Kapitus Servicing, Inc. v. Frierdich

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UNITED STATES BANKRUPTCY COURT
SOUTHERN DISTRICT OF ILLINOIS
In Re 	)
) 	Case No. 	25-30549
ERIC J. FRIERDICH, 	)
) 	Chapter 7
Debtor. 	)
___________________________________ )
)
KAPITUS SERVICING, INC., 	)
)
Plaintiff, 	)
v. 	) 	Adv. No. 	25-03024
)
ERIC J. FRIERDICH, 	)
)
Defendant. 	)
Before the Court is the Defendant’s Motion to Dismiss Plaintiff’s Complaint
to Determine Dischargeability of Debt and for Other Relief. For the reasons set
forth herein, the Motion to Dismiss will be granted, in part.
I. 	Factual Background
Eric J. Frierdich (“Debtor”) filed his voluntary Chapter 7 petition on July
23, 2025. Donald Samson was appointed the case trustee and conducted several
creditors meetings with the final meeting occurring on October 15, 2025. The
Debtor received his discharge on December 4, 2025. The trustee has filed a
report of no distribution stating that he has found no property available for
distribution to creditors.
O P I N I O N
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Relevant to the issues here, the Debtor scheduled Kapitus Servicing, Inc.
(“Kapitus”) 	as 	an 	unsecured 	creditor 	in 	the 	amount 	of 	$92,333.25. 	After
obtaining an extension of time, Kapitus filed this adversary complaint seeking to
except the debt owed to it from the Debtor’s discharge. In its complaint, Kapitus
alleges that the Debtor is the sole owner of Midwest Carpet and Duct Cleaning,
Inc., d/b/a Midwest Duct Cleaning (“Midwest”). It further alleges that, in October
2022, it lent $88,800 to Midwest, that the Debtor guaranteed the obligation of
Midwest to repay the loan, and that the loan was secured by an interest in all of
Midwest’s 	property 	including 	its 	business 	receipts. 	It 	further 	alleges 	that
Midwest and the Debtor defaulted on the loan. Specifically, Kapitus alleges that,
within a month of the loan being made, the Debtor violated loan covenants by
obtaining additional funding for Midwest and by using multiple bank accounts
rather than the one account required by the covenants. Kapitus says that it filed
a complaint in Virginia state court against the Debtor and Midwest and, in 2023,
obtained a default judgment against both the Debtor and Midwest in the amount
of $134,570.62.
In 	its 	complaint, 	Kapitus 	alleges 	in 	Count 	I 	false 	representations,
fraudulent transfers, and actual fraud, relying on the breaches of loan covenants
by 	Midwest 	and 	the 	Debtor. 	Kapitus 	says 	that 	the 	Debtor 	made 	false
representations in the loan documents and never intended to have Midwest
repay the loan. Count II of the complaint alleges the making of false statements
in writing about the Debtor’s and Midwest’s financial condition. Again, Kapitus
relies on the loan covenants and says that the Debtor never intended for the loan
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to be paid. Count III of the complaint alleges embezzlement by suggesting that
the 	Debtor’s 	transfer 	of 	funds, 	including 	loan 	proceeds 	from 	one 	Midwest
account to another was wrongful. Count IV of the complaint alleges willful and
malicious conduct by the Debtor, again relying on the representations made in
the loan documents and the alleged breach of loan covenants. Kapitus requests
the entry of a judgment as to all counts holding that the previously-entered
money judgment from Virginia plus additional interest, fees, and costs be
excepted from the Debtor’s discharge. 1
The Debtor responded to the complaint by filing a Motion to Dismiss and
accompanying memorandum of law (collectively “Motion to Dismiss”) asserting
that Kapitus had failed to state claims upon which relief can be granted. The
Motion to Dismiss asserts that the money judgment obtained in Virginia can
have no collateral estoppel effect in this case because it was a default judgment
and Illinois law, which he says is controlling, would limit its use. Further, he
says the judgment does not include the types of specific findings necessary to
provide meaningful issue preclusion.
The 	Debtor’s 	Motion 	to 	Dismiss 	also 	addresses 	each 	count 	of 	the
complaint. As to Count I, the Debtor says that Kapitus has pleaded no more than
a breach of contract claim. Many of the representations made by the Debtor
related to future conduct, and facts were not pleaded to support an inference
1 In a response brief, Kapitus asks not only that the debt be declared nondischargeble but that the Debtor be collaterally
estopped from claiming that the debt is dischargeable. Kapitus wants the judgment to be used to preclude the raising
of any issues or defenses by the Debtor in this proceeding. The collateral estoppel issues will be discussed briefly
below. But it is important to note at this point that the collateral estoppel claim is not even raised by Kapitus as to
Count I of the complaint. Information about the Virginia judgment is set forth at paragraphs 43 through 45 of the
general allegations of the complaint. Count I incorporates only paragraphs 1 through 39 of the general allegations.
