CONTRACTOR WINS AGAINST NONDISCHARGEABILITY CLAIMS OF CLIENT

The business of building contractors has been bad since the housing bubble burst. Gone are the days when homeowners can easily get a 2nd trust deed against equity in their homes for home improvement. A lot of houses are under water. Even a homeowner with a perfect credit score cannot get financing for home improvement because his house cannot qualify for a 2nd trust deed loan without equity. Going to a building contractors’ convention nowadays is just like attending a funeral. Hence, many contractors get into cash flow problems for lack of business and cannot finish projects contracted and paid for. They walk away from projects leaving clients who are angry and frustrated because they have paid for a finished house that is only halfway done. Scenarios like these are ripe for non-dischargeability claims based on fraud and deceit when contractors file for bankruptcy relief.

Like most debtors, honest contractors also qualify for debt relief and a fresh start in life in bankruptcy. But they face the possibility of defending against non-dischargeability claims from clients because it looks like the just took their clients money and did not finish the job. Client normally relies on the non-dischargeability claims of fraud and intent to cause injury against contractors to substantiate their adversarial complaints.

However, what most clients fail to understand is that as plaintiffs, they have to prove by a preponderance of evidence that the contractor had the intent to defraud and deceive them when the contract was signed to have their claims excepted from discharge. It is not enough just to allege fraud and deceit on the part of contractor.

In Re McMann, debtor was an officer and director of Wizard, a Florida corporation engaged in the construction of houses. In May 2005, the plaintiff, a limited liability company formed for the purpose of building a house for Mr. & Mrs. Straus, hired Wizard to build the house for $600,000. Five months later, after learning that liens had been placed against the property for unpaid supplies and services, and worried that the job would not be completed on time, the plaintiff repudiated the contract and sued debtor, his wife, his dog, his parakeet and Wizard. The court granted summary judgments for his dog and parakeet on the ground that they were strangers to the contract. Plaintiff also filed complaints with the Florida Department of Business and Professional Regulation (DBPR) asking the department to allow plaintiff to tar and feather debtor in public.

Plaintiff obtained a judgment of $1.6 million against debtor’s wife and wizard but could not get a judgment against debtor because he filed for bankruptcy. Plaintiff then filed an adversary complaint asserting that it held a claim that was non-dischargeable pursuant to Section 523(a)(2) and (a)(6), fraud and deceit, and intent to cause injury. At trials, it was revealed that seven clients paid debtor to build homes for them between June 2004 and April 2006. None of the homes were completed, and all of the clients filed complaints with the DBPR, but only plaintiff asked to tar and feather debtor. IT was also discovered that the debtor used money paid to Wizard to pay his personal expenses. The court found no proof that the debtor falsely represented that the house would be completed within one year, noting that there was too little information regarding the debtor’s financial condition to conclude that it was impossible, and the plaintiff’s repudiation of the contract prevented performance. But even if the representation was false, the court found no evidence of INTENT TO DECEIVE. The court also found no intent to harm plaintiff. Buried in the plaintiff’s post trial brief was a request that the court amend the pleadings to conform to the evidence presented at trial and rule that its claim be excepted under Section 523(4) – “fraud or defalcation while acting in a fiduciary capacity, embezzlement, or larceny;”. However, the court disagreed with plaintiff because plaintiff’s counsel did not bring this factor up at trial.

Plaintiff’s claim for $1.6 million DISCHARGED.

Lawrence Bautista Yang is a graduate of Georgetown University Law Center and has been in law practice for thirty years. He specializes in bankruptcy, business and civil litigation and has handled more than five thousand successful bankruptcy cases in California. He speaks Mandarin and Fujien and looks forward to discussing your case with you personally. Please call (626) 284-1142 for an appointment at 1000 S Fremont Ave Bldg A-1 Suite 1125 Unit 58 Alhambra, CA 91803.