Saleh v. Romero

UNITED STATES BANKRUPTCY COURT

DISTRICT OF NEW JERSEY

MITCHELL H. COHEN U.S. COURTHOUSE

401 Market Street

P.O. BOX 2067

CAMDEN, NJ 08101-2067

Andrew B. Altenburg, Jr. (856) 361-2320

U.S. BANKRUPTCY JUDGE

January 27, 2023

VIA CM/ECF

Aiden Murphy, Esquire Kenneth Borger, Esquire

Scura, Wigfield, Heyer & Stevens Brenner Spiller & Archer

1599 Hamburg Turnpike 125 Route 73 North

Wayne, NJ 07470 West Berlin, NJ 08091

RE: Saleh v. Romero

Adv. Pro. No. 22-1290-ABA

Dear Mr. Murphy and Mr. Borger:

DECISION

The following constitutes this court’s findings of fact and conclusions of law as required

by Federal Rule of Bankruptcy Procedure 7052.

An understanding of the procedural history of the proceeding is warranted.

This matter was originally brought before the court on October 5, 2022, by the

debtor/defendant, Antonio Romero (“Defendant”), through his motion to dismiss (Doc. No. 4) the

complaint (Doc. No. 1) of Plaintiff Malik Saleh (“Plaintiff”) in the above-referenced Adversary

Proceeding. In sum, Plaintiff alleged that he possesses a nondischargeable claim under Section

523(a)(2) of the Bankruptcy Code, and further, that the Defendant should be denied discharge

altogether under Section 727 of the Bankruptcy Code. Defendant moved to dismiss the case for

failure to state a claim on which relief may be granted and argued that allegations in the complaint

did not meet the pleading requirements imposed under the Twombly and Iqbal cases. Bell Atl.

Corp. v. Twombly, 550 U.S. 544, 555–56 (2007) and Ashcroft v. Iqbal, 556 U.S. 662, 678 (2009).

In response, as was his right under Fed. R. Bankr. P. 7015, Plaintiff timely filed an amended

complaint (Doc. No. 5). The Defendant filed his second motion to dismiss (Doc. No. 6), and

Plaintiff responded (Doc. No. 10).

On November 22, 2022, the court conducted a hearing on Defendant’s second motion to

dismiss at which time both parties, through their counsel, appeared. As the record reflects (Doc.

No. 13), the court granted the motion to dismiss because it found that the second complaint failed

to state a claim on which relief may be granted, as the threadbare allegations merely reciting the

elements of the causes of actions did not meet the pleading requirements of Twombly and Iqbal.

Id. In addition, the court expressed its concerns as to whether Plaintiff had standing, as he failed

to demonstrate how Defendant, an individual, could be liable for a corporate debt under the law.

Being a member or agent of an LLC was not enough to impose personal liability. Nevertheless, in

lieu of immediate dismissal, the court permitted Plaintiff one final opportunity to amend his

complaint. (Doc. No. 14).

On his third attempt, Plaintiff filed his Second Amended Complaint (“Second Amended

Complaint”) (Doc. No. 15). In response thereto, Defendant filed his latest motion to dismiss (the

“Motion”) (Doc. No. 16), Plaintiff responded, and the parties appeared before the court and made

arguments on January 10, 2023. With all pleadings submitted and all hearings concluded, the

record is closed, and this matter is now ripe for disposition.

A Civil Rule 12(b)(6) motion to dismiss for failure to state a claim is made applicable in

an adversary proceeding pursuant to Bankruptcy Rule 7012. Fed. R. Bankr. P. 7012; Fed. R. Civ.

P. 12(b)(6). Pursuant to Federal Rule of Civil Procedure 12(b)(6), the court may dismiss a

complaint for failure to state a claim upon which relief may be granted. Wells Fargo Equip. Fin.,

Inc. v. Alario, No. 10–37591 MBK, 2011 WL 3510865, at *2 (Bankr. D.N.J. Aug. 9, 2011). A

motion to dismiss under Civil Rule 12(b)(6) may be granted only if, accepting all well-pleaded

allegations in the complaint as true and viewing them in the light most favorable to the plaintiff, a

court concludes that plaintiff has failed to set forth “fair notice of what the claim is and the grounds

upon which it rests.” Bell Atlantic Corp. v. Twombly, 550 U.S. 544, 555 (2007) (ellipses omitted).