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that the Debtor never intended to comply with the promises related to the future.
With 	respect 	to 	Count 	II, 	the 	Debtor 	says 	that 	none 	of 	the 	alleged
misrepresentations related to the Debtor’s or Midwest’s financial condition or
any component of either of their financial conditions. The Debtor asserts that a
promise to act in the future by itself is not a representation regarding financial
condition. As to Count III, the Debtor says no allegations are made that the fund
transfers complained of were for the benefit of anyone other than Midwest. In his
reply brief, the Debtor also says that Kapitus had no ownership interest in the
funds and that, in any event, a person or entity cannot embezzle from itself.
Finally, with respect to Count IV, the Debtor complains that Kapitus repeatedly
uses the terms “willful and malicious” but fails to plead any facts to support a
finding that the Debtor’s conduct was both willful and malicious. No facts were
pleaded by Kapitus to support a claim that the Debtor intended to injure Kapitus.
The Motion to Dismiss has now been fully briefed by the parties. This Court
has reviewed and considered the parties’ arguments and relevant case law, and
the matter is ready for decision.
II. 	Jurisdiction
This Court has jurisdiction over proceedings “arising under title 11, or
arising in or related to cases under title 11” pursuant to 28 U.S.C. §1334. All
bankruptcy cases and proceedings filed in the Southern District of Illinois have
been referred to the bankruptcy judges. SDIL-LR Br1001.1; see 28 U.S.C.
§157(a). Determinations as to the dischargeability of particular debts are core
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proceedings. 28 U.S.C. §157(b)(2)(I). The issues here arise from the Debtor’s
bankruptcy itself and from the provisions of the Bankruptcy Code and may
therefore 	be 	constitutionally 	decided 	by 	a 	bankruptcy 	judge. 	See 	Stern 	v.
Marshall, 564 U.S. 462, 499 (2011).
III. 	Legal Analysis
To survive a motion to dismiss for failure to state a claim upon which relief
can be granted, a complaint need only allege enough factual allegations to
plausibly suggest a claim for relief. Bell Atl. Corp. v. Twombly, 550 U.S. 544, 570
(2007); Fed. R. Civ. P. 12(b)(6); Fed. R. Bankr. P. 7012. That is, a complaint must
“plausibly suggest that the plaintiff has a right to relief, raising that possibility
above a speculative level[.]” EEOC v. Concentra Health Servs., Inc., 496 F.3d 773,
776 (7th Cir. 2007) (internal quotation marks omitted) (citing Twombly, 550 U.S.
at 555); see also Fed. R. Civ. P. 8(a); Fed. R. Bankr. P. 7008. “[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[.]” Twombly, 550 U.S. at 555 (internal quotation marks
omitted). 	Twombly 	“demands 	more 	than 	an 	unadorned, 	the-defendant-
unlawfully-harmed-me accusation.” Ashcroft v. Iqbal, 556 U.S. 662, 678 (2009)
(citations omitted). While detailed specifics may not be required, there must be
some facts alleged to support each element of the cause of action. Iqbal, 556 U.S.
at 678-79; see also Olson v. Champaign Cnty., 784 F.3d 1093, 1098-99 (7th Cir.
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2015). Fraud must be pleaded with specificity. Fed. R. Civ. P. 9(b); Fed. R. Bankr.
P. 7009.
“A claim has facial plausibility ‘when the plaintiff pleads factual content
that allows the court to draw the reasonable inference that the defendant is liable
for the misconduct alleged.’” Bissessur v. Indiana Univ. Bd. of Trs., 581 F.3d 599,
602 (7th Cir. 2009) (quoting Iqbal, 556 U.S. at 678). When ruling on a motion to
dismiss, a court must accept all well-pleaded factual allegations as true and draw
all reasonable inferences in favor of the non-moving party. Iqbal, 556 U.S. at
678; McReynolds v. Merrill Lynch & Co., 694 F.3d 873, 879 (7th Cir. 2012). Those
well-pleaded facts, however, must “permit the court to infer more than the mere
possibility of misconduct[.]” Iqbal, 556 U.S. at 679.
In discussing the pleading standards, the Debtor raised the issue of
whether collateral estoppel would apply here. The Debtor claimed that it would
not because the Virginia judgment that Kapitus obtained against him was
entered by default and Illinois law, which he claims should apply, does not give
collateral estoppel effect to default judgments. Kapitus responded by asserting
that, under Virginia law that it claims should apply, default judgments may
support collateral estoppel. At this point, the discussion of collateral estoppel is
largely premature. Kapitus may not rely on collateral estoppel to avoid pleading
all required elements of each asserted claim. Nothing in the standards set forth
above provides for a deviation from the requirements because the Debtor might
be precluded from relitigating an issue here. A key element of collateral estoppel
is that the issues decided in the prior case must be identical to issues presented
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for adjudication in the subsequent case. Gambino v. Koonce, 757 F.3d 604, 608
(7th Cir. 2014) (citations omitted). The analysis of whether identical issues are
presented here cannot be made until well-pleaded claims have been made.
