Midas Auto Sales, Inc. v. Holley

UNITED STATES BANKRUPTCY COURT
DISTRICT OF NEW MEXICO
In re:
MICHAEL ALLEN HOLLEY,
Case No. 7-12-12608 Ta
Debtor.
MIDAS AUTO SALES, INC.,
Plaintiff,
v. 	Adversary No. 12-1301 T
MICHAEL ALLEN HOLLEY,
Defendant.
MEMORANDUM OPINION
This matter is before the Court on Defendant’s Motion to Dismiss with
Prejudice (the “Motion”). Plaintiff objected to the Motion and the matter has been
briefed. 	For the reasons set forth below, the Court finds that the Motion should
be denied for the most part, but that Plaintiff should be required to file an
amended complaint within 14 days from the entry of this opinion.
I. 	BACKGROUND
1. 	Defendant was the manager and majority owner of Duke City Auto
Auction, LLC, a New Mexico limited liability company (“Duke City”).
2. 	On or about April 5, 2011, Plaintiff delivered 12 vehicles it owned to
Duke City, to sell at Duke City’s auction.
3. 	Duke 	City 	sold 	some 	of 	the 	vehicles 	and 	received 	the 	sales
proceeds.
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4. 	On or about April 6, 2011, Duke City issued Plaintiff eight checks
drawn on Duke City’s account at Peoples Bank in Albuquerque, New Mexico.
5. 	Plaintiff alleges that when it presented the checks for payment,
Peoples Bank refused to honor the checks, stating that there were insufficient
funds in the account.
6. 	Duke City went out of business shortly thereafter.
7. 	Defendant filed this chapter 7 bankruptcy case July 11, 2012.
8. 	Plaintiff filed a Complaint for Determination of Dischargeability and
Objection to Discharge of Debt on October 12, 2012, doc. 1 (the “Complaint”).
9. 	Defendant filed the Motion on March 11, 2013, doc. 12. 	Plaintiff
filed a Response to Motion to Dismiss With Prejudice on March 27, 2013, doc. 20
(“Response”) and a Supplemental Brief in Support of 11 U.S.C. § 523(a)(4) and
(6) Claims and For Discovery on April 11, 2013, doc. 25 (“Plaintiff’s Brief”).
Defendant filed a Supplemental Brief in Support of Debtor’s Motion to Dismiss on
April 24, 2013, doc. 27 (“Defendant’s Brief”).
10. 	At a hearing held March 28, 2013, the Court denied the Motion with
respect to Plaintiff’s claim under § 523(a)(2).
II. 	DISCUSSION
A. 	Exclusion of Matters Outside the Pleadings. 	Although styled a
motion 	to 	dismiss, 	the 	Motion 	and 	Defendant’s 	Brief 	focus 	exclusively 	on
challenging Plaintiff’s version of the facts. 	In the Motion, Defendant argues that
there “are no facts to support any of the legal theories” Plaintiff asserts. 	Motion,
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p. 1. Defendant asserts that Plaintiff’s allegations are “factually false” and “a total
fabrication.” 	Motion, 	p. 	2. 	In 	his 	Brief, 	Defendant 	asserts 	that 	Plaintiff’s
allegations “are simply not true,” p. 1; that Plaintiff is “unable to substantiate” its
allegations, p. 1; that certain allegations are “untrue,” p. 5; that certain allegations
are 	“without 	merit,” 	p. 	5; 	that 	a 	certain 	accusation 	is 	“false,” 	p. 	9, 	etc.
Defendant’s Brief attaches a number of exhibits, including check copies and a
copy of a bank account statement.
While 	Plaintiff’s 	Brief 	contains 	substantial 	legal 	argument, 	Plaintiffs
Response and Brief also argue the facts, attach affidavits, and attach numerous
exhibits.
Under Rule Bankruptcy Rule 7012 and FRCP 12, the Court must either
exclude all matters presented that are outside of the pleadings, or else treat the
Motion as a motion for summary judgment. 	The Court has broad discretion to
refuse to accept the extra-pleading materials and resolve the motion solely on
the basis of the pleading itself. 	Navajo Nation v. Urban Outfitters, Inc., __ F.
Supp. 2d __, 2013 WL 1294670 (D.N.M. 2013), citing Lowe v. Town of Fairland,
Okl., 143 F.3d 1378, 1381 (10 th Cir. 1998). 	See generally 5A Wright & Miller,
Federal Practice and Procedure§ 1366 (1990). 	If the Court elects to convert the
motion to dismiss into a motion for summary judgment, it must give notice to the
parties and allow them to present extra-pleading evidence. 	Navajo Nation, 2013
WL 1294670, at *6.
The Court will not convert the Motion into a motion for summary judgment,
and therefore will not consider any extra-pleading materials. 	The Court will treat
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the Motion as a motion to dismiss under FRCP 12(b)(6) for failure to state a claim
upon which relief can be granted.
