
Rule 56(c), except the mere pleadings themselves.” 	Id. 	The
court does not try the case on competing affidavits or
depositions; the court's function is only to determine if there
is a genuine issue for trial. 	Anderson v. Liberty Lobby, Inc.,
477 U.S. 242, 249 (1986).
In ruling on a motion for summary judgment, the trial court
views the evidence and draws reasonable inferences therefrom in
the light most favorable to the nonmoving party. 	Mountain
Highlands, LLC v. Hendricks, 616 F.3d 1167, 1169-70 (10 th Cir.
2010)(citing Garrison v. Gambro, Inc., 428 F.3d 933, 935 (10th
Cir. 2005)). 	On those issues for which it bears the burden of
proof at trial, the nonmovant “must go beyond the pleadings and
designate specific facts so as to make a showing sufficient to
establish the existence of an element essential to [its] case in
order to survive summary judgment.” 	Id. at 1170 (quoting Cardoso
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Page -10-
v. Calbone, 490 F.3d 1194, 1197 (10th Cir. 2007)) (internal
quotation marks omitted). 	“If a party that would bear the burden
of persuasion at trial does not come forward with sufficient
evidence on an essential element of its prima facie case, all
issues concerning all other elements of the claim and any
defenses become immaterial.” 	Adler v. Wal-Mart Stores, Inc., 144
F.3d 664, 670 (10 th Cir. 1998)(citing Celotex, 477 U.S. at 322-
23). 	“[F]ailure of proof of an essential element renders all
other facts immaterial.” 	Mountain Highlands, 616 F.3d at 1170
(quoting Koch v. Koch Indus., Inc., 203 F.3d 1202, 1212 (10th
Cir.), cert. denied, 531 U.S. 926 (2000)).
New Mexico LBR 7056-1 governs summary judgment motions. It
provides, in part:
The memorandum in support of the motion shall set
out as its opening a concise statement of all of the
material facts as to which movant contends no genuine
issue exists. 	The facts shall be numbered and shall
refer with particularity to those portions of the
record upon which movant relies.
A memorandum in opposition to the motion shall
contain a concise statement of the material facts as to
which the party contends a genuine issue does exist.
Each fact in dispute shall be numbered, shall refer
with particularity to those portions of the record upon
which the opposing party relies, and shall state the
number of the movant's fact that is disputed. 	All
material facts set forth in movant’s statement that are
properly supported shall be deemed admitted unless
specifically controverted.
FACTS
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Page -11-
Because Plaintiffs did not respond to Defendants’ Motion,
all facts listed in the Statement of Undisputed Facts are deemed
admitted. 	The Statement contains three facts, all properly
supported by an affidavit and attached documents.
1. 	Hernandez is not a licensed contractor.
2. 	Hernandez is not the qualifying party for the contractor’s
license.
3. 	Hernandez is not an officer of HDR Enterprises, LLC.
THE STATUTE
Plaintiffs seek relief under Bankruptcy Code sections
523(a)(2)(A), (a)(4) and (a)(6). 	Those sections provide:
(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 pretenses, a false representation, or
actual fraud, other than a statement respecting
the debtor's or an insider's financial condition;
...
(4) for fraud or defalcation while acting in a
fiduciary capacity, embezzlement, or larceny;
...
[or]
(6) for willful and malicious injury by the debtor
to another entity or to the property of another
entity.
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Page -12-
DEFENDANTS’ ARGUMENTS
Defendants argue that given the three undisputed facts
above, and Plaintiffs’ failure to allege crucial elements of each
of the causes of action, they cannot prevail on their complaint.
1. 	DEFENDANTS ARGUE THAT THE COMPLAINT FAILS TO ALLEGE A DEBT
First, Defendants argue that the complaint fails to allege
that Christopher Hernandez had any obligation to perform under
the contract, and fails to allege that the corporate structure of
HDR should be disregarded. 	The Court disagrees, in part.
Paragraph 6 of the complaint states, in part, “In the summer of
2008 MVI contracted with ... Chris Hernandez ...” 	(Doc 1 ¶ 6).
This is sufficient to state an element of a contract claim
against Chris Hernandez.