Because the complaint will be dismissed in large measure, the extent of any
collateral estoppel effect cannot be determined until an amended complaint that
can survive a motion to dismiss is on file.
Each of the four counts will be analyzed under the pleading standards set
forth above.
A. Count I – 11 U.S.C. §523(a)(2)(A)
Kapitus asserts in Count I that the debt owed to it by the Debtor should
be excepted from discharge because the debt was obtained by “false pretenses,
a false representation, or actual fraud” relating to statements respecting matters
other than the Debtor’s financial condition. 11 U.S.C. §523(a)(2)(A). The facts as
pleaded attempt to state claims for both false representations and actual fraud,
distinct causes of action that will be discussed separately.
To state a claim for false representations, a plaintiff must allege (1) a false
representation or omission made by the debtor; (2) that the debtor knew was
false or made with reckless disregard for the truth; (3) that the debtor made with
the intent to deceive; (4) and upon which the creditor justifiably relied. Ojeda v.
Goldberg, 599 F.3d 712, 716-17 (7th Cir. 2010); accord Iqbal, 556 U.S. at 678-
79, and Olson, 784 F.3d at 1098-99 (plaintiff must allege some facts to support
each element of cause of action). Generally, allegations of mere breaches of
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contractual promises do not satisfy the pleading requirements. In re Davis, 638
F.3d 549, 554 (7th Cir. 2011). Making a promise that one does not intend to
keep, however, is fraud, and plausible allegations of a debtor entering into a
contract with no intention of performance may state a claim. Id.; Holtz v.
JPMorgan Chase Bank, 846 F.3d 928, 932 (7th Cir. 2017); AmeriCash Loans,
LLC v. Marquardt (In re Marquardt), 561 B.R. 715, 725 (Bankr. C.D. Ill. 2016);
Shelby Shore Drugs, Inc. v. Sielschott (In re Sielschott), 332 B.R. 570, 572 (Bankr.
C.D. Ill. 2005) (Lessen, J.).
False representations involve fraud, and, as set forth above, fraud must
be pleaded with particularity. Fed. R. Civ. P. 9(b); Fed. R. Bankr. P. 7009.
Allegations made “upon information and belief” do not ordinarily satisfy that
standard; such allegations may only suffice when the underlying facts are
inaccessible to the plaintiff, and the plaintiff pleads the grounds for suspicion.
Pirelli Armstrong Tire Corp. Retiree Med. Benefits Tr. v. Walgreen Co., 631 F.3d
436, 442-43 (7th Cir. 2011); Grochocinski v. Campbell (In re Campbell), 475 B.R.
622, 639 n.12 (Bankr. N.D. Ill. 2012).
Kapitus’ allegations regarding false representations are made principally
in the general allegations section of the complaint and at paragraph 55 of Count
I. Kapitus says that the Debtor misrepresented Midwest’s financial condition and
misrepresented 	that 	Midwest 	would 	not 	enter 	into 	additional 	financing
agreements, would deposit all receipts into a designated account, and would
ensure that sufficient funds remained in the designated account so that Kapitus
could withdraw its payments as they became due. Throughout Count I, Kapitus
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alleges “on information and belief” that the Debtor knew his promises on behalf
of Midwest were false and that he never intended to honor the promises.
Kapitus’ 	claim 	that 	the 	Debtor 	misrepresented 	Midwest’s 	financial
condition 	cannot 	be 	considered 	in 	analyzing 	Count 	I. 	Misrepresentations
regarding Midwest’s financial condition are not actionable under §523(a)(2)(A);
they are only actionable under §523(a)(2)(B). Lamar, Archer & Cofrin, LLP v.
Appling, 584 U.S. 709, 715 (2018); Schiller DuCanto & Fleck, LLP v. Potter (In re
Potter), 616 B.R. 745, 751-52 (Bankr. N.D. Ill. 2020).
The other misrepresentations alleged to have been made by the Debtor all
relate to promises of future conduct. Allegations that promises were not kept,
without more, do not support a fraud or misrepresentation claim; they support
no more than a dischargeable breach of contract claim. Davis, 638 F.3d at 554.
