Hillsman et al v. Morgan et al, No. 3:2013cv00256 - Document 27 (D. Nev. 2014)

Court Description: OPINION AND ORDER - The order of the Bankruptcy Court is AFFIRMED. FURTHER ORDERED that the # 22 Motion for Attorney's Fees and Costs is DENIED. Signed by Judge Robert C. Jones on 7/29/2014. (Copies have been distributed pursuant to the NEF - DRM)
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1 2 3 4 5 6 UNITED STATES DISTRICT COURT 7 DISTRICT OF NEVADA 8 In re ROSALIE ALLEN MORGAN, 9 Debtor. 10 11 ROBERT G. HILLSMAN, 12 Plaintiff Appellant, 13 14 vs. ROSALIE ALLEN MORGAN, 15 Defendant Appellee. ) ) ) ) ) ) ) ) ) ) ) ) ) ) ) Bankr. No. 12-bk-51208-BTB Adv. No. 12-ap-05066-BTB 3:13-cv-00256-RCJ OPINION AND ORDER 16 17 This is an appeal of the dismissal of an adversary complaint, as amended, seeking a 18 determination of nondischargeability of debt in a Chapter 7 bankruptcy case pending in this 19 District. The Court has jurisdiction under 28 U.S.C. § 158(a). For the reasons given herein, the 20 Court affirms the order of the bankruptcy court and denies fees and costs to Appellee. 21 I. FACTS AND PROCEDURAL HISTORY 22 In September and October 2006, Plaintiff Appellant Robert Hillsman gave 23 Debtor Defendant Appellee Rosalie Morgan a loan totaling $745,000 represented by three 24 promissory notes. (See Am. Compl. ¶¶ 21 26, Apr. 11, 2013, ECF No. 24 in Case No. 12-ap- 25 5066). He gave her the loan so that she could purchase and develop certain coastal island 1 property in Texas on which she anticipated gambling would soon be legalized, causing the value 2 to increase. (See id. ¶¶ 12 15). She represented to him that she had commitments from buyers to 3 sign pre-purchase agreements, and she represented via a financial statement that her net worth 4 was nearly $7 million. (See id. ¶¶ 19 20). Part of the loan was originally due on November 25, 5 2006, and part of the loan was originally due on January 4, 2007, but the parties agreed in writing 6 to extend the due date for the entire loan to May 31, 2007, based on Defendant Appellee s 7 representations that she had substantial assets and that she expected to receive the pre-purchase 8 funds from her investors, as well as conventional financing, soon. (See id. ¶¶ 32 36). 9 Defendant Appellee failed to repay the loan by the extended due date, although she eventually 10 made a $300,000 payment. (See id. ¶ 37). Additionally, Defendant Appellee has failed to pay 11 Plaintiff Appellant for his consulting services under a September 2006 contract. (See id. 12 ¶¶ 10 11, 38). Plaintiff Appellant claims $445,000 plus interest under the loan and at least 13 $300,000 under the consulting contract. (See id. ¶¶ 37 38). 14 Plaintiff Appellant brought the present adversary proceeding after Defendant Appellee 15 filed for Chapter 7 bankruptcy protection in May 2012. The Amended Complaint ( AC ) lists 16 three core claims for nondischargeability under 11 U.S.C. § 523(a)(2)(A), (a)(2)(B), and (a)(4). 17 The bankruptcy court dismissed for failure to state a claim under Rules 8 and 9, and because the 18 debt was not established pre-petition. Plaintiff Appellant appealed. Defendant Appellee has 19 asked for fees and costs. 20 II. 21 STANDARD OF REVIEW The bankruptcy court s conclusions of law, including its interpretations of the bankruptcy 22 code, are reviewed de novo, and its factual findings are reviewed for clear error. See Blausey v. 23 U.S. Trustee, 552 F.3d 1124, 1132 (9th Cir. 2009). A reviewing court must accept the 24 bankruptcy court s findings of fact unless it is left with the definite and firm conviction that a 25 mistake has been committed. See In re Straightline Invs., Inc., 525 F.3d 870, 876 (9th Cir. 2008). Page 2 of 6 1 2 III. ANALYSIS The Court needn t examine the merits of the claims to affirm, because the bankruptcy 3 court was correct that the alleged debt was not established pre-petition, and that the relevant state 4 statute of limitations prevents such an action now, even if debt could be established post-petition 5 for the purposes of § 523. State statutes of limitations on actions for fraud have no bearing on 6 § 523 claims simply because § 523 claims also touch upon the issue of fraud. Banks v. Gill 7 Distribution Ctrs., Inc., 263 F.3d 862, 867 69 (9th Cir. 2001) (Hagen, J.). A creditor such as 8 Plaintiff Appellant here may file a state law claim on the promissory notes, e.g., for breach of 9 contract, and then maintain a § 523 action in a bankruptcy proceeding so long as the claim 10 involves fraud under the meaning of § 523, regardless of whether fraud is an element of the state 11 law claim, whether the state law claim is reduced to judgment before the § 523 claim is filed, or 12 whether the statute of limitations on a state law fraud claim has run, so long as the § 523 claim is 13 otherwise timely under the bankruptcy code and rules, i.e., the underlying debt has been 14 established pre-petition. See id. Here, however, there is no allegation that Plaintiff Appellant 15 has ever filed any state law breach of contract claim on the loan, whether in state court or in an 16 adversary proceeding under § 1334(b), so he did not establish his debt pre-petition under even 17 the more permissive view of Banks, and the six-year statute of limitations to file such a claim has 18 now run,1 even if the Court were to extend Banks and rule that a creditor may file an action post- 19 petition to establish a § 523 claim so long as the state law statute of limitations on an action to 20 establish a claim that would qualify under § 523 had not yet run. Plaintiff therefore cannot 21 prevail on any state law