The Court agrees that there are no allegations in the
complaint that would suggest that Christopher Hernandez should be
made liable for HDR’s debts. 	See Scott v. AZL Resources, Inc.,
107 N.M. 118, 121, 753 P.2d 897, 900 (1988):
A basic proposition of corporate law is that a
corporation will ordinarily be treated as a legal
entity separate from its shareholders. 	Shareholders
can thus commit limited capital to the corporation with
the assurance that they will have no personal liability
for the corporation's debt. ... Only under special
circumstances will the courts disregard the corporate
entity to pierce the corporate veil holding individual
shareholders or a parent corporation liable. 	This is
done where the corporation was set up for fraudulent
purposes or where to recognize the corporation would
result in injustice. 	Scott Graphics, Inc. v. Mahaney,
89 N.M. 208, 211, 549 P.2d 623, 626 (Ct.App.), cert.
denied, 89 N.M. 322, 551 P.2d 1369 (1976).
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Page -13-
New Mexico decisions have held that piercing the
corporate veil is an equitable remedy. 	Three
requirements must be satisfied to obtain this relief: a
showing of instrumentality or domination, improper
purpose and proximate causation. 	Harlow v. Fibron
Corp., 100 N.M. 379, 382, 671 P.2d 40, 43 (Ct.App.),
cert. denied, 100 N.M. 439, 671 P.2d 1150 (1983).
The complaint fails to allege that the corporation was set up for
a fraudulent purpose, that Christopher Hernandez dominated the
corporation or treated it as his personal asset. 	Furthermore, in
New Mexico, officers are generally not liable for contract
violations by a corporation. 	Two Old Hippies, LLC v. Catch the
Bus, LLC, ___ F. Supp.2d ___, 2011 WL 831302 at *13 (D. N.M.
2011)(quoting Kreischer v. Armijo, 118 N.M. 671, 673, 884 P.2d
827, 829 (Ct.App. 1994)). 	See also Crossingham Trust v. Baines,
(In re Baines), 337 B.R. 392, 407 (Bankr. D. N.M. 2006)(Stating
the rule that a corporate officer or shareholder, by virtue of
that status alone, is not liable for the acts or debts of the
corporation.)(Citing In re Tinker, 311 B.R. 869, 874-75 (Bankr.
D. Colo. 2004)). 	And, despite a complaint’s characterization of
a cause of action as a tort the court should look at the
“gravamen of the complaint” to determine if it is essentially a
breach of contract case. 	Id. 	Similarly, MVI’s complaint is
really a breach of contract case and there are no allegations
that suggest that Christopher Hernandez should be personally
liable.
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9Section 523(a)(2)(A) makes certain common-law torts
nondischargeable in bankruptcy. 	Field v. Mans, 516 U.S. 59, 69
(1995). 	“The operative terms in § 523(a)(2)(A), ... ‘false
pretenses, a false representation, or actual fraud,’ carry the
acquired meaning of terms of art. 	They are common-law terms,
and, ... in the case of ‘actual fraud,’ ... they imply elements
that the common law has defined them to include.” 	Id.
Therefore, the bankruptcy court should look to the common law of
torts for the elements of fraud. 	The Field court stated that the
most widely accepted distillation of the common law of torts was
the Restatement (Second) or Torts (1976). 	(“Restatement”). 	Id.
at 70.
The Restatement § 525 provides:
§ 525. Liability For Fraudulent Misrepresentation.
One who fraudulently makes a misrepresentation of fact,
opinion, intention or law for the purpose of inducing
another to act or to refrain from action in reliance
upon it, is subject to liability to the other in deceit
for pecuniary loss caused to him by his justifiable
reliance upon the misrepresentation.
The Court of Appeals for the Tenth Circuit recently stated
what a plaintiff must prove to succeed under Section 523(a)(2)(A)
in the Restatement § 525 context:
(continued...)
Page -14-
In summary, the Court finds that there is a material
question of fact as to whether the Defendants, personally, owe a
debt. 	However, there is no question of fact that Defendants are
not liable for HDR’s debts under a piercing the corporate veil
theory. 	Because the Court finds a material question of fact as
to their personal liability, the Court will address Defendants’
other arguments.
2. 	THE SECTION 523(a)(2)(A) CLAIM
Second, Defendants argue that the complaint fails to allege
any misstatements of fact to support a fraud claim 9. 	The Court
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9(...continued)
In order to establish a non-dischargeable claim
under this subsection, a creditor must prove the
following elements by a preponderance of the evidence:
“The 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 (10th Cir. 1996).
Johnson v. Riebesell (In re Riebesell), 586 F.3d 782, 789 (10 th
Cir. 2009). 	The Riebesell Court also acknowledged that in Field
v. Mans, 516 U.S. 59, 74-75 (1995) the Supreme Court ruled that
only justifiable, not reasonable, reliance was required. 	Id. at
791-92. 	In other words, the creditor must prove:
• a false representation,
• made with the intent to deceive,
• on which the creditor actually and justifiable relied, and
• the representation caused the creditor to sustain a loss.