A complaint will survive a motion to dismiss if it “contain[s] sufficient factual matter, accepted as

true, to state a claim to relief that is plausible on its face.” Ashcroft v. Iqbal, 556 U.S. 662, 678

(2009) (internal quotation omitted). The plausibility standard requires that “the plaintiff plead[ ]

factual content that allows the court to draw the reasonable inference that the defendant is liable

for the misconduct alleged” and demands “more than a sheer possibility that a defendant has acted

unlawfully.” Id. Accordingly, “a pleading that offers labels and conclusions or a formulaic

recitation of the elements of a cause of action will not do. . . . Nor does a complaint suffice if it

tenders naked assertions devoid of further factual enhancement.” Id. (internal quotations omitted).

As they are brief, the court incorporates the facts alleged in the Second Amended

Complaint:

8. On or about January 27, 2021, Plaintiff entered into an agreement for services with

Elevated Automations LLC (“Elevated Automations”) (the “Agreement”). See

Exhibit A attached hereto.

9. As part of the Agreement, Plaintiff transferred a total of $50,000 in exchange for

Elevated Automations creation of an online marketplace for a “Shopify” store for

the purpose of selling pillows and cushions made for couches.

10. The transfers to Elevated Automations took place via $30,000 by wire transfer and

$20,000 by credit transfer.

11. Prior to entering into the Agreement, Plaintiff was in communications with

Defendant.

12. Defendant was co-founder, principal and majority owner of Elevated Automations.

See Exhibit B1 attached hereto.

13. Defendant participated in three zoom meetings between December 2020 and

January 2021. These zoom meetings demonstrated how much a “Shopify” store

could produce revenue based on investments given by Plaintiff.

14. At these zoom meetings, Defendant represented to Plaintiff that Plaintiff would see

a complete return on his investment within the first year following the investment,

and that Elevated Automations would create an online store for Plaintiff.

15. At these meetings, Defendant represented that if Plaintiff did not make his

investment back within the first year, Elevated Automations would return his entire

investment.

16. Plaintiff entered into the Agreement and did in fact pay $50,000.00 to Elevated

Automations based on all the above representations.

17. No return of Plaintiff’s investment was ever made.

18. Defendant made these statements for the sole purpose of convincing Plaintiff to

enter the Agreement.

Second Amended Complaint, ¶¶ 8–18. These facts are undisputed. It is also undisputed that

Defendant did not sign the Agreement nor did he make any guarantee thereunder. What is more,

there has been no determination by any court that Defendant is liable to Plaintiff. These facts alone,

taken as true, do not establish a cause of action under 11 U.S.C § 523(a)(2) nor do they give

standing to Plaintiff to pursue claims under Section 727 of the Bankruptcy Code.

Section 523(a)(2) Claim

However, apparently foregoing seeking personal liability for a corporate debt, Plaintiff has

alleged that Defendant personally committed fraud, in the course of the sale pitch and/or

negotiating the Agreement, under Section 523(a)(2). Section 523(a)(2) excepts from discharge

“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, other than a statement

respecting the debtor’s or an insider’s financial condition.” 11 U.S.C. § 523(a)(2). Plaintiff

specifically alleges in Count One that:

1 Exhibit B appears to be copies of text messages between the parties. However, those messages did not start until

after the Agreement was signed and their relevance is questionable.

24. Defendant represented that if Plaintiff did not see his return on investment within

the first year, Defendant’s company would return Plaintiff’s entire investment.

25. Defendant made these representations to Plaintiff knowing the representations were

false when made and Defendant made the false representation with the intent that

Plaintiff rely on said representations.

26. Defendant, as co-founder and principal of Elevated Automations, made these

representations at a time where he knew the statements were untrue based on

Elevated Automations’ solvency.

27. Based on these communications, Plaintiff entered into the Agreement and invested

$50,000 in Elevated Automations.

28. No return of investment money was ever made.

29. Plaintiff reasonably relied on Defendant’s false representations when entering into

the Agreement and transferring money to Elevated Automations.

30. Plaintiff’s reliance on Defendant’s representation was justifiable because

Defendant, as a principal and insider of Elevated Automations, had specialized

knowledge of Elevated Automations solvency.

31. Defendant never intended to repay Plaintiff’s initial investment, and Defendant

knew at the time of inducement that Elevated Automations did not have the ability

to repay the initial investment.

Second Amended Complaint, ¶¶ 24–31. Plaintiff has properly alleged the necessary elements to

establish a possible claim under Section 523(a)(2), and has wrapped allegations directly at

Defendant around those elements. These pleaded allegations, taken as true and viewing them in

the light most favorable to the Plaintiff, appear to state a claim to relief that is plausible on its face.

