Bankr. L. Rep. P 74,064 in Re Andrew J. Lane, Debtor. Peter H. McCallion v. Andrew J. Lane, 937 F.2d 694, 1st Cir. (1991)

937 F.
2d 694
Bankr. L. Rep. P 74,064

In re Andrew J. LANE, Debtor.
Peter H. McCALLION, et al., Appellants,
v.
Andrew J. LANE, Appellee.
No. 91-1022.
United States Court of Appeals,

First Circuit.
Heard May 7, 1991.
Decided July 2, 1991.
Peter H. McCallion, Garrison, N.Y., for appellants.

Charles R. Dougherty with whom Marguerite T. Grant and Hill & Barlow
were on brief, Boston, Mass., for appellee.
Before SELYA, Circuit Judge, BOWNES, Senior Circuit Judge, and
CYR, Circuit Judge.
CYR, Circuit Judge.
This is an appeal from a district court order affirming the bankruptcy court's
dismissal of an action brought by appellants for the imposition of a constructive
trust on certain funds in the chapter 11 estate of appellee Andrew J. Lane, and
for a determination that Lane's indebtedness to appellants is nondischargeable.
We affirm in part, vacate in part, and remand.
2* BACKGROUND
3
The amended complaint alleges that appellants agreed to sell their shares of
stock in Indian Hill Associates, Inc. to appellee Lane for $1,675,000, which was
to include a $375,000 downpayment, three installment payments of $350,000
each, and a final installment payment of $250,000. The agreement expressly
states that appellants "agree to accept payment from an escrow fund" or in the
form of an irrevocable letter of credit. Lane subsequently refused to tender the

downpayment until appellants agreed that the last two installment payments
were to be contingent upon Lane's obtaining approval for a subdivision.
Although appellants acceded to Lane's demands on or about February 12, 1988,
Lane had not yet applied for subdivision approval by the time appellants filed
their complaint with the bankruptcy court, approximately twenty months later.
4
Lane ultimately obtained interim credit with which to make the downpayment.
Later, Indian Hill Associates, Inc., then controlled by Lane, obtained a $5.7
million line of credit with Bankers Trust, the proceeds of which were to be used
only to refinance the purchase of certain real property and to fund Lane's
payments to appellants under the Indian Hill stock purchase agreement.
On August 1, 1988, Bankers Trust wired the first installment payment directly
to appellants. In early October 1988, Bankers Trust advanced Lane funds with
which to make the second installment, but Lane never remitted the second
installment to appellants. On October 17, 1988, Lane informed Bankers Trust
that he was litigating the stock purchase agreement, and requested that the bank
6
hold
all advances against the stock purchase price as may become due and payable,
in an interest bearing escrow account; such account to be disbursed in accord with
the terms of a final judgment or settlement in the aforesaid litigation [between Lane
and appellants]. In the event that you advise us that this arrangement is acceptable,
we [Indian Hill Associates, Inc.] will send you a check for $365,876.71 [the amount
Bankers Trust had disbursed to Lane for the second installment payment, with
accrued interest].1
7
There is no contention that Bankers Trust acceded to the proposal.
Lane filed a chapter 11 petition on March 24, 1989, and appellants eventually
initiated the adversary proceeding which precipitated the present appeal.
II
DISCUSSION
9
At the time the bankruptcy court ruled on Lane's motion to dismiss, it had
before it, and did not expressly exclude from consideration, certain matters
outside the pleadings. Nevertheless, we restrict our review to the complaint and
certain exhibits attached to the complaint, which are properly considered part of
the pleadings for rule 12(b)(6) purposes. 2 See Fed.R.Civ.P. 10(c) ("A copy of
any written instrument which is an exhibit to a pleading is a part thereof for all
purposes."); Beam v. IPCO Corp., 838 F.2d 242, 244 (7th Cir.1988); see also
PFZ Properties, Inc. v. Rodriguez, 928 F.2d 28, 29 n. 1 (1st Cir.1991)
(unnecessary to address propriety of trial court's consideration of matters
outside pleadings when appellate court limits its own analysis to the pleadings);
O'Brien v. DiGrazia, 544 F.2d 543, 545 (1st Cir.1976) (district court's error in
considering matters outside pleadings should not be basis for setting aside a
dismissal justifiable without reference to extrinsic matters), cert. denied, 431
U.S. 914, 97 S.Ct. 2173, 53 L.Ed.2d 223 (1977). See generally 5 C. Wright &
A. Miller, Federal Practice and Procedure Sec. 1327 (1990) (hereinafter
"Wright & Miller").
10
A rule 12(b)(6) dismissal is subject to de novo review. We will affirm the