10 Also, the substance of the cited statement suggests that
the damage had already been done. 	The Court fails to see how a
representation made after the fact could have proximately caused
earlier damage.
Page -15-
agrees with Defendants. 	The only paragraph that explicitly
states the content of a representation is paragraph 47: “At all
times material, Hernandez represented to Plaintiffs that he would
handle the lack of payment(s) cited herein.” 	This representation
was a promise as to future events.
A promise to perform in the future does not establish a
cause of action for fraud or deceit unless the plaintiff alleges
and proves that there was a present intent not to perform when
the promise was made 10 . 	Yunkers v. Whitcraft, 57 N.M. 642, 647,
261 P.2d 829, 832 (1953)(“[T]here is no tangible evidence to show
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Page -16-
the defendants formed a decision not to continue with their
agreement which they did not disclose to the plaintiff while
under duty to do so.”) 	Accord Lightning Lube, Inc. v. Witco
Corp., 4 F.3d 1153, 1186 (3 rd Cir. 1993)(Applying New Jersey
law). 	See also Restatement § 530(1)(“A representation of the
maker's own intention to do or not to do a particular thing is
fraudulent if he does not have that intention.”) and cmt. d:
The intention that is necessary to make the rule stated
in this Section applicable is the intention of the
promisor when the agreement was entered into. 	The
intention of the promisor not to perform an enforceable
or unenforceable agreement cannot be established solely
by proof of its nonperformance, nor does his failure to
perform the agreement throw upon him the burden of
showing that his nonperformance was due to reasons
which operated after the agreement was entered into.
Therefore, paragraph 47, by itself, is insufficient to establish
fraud and is not even evidence of fraud. 	And, the complaint
makes no allegation that Hernandez lacked the intention to
perform when he made the statement.
Furthermore, the complaint fails to comply with Fed.R.Civ.P.
9, made applicable to bankruptcy proceedings by Fed.R.Bankr.P.
7009. 	That rule states, in relevant part:
Rule 9. Pleading Special Matters
...
(b) Fraud or Mistake; Conditions of Mind. 	In alleging
fraud or mistake, a party must state with particularity
the circumstances constituting fraud or mistake.
Malice, intent, knowledge, and other conditions of a
person's mind may be alleged generally.
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Page -17-
The United States District Court for the District of New
Mexico recently ruled on a Motion to Dismiss for failure to plead
with specificity under Rule 9(b). 	Two Old Hippies, ___ F.
Supp.2d ___, 2011 WL 831302 (D. N.M. 2011). 	In denying the
motion, the court stated:
The Court agrees that the Complaint adequately
states the alleged misrepresentation. 	“At a minimum,
Rule 9(b) requires that a plaintiff set forth the who,
what, when, where and how of the alleged fraud.”
United States ex rel. Schwartz v. Coastal Healthcare
Group, Inc., 232 F.3d 902, at *3. 	See Midgley v.
Rayrock Mines, Inc., 374 F.Supp.2d [1039 (D. N.M.
2005)] at 1047 (“To survive a motion to dismiss, an
allegation of fraud must ‘set forth the time, place,
and contents of the false representation, the identity
of the party making the false statements and the
consequences thereof.’” (quoting Schwartz v. Celestial
Seasonings, Inc., 124 F.3d [1246 (10 th Cir. 1997)] at
1252)). 	“On the other hand, rule 9(b) does not require
specific knowledge regarding the defendant's state of
mind.” 	Midgley v. Rayrock Mines, Inc., 374 F.Supp.2d
at 1047. 	Counts III, IV, V, and VII of the Complaint
are predicated upon allegations that the Defendants
willfully and intentionally made misrepresentations of
fact to Two Old Hippies. ...
Two Old Hippies adequately pleads the alleged
misrepresentation in the Complaint. 	The Complaint
alleges that the Defendants told Two Old Hippies that
... [detailed factual allegations]. ... 	The Complaint
thus states what was said, by whom, approximately when
and in what context. 	This factual particularity
satisfies rule 9(b)'s pleading requirements.
Id. at *6. 	See also 5A Wright, Miller, Kane and Marcus, Fed.
Prac. & Proc. Civ. § 1297 (3d ed.)(“[T]he reference to
‘circumstances’ in the rule is to matters such as the time,
place, and contents of the false representations or omissions, as
well as the identity of the person making the misrepresentation
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11 The Court recognizes that HDR is not a co-defendant in
this adversary, but the complaint alleges fraudulent activity by
both HDR and Hernandez.
