United States District Court, C.D. Illinois, Urbana Division
December 8, 2014
IN RE: DREW W. MILLER & ANGIE MILLER, Debtors.
DREW MILLER, Appellee ROBERT APPERSON & CAROL APPERSON, Appellants,
For Carol Apperson, Robert Apperson, Appellants: Rochelle A Funderburg, LEAD ATTORNEY, MEYER CAPEL PC, Champaign, IL.
For Drew W Miller, Appellee: Brian D Pondenis, LEAD ATTORNEY, PONDENIS LAW OFFICE, Urbana, IL.
COLIN S. BRUCE, UNITED STATES DISTRICT JUDGE.
This is an appeal from an Order entered by the United States Bankruptcy Court for the Central District of Illinois, in Bankruptcy Case No. 13-90326, brought pursuant to 28 U.S.C. § 158(a). Following this court's careful review, this court affirms the Order of the Bankruptcy Court.
On March 19, 2013, Drew W. Miller and Angie Miller filed for Chapter 7 bankruptcy protection. On May 9, 2013, Plaintiffs Robert Apperson and Carol Apperson filed an adversary complaint against Defendant Drew W. Miller, individually and d/b/a DMC Custom Homes. Plaintiffs brought their action pursuant to 11 U.S.C. § 523(a)(2) and alleged that their claim against Defendant was not dischargeable in bankruptcy based upon fraud. Specifically, Plaintiffs alleged that, on or about February 19, 2010, Plaintiffs and Defendant entered into a contract wherein Defendant agreed to make repairs to a home owned by Plaintiffs in Savoy, Illinois, as a result of a fire that occurred there. Plaintiffs attached a copy of the contract to their adversary complaint. Plaintiffs alleged that Defendant undertook to make the repairs and, pursuant to the agreement, