KSB

Judge Berger

12-06127 Sinclair Oil Corporation v. Martin, Jr (Doc. # 20) - Document Text

The relief described hereinbelow is SO ORDERED.
SIGNED this 26th day of February, 2014.


IN THE UNITED STATES BANKRUPTCY COURT
FOR THE DISTRICT OF KANSAS


In re:

WILLIAM H. MARTIN, JR., Case No. 12-21938-7
Debtor.

SINCLAIR OIL CORPORATION,
Plaintiff,

v. Adv. No. 12-6127
WILLIAM MARTIN, JR.,
Defendant.

ORDER DENYING IN PART AND GRANTING IN PART
DEFENDANT’S MOTION TO DISMISS


This matter is before the Court on Defendant William Martin, Jr.’s motion to dismiss1 the
adversary complaint filed against him by Plaintiff Sinclair Oil Corporation (“Sinclair Oil”). The
adversary complaint seeks the denial of discharge of debt to Sinclair Oil, claiming that Martin is

1

Doc. 12.

14.02.25 Sinclair Oil v. Martin MTD.wpd
Case 12-06127 Doc# 20 Filed 02/26/14 Page 1 of 11


the alter ego of Convenience Express, Inc. (which is itself the general partner of Convenience
USA LP), a company in debt to Sinclair Oil for $511,451.56. Plaintiff claims the debt is not
dischargeable under 11 U.S.C. § 523(a)(2)(A) and/or (a)(6) and that Martin should be denied a
discharge under § 727.2 Martin has moved to dismiss the complaint under Federal Rules of Civil
Procedure 12(b)(6) and 9(b), arguing that the allegations made are conclusory and do not satisfy
minimal pleading standards.

Because the Court finds that Plaintiff has stated just enough facts to support its claims
under §§ 523(a)(2)(A) and (a)(6), the Court denies Defendant’s motion to dismiss the § 523
claims. Plaintiff has chosen not to pursue its § 727 claim, however, and the Court grants the
motion to dismiss that claim, without prejudice.

I. Background and Findings of Fact
Defendant/Debtor Martin filed a chapter 7 bankruptcy petition listing nearly two million
dollars of debt or joint debt, 3 and Plaintiff Sinclair Oil filed a proof of claim in that bankruptcy
for $511,451.56 for unsecured debt for nonpayment of a purchase. Sinclair Oil then filed this
adversary proceeding, generally alleging in its complaint that the debt is the result of fraud,
deceit, misrepresentations, and concealment perpetrated by Martin against Sinclair Oil.
Specifically, Sinclair Oil claims that between June 4, 2008, and July 8, 2008, ostensibly pursuant
to an August 1, 2006, distributor sale contract, Convenience USA LLP (“Convenience USA”)
acquired motor fuel and other petroleum products from Sinclair Oil. Convenience USA

2 All future statutory references are to title 11 of the United States Code, unless otherwise specified.
3 As discussed below, Martin is a controlling partner in M&W Midwest Properties, LLC, and much of the
debt listed in his individual petition is listed as joint debt with that company.
-2


14.02.25 Sinclair Oil v. Martin MTD.wpd
Case 12-06127 Doc# 20 Filed 02/26/14 Page 2 of 11


apparently acted through its general partner, Convenience Express, Inc. (“Convenience
Express”). Sinclair Oil alleges that Convenience USA had the obligation to pay Sinclair Oil for
these products at the time of acquisition, but Convenience USA was insolvent and had no ability
to make payment for the product.

Sinclair Oil alleges that Martin knew or should have known that “the product was
obtained by fraud, deceit and misrepresentation without the ability to pay and without any
reasonable likelihood of having the ability to pay for the product in the foreseeable future.”4
Convenience USA apparently had a $300,000 secured line of credit for product from Sinclair
Oil, but at least some portion of the product acquired was distinct from this secured credit line.
At some point (again, the exact details are not clear), Sinclair Oil realized the extent of
Convenience USA’s acquisition of product and made demand for payment, which Convenience
USA did not transmit.

