Rowland v. Walls

UNITED STATES BANKRUPTCY COURT
FOR THE SOUTHERN DISTRICT OF OHIO
WESTERN DIVISION AT DAYTON
In re: 	ROBERT E DWARD W ALLS,
Debtor
Case No. 	07-30251
Adv. No. 	07-3110
JUDITH ROWLAND
RICHARD R OWLAND ,
Plaintiffs
v.
ROBERT E DWARD W ALLS,
Defendant
Judge Waldron
Chapter 7
DECISION 1) GRANTING
DEFENDANT’S MOTION TO DISMISS
PLAINTIFFS’ § 523(a)(4) CAUSE OF
ACTION AND 2) GRANTING
PLAINTIFFS’ MOTION FOR LEAVE
TO AMEND THE COMPLAINT TO
PLEAD A § 523(a)(2) CAUSE OF
ACTION
DATED AT DAYTON, OHIO this 12th day of September, 2007:
This document has been electronically entered in the records of the United
States Bankruptcy Court for the Southern District of Ohio.
IT IS SO ORDERED.
Dated: September 12, 2007
____________________________________________________________
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Procedural Background
On May 7, 2007, Judith and Richard Rowland (the “Plaintiffs”) filed a complaint
against the Debtor, Robert Edward Walls (Doc. 1) (the “Defendant”). 	The complaint
alleged that a debt arising from the purchase of real property, including certain related
state law environmental issues, should be found non-dischargeable pursuant to 11
U.S.C. § 523(a)(4). 	On June 14, 2007, the Defendant filed a Motion to Dismiss (Doc.
10), asserting the Plaintiffs’ complaint failed to state a claim upon which relief could be
granted. See Federal Rule of Civil Procedure 12(b)(6), applicable by Bankruptcy Rule
7012. The Plaintiffs filed a response to the motion on July 5, 2007 (Doc. 13).
On July 3, 2007, the Plaintiffs moved for leave to amend their complaint in order
to include a cause of action under 11 U.S.C. § 523(a)(2) (Doc. 12). The Defendant filed
a response in opposition on July 13, 2007 (Doc. 15), arguing the time to file such a
cause of action had expired under Bankruptcy Rule 4007(c), the proposed amended
complaint sought to pursue separate legal theories involving new facts, and, therefore,
did not relate back to the filing date of the original complaint. See Federal Rule of Civil
Procedure 15(c), applicable by Bankruptcy Rule 7015. 	The Plaintiffs filed a reply brief
on July 31, 2007 (Doc. 16).1
Jurisdiction
This court has jurisdiction pursuant to 28 U.S.C. § 1334 and the Standing Order
of Reference entered in this District. 	This is a core proceeding pursuant to 28 U.S.C. §
157(b)(2)(I).
1 In the interests of considering all the views of both parties, the court reviewed the Plaintiffs’ reply brief,
although it was filed out of time. See LBR 9013-1(c) (Reply memorandum shall be filed not later than
seven days after the date of the certificate of service of the response memorandum).
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Facts2
Plaintiffs’ Original Complaint
The real property at issue is located in Montgomery County, at 60 South State
Street, Phillipsburg, Ohio (Doc. 1, ¶ 7) (the “property”), and has been contaminated by
petroleum products from underground storage tanks (the “storage tanks”) that were
previously located on the property (Doc. 1, ¶ 8). The Defendant purchased the property
from a non-party, Don Beam, on or about April 5, 1994 (Doc. 1, ¶ 9). 	At that time, the
storage tanks, which contained petroleum products, were still located on the property
(Doc. 1, ¶ 10).
In April 1997, the Defendant arranged to remove the storage tanks, but due to
holes in the storage tanks, petroleum products had leaked on the property (Doc. 1, ¶
11). 	This release was reported to the Ohio Department of Commerce, Bureau of
Underground Storage Tank Regulations (“BUSTR”) on or about May 6, 1997 (Doc. 1, ¶
12). 	The Defendant had personal knowledge of the leak and was aware the leak was
reported to BUSTR (Doc. 1, ¶ 14). 	BUSTR views Don Beam and the Defendant as
“jointly responsible” for the petroleum leak (Doc. 1, ¶ 15).
