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In re Koch

United States District Court, D. Minnesota

March 29, 2017

In re DOUGLAS J. KOCH, Debtor.
DOUGLAS J. KOCH, Appellee. DAVID GAVIN, Appellant, BKY No. 15-44325 Adv. No. 16-04032

          Erik F. Hansen, BURNS & HANSEN, P.A., for appellant

          Matthew R. Burton, LEONARD, O'BRIEN, SPENCER, GALE & SAYRE, LTD, for appellee.


          JOHN R. TUNHEIM Chief Judge

         In this bankruptcy appeal, Appellant David Gavin challenges the Bankruptcy Court's dismissal of his 11 U.S.C. § 523(a)(2)(A) and (B) claims against Appellee Douglas J. Koch. The Bankruptcy Court determined that Gavin's claims of fraud failed to satisfy the heightened pleading standards applicable under Fed.R.Civ.P. 9(b). Because the Court concludes that Gavin adequately pleaded the elements of a § 523(a)(2)(A) claim, the Court will vacate the Bankruptcy Court's order in part and remand to allow that claim to proceed. However, as the Court finds that the Share Purchase Agreement is not a “statement in writing . . . respecting the debtor's or an insider's financial condition” for purposes of § 523(a)(2)(B), the Court will affirm the Bankruptcy Court's order dismissing that claim - albeit for a different reason than the Bankruptcy Court's determination that Gavin failed to identify a statement in writing.


         Gavin previously owned Northland Employment Services, Inc., a Minnesota Corporation (“Northland”). (Appellant's Br., Attach. (“App.”) at 67, Aug. 5, 2016, Docket No. 10.)[1] Around October 1, 2009, Gavin entered into to a Share Purchase Agreement where he sold all of Northland's stock to NAK, LLC (“NAK”), a Minnesota limited liability company. (Id.) Gavin financed a portion of the sale through operation of a Promissory Note, whereby NAK was obliged to make payments to him over a period of time. (Id. at 68, 119-20.)

         During the sale, Koch, Matthew L. Anderson and Gary Nygaard specifically represented they were the sole members of NAK. (Id. at 68.) In fact, four other individuals collectively owned ten percent of NAK's outstanding membership interest for the sole purpose of “secur[ing] the financing required to complete the Share Purchase Agreement.” (Id.) Koch, Nygaard, and Anderson intentionally and deliberately made the false representation regarding NAK's ownership, intending that Gavin “would rely upon it, in order to induce [Gavin] to enter into the Share Purchase Agreement.” (Id. at 70.) Gavin would not have entered into the agreement had he known the truth. (Id.)

         Following the sale, Koch, Nygaard, and Anderson violated the terms of the Shareholder Control Agreement by altering their compensation and pledging NAK's corporate assets without first consulting with Gavin. (Id. at 72.) After providing opportunities to cure these breaches, Gavin commenced an action against Koch, NAK, Nygaard, and Anderson on November 6, 2014, alleging violation of the Share Purchase Agreement. (Id. at 72-73.) The parties settled the matter on January 15, 2015. (Id. at 73.) As part of that mediated settlement agreement, the parties agreed that Gavin was owed $407, 500.00 on the Promissory Note and detailed when such payments would be made. (Id. at 73-74.) However, at the time of entering into the agreement, Koch, Nygaard, and Anderson had no intention of performing as they knew NAK would be unable to pay Gavin, but they nevertheless sought to induce Gavin to delay efforts to enforce the Share Purchase Agreement. (Id. at 74-75.) Shortly thereafter, Koch and the others defaulted on their payments to Gavin. (Id. at 75-76.)

         In response to Gavin's notices regarding their defaults, on June 5, 2015, counsel for Koch, NAK, Nygaard, and Anderson sent a letter to Gavin's counsel, which stated “[o]ur clients need to suspend payments to your client until the debts to the IRS and State of Minnesota have been paid.” (Id. at 76.) Koch then petitioned for Chapter 7 bankruptcy on December 18, 2015. (Id. at 66.) Gavin commenced this action on March 21, 2016, alleging that Koch obtained Gavin's money or property by false representation and that the debt was nondischargeable under 11 U.S.C. § 523(a)(2)(A), (a)(2)(B), (a)(19)(A)(ii), and (a)(19)(B)(ii). (Id. at 1, 13-19.) Subsequently, on April 19, 2016, Koch moved to dismiss the complaint. (Id. at 20-23, 35-47.) On May 5, 2016, the Bankruptcy Court issued an order granting Koch's motion to dismiss Gavin's § 523(a)(19)(A)(ii) and (B)(ii) claims, but allowing Gavin to file an amended complaint on his § 523(a)(2)(A) and (B) claims.[2] (Id. at 65.) Gavin filed an amended complaint regarding the latter claims on May 20, 2016, (id. at 66-85), and Koch subsequently renewed his motion to dismiss on June 2, 2016 (id. at 161-69).

         On June 22, 2016, the Bankruptcy Court determined that Gavin failed to adequately plead the elements of his § 523(a)(2)(A) and (B) claims under the heightened pleading standards applicable to fraud claims under Fed.R.Civ.P. 9(b), and therefore granted Koch's motion to dismiss with prejudice. (Bankr. Tr. of Hr'g at 47:6-10, July 21, 2016, Docket No. 6.) On July 6, 2016, Gavin filed a notice of appeal; Gavin contends the Bankruptcy Court's determination was erroneous because, under the Bankruptcy Court's logic, Gavin would need to conclusively prove his assertions at the pleading stage.



         In bankruptcy proceedings, the Court sits as an appellate court and reviews the Bankruptcy Court's conclusions of law de novo and its findings of fact for clear error. See Reynolds v. Pa. Higher Educ. Assistance Agency (In re Reynolds), 425 F.3d 526, 531 (8th Cir. 2005). Thus, the Court will review de novo the Bankruptcy Court's dismissal of Gavin's complaint. Minn. Majority v. Mansky, 708 F.3d 1051, 1055 (8th Cir. 2013).

         In reviewing a dismissal under Rule 12(b)(6), the Court views a complaint in “the light most favorable to the nonmoving party.” Longaker v. Boston Sci. Corp., 872 F.Supp.2d 816, 819 (D. Minn. 2012). The Court considers all facts alleged in the complaint as true to determine whether the complaint states a “‘claim to relief that is plausible on its face.'” Braden v. Wal-Mart Stores, Inc., 588 F.3d 585, 594 (8th Cir. 2009) (quoting Ashcroft v. Iqbal, 556 U.S. 662, 678 (2009)). “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.” Iqbal, 556 U.S. at 678. “Where a complaint pleads facts that are ‘merely consistent with' a defendant's liability, it ‘stops short of the line between possibility and plausibility[, ]'” and therefore must be dismissed. Id. (quoting Bell Atl. Corp. v. Twombly, 550 U.S. 544, 555 (2007)). Although the Court accepts the complaint's factual allegations as true, it is “not bound to accept as true a legal conclusion couched as a factual allegation.” Twombly, 550 U.S. at ...

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