Sinclair Oil then alleges that Martin, knowing that Convenience USA “had not paid for
the product and could not pay for the product, . . . concealed, transferred, dissipated or
absconded with the product,” including selling or transferring the product to a third party.5 Then,
in early July 2008, Martin entered into an agreement with M&W Midwest Properties, LLC
(“M&W”), a company also controlled by Martin, to convey to M&W all or substantially all of
Convenience USA’s assets.

Sinclair Oil filed suit in state court against Convenience USA, Convenience Express, and
Martin, seeking compensation for the product acquired. There, as it does here, Sinclair Oil

4 Doc. 1 ¶ 6(a).

5 Doc. 1 ¶ 6(d).

-3


14.02.25 Sinclair Oil v. Martin MTD.wpd
Case 12-06127 Doc# 20 Filed 02/26/14 Page 3 of 11


alleged individual liability by Martin based on Martin being the alter ego of the Convenience
entities. 6 Again, Sinclair Oil alleges that Martin knowingly and intentionally engaged in fraud,
deceit, and misrepresentation to maliciously and willfully injure Sinclair Oil by “fraudulently
and deceitfully obtaining product from Sinclair without paying for it so that Martin could further
his individual and personal financial interests.”7 At some point after Sinclair Oil filed its state
court lawsuit, Convenience USA and Convenience Express filed bankruptcy petitions, followed
by the individual chapter 7 bankruptcy petition filed by Martin.

Rather than answering the adversary proceeding complaint, Martin has moved to dismiss.
Martin challenges the sufficiency of the complaint for all three counts: §§ 523(a)(2)(A),
523(a)(6), and 727. In its response to Martin’s motion to dismiss, Sinclair Oil additionally
alleges that Martin’s intent in orchestrating the scheme outlined in the complaint was to get
assets to M&W, so that the bank holding a note on M&W would not call the note and Martin’s
personal guaranty of the M&W debt. Sinclair also claims in its response that Martin “essentially
acknowledged” in a deposition in the state court lawsuit “both the wrongful scheme to deceive
Sinclair in order to obtain the motor fuel and to convey it to MW thereafter.”8 Sinclair Oil also
attaches to its response a journal entry of judgment entered in an adversary proceeding in the
bankruptcy cases of the Convenience entities against M&W. Because these additional alleged

6 To support its alter ego claim, Sinclair Oil alleges that neither Convenience USA nor Convenience
Express were sufficiently capitalized when the debt was incurred, that Martin failed to follow or meet the corporate
formalities required by controlling Kansas statutes, that no corporate dividends were paid and no person other than
Martin ever acted as an officer or director, that Martin siphoned corporate funds as the dominant stockholder, and
that Martin merely operated Convenience Express as a facade for his own operations. See Doc. 1 ¶ 10. Martin does
not challenge this portion of Sinclair Oil’s complaint as insufficiently plead.

7 Doc. 1 ¶ 6(f).

8 Doc. 16, at 3.

-4


14.02.25 Sinclair Oil v. Martin MTD.wpd
Case 12-06127 Doc# 20 Filed 02/26/14 Page 4 of 11


facts stated in Sinclair Oil’s response to Martin’s motion to dismiss do not appear in the
complaint but in a response brief, they will not be considered further. 9
Finally, Sinclair Oil states in its response that it elects not to pursue the § 727 claim, and
it seeks to withdraw that claim without prejudice.

II. Analysis
A. Standard for Motion to Dismiss
An adversary proceeding to determine the dischargeability of particular debts is a core
proceeding under 28 U.S.C. § 157(b)(2)(I), over which this Court may exercise subject matter
jurisdiction.10

Martin brings his motion to dismiss under Federal Rule of Civil Procedure 12(b)(6),
which permits a motion for “failure to state a claim upon which relief can be granted.”11 The
requirements for a legally sufficient claim stem from Rule 8(a), which requires “a short and plain
statement of the claim showing that the pleader is entitled to relief.”12 To survive a motion to
dismiss, a complaint must present factual allegations that, when assumed to be true, “raise a right
to relief above the speculative level.”13 The complaint must contain “enough facts to state a
claim to relief that is plausible on its face.”14 “[T]he complaint must give the court reason to