The Defendant entered a contract to sell the property to the Plaintiffs in July 2001
and the contract was amended in August 2001 (Doc. 1, ¶ 16; see Exh. A to Doc. 1 –
Contract to Purchase and Contract to Purchase Real Estate Addendum). The purchase
price was $110,000 (Doc. 1, ¶ 17). 	Prior to the closing, the Plaintiffs learned of the
2 The facts section includes the allegations of the complaint (Doc. 1) and the proposed amended
complaint (Doc. 12 – Exh. A), which, for purposes of the pending motions only, the court assumes are
true.
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petroleum leak and the parties entered an Environmental Indemnity Agreement dated
October 9, 2001 (Doc. 1, ¶¶ 18-19; Exh. B. to Doc. 1).
At the closing, the Defendant received $87,389.96, by reducing the purchase
price of $110,000 by $22,610.04 in settlement charges (Doc. 1, ¶ 20; see Exh. C to
Doc. 1). 	The settlement charges included an $11,000 escrow account, which provided
that the holder of the escrow funds, the Chicago Title Company, would release the
funds upon the following condition: “CLEAR EPA CERTIFICATE – money will be
disbursed to contractor upon receipt of invoice for work completed.” (Doc. 1, ¶ 21; Exh.
D to Doc. 1). 	The funds were “to cover the anticipated cost of having the monitoring
wells sampled[.]” (Doc. 1, ¶ 35). 	The Plaintiffs assert that the Environmental Indemnity
Agreement required the Defendant to hold the entire $87,389.96 in trust to investigate
and remediate environmental issues on the property, associated with the petroleum leak
(Doc. 1, ¶¶ 22-28; 31-41).
Due to the failure of the Defendant to resolve the environmental issues, the
Plaintiffs allege they have suffered damages in the form of a diminution in the value of
the property and may be required, by BUSTR, to investigate and remediate the
property. 	The Plaintiffs also allege that a separate agreement the Defendant reached
with Don Beam constitutes fiduciary fraud with the meaning of § 523(a)(4) (Doc. 1, ¶¶
29, 30 and 37) since the agreement was reached without the Plaintiffs’ consent and was
a breach of the fiduciary duty the Defendant owed the Plaintiffs.
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Plaintiffs’ Proposed Amended Complaint
The Plaintiffs’ proposed amended complaint (Doc. 12 – Exh. A) includes a new
count 	under 	§ 	523(a)(2) 3 and 	is 	grounded 	in 	fraudulent 	misrepresentation 	and
concealment (¶ 67) 4 . 	Beyond the facts incorporated from the original complaint, the
proposed amended complaint references a “financing contingency” that allowed the
Plaintiffs to terminate the contract if their lender, National City Bank, did not receive a
“No Further Action Letter” (the “NFA letter”) concerning the property from BUSTR (¶ 55).
The proposed amended complaint also alleges the Defendant had possession of a
report of TCA Environmental, Inc. (“TCA”) showing groundwater contamination that
exceed the BUSTR standard and, therefore, knew that no NFA letter would be issued
by BUSTR (¶¶ 20-23, 57). 	The Plaintiffs further allege that they relied on false
representations from the Defendant that the NFA letter would be issued and any
remediation would be covered by the $11,000 escrow fund (¶¶ 58-60). 	The remainder
of the allegations concern fraudulent misrepresentation and concealment in allowing the
Plaintiffs to believe that the property was eligible for funds to assist in remediation from
the Petroleum Underground Storage Tank Compensation Board (¶¶ 17, 18, 63, 64) and
further deception and failure to disclose a contamination report prepared by E3, Inc. (¶¶
13, 14, 62), the aforementioned environmental assessment by TCA (¶¶ 20-23, 62) and
3 The proposed amended complaint (Doc. 12 – Exh. A), although only referencing § 523(a)(2), is clearly
based on § 523(a)(2)(A), and not § 523(a)(2)(B). Section § 523(a)(2)(A) states that “[a] discharge under
section 727 . . . of this title does not discharge an individual debtor from any debt . . . for money, property,
services, or an extension, renewal, or refinancing of credit, to the extend obtained, by . . . false pretenses,
a false misrepresentation, or actual fraud, other than a statement respecting the debtor’s or an insider’s
financial condition[.]”.