claim on the loan, even if the bankruptcy court were to permit a post- 22 petition suit to establish it. Because Plaintiff Appellant s debt was not established pre- 23 petition, and because the six-year statute of limitations to establish it has run, the bankruptcy 24 1 25 Plaintiff alleges that Defendant Appellee failed to honor the notes when due (as extended) on May 31, 2007. (See Am. Compl. ¶¶ 36 37). That was more than six years ago. See Nev. Rev. Stat. § 11.190(1)(b). Page 3 of 6 1 court was correct to dismiss the § 523 claims, see In re Gergely, 110 F.3d 1448, 1453 54 (9th 2 Cir. 1997), and to limit Plaintiff Appellant to asserting garden-variety claims in the bankruptcy 3 case based on the notes.2 4 Finally, the Court must address whether the appeal was frivolous. If so, it should grant 5 Defendant Appellee s motion for fees and costs under Bankruptcy Rule 8020.3 The Court finds 6 that the appeal was not frivolous. Although the bankruptcy court reached the correct result, 7 Plaintiff Appellant is in fact correct that the bankruptcy court erred in ruling that the state statute 8 of limitations for fraud was relevant to his § 523 claim. Plaintiff Appellant then made a non- 9 frivolous argument for the Court to interpret or expand the holding of Banks to permit a § 523 10 claim so long as it is made within the state statute of limitations governing the underlying civil 11 claim, even if the civil claim is brought post-petition. The Court has rejected this argument, both 12 because it does not believe the Court of Appeals would interpret established to include post- 13 petition claims and because the Court believes that at a minimum the Court of Appeals would 14 require such a claimant to actually bring the underlying claim, whether in state court or in an 15 adversary proceeding, and Plaintiff Appellant did not do that here, but the Court cannot say the 16 argument for an expansive reading of Banks, or an extension of it, was frivolous, particularly as 17 the relevant points of law are complex and not clearly settled in their contours. 18 Next, the appeal might still have been frivolous if there was no non-frivolous argument 19 against the rulings that the claims failed on the merits. The bankruptcy court correctly dismissed 20 the second claim under § 523(a)(4) on the merits, and the claim is probably frivolous. Only 21 relationships having the traditional characteristics of express trusts (whether created under the 22 23 24 25 2 The Court does not via this Opinion mean to preclude the bankruptcy court s consideration of a future motion to reconsider in that court if Plaintiff Appellant were to adduce evidence of having filed a pre-petition action on the notes in state court. 3 Defendant Appellee requests fees and costs under Appellate Rule 38, but Bankruptcy Rule 8020 is the appropriate rule in this context. Page 4 of 6 1 common law or by statute) at the time of the transfer of the disputed res implicate a fiduciary 2 relationship under the meaning of § 523(a)(4), not arms-length relationships or even fiduciary 3 relationships arising as a matter of law due to some later malfeasance, i.e., constructive or 4 resulting trusts. In re Hemmeter, 242 F.3d 1186, 1189 90 (9th Cir. 2001). At issue here is an 5 arms-length loan transaction wherein the parties negotiated and arranged the contours of their 6 rights and responsibilities, not a traditional trust-like relationship such as a partnership. See In re 7 Utnehmer, 499 B.R. 705 (B.A.P. 9th Cir. 2013); In re Hemmeter, 242 F.3d at 1190. The loans in 8 this case are simply promissory notes, and there is no separate agreement that might indicate an 9 intent to enter into anything like a partnership under Texas or Nevada law.4 The Court therefore 10 affirms the dismissal of the second claim for failure to state a claim. 11 Although the appeal of the second claim on the merits was probably frivolous, the Court 12 does not believe it was frivolous to appeal the dismissal of the first and third claims on the 13 merits. Plaintiff Appellant has arguably sufficiently identified the who, what, where, and when 14 of the alleged fraudulent statements and representations under the § 523(a)(2)(A) and (B) claims 15 in paragraphs twelve through twenty-one and thirty-four through thirty-six of the AC and the 16 documents attached thereto and incorporated thereby. The Court has examined the AC closely 17 enough to determine that it is not frivolous to argue that the first and third claims are sufficiently 18 pled under Rule 9(b). Because Plaintiff Appellant made non-frivolous arguments to expand 19 Banks to allow the claims, and because it is not beyond reasonable dispute that the first and third 20 claims were sufficiently pled under Rule 9(b), the appeal was not frivolous. Nor are fees and 21 costs appropriate under 28 U.S.C. §§ 1912, 1927 or under the Court s inherent powers. 22 /// 23 24 25 4 Because there is no colorable allegation of any partnership-like relationship, the Court need not determine whether Texas or Nevada law would apply to such allegations if made. It is clear that the litigants were not partners or any other kind of fiduciaries under the meaning of § 523(a)(4). Page 5 of 6 1 CONCLUSION 2 IT IS HEREBY ORDERED that the order of the Bankruptcy Court is AFFIRMED. 3 IT IS FURTHER ORDERED that the Motion for Attorney s Fees and Costs (ECF No. 22) 4 5 6 is DENIED. IT IS SO ORDERED. Dated this 17th day of July,July, 2014. Dated: This 29th day of 2014. 7 8 _____________________________________ ROBERT C. JONES United States District Judge 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 Page 6 of 6