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).