Generally, false representations must “relate to a ‘present or past fact,’ not future
facts or future conduct.” Potter, 616 B.R. at 752 (quoting Groom v. Krook (In re
Krook), 615 B.R. 479, 485 (Bankr. N.D. Ill. 2020)) (internal quotation marks
omitted). But Kapitus asserts that the close proximity in time from when the
promises were made to when the defaults began adds enough to the allegations
to state a plausible false representation claim. Kapitus’ allegations against the
Debtor 	are 	bare 	bones, 	made 	largely 	on 	“information 	and 	belief,” 	and 	are
supported only by limited facts. However, the allegations are enough—just barely
enough—to get past the pleading stage. To be clear, the allegations will have to
be supplemented by more evidence to meet Kapitus’ burden of proof at trial. The
Debtor’s stated defense regarding the number of payments made on the debt
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before the final default, although not considered at this stage, could well be
enough to defeat Kapitus’ claim at trial. For now, however, Count I will not be
dismissed to the extent it attempts to state a claim for false representations.
Kapitus also attempts to state a claim for actual fraud in Count I. Actual
fraud encompasses “any deceit, artifice, trick, or design involving direct and
active operation of the mind, used to circumvent and cheat another[.]” McClellan
v. Cantrell, 217 F.3d 890, 893 (7th Cir. 2000) (citations omitted). To state a claim
for actual fraud, Kapitus must plead facts to plausibly allege (1) that a fraud
occurred; (2) that the debtor intended to defraud, and (3) that the fraud created
the debt at issue. Id. Actual fraud must be pleaded with Rule 9(b) particularity.
In attempting to state a claim for actual fraud, Kapitus relies on two
different theories. First, Kapitus makes a claim in the nature of fraudulent
inducement. This theory adds little to the complaint as it relies on the same
allegations and, ultimately, will rely on the same proofs already discussed. But,
as with the false representation claim, it presents just enough to state a plausible
claim and will not be dismissed. Second, Kapitus presents an actual fraud claim
relying on allegations of fraudulent transfers. Kapitus falls well short on that
theory.
Kapitus labeled Count I as brought, in part, as a fraudulent transfer claim
and, 	at 	paragraph 	57, 	alleges 	that 	the 	transfers 	made 	from 	the 	account
designated for payment of Kapitus were fraudulent. Kapitus says that the Debtor
transferred 	funds 	to 	“other 	accounts” 	but 	does 	not 	describe 	those 	other
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accounts. 2 The only inference to be drawn from such limited allegations is that
the alleged transfers were made to other accounts held in the name of Midwest.
Therein lies the problem for Kapitus.
As used here, the term “transfer” means “each mode, direct or indirect,
absolute or conditional, voluntary or involuntary, of disposing of or parting
with—(i) property; or (ii) an interest in property.” 11 U.S.C. §101(54)(D). If the
alleged transfers did not involve Midwest actually disposing of or parting with
property—and the allegations suggest that they did not—then there were no
“transfers” and no action based on fraudulent transfers can be plausibly stated.
Additionally, Kapitus overlooks the fact that §523(a)(2)(A) excepts from
discharge debts obtained by or incurred by actual fraud. Here, the Debtor’s
liability, as pleaded by Kapitus, arose when he signed the guaranty at the
beginning of the loan transaction. He did not incur any further debts or liabilities
by making the so-called transfers. And, as set forth above, no facts are pleaded
to support a claim that he was the personal recipient of the so-called transfers.
No other allegations in Count I expound on the fraudulent transfer theory
in any meaningful way. The allegations are mainly just labels and conclusions
that controlling case law warns is not enough. Twombly, 550 U.S. at 555.
Kapitus makes no plausible claim that any “transfer” occurred—fraudulent or
2 In its response to the Motion to Dismiss, Kapitus alleges that the Debtor “drained the agreed-upon Account and
transferred the funds for his own use.” But unsupported allegations in the response that were not included in the
original complaint do not remedy the defective complaint. Such allegations only serve to highlight the problem with
the original complaint. Legacy Constr. Servs., LLC v. Segobiano (In re Segobiano), 2026 WL 117102, at *2 n.1 (Bankr.
C.D. Ill. Jan. 15, 2026). Further, at Count IV, paragraph 94 (unnumbered bullet point 4), Kapitus specifically pleads
that the funds were transferred to “other operating accounts.” The Count IV allegations are not incorporated in Count
I, but the contradiction cannot be ignored.
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otherwise. Absent more—much more—Count I does not come close to stating a
claim for actual fraud based on a fraudulent transfer scheme. Count I, to the
extent it attempts to plead a claim for actual fraud based on fraudulent transfers,
will be dismissed.