Iqbal, 556 U.S. 662. If true, and because the court must take the allegations as true, the court can

draw a reasonable inference that the Defendant is liable for the misconduct alleged—fraud or

misrepresentation during the sales pitch/contract negotiations. Id. And, while the court is

concerned that Plaintiff may not fully understand his ultimate burden of proof, that matter will be

left for another day. Accordingly, the Motion as to the Section 523 claim will be denied.

Section 727 Claims

Plaintiff has alleged claims against the Defendant under Section 727(a)(4)(A) and (5). In

turn, Defendant has challenged Plaintiff’s standing to bring the Section 727 claims. Importantly:

Section 727(a) provides exceptions to the general rule that bankruptcy debtors are

entitled to a discharge of their debts. Rosen v. Bezner, 996 F.2d 1527, 1531 (3d Cir.

1993). The section is construed liberally in favor of the debtor because

“[c]ompletely denying a debtor his discharge, as opposed to avoiding a transfer or

declining to discharge an individual debt pursuant to § 523, is an extreme step and

should not be taken lightly.” Id.; see Wachovia Bank, N.A. v. Spitko (In re Spitko),

357 B.R. 272, 298 (E.D. Pa. 2006) (noting that denial of a debtor’s discharge is a

harsh sanction). . . .

A party objecting to discharge bears the burden of proving those objections by a

preponderance of the evidence. Id.; Pyramid Tech. Corp. v. Cook (In re Cook), 146

B.R. 934, 940 (Bankr. E.D. Pa. 1992); see Grogan v. Garner, 498 U.S. 279, 286–

87 (1991) (determining that preponderance of the evidence is the appropriate

burden of proof governing the applicability of the Bankruptcy Code's

nondischargeability provisions). The Court has discretion in determining whether

to grant the debtor a discharge. In re Cook, 146 B.R. at 940.

In re Coven, No. 04-24703 (RTL), 2007 WL 1160332, at *5 (D.N.J. Apr. 17, 2007).

But first, Plaintiff must have standing.

As the Third Circuit has instructed when addressing the issue of standing in

bankruptcy cases, a party must demonstrate:

an “injury in fact” that is “concrete,” “distinct and palpable,” and

“actual or imminent.” Whitmore v. Arkansas, 495 U.S. 149, 155, 110

S. Ct. 1717, 109 L.Ed.2d 135 (1990). Additionally, the party must

establish that the injury “fairly can be traced to the challenged action

and is likely to be redressed by a favorable decision.” Id. (internal

quotations omitted).

In re Global Industrial Technologies, Inc., 645 F.3d at 210; see generally Lujan v.

Defenders of Wildlife, 504 U.S. 555, 560–61, 112 S.Ct. 2130, 119 L.Ed.2d 351

(1992).

“[T]he standing inquiry remains focused on whether the party invoking

jurisdiction had the requisite stake in the outcome when the suit was filed.” Davis

v. Federal Election Commission, 554 U.S. at 734, 128 S. Ct. 2759. Although a case

or controversy may exist at the time the litigation is commenced, it must continue

at every stage of a proceeding:

That restriction requires that the party invoking federal jurisdiction

have standing—the “personal interest that must exist at the

commencement of the litigation.” Friends of Earth, Inc. v. Laidlaw

Environmental Services (TOC), Inc., 528 U.S. 167, 189, 120 S. Ct.

693, 145 L.Ed.2d 610 (2000) (internal quotation marks omitted).

But it is not enough that the requisite interest exist at the outset. “To

qualify as a case fit for federal-court adjudication, ‘an actual

controversy must be extant at all stages of review, not merely at the

time the complaint is filed.’ ” Arizonans for Official English v.

Arizona, 520 U.S. 43, 67 [117 S. Ct. 1055, 137 L.Ed.2d 170] (1997).

Davis v. Federal Election Commission, 554 U.S. at 732–33, 128 S. Ct. 2759; see,

e.g., Chamber of Commerce of U.S. v. E.P.A., 642 F.3d 192, 199 (D.C. Cir. 2011).

In re Aloia, 496 B.R. 366, 377 (Bankr. E.D. Pa. 2013); see also Spokeo, Inc. v. Robins, 578 U.S.

330 (2016) (Injury-in-fact requirement for standing requires an injury that is both concrete and

particularized. Particularized means that it affects the plaintiff in a personal and individual way.

