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Judge Berger

13-06082 Clay-Platte Development Corporation v. Jones et al (Doc. # 40)

Clay-Platte Development Corporation v. Jones et al, 13-06082 (Bankr. D. Kan. Apr. 25, 2014) Doc. # 40

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The relief described hereinbelow is SO ORDERED.
SIGNED this 25th day of April, 2014.


IN THE UNITED STATES BANKRUPTCY COURT
FOR THE DISTRICT OF KANSAS

In re:

RANDALL SCOTT JONES, Case No. 13-20861-11
Debtor.

CLAY-PLATTE DEVELOPMENT CORPORATION,
Plaintiff,

v. Adv. No. 13-6082
RANDALL SCOTT JONES, RJ EQUIPMENT
LEASING LLC, and RANDALL S. JONES, D.D.S., P.A.,
Defendants.

ORDER DENYING IN PART AND CONDITIONALLY GRANTING IN PART
DEFENDANTS’ MOTION TO DISMISS


This matter is before the Court on the motion to dismiss filed by Defendants Randall S.
Jones (“Jones”), RJ Equipment Leasing LLC (“RJ Equipment”), and Randall S. Jones D.D.S.,

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P.A. (“Jones D.D.S.”).1 Defendants seek dismissal of the adversary complaint filed against them
by Plaintiff Clay-Platte Development Corporation (“Plaintiff”). The complaint sets out two
counts: one count for declaratory relief that certain collateral secures debt to the Plaintiff and
one count under 11 U.S.C. § 727(a)(4)2 for denial of discharge based on allegedly making false
statements knowingly and fraudulently. Defendants have moved to dismiss the adversary
complaint under Federal Rule of Civil Procedure 12(b)(6), arguing that Plaintiff’s allegations fail
to state a claim entitling it to relief.
The Court finds that Plaintiff has alleged sufficient facts to state a claim for relief on
count I of its complaint, but that count II of the complaint fails to address certain statutory
requirements for nondischargeability in an individual chapter 11 case. The Court therefore
denies the motion to dismiss as to count I, but grants the motion to dismiss without prejudice as
to count II.

I. Background and Findings of Fact
The parties’ business relationship began in November 2009, when Defendant RJ
Equipment applied for a loan with Plaintiff. The same day it applied for the loan, RJ Equipment
signed a promissory note and security agreement with Plaintiff on the loan, and Defendant Jones
signed a guarantee of the loan. Pursuant to these agreements, RJ Equipment gave a security

1 Doc. 9.

2 This matter is a core proceeding under 28 U.S.C. §157(b)(2)(A), (D), (G), (M), and
(O). This Court has jurisdiction under 28 U.S.C. §157 and 1334. Venue is proper pursuant to 28

U.S.C. §1408 and 1409. All future statutory references are to the Bankruptcy Code (“Code”), as
amended by the Bankruptcy Abuse Prevention and Consumer Protection Act of 2005, 11 U.S.C.
§§ 101 - 1532, unless otherwise specifically noted.
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interest to Plaintiff in all goods, furniture, fixtures, and equipment, whether owned then or
acquired thereafter, including all products and proceeds therefrom (the “collateral”). Included in
this collateral were assorted items of dental equipment. Both RJ Equipment and Jones
represented to Plaintiff that the collateral belonged to RJ Equipment.

Plaintiff’s loan to RJ Equipment was for $180,687.50. RJ Equipment agreed to repay the
loan to Plaintiff with interest, at 5.5 percent, in accordance with the terms of the parties’
agreements. Plaintiff alleges it is the first priority, perfected, secured creditor on the collateral.

Jones filed an individual chapter 11 bankruptcy petition on April 9, 2013. Neither RJ
Equipment nor Defendant Jones D.D.S. have filed for bankruptcy. In Schedule D of his
bankruptcy petition, Jones acknowledged that the collateral for the loan discussed above belongs
to RJ Equipment. Shortly after Jones’s bankruptcy petition was filed, Plaintiff filed a proof of
claim for $138,967.33 as a creditor of Jones’s chapter 11 case. Jones has filed no objection to
this proof of claim.

In Jones’s proposed bankruptcy plan, he attempts to “cram down” the loan from Plaintiff
to RJ Equipment. Plaintiff has objected within Jones’s bankruptcy case to those attempts.3
Jones has also claimed in his bankruptcy case that the collateral at issue never belonged to RJ
Equipment, and that, alternatively, the collateral was purchased by and belongs to Jones himself.
In his bankruptcy, Jones has also claimed that the collateral was never re-titled in the name of RJ

3 Recently, Jones amended his proposed chapter 11 bankruptcy plan (ECF 13-20861, 81)
to provide for surrender of the dental equipment to Plaintiff, with any remaining deficiency to be
allowed as an unsecured claim. Unsecured claimants are then to share in a pool of $5,000.
Several creditors have objected to this amended plan, and no chapter 11 plan has been confirmed
in Jones’s chapter 11 case.

