Boston Bankruptcy Update: ONE MAN’S “BREACH OF CONTRACT” CAN SOMETIMES BE ANOTHER MAN’S “FRAUD”

In a recent decision by Bankruptcy Judge William C. Hillman in the case of In re Kappeler, the Bankruptcy Court in Boston was presented with a Motion to Dismiss an adversary proceeding seeking to declare a debt that the Debtor thought was a dischargeable breach of contract one for a non-dischargeable fraud. The Debtor, an electrician, had been hired to do some electrical work for the plaintiff, an assisted-living facility in Blackstone, Massachusetts.

 

The plaintiff claimed that the Debtor had represented that he would perform the electrical work and install a fire alarm system in a competent fashion, that he would complete all work to code standards and that all work had passed inspection. The plaintiff went on to allege that the electrical work was not code compliant and did not meet the requirements for a commercial assisted-living facility, necessitating  the plaintiff to pay substantial sums for correction of the work performed by the Debtor. When the Debtor filed a petition for bankruptcy protection under Chapter 7 of the Bankruptcy Code, the plaintiff brought an adversary proceeding to declare the debt owed to it to be non-dischargeable for fraud.

 

The Debtor responded with a Motion to Dismiss the case based upon the assertion that, among other things, the Plaintiff’s damages were caused from substandard work (i.e. a breach of contract) and not from any misrepresentation as to whether the work was “up to code” or had not been inspected (i.e. positive fraud). The court denied the Motion to Dismiss pointing out that the Debtor had been paid some $35,000 for the electrical work that he did do and therefore the claim for fraud, although needed to still be proven with evidence, the adversary proceeding’s Complaint, in fact, was “plausible” and therefore not subject to being dismissed by the court at that point in the adversary proceeding.

 

What does this really mean for debtors and creditors? Generally, a simple breach of a contract, by itself, does not give rise to a debt that is non-dischargeable for fraud. However, where specific representations are made about the quality of the work or whether work will be performed in a particular way, such representations may give rise to a potential adversary proceeding for non-dischargeability. By comparison, in the case of Bellas Pavers v. Stewart, the very same Judge granted a directed verdict in favor of the Debtor after the close of a plaintiff creditor’s case where the creditor (a sub-contractor) could not prove that the Debtor (the general contractor) intended not to pay the contractor at the time that the contractor was retained. Judge Hillman was affirmed by the Bankruptcy Appellate Panel for the First Circuit on an appeal defended by my firm. Which only goes to show that when differentiating between a contract claim and fraud claim, the “devil is in the details”.

 

In Re: Kappeler, Daniel W. (Lawyers Weekly No. 04-012-14) (16 pages) (Hillman, J.) (USBC) Jonathan Horne, of Jager Smith, for the debtor; Patrick O. Flaherty for plaintiff Ducharme Estates, Ltd. (Chapter 7 Case No. 11-18166-WCH; Adversary Proceeding No. 13-1166) (Jan. 30, 2014).

Boston Bankruptcy Update: A Chapter 13 Debtor must include ALL pre-petition mortgage arrears in Plan

A Boston Bankruptcy Judge recently held that a Chapter 13 Plan must include all pre-petition arrears in their plan, or it cannot be confirmed.


Where a mortgage lender has objected to confirmation of a Chapter 13 plan, the objection must be sustained and the plan cannot be confirmed unless the plan provides for a plan to cure all of the prepetition arrearage.

