# Barrett v. Storm

> United States Bankruptcy Court, N.D. Georgia · March 27, 2024

URL: https://www.frixlaw.com/law-library/cases/10457076

## Case

- **Court:** United States Bankruptcy Court, N.D. Georgia
- **Decided:** March 27, 2024
- **Opinion:** 100trialcourt
- **Cited by:** 0 later opinions in the Frix Law Library

## Citator (automated)

- No negative treatment found by the automated citator. That is not the same as a confirmation that the case is good law; read the citing cases.
- Full citator and citing cases: https://www.frixlaw.com/law-library/cases/10457076

## How later opinions describe it (automated extraction)

- concluding that the “the language contained in the sales agency agreement, evidencing a trust, is mere boiler plate,” and “in looking at the substance of the relationship between the parties, the specific intent to create an express trust (fiduciary relationship

## Opinion text

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Lisa Ritchey Craig
U.S. Bankruptcy Court Judge

UNITED STATES BANKRUPTCY COURT
NORTHERN DISTRICT OF GEORGIA
ATLANTA DIVISION
IN THE MATTER OF: : CASE NUMBERS
ROBERT STORM, : BANKRUPTCY CASE
: 23-55028 LRC
Debtor.

CRAIG BARRETT, : ADVERSARY PROCEEDING
: NO. 23-05167-LRC
Plaintiff, :
V. :
ROBERT STORM, : IN PROCEEDINGS UNDER
CHAPTER 7 OF THE
Defendant. : BANKRUPTCY CODE
ORDER
Before the Court is the Motion to Dismiss Complaint for Failure to State a Claim
upon which Relief May be Granted (Doc. 4) (the “Motion’) filed by Robert Storm
(“Defendant”). The Motion seeks dismissal, pursuant to Rule 7012 of the Federal Rules of

Bankruptcy Procedure, of the amended complaint (Doc. 1, the “Complaint”) filed by Craig
Barrett (“Plaintiff”). The Complaint seeks a determination that a debt owed by Defendant
to Plaintiff is nondischargeable under 11 U.S.C. §§ 523(a)(2)(A), (a)(4), and (a)(6).

Accordingly, this matter constitutes a core proceeding over which this Court has subject
matter jurisdiction. See 28 U.S.C. §§ 157(b)(2)(I); § 1334. Plaintiff opposes the Motion
but has, in its response, moved to dismiss the § 523(a)(2)(A) claim (Count V) without
prejudice, leaving only the §§ 523(a)(4) and (a)(6) claims for analysis. As the Court
concludes that the Complaint fails to state a claim under § 523(a)(4) (Count VI), the Court

will grant the Motion as to Count V and VI but will deny it as to the § 523(a)(6) claim
(Count VII).
Facts1
On or about February 6, 2019, BinaNat Capital, LLC, a Georgia limited liability
company (“BinaNat”) made a loan to Lewis & Finch, LLC, secured by property on

Haygood Avenue in Atlanta, Georgia, in the amount of $308,750 (the “First Loan”).
Defendant is the sole member of BinaNat, which is also the debtor in a separate bankruptcy
case filed with this Court (Case No. 23-55019-LRC). On or about February 14, 2020,
BinaNat made a loan to ATL Flipsters, LLC, secured by property on Eason Street in
Atlanta, Georgia, in the amount of $188,500 (the “Second Loan”). In March 2019, BinaNat

made another loan which was secured by property on Edgewater Avenue in Atlanta,

1  The Court has taken the facts from the allegations of the Complaint. See generally Intravisual Inc. v.
Fujitsu Microelectronics Am. Inc., 2011 WL 1004873, at *5 (E.D. Tex. Mar. 18, 2011) (holding that
“allegations pled on ‘information and belief’ should be reviewed in the same way as all factual allegations
in a Complaint” such that, the “mere fact that allegations begin with the statement ‘on information and
belief’ will not automatically render them insufficient”).
Georgia (the “Third Loan,” together with the First Loan and Second Loan, hereinafter
referenced as the “Loans”). BinaNat transferred and assigned to Plaintiff 16.9% or $50,000
of the First Loan, 26.53% or $50,000 of the Second Loan and $75,000 of the Third Loan,

for a total investment by and assignment to Plaintiff of $175,000, pursuant to certain
Servicing Agreements (the “Servicing Agreements”) dated February 6, 2019, February 14,
2020, and March 2019.
The Servicing Agreements also provided that BinaNat would service the Loans for
the direct benefit of Plaintiff. Pursuant to the Servicing Agreements, BinaNat and

