United States District Court, D. Minnesota
In re DOUGLAS J. KOCH, Debtor.
DOUGLAS J. KOCH, Appellee. DAVID GAVIN, Appellant, BKY No. 15-44325 Adv. No. 16-04032
F. Hansen, BURNS & HANSEN, P.A., for appellant
Matthew R. Burton, LEONARD, O'BRIEN, SPENCER, GALE &
SAYRE, LTD, for appellee.
MEMORANDUM OPINION AND ORDER ON ORDER OF THE
R. TUNHEIM Chief Judge
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.
previously owned Northland Employment Services, Inc., a
Minnesota Corporation (“Northland”).
(Appellant's Br., Attach. (“App.”) at 67,
Aug. 5, 2016, Docket No. 10.) 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.)
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.)
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.)
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. (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).
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.
STANDARD OF REVIEW
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).
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 ...