4 All the paragraph references in this section are to Exhibit A of Document 12.
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an October 1, 2007 letter from BUSTR which required a remediation of the property (¶
61).
Issues Presented
1) 	Is the Plaintiffs’ cause of action, pursuant to 11 U.S.C. § 523(a)(4), subject to
dismissal for failure to state a claim upon which relief can be granted?
2) 	Are the Plaintiffs entitled to amend their complaint to add a 11 U.S.C. § 523(a)(2)
cause of action pursuant to the relation back provisions of Federal Rule of Civil
Procedure 15(c), after the time has expired to file such a cause of action under Federal
Rule of Bankruptcy Procedure 4007(c)?
Issues Decided
1) The Plaintiffs’ cause of action, pursuant to 11 U.S.C. § 523(a)(4), is subject to
dismissal for failure to state a claim upon which relief can be granted.
2) The Plaintiffs are entitled to amend their complaint to add a 11 U.S.C. § 523(a)(2)
cause of action pursuant to the relation back provisions of Federal Rule of Civil
Procedure 15(c), after the time has expired to file such a cause of action under Federal
Rule of Bankruptcy Procedure 4007(c).
Analysis
Standard for Motion to Dismiss
Federal Rule of Civil Procedure 12(b)(6), applicable to adversary proceedings by
Bankruptcy Rule 7012, states that a defendant may move to dismiss a complaint for
“failure to state a claim upon which relief can be granted.” 	The Sixth Circuit has stated
that “[d]ismissal of a complaint for the failure to state a claim on which relief may be
granted is appropriate only if it appears beyond a doubt that the plaintiff can prove no
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set of facts in support of his claim that would entitle him to relief.” Thomas v. Eby, 481
F.3d 434, 437 (6th Cir. 2007) (citation omitted). 	To survive a defendant’s motion, the
plaintiff’s complaint “must contain either direct or inferential allegations respecting all the
material elements to sustain a recovery under some viable legal theory.” 	Varljen v.
Cleveland Gear Co., Inc., 250 F.3d 426, 429 (6th Cir. 2001) (citations and internal
quotation marks omitted).
In considering a motion to dismiss, the court “must consider as true the well-
pleaded allegations of the complaint and construe them in the light most favorable to the
plaintiff.” 	Id. 	However, 	the 	court 	“need 	not 	accept 	as 	true 	legal 	conclusions 	or
unwarranted factual inferences” in the complaint. Id. (citations omitted). 	The Supreme
Court has recently reminded the federal courts that while a plaintiff need not provide
detailed factual allegations to survive a motion to dismiss pursuant to Rule 12(b)(6), “a
plaintiff’s obligation to provide the ‘grounds’ of his ‘entitlement to relief’ requires more
than labels and conclusions, and a formulaic recitation of the elements of a cause of
action will not do.” Bell Atlantic Corp. v. Twombly, 	U.S. 	, 127 S.Ct. 1955,1964-65
(2007) (citations omitted).
The Plaintiffs’ cause of action, pursuant to 11 U.S.C. § 523(a)(4), is subject to
dismissal for failure to state a claim upon which relief can be granted.
In their original complaint (Doc. 1), the Plaintiffs’ claim is premised upon the
provisions of 11 U.S.C. § 523(a)(4), which states that “[a] discharge under section 727 .
. . does not discharge an individual debtor from any debt . . . for fraud or defalcation
while 	acting 	in 	a 	fiduciary 	capacity, 	embezzlement, 	or 	larceny.” 	The 	Plaintiffs’
complaint does not allege embezzlement or larceny, but instead “fraud or defalcation
while acting in a fiduciary capacity.” (Doc. 1, ¶¶ 40 and 41).
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The Sixth Circuit Court of Appeals has recently reiterated the elements of a §
523(a)(4) cause of action for defalcation in a fiduciary capacity. Bd. of Trustees of the
Ohio Carpenters’ Pension Fund v. Bucci (In re Bucci), 493 F.3d 635 (6th Cir. 2007).