Defendant guaranteed to and in favor of Plaintiff all of the respective obligations of the
borrowers under the Loans. The Loans were subsequently repaid to BinaNat and Defendant
in full, but contrary to Defendant’s and BinaNat’s obligations under the Servicing
Agreements, the proceeds of the Loans were retained by Defendant and BinaNat and not
paid to Plaintiff. Prior to the filing of the above bankruptcy proceedings, Plaintiff made

multiple demands to BinaNat and Defendant for payment of the proceeds of the Loans, but
Defendant and BinaNat have failed and refused to make such payments.
Legal Standards
The Motion is brought pursuant to Rule 12(b)(6) of the Federal Rules of Civil
Procedure, made applicable to this adversary proceeding by Rule 7012 of the Federal Rules

of Bankruptcy Procedure. Dismissal of a complaint is appropriate if it fails “to state a claim
upon which relief can be granted.” Fed. R. Civ. P. 12(b)(6). Whether a complaint states a
claim must be considered in relation to Rule 8(a), which requires a pleading contain a “short
and plain statement of the claim showing that the pleader is entitled to relief.” Fed. R. Civ.
P. 8(a)(2). This standard “does not require ‘detailed factual allegations,’ but it demands
more than an unadorned, the-defendant-unlawfully-harmed-me accusation.” Ashcroft v.
Iqbal, 556 U.S. 662, 678, 129 S. Ct. 1937, 1949, 173 L. Ed. 2d 868 (2009) (citing Bell Atl.

Corp. v. Twombly, 550 U.S. 544, 127 S.Ct. 1955, 167 L.Ed.2d 929 (2007)). The complaint
must contain “sufficient factual matter, accepted as true, to ‘state a claim to relief that is
plausible on its face.’ 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.” Id.

Relevant to this case, however, under Rule 9(b), allegations of fraud must be pled
with particularity, but “[m]alice, intent, knowledge, and other conditions of a person's mind
may be alleged generally.” Fed. R. Civ. P. 9(b). “Rule 9(b) is satisfied if the complaint sets
forth ‘(1) precisely what statements were made in what documents or oral representations
or what omissions were made, and (2) the time and place of each such statement and the

person responsible for making (or, in the case of omissions, not making) same, and (3) the
content of such statements and the manner in which they misled the plaintiff, and (4) what
the defendants obtained as a consequence of the fraud.’” Tello v. Dean Witter Reynolds,
Inc., 494 F.3d 956, 972 (11th Cir. 2007) (quoting Ziemba v. Cascade Int'l, Inc., 256 F.3d
1194, 1202 (11th Cir. 2001)). “‘[A]lternative means are also available to satisfy the rule’

in substantiating fraud allegations.” Tello, 494 F.3d at 972-73.
A court must accept all well-pled facts as true and must construe those facts and the
complaint in the light most favorable to the plaintiff but need not accept legal conclusions.
Mink v. Smith & Nephew, Inc., 860 F.3d 1319, 1324 (11th Cir. 2017); Fourth Estate Pub.
Benefit Corp. v. Wall-Street.com, LLC, 856 F.3d 1338, 1339 (11th Cir. 2017). Here, the
Complaint seeks a determination that the debt owed by Defendant to Plaintiff is
nondischargeable under §§ 523(a)(4) and (a)(6). “[T]he claims of fraud or defalcation

while acting as a fiduciary under § 523(a)(4) are governed by the heightened pleading
standards of Rule 9, while Plaintiff's claims for . . . embezzlement under § 523(a)(4) and
the claims under § 523(a)(6) are governed by Rule 8.” In re Wells-Lucas, 2021 WL
1234454, at *1–2 (Bankr. N.D. Ga. Mar. 31, 2021); see also In re Presley, 490 B.R. 633,
639 (Bankr. N.D. Ga. 2013) (“Rule 9's heightened pleading standard does not apply to

allegations of embezzlement . . . under this section.”).
Analysis
Defendant submits that “the Complaint does not allege any facts to support the
conclusions of misconduct.” The Court notes that the Complaint does state that “[t]he
Loans were subsequently repaid to BinaNat and [Defendant] in full, but contrary to