B. Count II – 11 U.S.C. §523(a)(2)(B)
In Count II, Kapitus seeks to except its debt from the Debtor’s discharge
because it claims that debt was incurred by the use of a statement in writing
regarding the Debtor’s or an insider’s financial condition that was materially
false. 11 U.S.C §523(a)(2)(B). The specific elements of the cause of action require
pleading, and ultimately proving, that “(1) the debtor made a statement in
writing; (2) the statement was materially false; (3) the statement concerned the
debtor’s [or an insider’s] financial condition; (4) in making the statement, the
debtor had an intent to deceive the creditor; and (5) the creditor actually and
reasonably relied upon the statement.” Webster Bank v. Contos (In re Contos),
417 B.R. 557, 563 (Bankr. N.D. Ill. 2009) (citing Fischer Inv. Capital, Inc. v. Cohen
(In re Cohen), 507 F.3d 610, 613 (7th Cir. 2007), and In re Sheridan, 57 F.3d 627,
633 (7th Cir. 1995)). False representations made with the intent to deceive
involve fraud and must be pleaded with particularity. Fed. R. Civ. P. 9(b); Fed R.
Bankr. P. 7009.
One threshold issue in analyzing §523(a)(2)(B) claims is whether the
alleged false statements are “respecting the debtor’s or an insider’s financial
condition.” 	The 	Supreme 	Court 	has 	construed 	the 	phrase 	to 	encompass
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statements that have “a direct relation to or impact on the debtor’s overall
financial status[,]” including statements about a single asset. Appling, 584 U.S.
at 720. Thus, statements about a debtor’s income, expenses, assets, or liabilities
are statements respecting the debtor’s financial condition. Potter, 616 B.R. at
752 (citations omitted). But statements of mere intention such as a promise to
pay are not about a debtor’s financial condition; they are simply statements of
intention. Id.
A second, related threshold issue is whether the writing in question is
sufficiently 	substantive 	to 	be 	considered 	a 	“statement 	respecting 	financial
condition” as required by the statute. “A financial statement is materially false if
it paints a substantially untruthful picture by misrepresenting information that
would ordinarily affect the decision to grant credit, or if the lender would not
have made the loan ‘but for’ the debtor’s misrepresentations.” Bank of Rantoul v.
Adcock (In re Adcock), 618 B.R. 260, 264-65 (Bankr. C.D. Ill. 2020) (Perkins, J.)
(citing In re Morris, 230 B.R. 352 (Bankr. N.D. Ill. 1999), aff’d, 223 F.3d 548 (7th
Cir. 	2000)). 	Some 	courts 	have 	held 	that 	actual 	financial 	statements 	and
documents such as balance sheets, income statements, tax returns, and bank
statements are distinguishable from boilerplate transactional warranties that
recite 	legal 	conclusions 	but 	provide 	or 	contain 	no 	underlying 	financial
information. See, e.g., BBI Architectural Servs. v. Janney (In re Janney), 557 B.R.
476, 482 (Bankr. M.D. La. 2016) (“transactional documents that merely imply
some 	financial 	status” 	not 	“statements 	regarding 	the 	debtor’s 	financial
condition”); Caruso v. Segal (In re Segal), 195 B.R. 325, 332 (Bankr. E.D. Pa.
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1996) (lease and note documents “not, by any stretch of the imagination,
classifiable as financial statements”). Because Appling expanded the definition
of 	what 	statements 	are 	now 	included 	as 	“respecting” 	a 	debtor’s 	“financial
condition,” the range of documents that might be relied on by a creditor to judge
a debtor’s financial condition has likely also expanded. Individual pay stubs, bills
or invoices, and similar documents that provide information about only one
aspect of a debtor’s financial condition can now be considered. Nevertheless, the
concern about boilerplate language being relied on without any underlying
financial information being provided or reviewed remains valid.
In Count II, Kapitus repeats some of the same alleged misrepresentations
set forth in Count I, including the Debtor’s promise to use only the designated
account for depositing receipts and to not enter into further loan transactions
without Kapitus’ permission. Those promises are not respecting the Debtor’s or
Midwest’s financial condition; they are simply statements of intent and are not
actionable under §523(a)(2)(B). Potter, 616 B.R. at 752.
Kapitus 	also 	alleges 	in 	Count 	II 	that 	the 	Debtor 	made 	material
misrepresentations about the financial condition of Midwest and himself by
stating that both he and Midwest were solvent and were not planning to file
bankruptcy. Further, Kapitus alleges that the Debtor provided false financial
information and failed to disclose that Midwest was “low on funds” at the time of
the loan transaction. None of the allegations are supported by sufficient facts to
state plausible claims, but each will be briefly discussed.