Page -18-
or failing to make a complete disclosure and what that defendant
obtained thereby.”)
When there are more than one alleged fraudfeasor Rule 9 is
especially applicable; without specifying who made which
fraudulent statement or in what circumstance, a defendant cannot
prepare a defense. 	In contrast, Plaintiffs’ complaint ¶ 15
specifically states that all allegations apply to both
Christopher Hernandez and HDR 11 . 	Ignoring the fact that no
misrepresentations are actually alleged, if there had been, the
complaint would be subject to dismissal for failure to plead with
specificity. 	See Two Old Hippies, LLC, 2011 WL 831202 at *14 (A
complaint is subject to dismissal for failure to provide fair
notice if it fails to differentiate among the various defendants
and merely attributes actions to “the defendants.”)(quoting
Robbins v. Oklahoma, 519 F.3d 1242, 1249-50 (10 th Cir. 2008)).
Finally, the complaint does not allege that the Defendants
intended to deceive. 	It merely alleges that Plaintiffs relied,
but does not state how they relied, or that their reliance was
justifiable. 	(Doc 1, ¶ 48). 	And, it boldly alleges that “but
for” Defendants’ actions, MVI and Vigil would not have suffered
the damages. 	(Id., ¶ 53). 	These statement are conclusory and
alone they do not satisfy the required allegations of the
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12 E.g., ¶ 48 (“MVI relied on Hernandez’ written and verbal
misrepresentations.”); ¶ 54 (“HDR and Hernandez’ failure to pay
the required subcontractor, vendor invoices, and the additional
completion costs, are evidence of and based in fraud, conversion
and intentional misrepresentation.”) However, nowhere does the
complaint list a specific misrepresentation, when or by whom it
was made, its contents, why it was false, what actions by
Plaintiffs demonstrate that it was actually relied on, or how it
caused damage and the specific evidence of damage caused by the
specific representation.
Page -19-
elements of reliance or cause/ proximate cause. 	See 	Twombly,
550 U.S. at 555 (One needs more than a formulaic recitation of
the elements of the cause of action.)
In summary, the complaint alleges one representation, but
does not explicitly claim that it was false. 	The complaint makes
other general allegations about misrepresentations 12 but fails to
identify them at all, much less with specificity. 	Intent,
reliance, cause and proximate cause are not specified. 	The Court
finds that the fraud claims must be dismissed.
3. 	THE SECTION 523(a)(6) CLAIM
Third, Defendants argue that the complaint fails to allege
that either HDR or Hernandez ever intended any injury to MVI.
Defendants claim that this defeats a claim under section
523(a)(6).
Section 523(a)(6) states that a debt for willful and
malicious injury by the debtor to another entity or to the
property of another entity is nondischargeable. 	“Willful” for
purposes of section 523(a)(6) means “deliberate or intentional.”
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Page -20-
Tso v. Nevarez (In re Nevarez), 415 B.R. 540, 545 (Bankr. D. N.M.
2009).
The complaint, ¶ 37, alleges that the failure to pay
suppliers was “intentional and willful.” 	Paragraph 49 states, in
conclusory terms, that Plaintiffs’ business reputation was
damaged by the “willful, wanton and malicious acts and omissions”
of HDR and Hernandez. 	Paragraph 52 states that the “breach(es)
and omissions” were willful, wanton and deliberate. 	Paragraph 53
claims that “but for” the malicious, willful and intentional acts
and omissions, the Plaintiffs would not have suffered damages.
However, whether the Defendants acted willfully and maliciously
is ultimately irrelevant because Plaintiffs have failed to allege
all of the elements of any tort that could have been committed
willfully and maliciously.
The complaint does not specify exactly what the Defendants
did that was willful and malicious. 	A thorough review of the
entire complaint suggests that it might be one of two claims: 1)
willful and malicious injury resulting from a defamation of
Plaintiffs’ business reputation, or 2) a willful and malicious
conversion of Plaintiffs’ money. 	Each will be discussed.
A. 	BUSINESS REPUTATION
The law of defamation of reputation is well established
in New Mexico. Reputation is what a person is thought
to be, as distinguished from character, which is what a
person is. 	Proper v. Mowry, 90 N.M. 710, 568 P.2d 236
(Ct.App.1977). 	Restatement (Second) of Torts, s 559,
states as follows:
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Page -21-
Defamatory Communications Defined
A communication is defamatory if it tends so
to harm the reputation of another as to lower
him in the estimation of the community or to
deter third persons from associating or
dealing with him.