The 	Sixth 	Circuit 	has 	defined 	“defalcation” 	as 	“not 	only 	embezzlement 	and
misappropriation by a fiduciary, but also the failure to account for such funds.” Id. at 639
(citation and internal quotation marks omitted). 	A defalcation renders a debt non-
dischargeable “when the preponderance of the evidence establishes (1) a pre-existing
fiduciary relationship; (2) breach of that fiduciary relationship; and (3) a resulting loss.”
Id., quoting Commonwealth Land Title Co. v. Blaszak (In re Blaszak), 397 F.3d 386 (6th
Cir. 2005) (internal quotation marks omitted).
The Sixth Circuit, for purposes of § 523(a)(4), has defined the term “fiduciary
capacity” in a narrow manner, limiting it to situations where an express or technical trust
exists. Id. Accord Cash Amer. Fin. Svcs., Inc. v. Fox, 370 B.R. 104, 114 (B.A.P. 6th Cir.
2007). As the Bucci decision explained:
In Carlisle Cashway, Inc. v. Johnson (In re Johnson) . . . and In re
Interstate 	Agency 	. 	. 	. 	we 	limited 	the 	application 	of 	the 	defalcation
provision 	to 	express 	or 	technical 	trusts 	and 	refused 	to 	extend 	it 	to
constructive or implied trusts imposed by operation of law as a matter of
equity. The decisions in those cases relied on the Supreme Court's
holding in 	Davis v. Aetna Acceptance Co. . . . that the defalcation
provision applies only to express or technical trusts. Again in In re Garver,
we adopted a narrow definition of the defalcation provision and held that it
does not apply to someone who merely fails to meet an obligation under a
common law fiduciary relationship. . . . . Accordingly, the defalcation
provision applies to “only those situations involving an express or technical
trust relationship arising from placement of a specific res in the hands of
the debtor.”
To establish the existence of an express or technical trust, a creditor must
demonstrate: “(1) an intent to create a trust; (2) a trustee; (3) a trust res;
and (4) a definite beneficiary.” 	. . . Though the court in In re Blaszak
spoke of “an intent to create a trust,” it is clear in this circuit that a statute
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may create a trust for purposes of § 523(a)(4) if that statute defines the
trust res, imposes duties on the trustee, and those duties exist prior to any
act of wrongdoing.
Bucci at 639-40 (internal citations omitted). 	In addition, the Bucci decision stated “for a
trust relationship to satisfy § 523(a)(4), the fiduciary must have duties that preexist the
act creating the debt.” Id. at 643. The Sixth Circuit has applied this same standard for a
“fiduciary” to not only a cause of action for defalcation under § 523(a)(4), but a claim for
fraud under § 523(a)(4). Brady v. McAllister (In re Brady), 101 F.3d 1165, 1173 (6th Cir.
1997).
The determination of whether an express or technical trust exists is governed by
state law. Chapman v. Pomainville (In re Pomainville), 254 B.R. 699, 702 (Bankr. S.D.
Ohio 2000); Riden v. Sigler (In re Sigler), 196 B.R. 762, 764 (Bankr. W.D. Ky. 1996).
For an express trust to exist under Ohio law, the Supreme Court of Ohio has held:
there must be an explicit declaration of trust, or circumstances which show
beyond 	reasonable 	doubt 	that 	a 	trust 	was 	intended 	to 	be 	created,
accompanied with an intention to create a trust, followed by an actual
conveyance or transfer of lawful, definite property or estate or interest,
made by a person capable of making a transfer thereof, for a definite term,
vesting the legal title presently in a person capable of holding it, to hold as
trustee for the benefit of a cestui que trust5 or purpose to which the trust
fund 	is 	to 	be 	applied; 	or 	a 	retention 	of 	title 	by 	the 	owner 	under
circumstances which clearly and unequivocally disclose an intent to hold
for the use of another.
Dayton Title Agency, Inc. v. The White Family Cos. (In re Dayton Title Agency, Inc.),
292 B.R. 857, 869 (Bankr. S.D. Ohio 2003), citing Ulmer v. Fulton, 129 Ohio St. 323,
399-40 (1935). 	The essential elements of an express trust are the intention to create a
trust, the property transfer, and contemporaneous with the transfer, a beneficiary
5 The phrase “cestui que trust” simply refers to a beneficiary, specifically defined as “[t]he person for
whose benefit a trust is created and who is to enjoy the income or avails of it.” Black’s Law Dictionary
1048 (6th ed. abridged).