B. 	Sufficiency of Plaintiff’s Complaint. 	It is apparent from Plaintiff’s
Brief that it wishes to assert the following nondischargeability claims against
Defendant:
Subsection of §
523(a)
General
description of
claim
References in
Plaintiff’s Brief
§ 523(a)(2)(A) 	False pretenses,
a false
representation, or
actual fraud
pp. 1, 3, 5, 7, 23
§ 523(a)(4) 	Defalcation while
acting in a
fiduciary capacity
1, 2, 3, 4, 5, 7, 10,
14-23
§ 523(a)(4) 	Embezzlement 	1, 4, 5, 10-13, 23
§ 523(a)(4) 	Larceny 	1, 4, 5, 10-14, 23
§ 523(a)(6) 	Willful and
malicious injury to
property of
another
1, 2, 3, 6, 7, 23
In the Complaint, the claims are not adequately pled. The main paragraph
of the Complaint that identifies Plaintiff’s causes of action is paragraph 6, which
states:
The 	nondischargeability 	claims 	consist 	of 	an 	objection 	to
Dischargeability under 11 U.S.C. § 523(a)(2)(A) based on fraud or
false pretenses, an objection to Dischargeability under 11 U.S.C. §
523(a)(4) based on defalcation while acting in a fiduciary capacity,
and an objection to Dischargeability under 11 U.S.C. § 523(a)(4)
based on embezzlement of [Plaintiff’s] automobile delivered in trust
to 	be 	auctioned 	by 	Debtor 	which 	automobiles 	and 	titles 	were
converted to the benefit of debtors.
Complaint, p. 2. 	Paragraph 8 of the Complaint alleges that “the $40,300 debt
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owed by Debtors [sic] to Midas is nondischargeable under applicable sections of
the Bankruptcy Code.” 	Complaint, p. 3. 	There is no mention of alleged larceny
or alleged willful and malicious injury to property. 	There is no allegation about
whether, or how, an express or technical trust was created.
Although 	the 	pleading 	standards 	under 	the 	Federal 	Rules 	of 	Civil
Procedure 	are 	not 	stringent, 	a 	complaint 	must 	be 	sufficiently 	detailed 	and
informative to enable the defendant to respond. 	5 Wright & Miller, Federal
Practice and Procedure: Civil 3d § 1215, n. 5 and accompanying text. The Court
believes 	Plaintiff’s 	current 	complaint 	falls 	below 	this 	standard. 	Plaintiff’s
Complaint is not adequate to give Defendant enough notice of the claims against
him.
Plaintiff should be required to file an amended and restated complaint that
includes, at a minimum:
1. 	Separate counts for each subsection of § 523(a) that is
alleged to apply, and if a subsection includes multiple claims (e.g. § 523(a)(4)),
separate counts for each portion of the subsection;
2. 	For a count based on alleged fraud or false pretenses,
allegations of each element of a fraud claim under New Mexico law, plead with
particularity; 1
3. 	For a count based on alleged defalcation while acting in a
fiduciary capacity, allegations of the facts that give rise to the requisite express or
technical trust (including citations to any statute relied upon, and/or any writing or
other evidence of the creation of an express trust);
1 See Bankruptcy Rule 7009(b).
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4. 	For a count based on embezzlement, separate allegations of
each element of a civil embezzlement claim under New Mexico law;
5. 	For a count based on larceny, separate allegations of each
element of a civil larceny claim under New Mexico law;
6. 	For a count based on conversion or other willful injury,
separate allegations of each element of a conversion claim under New Mexico
law;
7. 	Allege why Defendant rather than Duke City should be held
accountable for any alleged wrongdoing; and
8. 	If Plaintiff has a good faith basis for asserting a claim for
attorney fees, the factual support of such a claim.
The Court will reserve ruling on whether any claims in the amended and
restated complaint that are not mentioned in the Complaint are timely.
C. 	The Nature of the Relationship Between the Parties. A key issue in
any § 523(a)(4) and (a)(6) claim is the nature of the relationship between the
parties. 	If Defendant had fiduciary duties to Plaintiff, and/or held the proceeds
from the sale of Plaintiff’s vehicles in an express or technical trust, then it will be
easier for Plaintiff to establish one or more of its (a)(4) or (a)(6) claims 2 On the
2 A § 523(a)(4) non-dischargeability claim based on alleged defalcation requires as a
threshold matter “the existence of a fiduciary relationship between the debtor and the
objecting party.” 	Antlers Roof-Truss and Builders Supply v. Storie (In Re Storie), 216
B.R. 283, 286 (10th Cir. BAP 1997). 	The existence of such a fiduciary relationship is
determined by federal law. 	Fowler Bros. v. Young (In re Young), 91 F.3d 1367, 1371
(10 th Cir. 1996); Sawaged v. Sawaged (In re Sawaged), 2011 WL 880464, at *3 (10th Cir.