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Equipment. Jones has also claimed that RJ Equipment does not file its own tax returns and that
the RJ Equipment entity has always been listed on Schedule C of Jones’s tax returns. Within its
adversary complaint, Plaintiff alleges that Jones’s statements with regard to the collateral have
been knowing and fraudulent false statements and that the false statements were material because
they concerned the parties’ business relationship and the true ownership of the collateral.

Plaintiff filed this adversary proceeding in August 2013. Defendants’ motion to dismiss
has been fully briefed, and the parties are engaging in discovery.

II. Analysis
A. Standard for Motion to Dismiss and Burden of Proof
Adversary proceedings to determine the validity, extent, or priority of liens and those
regarding objections to discharge are core proceedings under 28 U.S.C. § 157(b)(2)(K) and
§ 157(b)(2)(J) over which this Court may exercise subject matter jurisdiction.4

Defendants bring their 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 . . . .”5 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 . . . .”6 To survive a motion to
dismiss, a complaint must present factual allegations that, when assumed to be true, “raise a right

4 28 U.S.C. § 157(b)(1) and § 1334(b).
5 Rule 12 is made applicable to adversary proceedings via Federal Rule of Bankruptcy
Procedure 7012(b).
6 Rule 8 is made applicable to adversary proceedings via Federal Rule of Bankruptcy
Procedure 7008(a).
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to relief above the speculative level.”7 The complaint must contain “enough facts to state a claim
to relief that is plausible on its face.”8 “[T]he complaint must give the court reason to believe
that this plaintiff has a reasonable likelihood of mustering factual support for these claims.”9

The plausibility standard does not require a showing of probability that a defendant has
acted unlawfully, but requires more than “a sheer possibility.”10 “[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.”11 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.12

B. Declaratory Relief; Security of Collateral
Count I of Plaintiff’s complaint seeks a declaratory judgment under 28 U.S.C. § 2201 and
11 U.S.C. § 506(a) that Plaintiff holds a secured claim in the collateral to the full extent of the
value of the collateral and that the collateral belongs to RJ Equipment and not to Jones or Jones

D.D.S. Defendants seek dismissal of count I under Rule 12(b)(6), but then argue only that both
7 Bell Atl. Corp. v. Twombly, 550 U.S. 544, 555 (2007).

8 Id. at 570.

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

(emphasis in original).

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

11 Kan. Penn Gaming, LLC v. Collins, 656 F.3d 1210, 1214 (10th Cir. 2011) (quoting

Twombly, 550 U.S. at 555).
12 Iqbal, 556 U.S. at 678 (citing Twombly, 550 U.S. at 556).
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RJ Equipment and Jones D.D.S. are property of Jones’s chapter 11 bankruptcy estate and,
therefore, any argument made by Plaintiff regarding the “cram down” of the collateral cannot be
supported.

The Declaratory Judgment Act gives courts “the ability to declare the rights and other
legal relations of interested parties . . . .”13 To state a claim under the Declaratory Judgment Act,
a plaintiff must “show that there is substantial controversy, between parties having adverse legal
interests, of sufficient immediacy and reality to warrant the issuance of a declaratory
judgment.”14 To succeed on such a claim, a plaintiff must “show a ‘good chance’ that he will be
injured by the defendant’s conduct in the future.”15 A plaintiff can, however, “seek declaratory
relief before actual harm occurs if [he] has a reasonable apprehension of that harm occurring.”16

In count I of its complaint, Plaintiff alleges that an actual controversy exists as to the
ownership of the collateral. Plaintiff’s complaint details an alleged contractual relationship
between the parties: the date of the alleged contract, the identities of the parties to that contract,
the particulars of the parties’ arrangement, and the alleged security given. Plaintiff also details
the alleged obligations the parties made to each other with respect to the collateral. Plaintiff then
details the controversy over the statements made by Jones in his bankruptcy. It is clear from

13 United States v. Sec’y of Kansas, Case No. 03-1170-JTM, 2003 WL 22472226, at *2

(D. Kan. Oct. 3, 2003).
14 Super Tire Eng’g Co. v. McCorkle, 416 U.S. 115, 122 (1974) (internal quotation marks
omitted) (quoting Maryland Casualty Co. v. Pacific Coal & Oil Co., 312 U.S. 270, 273 (1941)).
15 Al-Ibrahim v. Hadid, Case No. CIV. A. 96-B-2429, 1997 WL 606283, at *4 (D. Colo.
Apr. 10, 1997) (citing Cox v. Phelps Dodge Corp., 43 F.3d 1345, 1347 (10th Cir. 1994)).
16
United States v. Colo. Supreme Court, 87 F.3d 1161, 1166 (10th Cir. 1996).
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these facts that the parties dispute the ownership of, and security in, the alleged collateral,
creating a substantial controversy that is immediate and real. As a result, the parties have
adverse legal interests. Plaintiff’s complaint also sets out how Plaintiff is injured by the alleged
behavior of Defendants, asserting that Jones seeks to value the collateral in his bankruptcy far
lower than Plaintiff contends the collateral should be valued and seeking an order from this
Court concerning the secured status and value of that collateral.

Defendants’ motion does not address the facts as plead, but instead seeks to debate the
true ownership of the collateral, the ownership of RJ Equipment and Jones, D.D.S, and the
contours of Jones’s bankruptcy estate property. For example, Defendants’ motion debates the
ownership of the shares of RJ Equipment and Jones, D.D.S, and also argues that “RJ Equipment
has never had a meaningful separate existence.”17 Defendants’ response then alleges additional
facts regarding the formation of RJ Equipment, the tax status of RJ Equipment, the leadership of
that entity, and the facts surrounding Jones’s divorce.18 Whatever the facts may ultimately prove
to be, the veracity of the facts supporting Plaintiff’s claim are not currently before this Court.
On a Rule 12(b)(6) motion to dismiss, the Court must assume the facts in the complaint are true,
then assess whether those facts are sufficient to support a claim. Here, Plaintiff has plead
sufficient facts to support its claim under the Declaratory Judgment Act. Defendants’ motion to
dismiss does not address the elements of Plaintiff’s claim, but instead argues the facts, which is

17 Doc. 9, 4 ¶ 8.
18 Id. ¶ 9.
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inappropriate at the motion to dismiss stage.19 The Court determines only that Plaintiff’s
complaint sufficiently states a claim for relief on count I. As a result, Defendants’ motion to
dismiss count I of Plaintiff’s complaint must be denied.

C. Denial of Discharge Under § 727(a)(4)
Count II of Plaintiff’s complaint seeks to deny a discharge to Jones under 11 U.S.C.
§ 727(a)(4), which denies a discharge to a debtor who “knowingly and fraudulently, in or in
connection with the case--(A) made a false oath or account; [or] (B) presented or used a false
claim[.]” Defendants seek dismissal of count II by denying that Jones concealed anything or that
he made any statement with fraudulent intent. Plaintiff responds by going through the elements
required under § 727(a)(4), alleging it has plead sufficient facts on each element.

To state a claim under § 727(a)(4), Plaintiff bears the burden of showing, by a
preponderance of the evidence, that Jones “knowingly and fraudulently” made an oath or false
claim and that the oath or false claim “relates to a material fact.”20 There are, therefore, two
prongs to the § 727(a)(4) inquiry: a knowingly and fraudulently made oath or false statement
and materiality.

The first prong requires that the oath or false claim be knowingly and fraudulently made:
“A debtor will not be denied discharge if a false statement is due to mere mistake or
inadvertence.”21 However, “reckless indifference to the truth has consistently been treated as the

19 See Iqbal, 556 U.S. at 678 (citing Twombly, 550 U.S. at 556) (stating that a
complaint’s factual matter must be “accepted as true” when analyzing a motion to dismiss).
20 Gullickson v. Brown (In re Brown), 108 F.3d 1290, 1294–95 (10th Cir. 1997).
21 Id. at 1294.
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functional equivalent of fraud for purposes of § 727(a)(4)(A).”22 Because a debtor is ordinarily
the only person able to directly state his intent, “fraudulent intent may be deduced from the facts
and circumstances of a case.”23 Cases in the Tenth Circuit have found that a knowingly and
fraudulently made “omission of assets from a Statement of Affairs or schedule may constitute a
false oath under section 727(a)(4)(A).”24

The second prong of the § 727(a)(4) claim deals with materiality. “A statement or
omission is material under § 727(a)(4) if it bears a relationship to the debtors’ business
transactions, or if it concerns the discovery of assets, business dealings, or the existence or
disposition of the debtor’s [sic] property.”25 Under this definition, the existence and disposition
of property has been considered a material fact.26

Plaintiff’s complaint alleges sufficient facts to support a § 727(a)(4) claim. Plaintiff
alleges false statements from Jones and/or RJ Equipment regarding the ownership of the
collateral. Specifically, Plaintiff alleges that Jones knowingly and fraudulently made false
statements either at the time the loan agreements between the parties were signed or at the time

22 U.S. Trustee v. Garland (In re Garland), 417 B.R. 805, 815 (B.A.P.10th Cir. 2009)
(internal quotation marks omitted) (quoting Cadle v. King (In re King), 272 B.R. 281, 302
(Bankr. N.D. Okla. 2002)).