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Although Kapitus says that the Debtor’s representations of solvency are
misrepresentations, Kapitus makes no affirmative claim that either the Debtor
or Midwest was insolvent when the loan was made. Further, Kapitus pleaded no
facts to support a finding of insolvency as to either the Debtor or Midwest at that
time. “Insolvency” is not defined in the loan documents but generally means, in
common parlance, that an individual or entity is “unable to pay debts as they
fall due in the usual course of business” or has “liabilities in excess of a
reasonable 	market 	value 	of 	assets 	held.” 	Insolvent, 	MERRIAM -WEBSTER ’ S
UNABRIDGED 	DICTIONARY , 	https://unabridged.merriam-
webster.com/unabridged/insolvent (last visited July 16, 2026). No facts are
pleaded that suggest either definition of insolvency would apply to the Debtor’s
or Midwest’s financial condition at the time the loan was made. Kapitus simply
placed the label and conclusion of misrepresentation on the Debtor’s statement
of solvency and then failed to plead any facts to back up that allegation. It has
not stated a plausible claim that the Debtor’s representations of solvency are
actionable under §523(a)(2)(B).
Likewise, Kapitus has failed to plead sufficient facts to state a plausible
claim related to the representation that neither the Debtor nor Midwest intended
to file bankruptcy. The representation is likely not one respecting their financial
condition but rather just a statement of intent. To the extent, however, that it
was a representation of financial condition, no facts were pleaded to support a
claim that it was a misrepresentation. Midwest has not filed bankruptcy; the
representation that it was not going to file bankruptcy was therefore apparently
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true and not a misrepresentation. The Debtor filed his bankruptcy case in July
2025—more than two and a half years after the loan documents were signed in
October 2022. In Count I, Kapitus’ allegation relating to the close proximity of
the loan transaction and the initial defaults was deemed to be sufficient to state
a plausible claim of misrepresentation at the inception of the loan. But a two-
and-a-half-year gap between the representation that he did not intend to file
bankruptcy and the Debtor’s actual bankruptcy filing is far too long to permit
the drawing of any inferences that the Debtor intended to file bankruptcy when
he signed the loan documents. Fraud must be pleaded with particularity and,
without any facts pleaded to support the allegation that the “no bankruptcy”
representation was false at the time made, the allegation is insufficient to state
a plausible claim.
Finally, Kapitus says that the Debtor provided false financial information.
In the general allegations rather than in Count II, Kapitus says that the Debtor
submitted 	financial 	documents 	to 	it 	but 	only 	specifically 	identifies 	bank
statements as having been provided. Kapitus does not allege that the bank
statements it received were altered in any way and makes no claim that the bank
statements contained false financial information. Instead, Kapitus alleges in
Count II that Midwest was “low on funds” at the time the loan was made and
that the Debtor failed to notify Kapitus of that fact.
“Low on funds” is a vague statement that does not plead falsity and fraud
with the specificity required. Kapitus says that it would not have made the loan
if 	it 	knew 	that 	Midwest 	was 	low 	on 	funds. 	But 	that 	makes 	little 	sense.
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Essentially, Kapitus is saying that it would not have made the loan if it knew
that Midwest needed the loan funds. Solvent, profitable businesses can have
cash flow issues from time to time and often resolve those issues by taking loans.
The fact that Midwest needed the loan proceeds can hardly be considered a
misrepresentation.
More 	importantly, Kapitus 	points 	to no 	written 	statement 	where 	the
omission of the “low on funds” information was made. Misrepresentations by
omission brought under §523(a)(2)(B) must be in writing and usually occur when
a borrower provides written financial information but fails to make full disclosure
of information specifically requested. See, e.g., New Century Bank v. Carmell (In
re Carmell), 424 B.R. 401, 415-16 (Bankr N.D. Ill. 2010); Union Planters Bank v.
Martin (In re Martin), 299 B.R. 234, 240-41 (Bankr. C.D. Ill. 2003) (Lessen, J.).
Kapitus said it received financial information but does not identify any document
where 	the 	amount 	of 	funds 	on 	hand 	at 	Midwest 	at 	the 	time 	of 	the 	loan
transaction should have been disclosed but was omitted or misrepresented.
Kapitus obtained bank records but does not say they were false. Without
pleading any facts of how, when, or where the misrepresentation by omission
was made, Count II does not state a plausible claim for providing false financial
condition information by omission. Count II will be dismissed.
C. Count III - 11 U.S.C. §523(a)(4)
Debts for “fraud or defalcation in a fiduciary capacity, embezzlement or
larceny” 	may 	be 	excepted 	from 	a 	debtor’s 	discharge. 	11 U.S.C. 	§523(a)(4).
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Kapitus alleges that the Debtor embezzled funds due to it and that his debt
should be excepted from discharge on that basis. “Embezzlement” has been
defined as the “fraudulent appropriation of property by a person to whom such
property has been entrusted or into whose hands it has lawfully come.” Matter
of Weber, 892 F.2d 534, 538 (7th Cir. 1989) (quoting Moore v. United States, 160
U.S. 268, 269 (1895)), abrogated on other grounds by, Grogan v. Garner, 498 U.S.
