E-Alert Case Updates

Bankruptcy Court’s Denial of Late Rule 12(b)(6) Motion to Dismiss Affirmed

Stephen Todd Stevens v. Stephen Showalter
Civil No.: PJM 11-060
by Lydia S. Hu, Associate
Semmes, Bowen & Semmes (www.semmes.com)

Appellant Stevens and Appellee Showalter entered an Agreement for the purchase of Showalter’s ownership interest in two corporations. A portion of the purchase price was paid at the time of contract formation and there was an agreement that the balance would be paid at a future time. The money owed was secured by a promissory note and deed of trust on property owned by Appellant Stevens.

Stevens defaulted on the terms of the note and Showalter eventually entered a confessed judgment against Stevens in a Circuit Court for Anne Arundel County. Soon thereafter, Stevens filed for Chapter 13 bankruptcy with the Bankruptcy Court of the District of Maryland and converted to Chapter 7 bankruptcy. After approximately nine months of bankruptcy proceedings, Appellee Showalter instituted an adversary proceeding against Stevens in bankruptcy court alleging that Stevens was unlawfully concealing and depleting his assets in order to deprive Showalter of his interest in the bankruptcy estate.

Without raising any defense regarding the conclusory nature of the allegations in the Complaint, Stevens filed an Answer. The Bankruptcy Court issued a Scheduling Order. More than five months after answering the Complaint, Stevens filed a Motion to Dismiss pursuant to Federal Rule of Civil Procedure 12(b)(6). Stevens argued that the Complaint was void of factual allegations and failed to comply with plausibility standards articulated by Supreme Court case law, Bell Atlantic Corp. v. Twombly, 550 U.S. 544 (2007) and Ashcroft v. Iqbal, 129 S.Ct. 1937 (2009). The Bankruptcy Court denied the Motion to Dismiss without a hearing and without offering an explanation, and the case proceeded to trial.

Bankruptcy Judge Paul Mannes presided over the trial on November 1, 2010. The Bankruptcy Court denied Stevens’ Motion to Dismiss and found that Stevens had undertaken numerous actions to remove his property from his control and put the property out of Showalter’s reach as a creditor. In so ruling, the Court wrote:

While the Complaint did not contain sufficient factual matter to state a claim plausible on its face sufficient to meet the pleading set forth in such cases as [Twombly and Iqbal], this issue was not raised by the Defendant.

On appeal to the District Court, Stevens argued that the Bankruptcy Court committed reversible error when it denied his Motion to Dismiss and declined to dismiss the Complaint for failing to meet the standards for pleading as dictated by Rule 8(a)(2). The District Court for Maryland concluded that the Bankruptcy Court did not commit reversible error in declining to dismiss the Complaint for failure to state a claim. First, Stevens’ Motion to Dismiss brought pursuant to Rule 12(b)(6) was filed after his Answer and, therefore, was untimely pursuant to Federal Rule 12(b). A Rule 12(b)(6) motion must be made before pleading, if a responsive pleading is allowed.

Also, even if the Bankruptcy Court erred in denying the Motion to Dismiss, any such error was harmless since Stevens suffered no prejudice as a result. Stevens retained his right to raise other defenses relating to failure to state a claim through filing a Rule 12(c) Motion for Judgment on the pleadings or even asserting the defense at trial. Stevens pursued neither one of these available modes of relief. Finally, even if the Bankruptcy Court had granted the motion, it would have provided Plaintiff leave to amend his Complaint. Accordingly, any such error in failing to grant a Motion to Dismiss was harmless. Accordingly, the District Court of Maryland affirmed the decision of the Bankruptcy Court relating to Stevens’ concealing and depleting assets.