23 Job v. Calder (In re Calder), 907 F.2d 953, 955-56 (10th Cir. 1990). Courts in the
Tenth Circuit analyze “badges of fraud” to identify fraudulent intent. See In re Garland, 417

B.R. at 815 (listing “badges of fraud”).
24 In re Calder, 907 F.2d at 955.
25 Freelife Int’l, LLC v. Butler (In re Butler), Case Nos. UT-06-077, 04-27637-JAB,
04P-3012-JAB, 2007 WL 866660, at *8 (B.A.P. 10th Cir. 2007).
26 In re Calder, 907 F.2d at 955.
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Jones signed his sworn bankruptcy petition schedules. Plaintiff alleges that Jones knew these
statements were false and that Jones purposefully made the false statements concerning a
material matter. Plaintiff alleges that the false statements were material because they concerned
the discovery of assets, the parties’ business dealings, and the existence or disposition of the
collateral at issue. Plaintiff alleges it is harmed by Jones’s false statements due to Jones’s efforts
to cram down the loan from Plaintiff to RJ Equipment by changing the value of the debt based
on the value of the collateral securing the loan.

Plaintiff’s complaint therefore alleges all elements necessary to state a claim for relief
under § 727(a)(4). As discussed above, Defendants contend that the facts do not support
Plaintiff’s claims, arguing that there was no concealment or fraudulent intent by Jones. As also
discussed above, this is not an appropriate argument in a motion to dismiss based on failure to
state a claim.27 The parties’ factual disputes must be fleshed out through discovery, and the
Court will address them at the appropriate time. Here, it is sufficient that Plaintiff has given
Defendants fair notice of the facts underlying its § 727(a)(4) allegation.28

Although not raised by Defendants, this Court recognizes that Plaintiff’s complaint’s
request for an order denying Jones a discharge is incomplete. Jones’s bankruptcy case is an
individual chapter 11 case under the Bankruptcy Code. Section 1141(d)(3) therefore requires

27 See Ashcroft v. Iqbal, 556 U.S. 662, 678 (2009) (citing Bell Atl. Corp. v. Twombly, 550

U.S. 544, 556 (2007)) (stating that a complaint’s factual matter must be “accepted as true” when
analyzing a motion to dismiss).
28 See Twombly, 550 U.S. at 555 (citing Conley v. Gibson, 355 U.S. 41, 47 (1957))
(requiring that a complaint give a defendant ‘fair notice” of the claim and the grounds for that
claim).

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more before the § 727(a) bars to discharge apply. Specifically, § 1141(d)(3) states that
“confirmation of a plan does not discharge a debtor if” three elements are met:

(A) the plan provides for the liquidation of all or substantially all of the property
of the estate;
(B) the debtor does not engage in business after consummation of the plan; and
(C) the debtor would be denied a discharge under section 727(a) of this title if the
case were a case under chapter 7 of this title.

The Tenth Circuit B.A.P. has concluded that “[a]ll three elements of § 1141(d)(3) must be
established before a Chapter 11 debtor’s discharge may be denied. A Chapter 11 discharge
cannot be denied solely on the ground that the debtor would have been denied a discharge under
Chapter 7.”29

Plaintiff’s complaint seeks to deny Jones a discharge solely under § 727(a)(4), without
any reference to the additional elements required for denial of discharge under § 1141(d)(3). As
a result, as currently stated, count II of Plaintiff’s complaint fails to plead all of the necessary
statutory requirements for denial of discharge.

Defendants’ motion to dismiss should be granted for Plaintiff’s failure to state a claim for
relief because count II of the complaint fails to address the required statutory elements for denial
of discharge in an individual chapter 11 case. The Court therefore grants without prejudice
Defendants’ motion to dismiss as to count II.30

29 Torrington Livestock Cattle Co. v. Berg (In re Berg), 423 B.R. 671, 677 (B.A.P. 10th
Cir. 2010) (citations omitted).

30 Apparently recognizing this infirmity, the Plaintiff filed a motion to dismiss count II of
its complaint on April 4, 2014 (Doc. 38). Plaintiff’s motion to dismiss is denied as moot.

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III. Conclusion
For the reasons set forth above, the Court denies Defendants’ motion to dismiss count I
of Plaintiff’s complaint. Plaintiff has alleged sufficient facts to support count I of its complaint
and has put Defendants on notice of the case made against them. The Court, however, grants
Defendants’ motion to dismiss as to count II of Plaintiff’s complaint.

It is, therefore, by the Court ordered that Defendants’ motion to dismiss is denied in
part and granted in part.
IT IS SO ORDERED.
###
ROBERT D. BERGER

U.S. BANKRUPTCY JUDGE
DISTRICT OF KANSAS
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