Stevens v. Showalter
Filing
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MEMORANDUM OPINION. Signed by Judge Peter J. Messitte on 8/30/11. (cms, Deputy Clerk)
IN THE UNITED STATES DISTRICT COURT
FOR THE DISTRICT OF MARYLAND
STEPHEN TODD STEVENS
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Appellant
v.
STEPHEN SHOWALTER
Appellee
Civil No.: PJM 11-060
MEMORANDUM OPINION
Stephen Todd Stevens has appealed a decision of the United States Bankruptcy Court
issued in Showalter v. Stevens, Adversary Proceeding No. 09-00854, Bankr. Case No. 09-10127
(Bankr. Md.). The Court has jurisdiction over the appeal pursuant to 28 U.S.C. § 158(a). No
hearing is necessary to dispose of this matter. See Local R. 105.6 (D. Md.). For the following
reasons, the Court AFFIRMS the decision of the Bankruptcy Court.
I.
The facts of the case are these:
In late 2004, Stevens and Appellee Stephen Showalter entered into a contract, whereby
Stevens agreed to purchase Showalter’s ownership interest in two corporations, Building Specs,
Inc. and Building Specs of Annapolis, Inc., for the price of $1,000,000. Pursuant to the
agreement, Stevens was to pay $50,000 at the time of contract formation, an additional $250,000
by January 15, 2005, and the remaining balance of $700,000 over an agreed-upon timeframe.
The money owed was secured by a promissory note and a deed of trust on real property owned
by Stevens in Upper Marlboro, Maryland. The contract also included a stock pledge agreement
for the two companies, a life insurance policy on Stevens’ life for the benefit of Showalter, and
UCC financing statements to secure the amount owed. Stevens eventually defaulted under the
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terms of the note, after which, on October 29, 2008, Showalter entered a confessed judgment
against Stevens in the Circuit Court for Anne Arundel County, Maryland in the amount of
$854,514.30.
On January 5, 2009, Stevens filed for Chapter 13 bankruptcy protection in the
Bankruptcy Court of this District. Subsequently, on March 13, 2009, he moved to convert the
case to Chapter 7. Then, on December 18, 2009, Showalter instituted an adversary proceeding1
against Stevens in the Bankruptcy Court, in which he appeared to allege that Stevens had been
unlawfully concealing or depleting assets in order to deprive Showalter and other creditors of
their respective interests in the bankruptcy estate.
In the Complaint he filed against Stevens in the Bankruptcy Court, Showalter alleged, in
somewhat conclusory language, that Stevens had been “funneling, transferring, or otherwise
appropriating” assets in an effort to “intentionally hide, deplete, and dissipate” funds in which
Showalter and others held an interest. Although the Complaint was short on specifics, it
expressly invoked 11 U.S.C. § 727, which states, among other things, that a discharge shall not
be granted where the debtor:
with intent to hinder, delay, or defraud a creditor . . . , has transferred, removed,
destroyed, mutilated, or concealed . . . : (A) property of the debtor, within one
year before the date of the filing of the petition; or (B) property of the estate, after
the date of the filing of the petition.
11 U.S.C. § 727(a)(2).
Despite the somewhat conclusory nature of the allegations in the Complaint, Stevens
filed an Answer on January 28, 2010. The Bankruptcy Court then issued a Scheduling Order, and
1
Pursuant to 28 U.S.C. § 157(b), Bankruptcy judges have the authority to hear “all core proceedings arising under
title 11,” including objections to discharges. 28 U.S.C. § 157(b)(2)(J).
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the parties proceeded to discovery.2 Then, on July 9, 2010, more than five months after he
answered the Complaint, Stevens filed a Motion to Dismiss, pursuant to Federal Rule of Civil
Procedure 12(b)(6),3 in which he argued that Showalter’s Complaint was virtually devoid of
factual allegations and therefore failed to comply with the plausibility standard articulated by the
Supreme Court in Bell Atlantic Corp. v. Twombly, 550 U.S. 544 (2007), and Ashcroft v. Iqbal,
129 S. Ct. 1937 (2009).4 Showalter opposed the Motion, arguing that it was untimely and that, in
any event, his allegations were sufficiently pled under Twombly and Iqbal. Less than a month
later, the Bankruptcy Court denied the Motion to Dismiss without a hearing and without offering
an explanation—written or otherwise.