dismissal "only if it clearly appears, according to the facts alleged," and any
reasonable inferences therefrom, "that the plaintiff cannot recover on any
viable theory." Correa-Martinez v. Arrillaga-Belendez, 903 F.2d 49, 52 (1st
Cir.1990).
A. "Constructive Trust" Claim

11
Four elements are required to establish a constructive trust under New York
law: 3 "(1) the existence of a ... fiduciary relationship, (2) the making of a
promise, (3) a transfer in reliance on the promise, [and] (4) unjust enrichment."
Hutton v. Klabal, 726 F.Supp. 67, 73 (S.D.N.Y.1989) (citing Sharp v.
Kosmalski, 40 N.Y.2d 119, 386 N.Y.S.2d 72, 74-75, 351 N.E.2d 721, 723-24
(1976)). Appellants attempt the required showing of a fiduciary relationship by
claiming that Lane agreed to act as escrow agent of the monies Bankers Trust
disbursed to Lane to fund the second installment payment. Appellants allege
three bases for their contention: (i) Lane's assent to the stock purchase
agreement, (ii) the October 17 letter, and (iii) Lane's receipt of funds allegedly
intended for appellants' benefit by Lane and Bankers Trust. These grounds are
considered in the order presented.
12
First, the stock purchase agreement provides: "Sellers agree to accept payment
from an escrow fund to be released by the bank funding the land purchase in
lieu of a letter of credit." (Emphasis added). The quoted language neither
constituted an escrow agreement between Lane and appellants, nor purported to
obligate Lane to establish or fund an escrow account. Appellants simply agreed
to accept any payment disbursed from escrow, in place of payment in the form
of a letter of credit.
13
Second, the October 17 letter merely requests Bankers Trust to escrow future
advances scheduled for disbursement under the Indian Hill Associates, Inc. line
of credit; it did not create or fund an escrow account, nor did it obligate Lane to
disburse funds directly to appellants from escrow in the event Bankers Trust
acceded to the proposed escrow arrangement. Furthermore, there is no
allegation that Bankers Trust ever acceded to Lane's proposal. Finally, even if
an escrow arrangement had eventuated under the October 17 letter, Bankers
Trust, not Lane, would have been the escrow agent.4
14
Third, appellants' putative status as intended beneficiaries of the line of credit

with Bankers Trust provides no footing for casting Lane in the role of a
fiduciary. Appellants adduce no New York caselaw supporting an intended
beneficiary claim to the proceeds from the Indian Hill Associates, Inc. line of
credit. Indeed, it does not appear that appellants could qualify as intended
beneficiaries under New York law, since any derivative benefit to appellants
would be dependent on the decision of Lane and/or Indian Hill Associates, Inc.
to draw on the latter's line of credit with Bankers Trust. See World Trade
Knitting Mills, Inc. v. Lido Knitting Mills, Inc., 154 A.D.2d 99, 551 N.Y.S.2d
930, 933 (1990) (performance required under contract must flow directly to
putative intended beneficiary); Strauss v. Belle Realty Co., 98 A.D.2d 424, 469
N.Y.S.2d 948, 950 (1983) (same), aff'd, 65 N.Y.2d 399, 492 N.Y.S.2d 555, 482
N.E.2d 34 (1985).
15
In sum, appellants allege no set of facts sufficient to demonstrate the fiduciary