9 See Hayes v. Whitman, 264 F.3d 1017, 1025 (10th Cir. 2001) (citing cases stating general rule that a
complaint may not be amended by a response to a motion to dismiss).
10 28 U.S.C. § 157(b)(1) and § 1334(b).
11 Rule 12 is made applicable to adversary proceedings via Federal Rule of Bankruptcy Procedure 7012(b).
12 Rule 8 is made applicable to adversary proceedings via Federal Rule of Bankruptcy Procedure 7008(a).
13 Bell Atl. Corp. v. Twombly, 550 U.S. 544, 555 (2007).

14

Id. at 570.
-5


14.02.25 Sinclair Oil v. Martin MTD.wpd
Case 12-06127 Doc# 20 Filed 02/26/14 Page 5 of 11


believe that this plaintiff has a reasonable likelihood of mustering factual support for these
claims.”15

The plausibility standard does not require a showing of probability that a defendant has
acted unlawfully, but requires more than “a sheer possibility.”16 “[M]ere ‘labels and
conclusions,’ and ‘a formulaic recitation of the elements of a cause of action’ will not suffice; a
plaintiff must offer specific factual allegations to support each claim.”17 Finally, the Court must
accept the nonmoving party’s factual allegations as true and may not dismiss on the ground that
it appears unlikely the allegations can be proven.18

Where a party alleges fraud—here, a claim under § 523(a)(2)(A) can be for “false
pretenses, a false representation, or actual fraud”—Rule 9(b) requires the party to “state with
particularity the circumstances constituting fraud or mistake,” with general allegations only
allowed for “[m]alice, intent, knowledge, and other conditions of a person’s mind.”19 A party
alleging fraud must “‘set forth the time, place, and contents of the false representation, the
identity of the party making the false statements and the consequences thereof.’”20 In other

15 Ridge at Red Hawk, L.L.C. v. Schneider, 493 F.3d 1174, 1177 (10th Cir. 2007) (emphasis omitted).

16 Ashcroft v. Iqbal, 556 U.S. 662, 678 (2009).

17 Kan. Penn Gaming, LLC v. Collins, 656 F.3d 1210, 1214 (10th Cir. 2011) (quoting Twombly, 550 U.S.

at 555).

18 Iqbal, 556 U.S. at 678 (citing Twombly, 550 U.S. at 556).

19 Rule 9(b) is made applicable to adversary proceedings via Federal Rule of Bankruptcy Procedure 7009.

20 Schwartz v. Celestial Seasonings, Inc., 124 F.3d 1246, 1252 (10th Cir. 1997) (quoting Lawrence Nat’l

Bank v. Edmonds (In re Edmonds), 924 F.2d 176, 180 (10th Cir. 1991)).
-6


14.02.25 Sinclair Oil v. Martin MTD.wpd
Case 12-06127 Doc# 20 Filed 02/26/14 Page 6 of 11


words, the alleging party must specify the “who, what, where, and when of the alleged fraud.”21

B. § 523(a)(2)(A) Claim
Under § 523(a)(2)(A), an individual is not discharged for any debt “for money, property,
services, or an extension, renewal, or refinancing of credit, to the extent obtained by . . . false
pretenses, a false representation, or actual fraud[.]” The creditor, here Sinclair Oil, bears the
burden of establishing false pretenses, a false representation, or actual fraud.22

To state a claim under § 523(a)(2)(A), Sinclair Oil must allege facts supporting the
following elements: (1) Martin engaged in false pretenses, false representations, or actual fraud;

(2) which Martin knew at the time to be false or fraudulent; (3) with the intent to deceive Sinclair
Oil; (4) Sinclair Oil justifiably relied on the representation; and 5) Sinclair Oil sustained damage
as a proximate result of the debtor’s false pretenses, false representations, or actual fraud.23 The
intent to deceive a creditor need not be from an express misrepresentation, but may be inferred
from the totality of circumstances. 24
Martin’s motion to dismiss argues that Sinclair Oil’s complaint points to no express
misrepresentation and does not expressly state an intent to deceive or justifiable reliance.
Sinclair Oil responds that a § 523(a)(2)(A) claim can be proven by either affirmative acts or
omissions, even without affirmative misrepresentations, and that justifiable reliance can be

21 Jamieson v. Vatterott Educ. Ctr., Inc., 473 F. Supp. 2d 1153, 1156 (D. Kan. 2007) (quoting Plastic
Packaging Corp. v. Sun Chem. Corp., 136 F. Supp. 2d 1201, 1203 (D. Kan. 2001)).