The matter later proceeded to trial,5 after which Bankruptcy Judge Paul Mannes issued a
decision denying Stevens a discharge on the grounds that Stevens had taken “numerous steps
within the year preceding the filing of his bankruptcy petition to remove property from his
control so as to put such property out of [Showalter’s] reach.” Showalter v. Stevens, Adversary
Proceeding No. 09-00854, Bankr. Case No. 09-10127, 2010 Bankr. LEXIS 4400, at *7 (Bankr.
2
According to Showalter, Stevens refused to: attend noted depositions, respond to interrogatories, and produce
requested documents. Showalter ultimately filed a Motion to Compel, which the Bankruptcy Court granted on July
1, 2010, giving Stevens until July 8, 2010 to produce the requested discovery. However, rather than responding to
the discovery requests by that date, Stevens filed a Motion to Dismiss, discussed infra.
3
Federal Rule of Civil Procedure 12(b)(6), which permits a party to raise the defense of failure to state a claim in a
pre-pleading motion, applies in adversary proceedings in Bankruptcy Court. See Fed. R. Bankr. P. 7012(b)
(“[Federal Rule of Civil Procedure] 12(b)-(i) applies in adversary proceedings.”).
4
In Twombly and Iqbal, the Supreme Court held that a Complaint may not rely on naked assertions, speculation, or
mere legal conclusions, Twombly, 550 U.S. at 556-57, and that the allegations in a Complaint must present enough
factual content to render a claim “plausible on its face,” i.e., to enable the court to “draw the reasonable inference
that the defendant is liable for the misconduct alleged,” Iqbal, 129 S. Ct. at 1949.
5
Prior to trial, Showalter filed a Motion for Summary Judgment, which Stevens opposed on the grounds that “there
is a material dispute of fact that goes to Mr. Stevens’ intent [under 11 § U.S.C. 727(a),] . . . an issue for the trier of
fact.” By Order dated November 1, 2010, the Bankruptcy Court denied Showalter’s Motion for Summary Judgment.
No other dispositive motions were filed by either party before trial, and neither party filed or renewed a dispositive
motion at trial.
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Md. Nov. 30, 2010). At the outset of his Opinion, Judge Mannes wrote the following in a brief
footnote:
While the Complaint did not contain sufficient factual matter to state a claim
plausible on its face sufficient to meet the pleading test set forth in such cases as
[Twombly and Iqbal], this issue was not raised by the defendant. Therefore, the
case was tried under ‘the old rules’ of notice pleading.
Id. at *1 n.1.
This appeal followed.
II.
On appeal, Stevens argues that the Bankruptcy Court committed reversible error when it
denied his Motion to Dismiss and thereby declined to dismiss Showalter’s Complaint for failing
to meet the pleading requirements of Federal Rule of Civil Procedure 8(a)(2).6 In response,
Showalter argues that Stevens procedurally waived his right to challenge the sufficiency of the
allegations in the Complaint, and that, in any event, the allegations in the Complaint were
sufficiently pled.7
III.
A district court reviews conclusions of law made by a bankruptcy court de novo. See
Cypher Chiropractic Ctr. v. Runski, 102 F.3d 744, 745 (4th Cir. 1996). The bankruptcy court’s
findings of fact, however, “shall not be set aside unless clearly erroneous.” Fed. R. Bankr. P.
8013; see also In re Bryson Props., XVIII, 961 F.2d 496, 499 (4th Cir. 1992). A finding of fact is
clearly erroneous when, “although there is evidence to support it, the reviewing court on the
6
Federal Rule of Civil Procedure 8(a)(2), which states that a complaint must include “a short and plain statement of
the claim showing that the pleader is entitled to relief,” applies in adversary proceedings in Bankruptcy Court. See
Fed. R. Bankr. P. 7008(a) (“[Federal Rule of Civil Procedure] 8 applies in adversary proceedings.”).
7
Stevens apparently declined to file a reply brief in this appeal.
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entire evidence is left with the definite and firm conviction that a mistake has been committed.”
Anderson v. Bessemer City, 470 U.S. 564, 573 (1985) (quoting United States v. U.S. Gypsum
Co., 333 U.S. 364, 395 (1948)).
