The Fifth Circuit taught a lesson in how to plead nondischargeability for fraud under Section 523(a)(2).
Pleading fraud in general terms won’t cut the mustard. Likewise, merely asking for permission to replead won’t necessarily prevent dismissal for failure to state a claim under Rule 12(b)(6).
A homeowner entered into a contract for a builder to construct his home. Disagreements were followed by termination of the contract and a settlement agreement where the builder signed an affidavit swearing that all subcontractors had been paid.
Evidently, the affidavit was inaccurate. After the builder filed a chapter 7 petition, the homeowner sued for nondischargeability under Section 523(a)(2)(A), alleging that the affidavit was false in saying that all subcontractors had been paid.
In addition to alleging that the affidavit was false, the complaint only alleged that subcontractors were not paid, that the builder knew the affidavit was false, and that the builder intended for the homeowner to rely on the affidavit.
The builder-debtor filed a motion to dismiss for failure to state a claim, which the bankruptcy court granted. The bankruptcy judge also denied a motion for leave to amend the complaint. The district court affirmed, prompting the homeowner’s appeal to the Fifth Circuit.
In a per curiam opinion on July 11, the Fifth Circuit upheld the bankruptcy court.
Although conclusory allegations ordinarily might suffice, heightened pleading requirements kick in under Federal Rule 9(b) and Bankruptcy Rule 7009 when the complaint alleges fraud. The appeals court said that the “plaintiff must lay out ‘the who, what, when, where, and how’ of the alleged fraud.”
The Fifth Circuit’s nonprecedential opinion said that the heightened pleading requirements were not met by the “barebones assertion” in the complaint “that certain subcontractors were not paid, or, more importantly, any explanation of how [the contractor’s] actions harmed [the homeowner] is conclusory.” Consequently, the appeals court held that the bankruptcy court properly dismissed under Rule 12(b)(6).
The appeals court seemed to be hinting that the homeowner should have listed subcontractors who were not paid, the amounts they were owed, and liens the subcontractors had filed against the home.
The homeowner also argued on appeal that the bankruptcy court committed error by refusing to allow an amended complaint under Federal Rule 15(a)(2) and Bankruptcy Rule 7015, which says that the “court should freely give leave [to amend] when justice so requires.”
According to the Fifth Circuit, there was no abuse of discretion by the bankruptcy judge in refusing to grant leave to amend because the homeowner only “replied in conclusory fashion” when the judge “asked [the homeowner] to describe the substantive allegations he would add to the complaint if the court were to permit amendment.”
“Despite several similar inquiries by the bankruptcy court, [the homeowner] never described any substantive allegations that he would add to the complaint,” the circuit court said. “Moreover, in this appeal, [the homeowner] does not explain to us how the alleged false statements . . . harmed him.”
In other words, the circuit court gave the homeowner several extra bites at the apple, even on appeal, but the homeowner still did not explain how the false statements “harmed him.” Thus, the bankruptcy court did not err in denying a motion to amend the complaint.