Requirements for Alleging Fraud in Federal & Bankruptcy Court

Because “fraud is a serious charge, easy to allege and hard to prove” (In re Doctors Hosp. of Hyde Park, Inc., 308 B.R. 311, 322 (Bankr. N.D. Ill. 2004)), Federal Rules of Civil Procedure Rule 9(b) imposes the requirement on plaintiffs to allege fraud with particularity in federal court, which includes bankruptcy court. Defendants are wisely advised to bring any vague allegations of fraud to the court’s attention to allow real estate fraud and business fraud cases to be dismissed at an early stage where the allegations as to who, what, where, why, when, and how of the purported fraud are lacking.

Heightened Pleading Standard of Federal Rules of Civil Procedure Rule 9(b) Require the Circumstances of Fraud to be Alleged with Particularity

Federal Rules of Civil Procedure Rule 9(b) states that: “In alleging fraud or mistake, a party must state with particularity the circumstances constituting fraud or mistake. Malice, intent, knowledge, and other conditions of a person’s mind may be alleged generally.” Under Federal Rules of Bankruptcy Procedure Rule 7009: “Rule 9 F.R.Civ.P. applies in adversary proceedings.” This means that FED. R. CIV. P. Rule 9(b) is applicable to a § 523(a)(2)(A) nondischargeability proceeding alleging fraud. See, e.g., In re Kimmel, 2008 WL 5076380 at *1 (9th Cir. 2008).

“In order to properly plead fraud with particularity, the complaint must allege the time, and content of the fraudulent representation such that a defendant can prepare an adequate response to the allegations.” In re Kimmel, 2008 WL 5076380 at *1. The heightened pleading standard is commonly cited as requiring the allegations to identify “the who, what, when, where, and how of the misconduct charged.” See, e.g. U.S. v. United Healthcare Ins. Co., 848 F.3d 1161, 1167 (9th Cir. 2016); Ebeid ex rel. United States v. Lungwitz, 616 F.3d 993, 998 (9th Cir. 2010).

Motion to Dismiss for Failure to Allege Fraud with Particularity

Federal Rule of Civil Procedure (“Rule) 12(b)(6), also made applicable in bankruptcy by Federal Rule of Bankruptcy Procedure (“Bankruptcy Rules”) 7012, provides that a defendant may bring a motion to dismiss based on a “failure to state a claim upon which relief can be granted[.]”

“In order to survive a dismissal motion, however, a plaintiff must allege facts that are enough to raise his/her right to relief “above the speculative level.” In re Dynamic Random Access Memory (DRAM) Antitrust Litigation, 536 F.Supp.2d 1129, 1134 (N.D. Cal. 2008) (citing Bell Atl. Corp. v. Twombly, 127 S. Ct. 1955, 1964-65 (2007)).  A plaintiff must allege “enough facts to state a claim that is plausible on its face,” not just conceivable. Twombly, 127 S. Ct. at 1974. “The tenet that a court must accept as true all of the allegations contained in a complaint is inapplicable to legal conclusions.” Ashcroft v. Iqbal, 556 U.S. 662, 678 (2009).

“‘Who, What, When, Where, and How’ of the Misconduct Charged” Must be Alleged in a Fraud Complaint

The Ninth Circuit in Vess v. Ciba–Geigy Corp. USA, 317 F.3d 1097, 1106 (9th Cir. 2003) made clear that: “Averments of fraud must be accompanied by ‘the who, what, when, where, and how’ of the misconduct charged.” Vess v. Ciba-Geigy Corp. USA, 317 F.3d 1097, 1106 (9th Cir. 2003). Vess applied this rule to find that: “A motion to dismiss a complaint or claim ‘grounded in fraud’ under Rule 9(b) for failure to plead with particularity is the functional equivalent of a motion to dismiss under Rule 12(b)(6) for failure to state a claim. If insufficiently pled averments of fraud are disregarded, as they must be, in a complaint or claim grounded in fraud, there is effectively nothing left of the complaint. In that event, a motion to dismiss under Rule 12(b)(6) would obviously be granted. Because a dismissal of a complaint or claim grounded in fraud for failure to comply with Rule 9(b) has the same consequence as a dismissal under Rule 12(b)(6), dismissals.” Vess found that “it is established law in this and other circuits that such dismissals are appropriate,” citing cases throughout the nation.

