United States Court of Appeals,

Eleventh Circuit.

No. 95-2658.

In re Arthur L. JOHANNESSEN, Jr. & Claudette Johannessen, p/k/a

Claudette LaPointe, Debtors.

Jeffrey R. FULLER; Nancy L. Fuller, Plaintiffs-Appellants,

v.

Arthur L. JOHANNESSEN, Jr., Claudette Johannessen, p/k/a

Claudette LaPointe, Defendants-Appellees.

Feb. 28, 1996.

Appeal from the United States District Court for the Middle

District of Florida. (No. 94-1900-Civ-T-17B and 93-00839),

Elizabeth A. Kovachevich, Chief Judge.

Before ANDERSON and BLACK, Circuit Judges, and FAY, Senior Circuit

Judge.

FAY, Senior Circuit Judge:

This appeal arises from the District Court's order affirming

the Bankruptcy Court's decision to grant a motion to dismiss for

failure to state a claim upon which relief can be granted.

Appellants contend that the District Court erroneously affirmed the

Bankruptcy Court's dismissal by imposing upon them the burden of

proving facts in response to a motion addressing only the

sufficiency of the complaint. We VACATE the judgment of the

District Court with instructions that it VACATE the order of the

Bankruptcy Court and REMAND the matter to the Bankruptcy Court for

proceedings on the merits.

I. BACKGROUND

Arthur Johannessen, Inc., a corporation in which Arthur

Johannessen was the principal, constructed a home for creditors,

Jeffrey and Nancy Fuller ("Fullers"). The Fullers filed a
complaint in state court against Johannessen, individually,

alleging, inter alia, fraud and breach of contract in the

construction of the home. However, the parties entered into a

settlement agreement in which Johannessen agreed to pay the Fullers

the sum of $16,000 with $3500 due immediately and the remainder to

be paid pursuant to a promissory note. Judgement was then entered

in accordance with the settlement agreement.

The appellees subsequently filed a voluntary petition for

bankruptcy, under Chapter Seven, with the United States Bankruptcy

Court for the Middle District of Florida. Thereafter, appellees

filed their Schedule F disclosing the appellants as unsecured

creditors.

In response, the Fullers filed their original complaint to

determine dischargeability of debt. The Bankruptcy Court entered

an order of conditional dismissal for failure to include the

appropriate caption, appropriate copies of summons, and filing fee.

The appellants then filed an amended complaint to determine

dischargeability of debt. Appellees filed a motion to dismiss

pursuant to Rule 12(b)(6) of the Federal Rules of Civil Procedure

made applicable to adversary bankruptcy proceedings under Rule 7012

of the Federal Rules of Bankruptcy Procedure. The Bankruptcy Court

entered an order granting the motion to dismiss for failure to

state a claim which granted leave for the filing of a second

amended complaint.

Appellants filed a second amended complaint and in turn, the

appellees filed a motion to dismiss pursuant to the aforementioned

Federal Rules. The Bankruptcy Court granted the motion to dismiss
for failure to state a claim, whereby Counts I and II were

dismissed with prejudice, however, Count III was dismissed with

leave to amend. Appellants filed a third amended complaint and the

appellees again filed a motion to dismiss. After a hearing on the

matter, the Court entered its order granting the motion to dismiss

for failure to state a claim, thereby dismissing appellant's third

amended complaint with prejudice.

The appellants filed a notice of appeal to the District Court,

where that court affirmed the Bankruptcy Court's order dismissing

the second and third amended complaints with prejudice. Appellants

appeal the decision of the District Court affirming the order of

the Bankruptcy Court solely with regard to the dismissal of the

third amended complaint.

II. STANDARD OF REVIEW

 Our review of a dismissal for failure to state a claim is de

novo. Hunnings v. Texaco, Inc., 29 F.3d 1480, 1484 (11th

Cir.1994).

III. DISCUSSION

Appellants assert that the District Court erroneously affirmed

the Bankruptcy Court's dismissal of appellants' third amended

complaint with prejudice by imposing upon them the burden of

proving facts while opposing a motion which solely addresses the

complaint's sufficiency. In the complaint appellants alleged that

the debt is excepted from discharge pursuant 11 U.S.C. §

523(a)(2)(A). As an exception to its discharge provisions, § 523

of the Bankruptcy Code provides:

(a) A discharge under section 727 ... of this title does not

discharge an individual debtor from any debt—
 * * * * * *

(2) for money, property, services, or an extension, renewal,

or refinancing of credit, to the extent obtained by—

 * * * * * *

(A) false pretense, a false representation, or actual fraud,

other than a statement respecting the debtor's or an

insider's financial condition;