[Defendant] and BinaNat’s obligations under the Servicing Agreements, and constituting
an act of theft, conversion and embezzlement, the proceeds of the Loans were retained by
[Defendant] and BinaNat and not paid to Plaintiff.” These, however, are legal conclusions,
not facts. According to Defendant, the Complaint should include such facts as the “dates
[Defendant] purportedly took money from BinaNat for himself, or any allegations of

specific amounts of money that [Defendant] took out of BinaNat for himself, or any
allegations providing details of the alleged theft, fraud, embezzlement, etc. such as whether
it was purportedly by means of checks, or wire transfers, or some other process.” In
response, Plaintiff acknowledges that Rule 9 applies to its fiduciary fraud claim but
cautions that [s]trict applications of Rule 9(b) prior to discovery are impermissible because
they may allow sophisticated defrauders to conceal details of their fraud and avoid
liability,” citing Jou v. Adalian (In re Adalian), 474 B.R. 150, 158 (Bank. M.D. Pa. 2012).

Plaintiff submits that its general allegations that Defendant and BinaNat received Plaintiff’s
property and did not remit it to Plaintiff are sufficient to permit the Court to infer that
Defendant acted knowingly and with fraudulent intent and that Plaintiff used the funds in
a manner inconsistent with Plaintiff’s rights. Further, Plaintiff urges the Court to find that
the Complaint alleges sufficient facts to establish, for purposes of § 523(a)(6), that

Defendant acted willfully and maliciously when he failed to remit the funds to Plaintiff.
The Court agrees with Defendant that the Complaint, as pled, is insufficient to state
a claim for relief under § 523(a)(4). As to the § 523(a)(4) claim, Plaintiff seeks a
determination that the debt is one for fraud or defalcation while acting in a fiduciary
capacity and embezzlement. “For a debt to be nondischargeable based upon [fraud or]

defalcation while acting in a fiduciary capacity, the debtor must have stood in a fiduciary
relationship with the creditor alleging nondischargeability of the debt; the fiduciary
relationship must have existed prior to the creation of the debt; and the debt must have
resulted from some act of fraud or defalcation by the debtor.” In re Riddle, 2011 WL
2461896, at *3 (Bankr. N.D. Ga. Apr. 6, 2011) (citing Quaif v. Johnson (In re Quaif), 4

F.3d 950, 953–955 (11th Cir.1993)). “In this circuit, a three-part test determines whether
a debtor acted ‘in a fiduciary capacity’ based on a fiduciary relationship created by a
contract or statute.” In re Godwin, 651 B.R. 392, 397 (M.D. Fla. 2023) (citing In re
Forrest, 47 F.4th 1229, 1241 (11th Cir. 2022). “First, ‘the fiduciary relationship must have
(1) a trustee, who holds (2) an identifiable trust res, for the benefit of (3) an identifiable
beneficiary.’ Second, a contract or statute ‘must define sufficient trust-like duties imposed
on the trustee,’ the most important being ‘the duty to segregate trust assets and the duty to

refrain from using trust assets for a non-trust purpose.’ Finally, the fiduciary relationship
must exist before the act of fraud or defalcation and cannot arise from the act.” Id. (internal
citations omitted). If the Complaint alleges facts to support a claim that Defendant
embezzled Plaintiff’s property, Plaintiff need not rely on the existence of a fiduciary
relationship to prevail under § 523(a)(4). See In re Wells-Lucas, 2021 WL 1234454, at *9

(Bankr. N.D. Ga. Mar. 31, 2021) (“Plaintiff must prove only one of the three to succeed.”).
Embezzlement is the “fraudulent appropriation of property by a person to whom such
property has been entrusted, or into whose hands it has lawfully come.” Ga. Dep't Human
Servs. v. Ngwangu (In re Ngwangu), 529 B.R. 358, 365 (Bankr. N.D. Ga. 2015) (quoting
Fernandez v. Havana Gardens, LLC, 562 F. App’x. 854, 856 (11th Cir. 2014)). To

establish embezzlement, “Plaintiff must show improper use of property of another that is
lawfully in the debtor's possession.” In re Logan, 2015 WL 4940041, at *7 (Bankr. N.D.
Ga. July 1, 2015). “‘Thus, to amount to embezzlement, conversion must be committed by
a perpetrator with fraudulent intent.’” In re McQuillin, 509 B.R. 773, 785 (Bankr. D. Mass.
2014) (quoting In re Sherman, 603 F.3d 11, 13 (1st Cir. 2010)). “Fraudulent intent may be

determined from the facts and circumstances surrounding the act.” In re Veneziano, 615
B.R. 666, 677 (Bankr. D. Conn. 2020).
As to the § 523(a)(6) claim, § 523(a)(6) states that a debt may be excepted from
discharge “for willful and malicious injury by the debtor to another entity or to the property
of another entity.” 11 U.S.C. § 523(a)(6). A finding of “willfulness” requires “‘a showing
of an intentional or deliberate act, which is not done merely in reckless disregard of the
rights of another.’” Maxfield v. Jennings (In re Jennings), 670 F.3d 1329, 1334 (11th Cir.