Dominguez v. Stone, 97 N.M. 211, 213, 638 P.2d 423, 425 (Ct.App.
1981).
Plaintiffs allege, at ¶ 49 that their business reputations
were damaged by Defendant’s acts. 	However, the complaint fails
to allege the elements of a defamation claim. 	In addition, the
complaint does not allege, and the Plaintiffs have offered no
proof, that the business had a reputation to begin with. 	See
Hue-Mar, LLC v. Freedomroads Operations Co., LLC, 2008 WL 2517173
at *3 n.3 (W.D. La. 2008)(When seeking damages for loss of
business reputation, the business must prove that it had a good
reputation and must show how the business reputation was
damaged.)
The jury instructions, UJI 13-1002(B) NMRA, state the nine
elements a plaintiff must prove to recover for defamation:
(1) 	The defendant published the communication; and
(2) 	The communication contains a statement of fact;
and
(3) 	The communication was concerning the plaintiff;
and
(4) 	The statement of fact was false; and
(5) 	The communication was defamatory; and
(6) 	The person[s] receiving the communication
understood it to be defamatory; and
(7) 	The defendant [knew that the communication was
false or negligently failed to recognize that it
was false] [or] [acted with malice]; and
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13 Rule 13-1002(B)(8) actually reads “The communication
caused actual injury to the plaintiff's reputation; and”. 	In
Smith v. Durden, 148 N.M. 679, 683, 241 P.3d 1119, 1123, 2010-
NMCA-097 at {12}, cert. granted, 149 N.M. 65, 243 P.3d 1147,
2010-NMCERT-10 (2010), the Court of Appeals suggested that
subsection 8 of the instruction be changed to the language in the
text above to reflect the proper statement of the law regarding
the tort of defamation in New Mexico. 	That change has not yet
been implemented. 	It is not materially relevant in this case.
Page -22-
(8) 	The communication caused actual injury to the
plaintiff; 13 and
(9) 	The defendant abused [its] privilege to publish
the communication.
See also Cory v. Allstate Insurance, 583 F.3d 1240, 1243 (10 th
Cir. 2009)(“Under New Mexico law, the elements of a defamation
action include: a defamatory communication, published by the
defendant, to a third person, of an asserted fact, of and
concerning the plaintiff, and proximately causing actual injury
to the plaintiff.”)(citing Newberry v. Allied Stores, Inc., 108
N.M. 424, 429, 773 P.2d 1231, 1236 (1989)).
The cases make clear that a defamation plaintiff must
specifically identify the defamatory statements. 	Weise v.
Washington Tru Solutions, L.L.C., 144 N.M. 867, 875-76, 192 P.3d
1244, 1252-53, 2008-NMCA-121 at {21} (“Although Plaintiffs
generally claim that Marvin was defamed, the amended complaint
does not specifically identify which statements defamed Marvin.”)
(Citing Andrews v. Stallings, 119 N.M. 478, 485, 892 P.2d 611,
618 (Ct.App. 1995)). 	See also Coronado Credit Union v. KOAT
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Page -23-
Television, Inc., 99 N.M. 233, 239, 656 P.2d 896, 902 (Ct.App.
1982):
With the exception of the statements discussed
above, Coronado did not plead specifically any other
language in the broadcast alleged to have been
defamatory, but instead made only vague, general
references to the false nature of the entirety of the
broadcast; therefore, summary judgment was proper as to
the other portions of the broadcast. 	Plaintiff has
failed to sustain its burden in response to KOAT–TV's
motion and come forward and show the existence of
genuine factual issues as to other allegedly untrue
statements which were alleged in its complaint and
which were not either substantially true or outside the
claims of privilege asserted by KOAT–TV warranting
summary judgment as a matter of law.
Plaintiffs’ complaint in this case fails totally to allege
the required elements of defamation. 	Without a defamation, there
can be no willful and malicious defamation.
B. 	CONVERSION
A debt for willful and malicious conversion of property can
be held nondischargeable under section 523(a)(6). 	Hernandez v.
Dorado (In re Dorado), 400 B.R. 304, 311 (Bankr. D. N.M. 2008).
Under New Mexico law,
Conversion is defined as the unlawful exercise of
dominion and control over personal property belonging
to another in exclusion or defiance of the owner's
rights, or acts constituting an unauthorized and
injurious use of another's property, or a wrongful
detention after demand has been made. 	Bowman v.