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designation. Id. (citation omitted). 	These elements, to form an express trust, “can be
created under less formal circumstances such as when a person accepts possession of
money or property for another with the express or implied understanding that he is not
to hold as his own absolute property, but is to hold and apply it for specific purposes.”
Id. (citations omitted).6
Assuming, arguendo, that a fiduciary relationship is alleged in this adversary
proceeding, the Defendant argues that neither the Environmental Indemnity Agreement
between the parties, nor any other agreement between the Defendant and the Plaintiffs,
demonstrates an intention to create a trust for the purchase price of the property.7 In
reviewing the Environmental Indemnity Agreement and related sale documents, the
court cannot find a single allegation which, if proven, could show an express, or even an
implied, intent to require the $87,389.96 purchase price to be held in trust, require the
Defendant to act as a trustee for such funds, or make the Plaintiffs the beneficiary. This
is all the more evident since the parties, in a related document (Doc. 1 – Exh. D),
demonstrated, with clarity, the ability to create a trust by escrowing the $11,000 res for
the benefit of a third party “contractor.” 	The parties, as a condition of the sale contract,
in a further sale addendum, or at the closing, had an opportunity to create a trust in the
$87,389.96 purchase price for future remediation of the property, but did not.8
6 At least in the context of the Sixth Circuit jurisprudence concerning § 523(a)(4), the term “technical trust”
does not appear to have a separate meaning from “express trust.” The case law consistently uses the
terms interchangeably.
7 The Environmental Indemnity Agreement and related sale documents, which are attached to the
Plaintiffs’ complaint are clearly not “matters outside the pleadings” and, therefore, may be considered on
a motion to dismiss. In determining a motion to dismiss, the Sixth Circuit allows documents which are not
only attached to a defendant’s motion to dismiss, but documents that are central to a plaintiff’s complaint.
Greenberg v. Life Ins. Co. of Virginia, 177 F.3d 507, 514 (6th Cir. 1999).
8 The court has reviewed the entire Environmental Indemnity Agreement (Doc. 1 – Exh. B). 	The key
sections on Indemnity, Remedial Work and, particularly, Procedures Relating to Indemnification, do not
indicate intent to create a trust. 	The complaint, although stating that the “purchase price “should have
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The 	Plaintiffs 	argue, 	regardless 	of 	whether 	the 	Environmental 	Indemnity
Agreement and related sale documents used the word “trust”, a clear intent to create a
trust exists. 	While the mere use of the word “trust” may not be outcome determinative,
the relevant documents do not refer to any language that would suggest a trust was
intended, nor do the Plaintiffs allege any statement or action taken by the Plaintiffs
outside of these agreements that would suggest the purchase price was to be held in
trust, with the Plaintiffs as the beneficiary. 	The Plaintiffs’ arguments attempt to equate
fraud, which could be cognizable under § 523(a)(2), with “fraud in a fiduciary capacity”
under § 523(a)(4).
The Plaintiffs’ citations of authority do not support the argument of an intent to
create a trust with the Plaintiffs as the beneficiary. 	In Indiana Lumbermens Mut. Ins.
Co., Inc. v. Constr. Alternatives, Inc. (In re Constr. Alternatives, Inc.), 2 F.3d 670 (6th
Cir. 1993), the court found there was no intent to create an express trust as to
construction 	progress 	payments 	or 	to 	provide 	that 	the 	surety 	company 	was 	the
beneficiary for such payments. In the decision, the Sixth Circuit noted that “no provision
of the General Agreement of Indemnity required [the Debtor] to keep any portion of the
progress payments as a separate trust fund, and the record does not indicate that [the
Debtor] kept the progress payments in a separate account.” Id. at 677. Similarly, in the
adversary sub judice, there is nothing to suggest the fund of $87,389.96 was required to
be 	segregated. 	The 	Plaintiffs 	argue 	that, 	as 	private 	individuals, 	unlike 	a 	surety
company, they lacked the means or ability to create a separate trust. 	Even assuming
been held in trust by Debtor for the specific use required by the Environmental Indemnity Agreement”
(Doc. 1 – Exh. A, ¶ 42) does not point to any provision of the Environmental Indemnity Agreement, or an
allegation outside the written sale documents, which would show an intent to create a trust for the
purchase price.