BAP 2011). Under Tenth Circuit law, a fiduciary relationship exists only where a debtor
has been entrusted with money pursuant to “an express or technical trust.” Sawaged, at
*3, citing Fowler Bros., 91 F.3d at 1371 and Allen v. Romero (In re Romero), 535 F.2d
618, 621 (10 th Cir. 1976).
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other hand, if the relationship between Plaintiff and Defendant was a simple
debtor-creditor relationship, then Plaintiff would not be able to establish its (a) (4)
defalcation claim.
The nature of the relationship between an automobile auction company
and its customers is not clear. 	See e.g. In re Teta, 2011 WL 2435948, at *10
(Bankr. D. Colo. 2011) (consignment of automobile for resale did not create a
trust relationship). 	In In re Howell, 178 B.R. 730 (Bankr. W.D. Tenn. 1995) the
court stated:
Courts generally require that in order for a fiduciary relationship to
exist when there is a consignment, the consignment proceeds must
be 	segregated 	and 	must 	not 	be 	available 	for 	the 	consignees
general use. In re Sutton at 394; see also Hurlbert v. Drake, 5 B.R.
149 (Bankr. D. Idaho 1980); DL & B Oil Company v. Dawson, 16
B.R. 343 (Bankr. N.D. Ill. 1982). In this case, there was no evidence
that the proceeds of the sale of the watch were segregated, and
there was no evidence presented that the parties even intended
that the proceeds were to be segregated. Therefore only a debtor-
creditor relationship existed, as opposed to a trust relationship. See
In re Farrell & Howard Auctioneers, Inc., 172 B.R. 712 (Bankr. D.
Mass. 1994). Although it is undisputed that Mr. Smallwood never
actually received payment for the watch, and although a court, as a
matter of equity, could find that an implied trust existed, the fact
remains that the parties' consignment relationship did not rise to the
level of an express trust as required by § 523(a)(4). Because the
court finds that no fiduciary relationship existed it is unnecessary for
this court to determine whether fraud or defalcation occurred.
178 B.R. at 733.
In In re Marshall, 24 B.R. 105 (Bankr. W.D. Mo. 1982), the bankruptcy
court held that under Missouri law, an auctioneer is an agent and not a fiduciary.
24 B.R. at 107. See also In re Beetler, 368 B.R. 720, 726 (Bankr. C.D. Ill. 2007)
(no fiduciary relationship arose because of consignment); In re Mask, 2007 WL
7138339, 	at 	*3 	(Bankr. 	N.D. 	Ga. 	2007) 	(no 	trust 	relationship 	based 	on
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consignment agreement); In re Rigsby, 18 B.R. 518, 520 (Bankr. E.D. Va. 1982)
(consignment 	not 	sufficient 	to 	establish 	an 	express 	technical 	trust); 	In 	re
Perryman, 191 B.R. 196, 199 (E.D. Okl. 1996) (same); and Matter of Hyers, 70
B.R. 764, 771 (Bankr. M.D. Fla. 1987) (no fiduciary relationship based on
consignment agreement).
Other cases may support Plaintiff’s position that it is more than a creditor
of Duke City. 	See, e.g., In re Khan, 461 B.R. 343, 348-49 (E.D. Va. 2011)
(finding that convenience store operator received gasoline proceeds in trust for
supplier, and therefore debt to supplier may be nondischargeable under (a)(4) or
(a)(6)); In re Ahmed, 2012 WL 6093446, at *4 (Bankr. E.D. Va. 2012) (following
Khan); Volunteer State Oil Co., v. Adkisson, 26 B.R. 879, 882 (Bankr. E.D. Tenn.
1983) (to the same effect); Pool v. Johnson, 2002 WL 598447, at *4 (N.D. Tex
2002) 	(agency 	relationship 	can 	be 	transformed 	into 	the 	type 	of 	fiduciary
relationship upon which an (a)(4) defalcation claim can be based).
While the existence of an express or technical trust is most important to an
(a)(4) defalcation claim, it is clear that if Plaintiff was never more than a general
creditor of Defendant, Plaintiff’s embezzlement, larceny, and conversion claims
would be difficult to prove.
The Court is not ruling on any issues relating to the relationship of the
parties, but only mentions the issues so Plaintiff, when drafting the amended
complaint, and Defendant, when responding, will consider them carefully. 	The
Court hopes to focus the parties’ attention on these critical issues so the litigation
can proceed as efficiently as possible, and claims with little or no factual support
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will not divert the parties’ time, effort, and money.
III. 	CONCLUSION
Defendant’s Motion to Dismiss will be denied, except to the extent that the
Court will require Plaintiff to file an amended complaint that complies with the
requirements set out above, within 14 days from the date of this opinion. 	A
separate order will be entered.
________________________________
Honorable David T. Thuma
United States Bankruptcy Judge
Date entered on docket: May 9, 2013.
Copies to:
Karl F. Kalm
Charles Kalm
P.O. Box 20248
Albuquerque, NM 87154
Michael Allen Holley
2347 Tulane Avenue
Long Beach, California 90815
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