“This case is before the court on three related matters: mortgagethe objection of chapter 13 debtor Ella L. Everett’s (the ‘Debtor’) to the proof of claim of Deutsche Bank Trust Company (‘Deutsche Bank’), Deutsche Bank’s objection to confirmation of the Debtor’s third amended chapter 13 plan (the ‘Plan’), and Deutsche Bank’s motion for relief from the automatic stay. The Debtor alleges that when her mortgage and note were transferred to Wells Fargo and subsequently to Deutsch Bank, these entities failed to credit payments to her account, improperly paid for insurance for one year, and improperly added fees and late charges to her mortgage. Therefore, she contends, the amount alleged to be in arrears on the mortgage pre‐petition by Deutsche Bank is incorrect, as is the total amount alleged to be outstanding on the note and mortgage. Deutsche Bank defends the amounts in its proof of claim and objects to confirmation of the Debtor’s Plan for grossly understating the extent of the arrearage it purports to cure. In support of its motion for relief from the automatic stay, Deutsche Bank argues that the Debtor has fallen some eight months further in arrears post‐petition. …

“I find that the Debtor has failed to produce substantial evidence to rebut the prima facie evidence that the Deutsche Bank proof of claim is correct. Therefore, the Debtor’s objection to proof of claim is overruled. Deutsche Bank has an allowed secured claim in the amount of $319,495.05, with prepetition arrears in the amount of $63,545.03. …

“Deutsche Bank argues that the Plan fails to provide for payment of its entire pre‐petition arrearage of $63,495.03, as the plan only proposes to cure pre‐petition arrears in the amount of $14,697.00. …

“I have determined that Deutsche Bank has an allowed secured claim in the amount of $319,495.05, including pre‐petition arrears in the amount of $63,545.03. Pursuant to 11 U.S.C. §1322(b)(5), a plan may ‘provide for the curing of any default.’ A debtor taking advantage of this option must cure the whole default. This plan fails to do so and therefore may not be confirmed. The objection to confirmation is accordingly sustained.”

In Re: Everett, Ella L. (Bailey, J.) (USBC) (Chapter 13 Case No. 10-19457-FJB) (July 15, 2013).

Divorce Attorney’s Legal Fees were not Dischargeable in a Chapter 7 Bankruptcy – where Court Found they were Incurred by way of Fraud

Where a Woman filed a Chapter 7 Bankruptcy After Racking up Thousands of Legal Fees for Her Divorce, the Bankruptcy Court Determined that the Woman Still Had to Pay Those Legal Fees – Divorce Legal Fees Incurred by Fraud are Not Discharged in Bankruptcy

Where a debtor owes fees to the law firm that represented her in a divorce proceeding, the debt is nondischargeable under 11 U.S.C. §523(a)(2)(A).

“By his complaint in this adversary proceeding, plaintiff Thomas Bolton, as assignee for purposes of collection of a claim belonging to the law firm of Conn Kavanaugh Rosenthal Peisch & Ford, LLP (‘CKRPF’), of which he is the controller, seeks a determination that the debt for legal fees owed to the firm for its representation of the defendant and debtor, Erin G. Kenneally, a/k/a/ Erin K. Hughes (‘Kenneally’), during the latter’s divorce proceeding is excepted from discharge. CKRPF contends that the debt is excepted from discharge under 11 U.S.C. §523(a)(2)(A) as a debt arising from false representations and false pretenses and under 11 U.S.C. §523(a)(6) as a debt for willful and malicious injury to CKRPF. As the gravamen of both counts, CKRPF alleges that Kenneally made a false promise of payment to the firm, a promise to pay the firm’s fees that she had no intent to honor, in reliance on which the firm was injured by expenditure of time and effort without compensation. …

“… Kenneally did promise to pay CKRPF for the services of its attorneys and for its expenses. She also promised to make this payment from the proceeds of the marital home, upon its sale. In making these promises, however, she tacitly but consciously reserved to herself the prerogative of paying as she saw fit in light of her then‐existing financial circumstances. I do not find that, when she made the promises, she had resolved not to pay — the evidence suggests that she did not decide whether she would pay until much later. I do find that, notwithstanding her outward promises, she had not, when she made her promises, resolvedto pay, had made no internal commitment to pay. As a promise is a commitment, her lack of commitment, resolve, and intent to pay rendered the promise false, a false representation of her intent and state of mind. ‘[A] promise made with a positive intent not to perform or without a present intent to perform satisfies §523(a)(2)(A).’ Rubin v. West (In re Rubin), 875 F.2d 755, 759 (9th Cir. 1989) (emphasis added). She made this false representation with knowledge of its falsity, knowledge that the Firm was unaware of her inward reservation, and intent to deceive and induce reliance.