Nevertheless, even where a bankruptcy court commits an error of law or makes a clearly
erroneous factual finding, its error will not result in reversal so long as the reviewing district
court concludes that the error was harmless. See In re Travelstead, 227 B.R. 638, 644 (D. Md.
1998) (noting that the harmless error doctrine applies to a district court’s review of the decision
of a bankruptcy court).
Because the issue raised in this case is a question of law—i.e., whether the Bankruptcy
Court erred when it declined to dismiss Showalter’s Complaint for failure to state a claim—the
Court reviews the Bankruptcy Court’s decision de novo.
IV.
Pursuant to the plain language of Federal Rule of Civil Procedure 12(b), it is beyond
dispute that a motion to dismiss brought pursuant to Rule 12(b)(6) is untimely when presented
after the filing of an answer. See Fed. R. Civ. P. 12(b) (noting that a 12(b)(6) motion “must be
made before pleading if a responsive pleading is allowed”) (emphasis added).
However, a failure to submit a 12(b)(6) defense before pleading is not necessarily fatal
because a defendant retains the right to raise the defense of failure to state a claim: (1) by filing a
motion for judgment on the pleadings, pursuant to Rule 12(c), after the pleadings are closed but
early enough not to delay trial, see Fed. R. Civ. P. 12(h)(2)(B); or (2) by raising the defense at
trial, see Fed. R. Civ. P. 12(h)(2)(C). Given this, many courts have concluded that a court may
construe an untimely Rule 12(b)(6) motion as a Rule 12(c) motion for judgment on the
pleadings. See, e.g., Edwards v. City of Goldsboro, 178 F.3d 231, 243 (4th Cir. 1999); Patel v.
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Contemporary Classics of Beverly Hills, 259 F.3d 123, 126 (2d Cir. 2001); Satkowiak v. Bay
County Sheriff’s Dep’t, 47 F. App’x 376, 377 n.1 (6th Cir. 2002).
It is equally true that, where a plaintiff’s complaint fails to state a claim upon which relief
can be granted, courts routinely grant leave to amend to provide the plaintiff with an opportunity
to cure the errors in his complaint. See Hayden v. Paterson, 594 F.3d 150, 161 n.9 (2d Cir. 2010)
(noting that, even when a complaint falls short of the Twombly/Iqbal plausibility standard, “a
court should freely give leave to amend before trial when justice so requires”) (internal citations
and quotation marks omitted). Indeed, “leave to amend should be denied only when . . .
amendment would be prejudicial to the opposing party, there has been bad faith on the part of the
[party seeking to amend], or amendment would be futile.” Matrix Capital Mgmt. Fund, LP v.
BearingPoint, Inc., 576 F.3d 172, 193 (4th Cir. 2009); see also Fed. R. Civ. P. 15(a)(2) (“The
court should freely give leave [to amend] when justice so requires.”); Fed R. Civ. P. 15(b)(1)
(noting that, even at trial, the court “should freely permit an amendment” to conform the
pleadings to the proof “when doing so will aid in presenting the merits and the objecting party
fails to satisfy the court that the evidence would prejudice that party’s action or defense on the
merits”).
Further still, it is undeniable that, at some point, a defendant no longer retains the right to
claim that he has been prejudiced by deficiencies in a plaintiff’s complaint. See Eberhardt v.
Integrated Design & Constr., Inc., 167 F.3d 861, 870-71 (4th Cir. 1999) (noting that a defense of
failure to state a claim cannot be brought after a trial on the merits, and that deficiencies in a
complaint do not violate a defendant’s due process rights where the defendant has had ample
opportunity to move for dismissal prior to and during trial). After all, the primary purpose of
allowing disposal of lawsuits at the motion to dismiss stage is not to foreclose meritorious claims
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through resort to technicalities, but rather to prevent a defendant from having to endure the time
and expense of litigation in defense of a dubious claim. See Francis v. Giacomelli, 588 F.3d 186,
193 & n.2 (4th Cir. 2009) (noting that the Supreme Court’s decisions in Twombly and Iqbal were
driven, at least in part, by the problems created by “strike suits,” whereby plaintiffs bring
“largely groundless claims to justify conducting extensive and costly discovery with the hope of
forcing [defendants] to settle at a premium to avoid the costs of the discovery”).
V.