relationship required for the establishment of a constructive trust under New
York law.5
B. "Conversion" Claim
16
Appellants allege that Lane's wrongful refusal to remit the funds disbursed by
Bankers Trust for the second installment payment gave rise to a
nondischargeable debt for willful conversion under Bankruptcy Code Sec.
523(a)(6). Assuming without deciding that Sec. 523(a)(6) is applicable,
appellants' claim cannot succeed as a matter of law, due to their failure to allege
facts sufficient to show that the funds allegedly converted belonged to
appellants.6 Appellants assert merely that Lane was obliged to transfer the
funds to them, not that actual title to the funds was in appellants at the time of
the alleged conversion.7 See Ahles v. Aztec Enter., Inc., 120 A.D.2d 903, 502
N.Y.S.2d 821, 822 (1986) (in action for conversion, "plaintiff must establish
legal ownership of a specific identifiable piece of property and the defendant's
exercise of dominion over or interference with the property in defiance of the
plaintiff's rights").
C. Sec. 523(a)(2)(A) Claim
17
The complaint alleges that Lane did not intend to comply with the stock
purchase agreement from the outset, as evidenced by his refusal to tender the
downpayment until appellants acceded to a disadvantageous amendment of the
stock purchase agreement which conditioned payment of the last two
installments on Lane's obtaining a subdivision approval for which he had not
even applied by the time the amended complaint was filed. Appellants insist
that these allegations state a claim under Bankruptcy Code Sec. 523(a)(2)(A)
that the entire amount Lane owes appellants is nondischargeable as a debt
incurred for property (Indian Hill stock) obtained by "false pretenses, false
representations, and actual fraud." See, e.g., In re Krause, 114 B.R. 582, 606
(Bankr.N.D.Ind.1988) ("if a debtor enters into a contract intending not to
comply with its terms and later defaults under that contract, such contract may
provide a basis for exceptions to discharge on the grounds of fraud"). At most,
an actionable Sec. 523(a)(2)(A) claim must state that the debt was incurred as a
proximate result of the claimant's reasonable reliance on a material
misrepresentation of fact knowingly made by the debtor with intent to deceive.
See In re Rubin, 875 F.2d 755, 759 (9th Cir.1989).8
18
Appellants minimally state an actionable nondischargeability claim under

Bankruptcy Code Sec. 523(a)(2)(A). The elements of a fraud claim were either
alleged in, or reasonably inferable from, the complaint. The allegation that Lane
executed the stock purchase agreement states a claim that Lane knowingly
made a material representation that he would comply with its terms. The
allegation that appellants transferred their Indian Hill shares to Lane plainly
implies that the transfer was made in reliance on Lane's fraudulent promise to
pay and that appellants' financial loss proximately resulted from its breach.
Their allegation that Lane never intended to comply with the stock purchase
agreement was sufficient to plead the scienter required under Sec. 523(a)(2)(A).
See Bankruptcy Rule 7009 (adopting Fed.R.Civ.P. 9(b) for application in
adversary proceedings) ("intent, knowledge, and other condition of mind of a
person may be averred generally").
19
Moreover, appellants allege that, after the Indian Hill shares were transferred,
Lane refused to make the promised downpayment until appellants acceded to a
disadvantageous amendment of the stock purchase agreement. Finally,
appellants allege that Lane never applied for the subdivision approval on which
appellants' right to payment of the last two installments was made contingent
under the terms of the amended agreement. We cannot agree that proof of these
allegations, together with all reasonable inferences therefrom, could not support
a finding of fraudulent intent sufficient to sustain a determination that some or
all of Lane's debt to appellants is nondischargeable. Thus, appellants state a
minimally sufficient claim for relief under Bankruptcy Code Sec. 523(a)(2)(A).
See In re Krause, 114 B.R. at 606 (allegation that debtor fraudulently intended
not to comply with agreement at time it was made states claim for relief under
Sec. 523(a)(2)(A)).9
D. Sec. 523(a)(2)(B) Claim
20
Although appellants charge that Lane fraudulently induced them to transfer

their Indian Hill shares by means of a materially false financial statement, see
Bankruptcy Code Sec. 523(a)(2)(B), their complaint does not allege any
particular omission or false information in Lane's financial statement. See
Bankruptcy Rule 7009 and Federal Rule of Civil Procedure 9(b) ("In all
averments of fraud ... the circumstances constituting fraud ... shall be stated
with particularity."). See also Wayne Investment, Inc. v. Gulf Oil Corp., 739
F.2d 11, 13 (1st Cir.1984) (rule 9 "requires specification of the time, place, and
content of an alleged false representation") (emphasis added) (quoting McGinty
v. Beranger Volkswagen, Inc., 633 F.2d 226, 228 (1st Cir.1980)); DiLeo v.
Ernst & Young, 901 F.2d 624, 626-27 (7th Cir.) (complaint alleging that
financial statements failed fully to reflect bad loans was inadequate under 9(b)
for failure to identify the bad loans), cert. denied, --- U.S. ----, 111 S.Ct. 347,
112 L.Ed.2d 312 (1990).
E. Sec. 523(a)(4) Claim