Concrete means de facto—that it actually exists. A concrete injury may be tangible or intangible,

and can include the risk of real harm. Just because Congress grants a cause of action does not mean

that the plaintiff has standing for violation of the procedural right. Plaintiffs must allege a harm

that is “actual or imminent” rather than speculative to have federal court standing); In re Wilton

Armetale, Inc., 968 F.3d 273, 280–81 (3d Cir. 2020) (distinguishing between constitutional

standing, and “bankruptcy standing,” i.e., ability to bring an action under the Code).

To be sure, negotiating a contract on behalf of an LLC does not, as a matter of law, give

rise to a claim for personal liability. Corp. Incentives, Inc. v. Unified Safe Guard, LLC, No. CV

20-13471, 2021 WL 2043092, at *2 (D.N.J. May 21, 2021), reconsideration denied, No. CV 20-

13471 (FLW), 2021 WL 2666667 (D.N.J. June 29, 2021). In addition, Plaintiff’s counsel conceded

that Defendant was not acting outside the scope of his role as a principal of the LLC. Audio of

1/10/23 hearing at 2:31 p.m. So, where’s the standing for Plaintiff to pursue claims under Section

727 of the Bankruptcy Code?

Certainly, under Section 727 “[t]he trustee, a creditor, or the United States trustee may

object to the granting of a discharge under subsection (a) of this section.” 11 U.S.C. 727(c)(1)

(emphasis added). Section 727(c)(1) is all-inclusive in terms of who may object to discharge under

727(a). In re Coven, 2007 WL 1160332, at *11 n.3. However, the Plaintiff must then establish that

he is a creditor. His creditor status is premised on his fraudulent inducement claim against the

debtor.

But that raises a Catch-22. If the Plaintiff is not successful in proving his fraudulent

inducement claim, then he will not be a creditor for purposes of bankruptcy standing under Section

727(c). See In re Wilton Armetale, Inc., 968 F.3d 273, 280 (3d Cir. 2020) (distinguishing between

constitutional standing, and “bankruptcy standing,” i.e., the ability to bring an action under

[Section 727]).

If the Plaintiff is successful, however, the fact that his claim will then be nondischargeable

pursuant to Section 523(a) eviscerates his constitutional standing, as he will no longer suffer an

injury-in-fact by the debtor’s Section 727 discharge—the Plaintiff’s claim will not be discharged

regardless. See In re Santos, 1:20-BK-12993-SDR, 2022 WL 4474127, at *6 (Bankr. E.D. Tenn.

Sept. 26, 2022) (“A denial of discharge under Section 727(a) affects all creditors, but plaintiff

cannot act for other creditors unless her actions also would help her[.]”); In re Brown, 18-10617-

JLG, 2018 WL 4637465, at *4 (Bankr. S.D.N.Y. Sept. 25, 2018) (“A creditor like Jennifer, who

holds only a non-dischargeable claim against the Debtor, is not similarly situated. She will neither

suffer an injury if the Debtor receives his bankruptcy discharge, nor realize a benefit if he is denied

his discharge. [Therefore,] she lacks standing to bring the claims against the Debtor in Count 1 of

the Complaint.”): BRite Fin. Servs., LLC v. Spearman (In re Spearman), Nos. 17-41184, 17-04353,

2017 Bankr. LEXIS 3472, at *4-5 (Bankr. E.D. Mich. Sep. 12, 2017) (“the Plaintiff lacks standing

in this adversary proceeding. Plaintiff no longer has a personal stake in this controversy as it can

gain nothing for itself beyond the relief already obtained pursuant to §523(a)(6). Plaintiff received

the entire relief sought in this action and its requested relief under §727(a)(2) is moot.”). See also

In re Mapley, 437 B.R. 225 (Bankr. E.D. Mich. 2010) (footnotes omitted):

It follows that the relief Plaintiff seeks in this adversary proceeding would give her

nothing she does not already have—what she already has is a claim against the

Debtor that will not be discharged in the Debtor's Chapter 7 case. Thus, Plaintiff

can gain nothing for herself by blocking the Debtor's discharge under § 727. And

Plaintiff does not have standing to object to the Debtor's discharge solely on behalf

of other creditors.

Id., 228–29. Likewise, if Plaintiff is ultimately successful here, he can gain nothing for himself

beyond the relief already obtained and, moreover, he does not have standing to object to the

Debtor's discharge solely on behalf of other creditors in this case – none of whom have sought the

extraordinary or extreme step of objecting to the Defendant’s discharge.

Accordingly, the court will dismiss Counts 2 and 3.

An appropriate order has been entered consistent with this decision and has been entered

on the court’s docket and served electronically via the court’s case management system.

/s/ Andrew B. Altenburg, Jr.

United States Bankruptcy Judge