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this statement is correct, despite the existence of the “$11,000 escrow trust”, such a
purely equitable argument forms no basis to impose an express or technical trust.
Further, while the court recognizes that the Environmental Indemnity Agreement was
part of the overall consideration for the property sale, the Plaintiffs fail to explain how
such contractual consideration could rise to the level of intent to create an express or
technical trust. See Bucci at 643 (“The key point for bankruptcy purposes, however, is
that 	Bucci 	had 	only 	a 	contractual 	obligation 	to 	pay 	the 	employer 	contributions.”;
emphasis in original).9
Finally, the Plaintiffs argue a trust existed because the Environmental Indemnity
Agreement was “to touch and concern the land and shall run with the land” and this
statement showed an intent to create a fiduciary relationship. 	The Plaintiffs refer to
Section 	5(b) 	of 	the 	Environmental 	Indemnity 	Agreement, 	which 	provides 	“[t]his
agreement is deemed to touch and concern the land and shall run with the land and
shall inure to the benefit of the Purchaser.” 	The Plaintiffs argue that such a real estate
covenant creates a fiduciary trust. 	While such a covenant may be binding in rem and
may affect future title holders to the property, the Plaintiffs never explain, and the court
is not aware, how such a covenant indicates intent to create a specific trust res, for the
Plaintiffs’ benefit, in connection with the purchase price for the sale of the property. The
9 Similarly, In Ford Motor Credit Co. v. Marinko (In re Marinko), 148 B.R. 846 (Bankr. N.D. Ohio 1992), the
Debtor sold floor-plan merchandise out of trust. The court found, under the totality of the circumstances,
evidence that an officer of the Debtor knew that sale proceeds were to be held in trust. In Int’l Fidelity Ins.
Co. v. Herndon (In re Herndon), 277 B.R. 765, 767 (Bankr. E.D. Ark. 2002), the indemnity agreement had
a specific provision providing for a “trust fund.” As noted, the Plaintiffs cannot point to any allegations of a
trust res or intent to create such a trust in their complaint. 	Instead, the parties had a contractual
arrangement as part of a real estate sale contract and the Environmental Indemnity Agreement was
simply part of the consideration for the contract. 	Except for the $11,000 escrow for the third party
“contractor”, there is nothing alleged which could show the Environmental Indemnity Agreement, related
documents or other actions of the Debtor created a trust for the purchase price.
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Plaintiffs fail to offer any other persuasive allegations concerning a cause of action
under § 523(a)(4) sufficient to withstand the Defendant’s motion to dismiss.
The Plaintiffs May Amend their Complaint To Plead a § 523(a)(2) Cause of Action
Plaintiffs seek to amend their complaint to include a cause of action pursuant to §
523(a)(2). 	The Defendant argues that the amendment is time barred because this
cause of action was not filed within 60 days of the first date set for the meeting of
creditors. See Bankruptcy Rule 4007(c) (“A complaint to determine the dischargeability
of a debt under § 523(c) 10 shall be filed not later than 60 days after the first date set for
the meeting of creditors under § 341(a)”.).
The Plaintiffs respond that the amended complaint would relate back to the filing
date of the original complaint. 	Federal Civil Rule of Procedure 15(c)(2), applicable to
this adversary proceeding by Bankruptcy Rule 7015, provides that “[a]n amendment of a
pleading relates back to the date of the original pleading when . . . the claim or defense
asserted in the amended pleading arose out of the conduct, transaction, or occurrence
set forth or attempted to be set forth in the original pleading[.]” 	The Defendant argues
that the Plaintiff’s proposed amended complaint does not relate back because it asserts
new facts as the basis for the proposed § 523(a)(2) cause of action.11
The Sixth Circuit explained the parameters of the relation back rule in Miller v.
Amer. Heavy Lift Shipping, 231 F.3d 242 (6th Cir. 2000). 	The court noted that “the
10 11 U.S.C. § 523(c) references 11 U.S.C. § 523(a)(2).