"Since 1970 ... the issue of nondischargeability has been a

matter of federal law governed by the terms of the Bankruptcy

Code." Grogan v. Garner, 498 U.S. 279, 284, 111 S.Ct. 654, 658,

112 L.Ed.2d 755 (1995). Furthermore, the operative terms in §

523(a)(2)(A) of "false pretenses, a false representation, or actual

fraud" are common-law terms which intimate elements the common law

has defined them to comprise. Field v. Mans, --- U.S. ----, ----,

116 S.Ct. 437, 443, 133 L.Ed.2d 351 (1995).

 The District Court properly relied on Conley v. Gibson, 355

U.S. 41, 78 S.Ct. 99, 2 L.Ed.2d 80 (1957), for the rule that "a

complaint should not be dismissed for failure to state a claim

unless it appears beyond doubt that the plaintiff can prove no set

of facts in support of his claim which would entitle him to

relief." Id. at 45-46, 78 S.Ct. at 102. However, the District

Court also cited Urbatek Systems, Inc. v. Lochrie (In re Lochrie),

78 B.R. 257 (Bankr. 9th Cir.1987), for the proposition that a

creditor is not entitled to assert a legal allegation in a

complaint with no substantial proof. The District Court continued

by stating: "... [A] mere allegation of a cause of action under §

523 is insufficient to render the claim dischargeable." Fuller v.

Johannessen, 180 B.R. 682, 686 (Bankr.M.D.Fla.1995) This is

followed by a discussion of the settlement in the state court
matter and the conclusion that: "Therefore, Appellants have not

met the preponderance of the evidence standard required in Section

523 determinations of dischargeability, and this Court affirms ..."

Id.

Most respectfully, we feel that the District Court has

misinterpreted these cases and imposed an improper burden on

appellants. Lochrie dealt with the availability to unlisted

creditors of the savings provisions of § 523(a)(3)(B) and 523(c).

As pointed out in Lochrie, after testing the sufficiency of the

allegations, there must be a trial on the merits. The problem in

Lochrie arose because of a summary ruling based upon the

allegations alone. The court there concluded: "We reverse the

bankruptcy court's ruling insofar as it finds that mere allegations

of a cause of action under § 523(a)(2), (4), or (6) are sufficient

for a finding of nondischargeability under § 523(a)(3)(B). This

matter is remanded to the bankruptcy court for a determination of

the merits of Urbatek's § 523(a)(2)(B) claim." Lochrie, 78 B.R. at

259.

There are two steps in handling these questions. The first

involves a review of the sufficiency of the allegations. If the

allegations are sufficient, the second step deals with the trial on

the merits under the appropriate burden of proof.

 In reviewing the sufficiency of the allegations, we turn to

Conley. "The Federal Rules of Civil Procedure do not require a

claimant to set out in detail the facts upon which he bases his

claim ... all the Rules require is a "short and plain statement of

the claim' that will give the defendant fair notice of what the
 1

In Vann, this circuit clarified that the applicable

standard of reliance a creditor must establish is "justifiable"

reliance rather than "reasonable" reliance. 

plaintiff's claim is and the grounds upon which it rests." Conley,

355 U.S. at 47, 78 S.Ct. at 103. In addition, "the district court

must accept the allegations of the complaint as true and must

construe the facts alleged in the light most favorable to the

plaintiff." Hunnings, 29 F.3d at 1484.

 The elements of a claim under § 523(a)(2)(A) are: the debtor

made a false statement with the purpose and intention of deceiving

the creditor; the creditor relied on such false statement; the

creditor's reliance on the false statement was justifiably founded;

and the creditor sustained damage as a result of the false

statement. See Schweig v. Hunter (In re Hunter), 780 F.2d 1577,

1579 (11th Cir.1986); City Bank & Trust Co. v. Vann (In re Vann),

67 F.3d 277 (11th Cir.1995).1

 With regard to the first element, the Fullers alleged, inter

alia, that appellee Arthur Johannessen misrepresented that monies

delivered to him from the Fullers would be applied pursuant to

their contract and that upon each draw application made by the

appellee, he represented that subcontractors and materialman

providing services or materials to the construction of the

appellants' home were fully paid by the draws from the appellants.

Further, appellants alleged that at the time the appellee accepted

delivery of the monies, he intended to misappropriate the funds for

his own use and for some of the start-up costs for homes other than

their own.

With regard to the second element, the appellants alleged that
they relied on the appellee's misrepresentations to their detriment

by delivering monies to him. With regard to the third element,

under the circumstances, as alleged by appellants, they would be

justified in relying on the statements. And further, with regard

to the fourth element, appellants alleged that they sustained

monetary damages as a result of the misrepresentations. We find

that the allegations are sufficient to state a claim upon which

relief can be granted. That being so, there must now be a trial on

the merits.

 Should Johannessen raise the contention on remand that the

settlement agreement nevertheless serves to extinguish appellants'

claim, the Bankruptcy court must consider this contention in light

of Greenberg v. Schools, 711 F.2d 152 (11th Cir.1983). In

Greenberg, this circuit held that "a debt which originates from the

debtor's fraud should not be discharged simply because the debtor

entered into a settlement agreement." Id. at 156. Rather, the

Bankruptcy Court should examine the factual circumstances behind

the settlement agreement to determine whether or not the debt

incurred stemmed from the alleged fraudulent conduct. Id. If the

court finds that the conduct was indeed fraudulent and resulted in

the debt at issue, the debt should be excepted from discharge. Id.

IV. CONCLUSION

We VACATE the judgment of the District Court with instructions

that it VACATE the judgment of the Bankruptcy Court and REMAND the

matter to the Bankruptcy Court for proceedings on the merits.