Butler, 98 N.M. 357, 648 P.2d 815 (Ct.App. 1982);
Taylor v. McBee, 78 N.M. 503, 433 P.2d 88 (Ct.App.
1967).
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Page -24-
Nosker v. Trinity Land Co., 107 N.M. 333, 337-38, 757 P.21d 803,
807-08 (Ct.App.), cert. denied, 107 N.M. 267, 755 P.2d 605
(1988).
In order to recover damages for conversion, a
plaintiff must have a right to immediate possession of
the property. Such a right is generally based on some
form of ownership interest. 	See Stephen v. Phillips,
101 N.M. 790, 689 P.2d 939 (Ct.App. 1984); Aragon v.
General Elec. Credit Corp., 89 N.M. 723, 557 P.2d 572
(Ct.App. 1976). 	Here, the evidence fails to establish
that Nosker had a possessory or ownership interest in
the equipment at the time of the alleged conversion.
Id.
The only allegations in the complaint that suggest Defendant
obtained Plaintiffs’ property are ¶ 30 (“MVI paid ... HDR ... for
the materials.”), ¶ 32 (“HDR and Hernandez invoiced MVI for work
performed on the project and MVI paid for such work.”) and ¶ 34
(HDR and Hernandez received payment for all of the invoices.”)
The complaint does not allege that Defendants took personal
property from the Plaintiffs, or made injurious use of any
property belonging to Plaintiffs, or that Plaintiffs asked for
anything back from Defendants which they refused to turn over.
In fact, the allegations state the opposite. 	The three listed
paragraphs all state that MVI paid HDR on invoices and for
materials.
Generally, when there is no security interest
involved, monies received by a debtor belong to the
debtor and their subsequent use by a debtor is not
considered embezzlement so that, in the absence of an
identifiable fund of cash belonging to the creditor, a
court is left with a simple breach of contract which is
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Page -25-
dischargeable. 	Here, there was no security agreement,
and once Plaintiffs paid the funds to Defendant, the
funds no longer belonged to Plaintiffs.
Dorado, 400 B.R. at 310 (Citations and internal punctuation
omitted.) 	Therefore, when Plaintiffs paid the invoices, the
funds became Defendants’ (or HDR’s) property. 	The definition of
conversion requires that the property converted belong to
another. 	So, Defendants did not convert Plaintiffs’ property.
See also Chiti v. Spectrum Golf, Inc. (In re Spectrum Golf,
Inc.), 2007 WL 7540965 at *7 (9 th Cir. BAP 2007)(“It is clear
that one cannot convert his own property.”)(Citations omitted.);
Gadtke v. Bren (In re Bren), 284 B.R. 681, 698 (Bankr. D. Minn.
2002)(“Payment of a contract price in exchange for the recipient
to undertake an obligation of future performance transfers the
ownership of the money to the recipient.”)(Citations omitted.);
Id. (“One cannot embezzle one's own property.”); Adamo v.
Scheller (In re Scheller), 265 B.R. 39, 54 (Bankr. S.D. N.Y.
2001)((“[O]ne cannot embezzle or convert one’s own property.”)
(Citations omitted.); United States Fire Insurance Co. v. Dean
(In re Dean), 9 B.R. 321, 324 (Bankr. M.D. Fla. 1981)(“It is
self-evident that one cannot convert its own property and an
action for conversion can only be maintained by one who had, at
the time of the conversion, either a general or a special
ownership interest in the property.”)(Decided under Bankruptcy
Act.)
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14 Debtors implicitly suggest in their Motion to Dismiss
that the Court should not consider the (a)(4) claim because the
caption of the complaint does not refer to (a)(4). 	The general
rule is that a complaint need not set forth its legal theories.
Zokari v. Gates, 561 F.3d 1076, 1084 (10 th Cir. 2009). 	Rather,
it must give the defendant fair notice of what the claim is and
the grounds upon which it rests. 	Id. (citing Bell Atlantic Corp.
v. Twombly, 550 U.S. 544 (2007)). 	Plaintiffs’ complaint cites
Allen v. Romero (In re Romero), 535 F.2d 618 (10 th Cir. 1976).
In Romero the Court stated:
The Supreme Court of New Mexico has stated that the
purpose of the [New Mexico Construction Industries
Licensing] Act is to provide “a comprehensive method
for the licensing and control of contractors in order
to protect the public from either irresponsible or
incompetent contractors”. 	Peck v. Ives, 84 N.M. 62,
499 P.2d 684 (1972). 	In our view, s 67-35-26, supra,
clearly imposes a fiduciary duty upon contractors who
have been advanced money pursuant to construction
contracts.