Applying these principles, the Court concludes with little difficulty that the Bankruptcy
Court did not commit reversible error in declining to dismiss Showalter’s Complaint for failure
to state a claim.
To begin, it is beyond dispute that Stevens’ Motion to Dismiss, which was expressly
brought pursuant to Rule 12(b)(6), was presented after the filing of his answer and was,
therefore, untimely. See Fed. R. Civ. P. 12(b) (noting that a 12(b)(6) motion “must be made
before pleading if a responsive pleading is allowed”) (emphasis added). Stevens does not deny
this, choosing instead to conveniently ignore it in his brief on appeal. In light of Rule 12(b)’s
clear command, the Court declines to find that the Bankruptcy Court committed any reversible
error in denying Stevens’ Motion.8
8
It is true, of course, that a court considering an untimely Rule 12(b)(6) motion may choose to construe the motion
as a Rule 12(c) motion for judgment on the pleadings. See, e.g., Edwards, 178 F.3d at 243. However, having found
no binding authority demonstrating that a court unequivocally must do so, nor any authority demonstrating that a
failure to do so necessitates the undoing of a trial on the merits where, as here, the defendant fails to re-assert his
defense in subsequent proceedings, the Court does not read Edwards and/or similar cases as mandating the result
Stevens seeks here. Moreover, the Court notes that there is at least some authority for the proposition that Twombly
and Iqbal do not require dismissal of a suit where discovery and/or trial have filled in any potential gaps in the
plaintiff’s complaint. See Ideal Steel Supply Corp. v. Anza, Civ. No. 09-3212, 2011 U.S. App. LEXIS 13176, at *38
(2d Cir. June 28, 2011) (“In light of the fact that discovery in this case had been completed . . . , we do not regard
Twombly as requiring that defendants’ Rule 12(c) motion be granted if evidence that had already been produced
during discovery would fill the perceived gaps in the Complaint.”).
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Additionally, the Court concludes that, even if the Bankruptcy Court erred in denying
Stevens’ Motion to Dismiss, any such error was harmless since Stevens suffered no prejudice as
a result. Stevens at all times retained the right to raise the defense of failure to state a claim by
filing a Rule 12(c) motion or by asserting the defense at trial. See Fed. R. Civ. P. 12(h)(2). He
also retained the right to challenge the sufficiency of Showalter’s claims by filing, at any time, a
motion for summary judgment pursuant to Federal Rule of Civil Procedure 56,9 or by filing, at
the close of Showalter’s case-in-chief at trial, a motion for judgment on partial findings pursuant
to Federal Rule of Civil Procedure 52(c).10 Given the multifarious options available to Stevens,
none of which he chose to take,11 the Court fails to see how he was in any way prejudiced by the
denial of his Motion to Dismiss. Furthermore, it is sharply apparent that, even if the Bankruptcy
Court had granted his Motion, it would have given Showalter leave to amend his Complaint, see
Hayden, 594 F.3d at 161 n.9 (noting that, even after Twombly and Iqbal, leave to amend should
be freely given), and the case almost certainly would have thereafter proceeded to the same
end—namely, a final judgment in Showalter’s favor.
Tellingly, Stevens does not attack the sufficiency of the evidence presented at trial, nor
does he otherwise contest the merits of the Bankruptcy Court’s ultimate decision. Instead, having
failed to exhaust the several remedies available to him pursuant to Rules 12(c), 12(h)(2), 56, and
52(c), he now asks this Court to undo the entire case, including an extensive trial on the merits,
and, if that were not enough, to enter judgment in his favor. The Court, without the least
hesitation, denies the requested relief.
9
Federal Rule of Civil Procedure 56 applies in adversary proceedings in Bankruptcy Court. See Fed. R. Bankr. P.
7056 (“[Federal Rule of Civil Procedure] 56 applies in adversary proceedings.”).
10
Federal Rule of Civil Procedure 52 applies in adversary proceedings in Bankruptcy Court. See Fed. R. Bankr. P.
52 (“[Federal Rule of Civil Procedure] 52 applies in adversary proceedings . . . .”).
11
See supra note 5.
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VI.
For the foregoing reasons, the decision of the Bankruptcy Court is AFFIRMED and the
case will be CLOSED. A separate Order will ISSUE.
/s/________________
PETER J. MESSITTE
UNITED STATES DISTRICT JUDGE
August 30, 2011
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