DOES ‘STOP PAYMENT’ ORDER INDICATE FRAUD?

We are talking about a “stop payment” order on a check to pay for services. Debtor then files for bankruptcy relief. Creditor objects to the discharge of debt because of the “stop payment” order. To illustrate, you hire a contractor to repair your house for $10,000. You give him a check for $10,000. He completes repairs then deposits your check. You stop payment on your check. Then you file for bankruptcy to discharge your debts including the $10,000 owed to the contractor. The contractor objects to the discharge of the $10,000 alleging that you defrauded him because you stopped payment on your check. Who is correct?

 In Re Lamanna, the debtor-defendant hired the plaintiff, Raleigh Plumbing & Heating Inc. to do plumbing work on a residential remodeling project for which he served as contractor. The plaintiff submitted an invoice to the debtor for a portion of the work. The plaintiff refused to return to the job until that invoice was paid. The debtor gave a check to the plaintiff for the amount due. After calling the bank to confirm that the check was good, the plaintiff completed the plumbing work. Big mistake! Should have asked for a cashier’s check. A check is useless until the funds have cleared. So it’s a no brainer that you should always ask for cash, certified check up front, or perform your service only after the check has cleared.

Three days later, the bank notified the plaintiff that a stop payment order had been placed on the check by the debtor. The plaintiff sued the debtor, and obtained a default judgment against him for actual damages of $2,890, punitive damages of $10,000, and attorney’s fees of $750. Debtor then filed for Chapter 13 bankruptcy. Plaintiff filed an adversary proceeding alleging that its claim was not dischargeable. The plaintiff alleged that the debtor fraudulently induced it to finish the job with a false promise of payment. § 523 (a)(2)(A) excepts from discharge any debt “for money, property, services, or an extension, renewal, or refinancing of credit, to the extent obtained by- (A) false pretenses, a false representation, or actual fraud, other than a statement respecting the debtor’s or an insider’s financial condition;” The debtor responded in a Clintonesque fashion, “I smoked but I did not inhale.” The debtor said that he intended to pay when he delivered the check (sure, just like when King David responded to his ten wives who asked him if he was interested in Bathsheeba. “What innocent me interested in Bathsheeba? No way, she’s butt ugly!” But then he had a disagreement with the homeowner. Debtor and the homeowner agreed that the debtor should immediately stop work without completing the project. The debtor said he told the homeowner that she would be responsible for paying the subcontractors including plaintiff. He stopped payment on the plaintiff’s check based on his assumption that she would in fact pay the homeowners would in fact pay the plaintiff.

Who do you think the court sided with? The bankruptcy court ruled for the debtor! “The evidence tends to support the debtor’s rendition of the circumstances,” the court said, adding that this case differed from those in which the debtor received a clear benefit. “In the present case, the chronology of events and the evidence as a whole is insufficient to establish that the debtor induced RPH to provide plumbing works with no intention of paying for the services, i.e., with intent to deceive. At most, the debtor’s belief that the homeowner would be responsible for paying unpaid subcontractors such as plaintiff was an ill-advised assumption, rendering the choice to stop payment on the check a bad one. That bad decision, nevertheless, does not constitute fraud for purposes of 523(a)(2)(A). King David was not that lucky. His first son with Bathsheeba died after a lingering illness and his two other sons were also killed as punishment for coveting Bathsheeba and sending her husband Captain Urriah to the heat of battle where he died.