22 DSC Nat’l Prop. LLC v. Johnson (In re Johnson), 477 B.R. 156, 169 (B.A.P. 10th Cir. 2012).

23

Id.

24 Fowler Bros. v. Young (In re Young), 91 F.3d 1367, 1375 (10th Cir. 1996); see also 6050 Grant, LLC v.
Hanson (In re Hanson), 428 B.R. 475, 486 (Bankr. N.D. Ill. 2010) (noting that false pretenses “do not necessarily
require overt misrepresentations” but can also include concealment or “failure to disclose pertinent information”).

-7 14.02.25
Sinclair Oil v. Martin MTD.wpd
Case 12-06127 Doc# 20 Filed 02/26/14 Page 7 of 11


proven by Sinclair Oil’s justifiable expectation of payment.

Although not a model of clarity, the allegations here support a claim under
§ 523(a)(2)(A). The complaint alleges that Martin, through the Convenience companies,
knowingly and through deceit acquired petroleum and other products from Sinclair Oil without
any reasonable likelihood of being able to pay for those products and without Sinclair Oil’s full
consent. The allegations also state that Martin then absconded with the product by transferring
that product to M&W, knowing that the Convenience entities had not and would not make
payment for the product. Sinclair Oil alleges that Martin engaged in this scheme so that he
“could further his individual and personal financial interests.” Sinclair Oil justifiably relied on
Martin, through the Convenience entities, for payment, and was damaged by nonpayment. As
stated above, to bring a § 523(a)(2)(A) claim, Sinclair Oil need not prove an express false
statement, although it can certainly make its case by doing so; it can also prove its case by
Martin’s knowing omissions regarding obtaining the product and thereafter secreting the product
away.

Sinclair Oil has carried its burden to plead the § 523(a)(2)(A) claim by stating just
enough facts to make the claim plausible on its face. 25 At this stage, these facts must be viewed
in the light most favorable to Sinclair Oil, 26 and although the Court expresses no opinion on
whether Sinclair Oil will ultimately prevail on its claim, the complaint sufficiently pleads each
element of a § 523(a)(2)(A) claim; Martin will not be hampered in his ability to prepare a

25 See Bell Atl. Corp. v. Twombly, 550 U.S. 544, 570 (2007) (stating that “heightened fact pleading of
specifics” is not required, “but only enough facts to state a claim to relief that is plausible on its face”).

26 See Lawrence Nat’l Bank v. Edmonds (In re Edmonds), 924 F.2d 176, 180 (10th Cir. 1991) (stating that
the facts alleged in a bankruptcy complaint must be assumed to be true).

-8


14.02.25 Sinclair Oil v. Martin MTD.wpd
Case 12-06127 Doc# 20 Filed 02/26/14 Page 8 of 11


defense. Martin’s motion to dismiss this claim is denied.

C. § 523(a)(6) Claim
Under § 523(a)(6), an individual is not discharged for any debt “for willful and malicious
injury by the debtor to another entity or to the property of another entity.” Again, Sinclair Oil as
the creditor bears the burden of establishing the elements of § 523(a)(6). 27

The injury alleged by the creditor under this subsection must be both willful and
malicious. 28 For injury to property to be willful under § 523(a)(6), it must be “a deliberate or
intentional injury, not merely a deliberate or intentional act that leads to injury.”29 Willfulness of
injury is typically inferred from a debtor’s other actions. 30 For injury to property to be malicious,
there must be “an intentional act [that is] ‘performed without justification or excuse.’”31 Under
this subsection, therefore, the debtor “must intend the consequences of his actions, not just the
actions themselves.”32 “[T]he debtor must ‘desire . . . [to cause] the consequences of his act
or . . . believe [that] the consequences are substantially certain to result from it.’”33