2012) (citing Hope v. Walker (In re Walker), 48 F.3d 1161, 1163 (11th Cir. 1995));
Kawaauhau v. Geiger, 523 U.S. 57, 61–62, 118 S.Ct. 974, 140 L.Ed.2d 90 (1998)) (“An
injury is willful when the injury itself was ‘deliberate or intentional’ and not merely the
result of an intentional act that resulted in injury.”). Accordingly, to be willful, the debtor
must commit “an intentional act the purpose of which is to cause injury or which is

substantially certain to cause injury.” Jennings, 670 F.3d at 1334. Malicious means
“‘wrongful and without just cause or excessive even in the absence of personal hatred, spite
or ill-will.’” Id. (citing Walker, 48 F.3d at 1164). No proof of “specific intent to harm
another” is necessary to establish malice. Id.
Defendant asserts that the Complaint contains insufficient facts to establish a claim

that Defendant owes it a debt arising from defalcation in a fiduciary capacity, theft, or
embezzlement, or a debt arising from willful and malicious injury. As the Court
understands the facts of this matter, having read the Complaint and its attachments,
including a representative servicing agreement, Plaintiff alleges it purchased an interest in
the Loans that BinaNat made to borrowers and BinaNat agreed to act as Plaintiff’s agent

to collect and remit the payments made by borrowers on the Loans. Plaintiff asserts that
BinaNat assigned the loans to Plaintiff, such that the funds repaid on the Loans belonged
to Plaintiff. From these facts, the Court can infer that Defendant understood that neither
he nor BinaNat was the owner of the Loans and that, when the funds were repaid, he did
not have the right to keep the money. But there are simply insufficient facts from which
the Court can infer fraudulent intent for purposes of establishing embezzlement. Rather,
the Complaint “simply makes the conclusory statement that [Defendant’s] acts constitute

embezzlement.,” and the Court “does not have to accept conclusions as true for purposes
of Rule 12(b)(6).” In re Sorge, 566 B.R. 369, 381 (Bankr. E.D.N.C. 2017). The simple
fact that someone failed to pay money to its rightful owner does not establish that he did
so with fraudulent intent. The Court recognizes that fraudulent intent is often inferred from
the circumstances. But the Complaint is very “bare bones.” For example, it contains no

additional facts suggesting that Defendant acted in a surreptitious manner or otherwise
attempted to conceal his actions, and it lacks any facts regarding what Defendant did with
the funds. Without any additional facts, the Court cannot infer fraudulent intent.
As to whether Defendant was acting in a fiduciary capacity, Plaintiff fails to argue
this point, stating simply that “Plaintiff’s allegations do not require establishing a fiduciary

relationship, though it is likely that Defendant’s obligations under the servicing agreement
do create such a relationship.” The Court cannot agree that the Servicing Agreement
supports a finding that Defendant acted in a fiduciary capacity. Standing alone, an agent-
principal relationship is insufficient to establish the type of fiduciary duty contemplated by
§ 523.” In re Fravel, 485 B.R. 1, 16 (Bankr. D. Mass. 2013); In re Heister, 290 B.R. 665,

673 (Bankr. N.D. Iowa 2003) (stating that § 523(a)(4) “does not encompass ordinary
commercial relationships such as debtor-creditor or principal-agent”) (citing In re Dove,
78 B.R. 630, 633 (Bankr. M.D. Ga. 1986)); In re Ridgway, 24 B.R. 780, 785 (Bankr. D.
Kan. 1982) (“Here there clearly was no express trust agreement. The parties' contract
established contractual duties but had none of the attributes of a trust agreement such as
the duty to preserve the res through investment or the duty to segregate funds.”); In re
Dawson, 16 B.R. 343, 346 (Bankr. N.D. Ill. 1982) (“This court interprets the qualifying

terms ‘fiduciary duty’ to require proof of a technical trust between the agent and principal,
before a debt due and owing between them can be found non-dischargeable.”); In re
Parton, 137 B.R. 902, 907 (Bankr. S.D. Ohio 1991) (“Absent additional factors, §
523(a)(4) does not apply to the fraud of agents.”). A “consignment agreement creating an
agency relationship does not, by itself, establish a fiduciary relationship for purposes of §