279, 	291 	(1991). 	The 	required 	elements 	of 	an 	exception 	to 	discharge 	for
embezzlement include that the Debtor appropriated funds for his own benefit
and did so with fraudulent intent or deceit. Id.
Kapitus bases its claim of embezzlement on allegations that the Debtor
moved funds from a Midwest account designated for payments to Kapitus to
other accounts that Kapitus could not access. Kapitus also alleges that the
Debtor failed to deposit receipts into the designated account in violation of the
loan agreement. The Debtor says that the allegations of Count III are insufficient
because nothing is pleaded to support the claim that the Debtor appropriated
the funds for his own use. In his reply brief, the Debtor also raises the issue of
whether Kapitus had an ownership interest in the funds.
That the Debtor misappropriated the funds for his own use is, without
question, an element of the cause of action sought to be pleaded; Kapitus admits
as much in its response. Kapitus says, however, that it need not allege how the
funds 	were 	used 	by 	the 	Debtor 	and 	that 	the 	general 	allegation 	of
misappropriation is sufficient. Kapitus relies on Krook for its argument that it
does not need to plead specifics of what happened to the funds. Krook, 615 B.R.
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at 486. But Krook involved a debtor who sold a vehicle to a buyer that the debtor
did not own and had no right to sell. After taking the money from the buyer, the
debtor 	did 	not 	deliver 	the 	vehicle. 	Those 	factual 	allegations 	were 	deemed
sufficient to state a cause of action because the benefit to the debtor was obvious.
Here, no such obvious personal benefit to the Debtor can be inferred from the
facts pleaded. As stated above, the facts as pleaded suggest that the funds went
from one Midwest account to another Midwest account. The funds may not have
gone where the loan agreement required them to go, but that does not mean that
the 	Debtor 	appropriated 	the 	funds 	for 	his 	personal 	use. 	Krook 	is 	clearly
distinguishable. Kapitus has pleaded no facts that support its claim that the
Debtor took Midwest funds for his personal use and therefore has not stated a
claim for embezzlement.
The Debtor says in his reply brief that Count III fails because Kapitus has
no ownership interest in the loaned funds. Rather, the loan funds and the
ongoing receipts of Midwest were owned by Midwest. Although Kapitus has not
had an opportunity to respond to this argument, it will be addressed. The
dismissal of Count III will be without prejudice, and discussing this issue now
may assist Kapitus if it chooses to replead.
As this Court has previously held, “[o]ne cannot embezzle one’s own
property.” Cripe v. Mathis (In re Mathis), 360 B.R. 662, 668 (Bankr. C.D. Ill. 2006)
(quoting Gadtke v. Bren (In re Bren), 284 B.R. 681, 698 (Bankr. D. Minn. 2002)).
Because collateral is generally owned by the borrower and the lender has only a
security interest or lien on the collateral, the lender’s interest “does not rise to a
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level of ownership sufficient to support a claim for embezzlement for purposes of
Section 523(a)(4)[.]” Mut. Mgmt. Servs., Inc. v. Fairgrieves (In re Fairgrieves), 426
B.R. 748, 756 (Bankr. N.D. Ill. 2010). The view that a lender’s interest in
collateral will generally not support a claim of ownership sufficient to state a
claim for embezzlement is the majority view. See, e.g., Oak Street Funding LLC v.
Brown 	(In 	re 	Brown), 	399 	B.R. 	44, 	47-48 	(Bankr. 	N.D. 	Ind. 	2008)
(misappropriation and use of collateral for purpose other than repayment may
be breach of contract or conversion but not larceny or embezzlement); Bank
Calumet v. Whiters (In re Whiters), 337 B.R. 326, 333 (Bankr. N.D. Ind. 2006)
(lender who takes security interest in the vehicle “does not have any ownership
interest in the vehicle which will sustain either an action for larceny or an action
for embezzlement”); Bombardier Capital, Inc. v. Dobek (In re Dobek), 278 B.R. 496,
510 (Bankr. N.D. Ill. 2002) (secured party “possesses only a lien, and is not in
ownership or possession of the property”); Deere & Co. v. Contella (In re Contella),
166 B.R. 26, 30 (Bankr. W.D.N.Y. 1994) (“As owner of the collateral, the debtor
remained the owner of its proceeds, even though both the collateral and its
proceeds were subject to a security interest. No person can embezzle from
himself.”).
A minority line of cases exists, allowing creditors to enforce their interest
in collateral through embezzlement claims. See, e.g., Jones v. Hall (In re Hall),
295 B.R. 877, 882 (Bankr. W.D. Ark. 2003) (collecting cases). This Court finds
the minority position unpersuasive. But as stated above, Kapitus will be granted
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leave to amend, and if there is more that can be pleaded to support its claim of
embezzlement, it will have an opportunity to do so. Count III will be dismissed.