11 To the extent the Debtor is arguing the Plaintiffs cannot amend simply because they are asserting a
new legal theory, the plain meaning of Federal Rule of Procedure 15(c), and the binding decision in Miller
v. Amer. Heavy Lift Shipping, 231 F.3d 242 (6th Cir. 2000), interpreting Rule 15(c), allows such
amendments. 	Instead, the pertinent question is whether the legal theory now being presented is
grounded in new, operative facts.
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thrust of Rule 15 is to reinforce the principle that cases should be tried on their merits
rather than on the technicalities of pleadings.” Id. at 248 (citations and internal quotation
marks omitted). However, an amended pleading does not “relate back” where it asserts
new “operative facts.” Id. at 249.
As an example, the court cited a decision where a new cause of action for a
lower back injury from jumping from a fence does not relate back when the original
complaint was for a neck injury sustained while lifting a heavy object. Id. at 249, citing
Koon v. Lakeshore Contractors, 128 F.R.D. 650, 653 (W.D. Mich. 1988). 	Furthermore,
the Sixth Circuit explicitly rejected any mechanical tests, such as requiring the same
evidence that could support the original claim could also support the amended claim or
determining whether the new claim changes the “when where, what and how” of the
injury alleged, finding such tests as incompatible with the liberal approach to Rule 15(c).
Id. at 249, n. 6, citing 6A Charles Alan Wright, Arthur R. Miller & Mary Kay Kane,
Federal Practice and Procedure § 1498, at 102-03 (1990 and Supp. 2000). 	Instead, in
allowing the plaintiff to amend his complaint, the court noted that he “alleged the very
same general set of facts in the amended complaints as he did in the original ones[.]” Id.
at 249.
This court finds the general, operative facts in the complaint and the proposed
amended complaint arose from the same conduct and transaction – the sale of the
property 	and 	the 	related 	sale 	documents, 	including 	the 	Environmental 	Indemnity
Agreement and involves the same general set of facts known to, or anticipated by, all
the parties involved in the transaction. 	It is true that the complaint asserts some facts
not contained in the initial complaint, including the NFA letter and other specific
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environmental tests related to the property, but these are permissible added events,
and, as alleged, where specifically known to, but withheld from the Plaintiff by, the
Defendant who now argues he should not be called to answer for these issues. 	The
essence of the factual predicate remains the same – the Plaintiffs allege they were
deceived concerning environmental issues with the property and the remediation of
these issues, and, as a result, have suffered damages. 	The underlying regulatory
agency, 	BUSTR 	is 	the 	focus 	of 	both 	the 	complaint 	and 	the 	proposed 	amended
complaint. 	It is these facts which form the operative nucleus of both the complaint and
proposed amended complaint.
The Sixth Circuit recently amplified its position in connection with the criteria for
determining relation back issues pursuant to Rule 15(c)(2):
Rule 	15(c)(2) 	is 	“based 	on 	the 	notion 	that 	once 	litigation 	involving
particular 	conduct 	or 	a 	given 	transaction 	or 	occurrence 	has 	been
instituted, the parties are not entitled to the protection of the statute of
limitations against the later assertion by amendment of defenses or claims
that arise out of the same conduct, transaction, or occurrence.” Brown v.
Shaner, 172 F.3d 927, 932 (6th Cir.1997). Rule 15(c)(2) does not define
the 	scope 	of 	the 	terms 	“conduct, 	transaction, 	or 	occurrence.” 	When
applying this standard to the facts of a given case, the Court gives content
to those terms not by generic or ideal notions of what constitutes a
“conduct, transaction, or occurrence,” but instead by asking whether the
party asserting the statute of limitations defense had been placed on
notice that he could be called to answer for the allegations in the amended
pleading. See Santamarina v. Sears, Roebuck & Co., 466 F.3d 570, 573
(7th Cir.2006) (“The criterion of relation back is whether the original
complaint gave the defendant enough notice of the nature and scope of
the 	plaintiff's 	claim 	that 	he 	shouldn't 	have 	been 	surprised 	by 	the
amplification of the allegations of the original complaint in the amended
one.”). The Rule also must be interpreted in light of the “fundamental tenor
of the Rules,” which “is one of liberality rather than technicality.” Miller, 231
F.3d at 248.