523(a)(4).” In re Narcisi, 691 F. App'x 606, 611 (11th Cir. 2017) (citing In re Blaszak,
397 F.3d 386, 391 (6th Cir. 2005) (“[A]n agent-principal relationship standing alone is
insufficient to establish the type of fiduciary duty contemplated by § 523.”).).
Here, as Defendant points out, the Servicing Agreement did not include language
requiring Defendant to preserve any res through investment or a duty to segregate funds.

Although the servicing agreement does states that “BinaNat shall hold the escrow funds
noted above in trust for repairs and renovations to the Security and shall disburse said
escrow funds pursuant to the terms of the Loan,” the Court is not convinced that anything
in the Servicing Agreement created an express trust sufficient to satisfy the narrow
construction of “fiduciary capacity” applies to § 523(a)(4). See generally In re Chick, 53

B.R. 697, 702–03 (Bankr. D. Or. 1985) (concluding that the “the language contained in the
sales agency agreement, evidencing a trust, is mere boiler plate,” and “in looking at the
substance of the relationship between the parties, the specific intent to create an express
trust (fiduciary relationship) [was] lacking”); In re Ellis, 310 B.R. 762, 764 (Bankr. W.D.
Okla. 2004) (“[E]ven though it uses the phrase ‘in trust,’ it is insufficient as a matter of law
to create a fiduciary relationship for purposes of § 523(a)(4).”) (citing Davis v. Aetna
Acceptance Co., 293 U.S. 328, 334, 55 S.Ct. 151, 79 L.Ed. 393 (1934) (“The substance of

the transaction is this, and nothing more, that the mortgagor, a debtor, has bound himself
by covenant not to sell the mortgaged chattel without the mortgagee's approval. The
resulting obligation is not turned into one arising from a trust because the parties to one of
the documents have chosen to speak of it as a trust.”). As the Complaint fails to plead
sufficient facts to establish a claim under § 523(a)(4), the Motion will be granted as to

Count VI.
The § 523(a)(6) claim, however, is sufficiently pled. Plaintiff alleges that it gave
BinaNat money that was to be used to make loans that would be assigned to Plaintiff and
that Defendant used Plaintiff’s money for other purposes in some instances and in others,
when borrowers paid Plaintiff’s funds to BinaNat, Defendant took the money and used it

for another purpose. Plaintiff also alleges that it never received all its money back. Again,
from these facts, the Court can infer that Defendant knew that the funds did not belong to
BinaNat or Defendant and, therefore, it was a substantial certainty that failure to remit the
funds to Plaintiff would injure Plaintiff’s property interest. Although Defendant may be
able to prove that he did not act willfully or with malice, for now, these facts are sufficient

to plead a claim for conversion of Plaintiff’s property, and the “Court concludes that these
allegations satisfy the facial plausibility test of Twombly and Iqbal and are sufficient to
permit [Defendant] to prepare an answer.” In re Dodge, 623 B.R. 663, 670 (Bankr. N.D.
Ga. 2020). Accordingly, the Court will deny the Motion as to Count VII.
Conclusion
For the reasons stated above, it is hereby
ORDERED that the Motion is GRANTED in part and DENIED in part;

IT IS FURTHER ORDERED that Count V of the Complaint to determine that a
debt is nondischargeable under § 523(a)(2)(A) is DISMISSED without prejudice;
IT IS FURTHER ORDERED that Count VI of the Complaint to determine that a
debt is nondischargeable under § 523(a)(4) is DISMISSED;
IT IS FURTHER ORDERED that the remainder of the Motion is DENIED.

END OF DOCUMENT
Distribution List

Robert Storm
94 Rosehill Court
St. Augustine, FL 32092

Michael D. Robl
Robl Law Group LLC
Suite 250
3754 LaVista Road
Tucker, GA 30084

Kenneth A. Shapiro
Mitchell & Shapiro, LLP
881 Piedmont Ave NE
Atlanta, GA 30309

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Source: Frix Law Library, https://www.frixlaw.com/law-library/cases/10457076. Public record. Not legal advice.