Citing this ruling from the Ninth Circuit in applying the standard from Iqbal and Twombly, the Hon. Fredrick E. Clement of the Bankruptcy Court for the Eastern District of California ruled in 2019 in analyzing an 11 U.S.C. § 523(a)(2)(A) non-dischargeability claim that “[a] plaintiff must include the ‘who, what, when, where, and how’ of the fraud.” In re Jorgensen, No. 18-14586-A-13, 2019 WL 6720418, at *5 (Bankr. E.D. Cal. Dec. 10, 2019). Jorgensen found that a particular alleged misrepresentation under § 523(a)(2)(A) failed to state a claim such that it was dismissed.

Pleading Standard for Bankruptcy Non-Dischargeability Based on Fraud Under 11 U.S.C. Section 523(a)(2)(A)

“Because an exception to discharge impairs a debtor’s fresh start, section 523(a)(2)(A) ‘should not be read more broadly than necessary to effectuate policy, e.g., preventing debtors from avoiding debts incurred by fraud or other culpable conduct.’” In re Sabban, 384 B.R. 1, 5 (B.A.P. 9th Cir. 2008), aff’d in part, 600 F.3d 1219 (9th Cir. 2010). In other words, the exception to discharge provided for in Bankruptcy Code Section 523(a)(2)(A) “should be construed strictly against creditors and in favor of debtors.” Id. “The Ninth Circuit requires that the provisions of § 523(a) exceptions to discharge should be construed narrowly.” In re Roberts, 538 B.R. 1, 9 (Bankr. C.D. Cal. 2015), aff’d, No. 1:12-AP-01371-MT, 2017 WL 5352672 (B.A.P. 9th Cir. Nov. 13, 2017), aff’d, 770 F. App’x 360 (9th Cir. 2019)

In the Ninth Circuit, “[t]o establish nondischargeability under § 523(a)(2)(A), a creditor must prove five elements: “(1) misrepresentation, fraudulent omission or deceptive conduct by the debtor; (2) knowledge of the falsity or deceptiveness of his statement or conduct; (3) an intent to deceive; (4) justifiable reliance by the creditor on the debtor’s statement or conduct; and (5) damage to the creditor proximately caused by its reliance on the debtor’s statement or conduct.” In re Gugliuzza, 852 F.3d 884, 888 (9th Cir. 2017) (citing In re Slyman, 234 F.3d 1081, 1085 (9th Cir. 2000)); see Graham v. Bank of Am., N.A. (2014) 226 Cal. App. 4th 594, 605–06 (elements of California cause of action for fraudulent misrepresentation).

As one Bankruptcy Court explained: “Fraud is a serious charge, easy to allege and hard to prove. The rules therefore require pleading with particularity. It must be clear from the beginning that the plaintiff has specific details of what happened, when, where, and to whom. No such details are alleged. [The fraud cause of action] will therefore be dismissed.” In re Doctors Hosp. of Hyde Park, Inc., 308 B.R. 311, 322 (Bankr. N.D. Ill. 2004).

As the Ninth Circuit Bankruptcy Appellate Panel explained: “Rule 9(b) of the Federal Rules of Civil Procedure, applicable in bankruptcy cases as Rule 7009, mandates that, ‘[i]n alleging fraud … a party must state with particularity the circumstances constituting fraud….’ The court may disregard any fraud allegations that do not satisfy Civil Rule 9(b)’s particularity requirement. Sanford v. MemberWorks, Inc., 625 F.3d 550, 558 (9th Cir.2010). ‘To meet this standard, [LBS’s] complaint must ‘identify the who, what, when, where, and how of the misconduct charged.…” Salameh v. Tarsadia Hotel, 726 F.3d 1124, 1133 (9th Cir.2013).” In re Craciun, No. ADV 12-01158-BB, 2014 WL 2211742, at *5 (B.A.P. 9th Cir. May 28, 2014). “In other words, Rule 9(b) requires plaintiffs to plead ‘the who, what, when, where, and how: the first paragraph of any newspaper story.’” In re Miltenberger, 538 B.R. 547, 553 (Bankr. E.D. Mo. 2015).

Contact an Experienced Federal and Bankruptcy Fraud Defense Attorney in Los Angeles, Orange County, San Diego, Riverside, Palm Springs, San Bernardino, & Silicon Valley

If you need legal assistance to establish a fraud claim or you have questions regarding the requirements of a fraud claim in federal court, contact the experienced business litigation attorneys and real estate litigation attorneys with knowledge of fraud defenses at Talkov law either by phone at (844) 4-TALKOV (825568) or online.