U.S. ex rel. Bledsoe v. Community Health Sys., Inc., 	F.3d 	, 2007 WL 2492439, at
*17 (6th Cir. Sept. 6, 2007).
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The Defendant argues, citing to an older bankruptcy court decision, that the
complaint 	is 	based 	factually 	on 	the 	Environmental 	Indemnity 	Agreement 	and 	the
BUSTR 	regulations 	only 	and 	the 	proposed 	amended 	complaint 	requires 	the
consideration of new evidence, presumably, such as the TCA test, and, therefore, the
proposed amended complaint should not relate back. See Citizens Fidelity Bank and
Trust Co. v. Wahl (In re Wahl), 	28 B.R. 688, 691 (Bankr. W.D. Ky. 1983) (holding the
causes of action in the amended complaint did not relate back because they would
“require the introduction of additional evidence . . . .”). 	However, as noted earlier, the
Sixth Circuit explicitly rejected such a mechanical test. Miller at 249, n. 6, citing 6A
Charles Alan Wright, Arthur R. Miller & Mary Kay Kane, § 1498, at 102-03. See also
Limor v. Buerger (In re Del-Mart Corp.), 322 B.R. 781, 793-97 (Bankr. M.D. Tenn. 2005)
(court reviewing and applying the liberal approach to Rule 15(c) advocated by the Sixth
Circuit’s decision in Miller).
In the circumstances of this adversary proceeding, the Defendant, who had prior
knowledge of the environmental issues, and who is alleged to have withheld information
in his possession which would have more fully explained the extent of the environmental
issues, “had been placed on notice that he could be called to answer for the allegations
in the amended pleading.” Bledsoe at *17.
The Sixth Circuit also noted that “[a]lthough the focus of our inquiry into whether
an amendment relates back pursuant to Rule 15(c)(2) is whether it arises from the
conduct, transaction, or occurrence”, other factors such as “[u]ndue delay in filing, lack
of notice to the opposing party, bad faith by the moving party, repeated failure to cure
deficiencies by previous amendments, undue prejudice to the opposing party, and
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futility of amendment” are also relevant. Miller at 250 (citation omitted). 	The Miller
decision further found that, of those factors, “notice and substantial prejudice to the
opposing party are critical . . . in determining whether an amendment should be
granted.” Id., quoting Hageman v. Signal L.P. Gas, Inc., 486 F.2d 479, 484 (6th Cir.
1973).
In 	this 	instance, 	the 	Defendant 	has 	been 	on 	notice 	of 	the 	potential
dischargeability issues concerning the sale of the property, there is no substantial
prejudice at this early stage in the adversary proceeding, the proposed amendment is
being filed in the early stage of this adversary proceeding, no bad faith is alleged by the
Defendant in regard to the amendment and the Plaintiffs have not amended their
complaint previously. 	Finally, the court cannot conclude, at this stage, that such an
amendment, alleging fraud under § 523(a)(2), would be futile. 12
Conclusion
The Defendant’s Motion to Dismiss (Doc. 10) the Plaintiffs’ cause of action
pursuant to 11 U.S.C. § 523(a)(4) is GRANTED. The Plaintiffs’ Motion for Leave to File
Amended Complaint (Doc. 12) is GRANTED. 	The Plaintiffs shall file, not later than
September 28, 2007, their proposed amended complaint (Doc. 12 – Exh. A), limited to
the § 523(a)(2) cause of action.
SO ORDERED.
12 The court, of course, expresses no opinion on the ultimate merits of the proposed § 523(a)(2) cause of
action.
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c:
Daniel A. Brown, Esq., 204 S. Ludlow Street, Suite 300, Dayton, Ohio 45402 (Atty. for
the Plaintiff)
Patricia L. Hill, Esq., 110 North Main Street, Suite 1520, Dayton, Ohio 45402 (Atty. for
the Plaintiff)
Robert Edward Walls, 240 Forest Avenue, West Milton, Ohio 45383-1622 (Debtor-
Defendant)
Roger E. Luring, Esq., 314 West Main Street, Troy, Ohio 45373-3242 (Atty. for the
Debtor-Defendant)
###
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