“The Firm did actually rely on these false promises by rendering services to her and electing not to insist on payment from other assets as a condition of continuing its service. The fact that the Firm did not take or insist on a mortgage on the home to secure its claim does not prove lack of reliance; rather it shows precisely that the Firm relied on the promise itself and nothing else. The reliance was justifiable; Kenneally does not contend that the Firm had reason to doubt the veracity of her promises. And that reliance caused the Firm to render services and make expenditures on Kenneally’s behalf, the services and expenditures that form the basis of its claim; but for these promises, the Firm would not have rendered the service and expenditures that gave rise to the debt. Accordingly, I conclude that the debt to the Firm, including any interest thereon, and any costs and attorney’s fees that may be awarded for its collection, are excepted from discharge under §523(a)(2)(A).”

In Re: Kenneally, Erin G. (Bailey, J.) (USBC) (Chapter 7 Case No. 11-22021-FJB; Adversary Proceeding No. 12-1074) (May 24, 2013).

Mass. Bankruptcy Law Update: State Court Fraud Verdict can be used to prove Fraud in Bankruptcy Court

Bankruptcy – Fraud – Collateral estoppel

Published: 7:43 am Fri, May 17, 2013
By Tom Egan

Where a creditor has charged a debtor with fraud under 11 U.S.C. §523(a)(2)(A), the debtor is collaterally estopped from relitigating the fraud issue based on a state court jury verdict.

“The issue presented by the Motion for Summary Judgment is whether the Plaintiff is entitled to summary judgment because the Debtor is collaterally estopped from contesting his liability under §523(a)(2)(A) based upon a state trial court jury verdict for fraud entered against the Debtor in favor of the Plaintiff. …

“The parties’ present dispute centers on whether the issue decided by the jury in the Superior Court case is identical to the issue presented in the adversary proceeding under §523(a)(2)(A). That is, whether the elements of fraud under Massachusetts law, as found by the jury based on the jury instructions, and fraud under §523(a)(2)(A) are identical. If the two standards are sufficiently identical, then the Debtor is collaterally estopped from litigating the merits of an exception to discharge under §523(a)(2)(A).

“Specifically, under §523(a)(2)(A), a plaintiff must prove actual fraud, not simply fraud implied by law. …

“Although the Superior Court summarized the elements of fraud under Massachusetts law in the jury instructions by referencing five elements, and the First Circuit in McCrory [v. Spigel, 260 F.3d 27 (1st Cir. 2001) and Palmacci [v. Umpierrez, 121 F.3d 781 (1st Cir. 1997)] referenced six elements under §523(a)(2)(A), the standards align. Notably, the First Circuit inCummings [v. HPG, Int’l, Inc., 244 F.3d 16 (1st Cir. 2001)] condensed the number of elements to three. This Court concludes that the actual number of elements used is not dispositive and finds that the jury instructions delivered by the Superior Court satisfy the requirements for an exception to discharge under §523(a)(2)(A). …

“… [T]he jury instructions and the jury verdict comport with the requirements for an exception to discharge under §523(a)(2)(A), and collateral estoppel applies to preclude relitigation of the Plaintiff’s claim. Given the preclusive effect of the judgment, there can be no genuine dispute as to any material fact on the issue of whether fraud was committed that led to a nondischargeable debt under §523(a)(2)(A). Accordingly, the Plaintiff is entitled to judgment as a matter of law. …

“Upon consideration of the foregoing, the Court shall enter an order granting the Plaintiff’s Motion for Summary Judgment with respect to Count I of her Complaint.”

In Re: Spagnuolo, Robert E., Jr. (Lawyers Weekly No. 04-039-13) (26 pages) (Feeney, J.) (USBC) (Chapter 7 Case No. 11-10844-JNF; Adv. P. No. 11-1290) (May 15, 2013).