The Court finds that this citation provided adequate notice to
Defendants that a claim under § 523(a)(4) was being made.
Page -26-
In summary, there is no allegation and nothing in the record
to suggest that Defendants converted any property of Plaintiffs.
Therefore, there is no willful and malicious conversion that
would be nondischargeable.
4. 	THE SECTION 523(a)(4) CLAIM14
Finally, Defendants argue that the complaint fails to allege
that either of the Defendants were fiduciaries, that either of
them defrauded anyone or defalcated, and that Romero simply does
not apply to the facts alleged. 	The Court agrees.
Plaintiffs argue that under Romero persons other than the
licensed general contractor risk individual liability. 	The Court
does not read Romero to stand for that proposition.
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15 The remainder of the Romero opinion deals with the fraud
claims raised by Allen and sufficiency of evidence questions. 	In
the case before this Court, the Defendants have already
established in their Motion for Summary Judgment that fraud is
not an issue. 	Therefore, the remainder of Romero, including the
lengthy quotations by Plaintiffs, are simply not relevant.
It is interesting to note, however, that the Romero Court
reduced the damage figure by amounts it called “consequential
(continued...)
Page -27-
In Romero, the Court of Appeals started its reasoning by
finding that the term “fiduciary capacity” as used in § 17(a)(4)
of the Bankruptcy Act, the predecessor to § 523(a)(4) of the
Bankruptcy Code, connected the idea of “trust or confidence”
which arises whenever one’s property is placed in the custody of
another. 	535 F.2d at 621 (Citations omitted)(Emphasis added.)
And, § 17(a)(4) applied only to technical trusts, not those which
the law implied from a contract. 	Id. (Citations omitted).
Finally, the Court recognized that the fiduciary relationship had
to exist prior to the creation of the debt in controversy. 	Id.
(citing Davis v. Aetna Acceptance Co., 293 U.S. 328 (1934)).
The court then analyzed the licensing scheme established by
the New Mexico statutes dealing with contractors and found that
the statutes imposed a fiduciary duty upon contractors that have
been advanced money pursuant to construction contracts. 	Id.
(Emphasis added.) 	It also pointed out that the statute imposed
duties upon the contractor before he had any dealings with a
particular owner, so the fiduciary duty arose independent of any
later debt. 	Id. at 622. 15
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15 (...continued)
damages” for inconvenience, diversion of efforts and mental
suffering. 	It stated “This claim is presented without cogent
theory.” 	Without expressing an opinion one way or the other,
MVI’s and Mr. Vigil’s claims for damage to business reputation in
what is essentially a contract claim might be unallowable
consequential damages. 	See 	Stancil V. Mergenthaler Linotype
Co., 589 F. Supp. 78, 85 (D. Hi. 1984)(“[T]his Court adopts the
majority view that damages for injury to reputation are not
properly awardable in a breach of contract suit.”); O’Leary v.
Sterling Extruder Corp., 533 F.Supp. 1205 (D. Wis. 1982)(“The
courts seem to be in general agreement that damages for injury to
reputation are not properly awardable in a breach of contract
suit.”)(Citing cases.)
Page -28-
Therefore, the lesson of Romero is that the New Mexico
statutes impose a fiduciary duty on licensed contractors to hold
money advanced to them by owners of properties and apply that
money as required by statute. 	See also Foxworth Galbraith Lumber
Co., Inc. v. Manelos (In re Manelos), 337 B.R. 409, 413 (Bankr.
D. N.M. 2006)(“The creditor/plaintiff in Allen v. Romero was the
owner of the project, not the subcontractor or supplier to the
debtor/contractor. 	The duty imposed by the relevant New Mexico
statute, N.M.S.A.1978 § 60–13–23(F), as analyzed in Allen v.
Romero, ran from the contractor to the property owner.”); and see
Id. at 414 (“[T]he Court remains unpersuaded that N.M.S.A.1978 §
60–13–23(F) should be construed to constitute a technical trust
imposed by statute upon contractors to create a fiduciary duty
owed by the contractor to subcontractors and suppliers that would
fall within the meaning of 11 U.S.C. § 523(a)(4).”); and see
Baines, 337 B.R. at 404 (“[T]he New Mexico statute imposes a
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Page -29-
fiduciary relationship on contractors who receive funds intended
for a specific purpose.”). 	Therefore, Plaintiffs’ reliance on
Romero is misplaced. 	Defendants were not contractors and
Plaintiffs were not owners.