D. Count IV – 11 U.S.C. §523(a)(6)
Count IV seeks to have the debt owed to Kapitus by the Debtor excepted
from discharge because it claims the debt arose from willful and malicious injury
to its property. 11 U.S.C. §523(a)(6). To prevail, Kapitus must plausibly allege
and ultimately prove (1) an injury caused by the Debtor; (2) willfulness; and (3)
malice. First Weber Group, Inc. v. Horsfall, 738 F.3d 767, 774 (7th Cir. 2013). An
injury is a “violation of another’s legal right, for which the law provides a remedy.”
Id. “Willful” modifies “injury,” not “act,” and the provision reaches “only acts done
with the actual intent to cause injury” and not intentional acts that happen to
cause injury. Kawaauhau v. Geiger, 523 U.S. 57, 61 (1998). To be willful, both
the act and the resulting injury must be intended. Id. at 61-62. Malice means
conduct undertaken “without just cause or excuse or in conscious disregard of
one’s 	duties.” 	Horsfall, 	738 	F.3d 	at 	775 	(citing 	and 	reaffirming 	Matter 	of
Thirtyacre, 36 F.3d 697, 700 (7th Cir. 1994)).
Allegations of ordinary breaches of contract generally are not sufficient to
support a claim under §523(a)(6). A breach, even a knowing or intentional
breach, does not by itself give rise to a willful and malicious injury; the conduct
must be tortious. Geiger, 523 U.S. at 61-62; Oakland Ridge Homeowners Ass’n
v. Braverman (In re Braverman), 463 B.R. 115, 119 (Bankr. N.D. Ill. 2011).
Considering breaches of contract as willful and malicious injuries would conflict
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with the authority under the Code to reject burdensome contracts; it would be
unfair to except a debt from discharge because a debtor took an action pre-
petition that is specifically allowed under the Code to be taken post-petition.
Wish Acquisition, LLC v. Salvino (In re Salvino), 373 B.R. 578, 588-91 (Bankr.
N.D. Ill. 2007); 11 U.S.C. §365. Further, most debtors know that nonpayment
will injure a creditor, but simple nonpayment is not and cannot be the standard
for determining willful and malicious conduct. If it was, many traditionally
dischargeable debts would be swept into the nondischargeable category. Wish
Acquisition, 373 B.R. at 588-91; Taylor v. Snyder (In re Snyder), 542 B.R. 429,
443-44 (Bankr. N.D. Ill. 2015) (collecting cases).
In the complaint, and in Count IV in particular, Kapitus pleads little more
than breach of contract. As set forth above, the allegations about the proximity
of the signing of the loan documents and the initial defaults is enough—but,
again, barely enough—to allow Count I to proceed as to false representations and
fraudulent inducement. Both theories state claims for intentional torts, but
neither, standing alone, is sufficient to state a claim for willful or malicious
conduct. A false representation can be made without any intent to harm a lender;
it can be made only with the intent to benefit the maker of the representation.
See Farm Credit Servs. of Am., PCA v. Woodrum (In re Woodrum), 2025 WL
601718, at *17, *20 (Bankr. C.D. Ill. Feb. 24, 2025) (Where debtor made some
payments and intended to use all loan proceeds in his farming operation, debt
excepted from discharge under §523(a)(2)(B) due to fraudulent loan application
but not under §523(a)(6) due to lack of proof of intent to injure lender.).
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Count IV lacks any specific facts that would support finding willful and
malicious conduct by the Debtor. To the contrary, several of the allegations plead
only the conclusion that the Debtor’s conduct was “willful and malicious.” More
than labels and conclusions are needed. Twombly, 550 U.S. at 555. Count IV
will be dismissed.
IV. 	Conclusion
The Debtor’s Motion to Dismiss will be granted, in part, and denied, in
part, as to Count I and granted as to all of Counts II, III, and IV. The dismissals
are without prejudice; Kapitus will be given leave to file an amended complaint.
Although it seems unlikely that Kapitus can successfully plead plausible claims
for all the causes of action it attempted to set forth in its original complaint,
parties should be given at least one opportunity to replead. Runnion ex rel.
Runnion v. Girl Scouts of Greater Chicago, 786 F.3d 510, 519 (7th Cir. 2015). In
constructing its amended complaint, Kapitus must pay close attention to the
required elements of each cause of action and determine if it can plead the facts
necessary to support its claims. It cannot continue to plead mere labels and
conclusions and to rely on “information and belief” allegations.
This Opinion is to serve as Findings of Fact and Conclusions of Law
pursuant to Rule 7052 of the Rules of Bankruptcy Procedure. See written Order.
ENTERED: July 21, 2026
/s/ Mary P. Gorman
_________________________________________
UNITED STATES BANKRUPTCY JUDGE
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