21
Appellants' Sec. 523(a)(4) nondischargeability claim, charging fraud or

defalcation by Lane while acting in a fiduciary capacity, fails for the reasons
adduced in the foregoing discussion of their constructive trust claim. See supra
pp. 696-697.
III
CONCLUSION
22
Appellants took a credit risk when they surrendered their Indian Hill shares in
return for Lane's unsecured promise to pay them $1,675,000 later. Lane did not
deliver and the parties did not resolve their differences. Although the
intervention of bankruptcy is seldom a welcome development for any
unsecured creditor, we cannot paint an arm's-length promise to pay as a
fiduciary obligation without impermissibly blurring commercial law. At the
same time, the complaint distinctly states a minimally sufficient
nondischargeability claim under Bankruptcy Code Sec. 523(a)(2)(A) which
was erroneously dismissed under rule 12(b)(6).10
23
For the foregoing reasons, we vacate the district court order affirming the
23
For the foregoing reasons, we vacate the district court order affirming the
dismissal of appellants' nondischargeability claim under Bankruptcy Code Sec.
523(a)(2)(A), and remand to the district court with directions to remand to the
bankruptcy court for further proceedings thereon. In all other respects the order
appealed from is affirmed. All parties are to bear their own costs.
Appellants were provided with a copy of Lane's letter
Exhibit A is the Indian Hill Associates, Inc. stock purchase agreement. Exhibit
B is the order of a New York State Supreme Court judge in a related case.
Exhibit C is the October 17 letter from Lane to Bankers Trust
As the district court applied New York substantive law, and the parties rely on
it, we do likewise. See Sheinkopf v. Stone, 927 F.2d 1259, 1264 (1st Cir.1991)
(ordinarily, federal court should honor parties' shared view as to applicable
substantive law)
Appellants similarly argue that the October 17 letter amounted to a promise

that Lane would place the funds for the second installment payment in escrow
with Bankers Trust. The reality is, however, that the October 17 letter, at best,
was a proposal by Lane to return the second installment to Bankers Trust under
certain conditions. Once again, there is no allegation that Bankers Trust
accepted the escrow proposal
Even assuming that Lane somehow became a fiduciary of the funds disbursed
for the second installment payment, appellants still could not establish a
constructive trust, as they have not alleged a transfer in reliance on Lane's
fiduciary promise, or in reliance on his fiduciary status. See Sharp, 40 N.Y.2d
at 122, 386 N.Y.S.2d 72, 351 N.E.2d 721 (even in the absence of an express
promise, constructive trust may be imposed on property transferred in reliance
on a fiduciary relationship)
Appellants also conclude, without citation to caselaw, that a "resulting trust"
was created for their benefit when Lane did not remit to appellants the funds
received for the second installment payment. Assuming without deciding that it
is appropriate to address such an underdeveloped theory of recovery, see United
States v. Zannino, 895 F.2d 1, 17 (1st Cir.), cert. denied, --- U.S. ----, 110 S.Ct.
1814, 108 L.Ed.2d 944 (1990), we find no legal basis for it. A resulting trust
may arise where: (1) an express trust fails, (2) an express trust is fully
performed without exhausting the trust estate, or (3) a seller conveys property
to a third party at the direction of the purchaser of the property. Saulia v.
Saulia, 31 A.D.2d 640, 295 N.Y.S.2d 980, 982 (1968) (quoting 4 Scott on
Trusts Sec. 404.1 at 2922 (2d ed.)), modified, 25 N.Y.2d 80, 302 N.Y.S.2d 775,
250 N.E.2d 197 (1969) (declining to apply law of trusts); see also Restatement
(Second) of Trusts ch. 12 introductory note at 323 (1959) (same). The present
circumstances do not conduce to the creation of a resulting trust.
6
Appellants likewise claim that Lane's retention of the second installment gave
rise to a nondischargeable debt for larceny under Bankruptcy Code Sec. 523(a)
(4). Their failure to allege facts sufficient to show title to the funds dictates
dismissal of their Sec. 523(a)(4) claim. See In re Graziano, 35 B.R. 589, 594
(Bankr.E.D.N.Y.1983) (defining larceny as requiring, inter alia, the taking of
another's property without consent of the owner)
Appellants' summary legal conclusion that the funds disbursed to Lane for the
second installment were "property of the plaintiffs [appellants]" is belied by the
facts alleged in the pleadings, which demonstrate at best a contractual claim to
payment of the second installment. See Kadar Corp. v. Milbury, 549 F.2d 230,
235 (1st Cir.1977) ("the court will not accept conclusory allegations on the
legal effect of the events plaintiff has set out if these allegations do not
reasonably follow from his description of what happened") (quoting 5A Wright
& Miller Sec. 1357 at 597); Nelson v. Monroe Regional Medical Center, 925
F.2d 1555, 1559 (7th Cir.1991) (court need not accept legal conclusions in
evaluating pleadings); 2A J. Moore & J. Lucas, Moore's Federal Practice, p
12.07[2.-5] at 12-63 to -64 & n. 6 (2d ed. 1990) (legal conclusions, deductions
or opinions not given presumption of correctness)
Not all courts require that a sufficient Sec. 523(a)(2)(A) claim state that the
claimant acted in reasonable reliance on the false representation. See, e.g., In re
Ophaug, 827 F.2d 340, 342-43 & n. 1 (8th Cir.1987). As the rule 12(b)(6)
record in the present case adequately avers reasonable reliance, we take no
position on the matter
Assuming without deciding that appellants presented a sufficient motion for