Plaintiffs’ argument that Romero extends liability to third
parties is also unfounded. 	In Romero the defendant was, in fact,
a licensed contractor. 	Romero, 535 F.2d at 621 (The issue was
“whether Romero acted in a fiduciary capacity in his dealings as
a general contractor with Allen.”). 	If Defendant were a licensed
contractor and the qualifying party for HDR, Plaintiff would have
a colorable argument. 	See Baines, 337 B.R. at 406:
[A]lthough the contract was between Plaintiffs and the
Defendants' corporation, Building Unlimited, Robert
Baines can nevertheless be held personally liable. 	It
is undisputed that Robert Baines was the qualifying
party for the contractor's license issued to Building
Unlimited. 	Under New Mexico law, [a] qualifying party
who is issued a certificate of qualification is an
individual who submits to be examined and who is
responsible for the licensee's compliance with the Act.
(Citation and internal quotations omitted.) 	However, the
established facts are that Christopher Hernandez is not a
licensed contractor and is not the qualifying party.
In summary, there is no trust. 	At most, Plaintiffs paid
invoices; they did not advance funds to be held in trust.
Defendants were not fiduciaries. 	There is no debt for
defalcation as a fiduciary and the claim under section 523(a)(4)
must be dismissed.
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Page -30-
CLAIMS AGAINST ANGELICA A. HERNANDEZ
The only reference to Ms. Hernandez in the complaint is in ¶
55. 	(“Upon information and belief, Angelica A. Hernandez has the
same culpability as her spouse due to her active knowledge in the
commissions and omissions cited herein.”) 	Mere knowledge, even
if “active”, of one’s spouse’s commissions or omissions, or of
contract breaches or torts, is not an exception to
dischargeability listed in Section 523. 	While she may be liable
under New Mexico community property law, the question of
dischargeability is a matter of federal law. 	Brown v. Felsen,
442 U.S. 127, 137 n.7 (1979)(The Supreme Court has the ultimate
word on the construction of section 17 of the Bankruptcy Act.
Bankruptcy is a federal statute and federal courts have the final
word on the meaning of any terms contained therein.)
Under the Bankruptcy Code, a debt can be held
nondischargeable only for actual fraud, not fraud imputed by law.
See, e.g. J.C. Penny Co. Inc. v. Love (In re Love), 47 B.R. 213,
215 (Bankr. D. Mo. 1985). 	See also Tsurukawa v. Nikon Precision,
Inc. (In re Tsurukawa), 258 B.R. 192, 198 (9 th Cir. BAP 2001):
As previously noted, the legislative history to §
523(a)(2)(A) requires that the debtor actually intend
to defraud the creditor and that the debt arise as a
result of the fraud. 	The cases that have attributed
the wrongdoing of a party to a debtor have done so
based on an agency theory. 	As shown, most of these
cases arise in the partnership arena. 	Where no agency
relationship exists, the courts have not generally
imputed the wrongdoing of a nondebtor spouse to a
debtor in holding a debt nondischargeable. 	See e.g.,
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Page -31-
[La Trattoria, Inc. v. Lansford (In re] Lansford), 822
F.2d [902 (9 th Cir. 1987)] at 904–05 (refusing to
impute a nondischargeable debt to the debtor spouse
without evidence of an agency relationship); American
Charter Fed. Sav. & Loan Ass'n v. Harris (In re
Harris), 107 B.R. 210, 215 (Bankr. D.Neb.1989) (finding
no evidence that wife acted as her husband's agent and
holding husband's conduct non-imputable to wife based
on marital relationship alone). 	Certainly, spouses can
be partners in a business enterprise where agency
principles apply. 	However, the marital status alone
does not create an agency relationship.
Ms, Hernandez’s debt (if any) is not nondischargeable.
CONCLUSION
The Court finds the Defendants Motion for Summary Judgment
is well taken and should be granted. 	The Court will enter an
Order in conformity with this Memorandum Opinion dismissing the
adversary complaint with prejudice.
Honorable James S. Starzynski
United States Bankruptcy Judge
Date Entered on Docket: 	September 1, 2011
Copies to:
Russell C Lowe
Attorney for Plaintiffs
PO Box 90536
Albuquerque, NM 87199-0536
Daniel J Behles
Moore, Berkson & Gandarilla, P.C.
Attorney for Defendants
P.O. Box 7459
Albuquerque, NM 87194
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