In his motion to dismiss, Martin claims the allegations regarding transfer of the
petroleum products from the Convenience entities to M&W cannot support a claim for injury to

27 Mitsubishi Motors Credit of America, Inc. v. Longley (In re Longley), 235 B.R. 651, 655 (B.A.P. 10th
Cir. 1999).
28 Panalis v. Moore (In re Moore), 357 F.3d 1125, 1129 (10th Cir. 2004).
29 Kawaauhau v. Geiger, 523 U.S. 57, 61 (1998).
30 Richards v. Smith (In re Smith), 472 B.R. 833 (Bankr. D. Colo. 2012).
31 Tso v. Nevarez (In re Nevarez), 415 B.R. 540, 544 (Bankr. D.N.M. 2009) (quoting Am. First Credit
Union v. Gagle (In re Gagle), 230 B.R. 174, 181 (Bankr. D. Utah 1999)).
32 Melquiades v. Hill (In re Hill), 390 B.R. 407, 411 (10th Cir. BAP 2008).
33 In re Moore, 357 F.3d at 1129 (quoting In re Longley, 235 B.R. at 657).
-9


14.02.25 Sinclair Oil v. Martin MTD.wpd
Case 12-06127 Doc# 20 Filed 02/26/14 Page 9 of 11


the property of Sinclair Oil, because after the sale of the property to Convenience USA, Sinclair
Oil no longer had any property interest in the property that could be damaged. Sinclair Oil
responds that it is the initial alleged false pretenses and deceit by Martin (acting through the
Convenience entities) that form the basis for its complaint and that this behavior by Martin is
clearly alleged as causing deliberate and intentional harm to Sinclair Oil in the amount of
$511,451.56.

Sinclair Oil has sustained its pleading burden here again, as the allegations found in
Sinclair Oil’s complaint also support a claim under § 523(a)(6). Again, although not a model
complaint with many details, the complaint alleges that Martin acted through his Convenience
entities to wrongfully and intentionally cause injury to Sinclair Oil, with the intent to cause harm
to Sinclair Oil (because Martin knew he could not pay for the product he had obtained, but
deceitfully took the product to instead further his own individual financial interests). Sinclair Oil
has met the pleading standards of Rule 8(a), and Martin’s motion to dismiss this claim must also
be denied.

D. § 727 Claim
Finally, Sinclair Oil’s complaint purports to state a claim under § 727, although no
factual support or any attempts to meet the elements of a § 727 claim is made in the complaint.
Wisely, in response to Martin’s motion to dismiss, Sinclair Oil abandons this claim. As a result,
Martin’s motion to dismiss this claim is granted, without prejudice.

III. Conclusion
For the reasons set forth above, the Court finds that Plaintiff has stated just enough facts
to support its claims under §§ 523(a)(2)(A) and (a)(6), and the Court denies Defendant’s motion

-10 14.02.25
Sinclair Oil v. Martin MTD.wpd
Case 12-06127 Doc# 20 Filed 02/26/14 Page 10 of 11


to dismiss as to the § 523 claims. Because Plaintiff has chosen not to pursue its § 727 claim,
however, the Court grants the motion to dismiss, without prejudice, as to that claim.
It is, therefore, by the Court ordered that Defendant Martin’s Motion to Dismiss is
DENIED IN PART and GRANTED IN PART, as stated more fully herein.
IT IS SO ORDERED.
###
ROBERT D. BERGER

U.S. BANKRUPTCY JUDGE
DISTRICT OF KANSAS
-11 14.02.25
Sinclair Oil v. Martin MTD.wpd
Case 12-06127 Doc# 20 Filed 02/26/14 Page 11 of 11

You are here: Home Opinions Judge Berger 12-06127 Sinclair Oil Corporation v. Martin, Jr (Doc. # 20)