summary judgment merely by filing their "Memorandum in Opposition to
Motion to Dismiss and in Support of Motion for Summary Judgment,"
summary judgment would not be warranted on their Sec. 523(a)(2)(A) claim, as
the summary judgment record would not compel a finding that Lane had no
intention to comply with the terms of the stock purchase agreement from the
outset. See Anderson v. Liberty Lobby, Inc., 477 U.S. 242, 249, 106 S.Ct. 2505,
2510, 91 L.Ed.2d 202 (1986) (summary judgment not proper if there is
"sufficient evidence favoring the nonmoving party for a jury to return a verdict
for that party"); Siegal v. American Honda Motor Co., Inc., 921 F.2d 15, 17
(1st Cir.1990) (summary judgment warranted only if moving party is entitled to
judgment as a matter of law)
10
Of course, we intimate no view as to how the Sec. 523(a)(2)(A) claim is to be

resolved on remand

Bankr. L. Rep. P 74,064 in Re Andrew J. Lane, Debtor. Peter H. McCallion v. Andrew J. Lane, 937 F.2d 694, 1st Cir. (1991)

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Bankr. L. Rep. P 74,064 in Re Andrew J. Lane, Debtor. Peter H. McCallion v. Andrew J. Lane, 937 F.2d 694, 1st Cir. (1991)

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937 F.

Bankr. L. Rep. P 74,064

United States Court of Appeals,

Peter H. McCallion, Garrison, N.Y., for appellants.

form of an irrevocable letter of credit. Lane subsequently refused to tender the

There is no contention that Bankers Trust acceded to the proposal.

A rule 12(b)(6) dismissal is subject to de novo review. We will affirm the

A. "Constructive Trust" Claim

Third, appellants' putative status as intended beneficiaries of the line of credit

In sum, appellants allege no set of facts sufficient to demonstrate the fiduciary

C. Sec. 523(a)(2)(A) Claim

Appellants minimally state an actionable nondischargeability claim under

Although appellants charge that Lane fraudulently induced them to transfer

E. Sec. 523(a)(4) Claim

Appellants' Sec. 523(a)(4) nondischargeability claim, charging fraud or

Appellants were provided with a copy of Lane's letter

Appellants similarly argue that the October 17 letter amounted to a promise

Assuming without deciding that appellants presented a sufficient motion for

Of course, we intimate no view as to how the Sec. 523(a)(2)(A) claim is to be

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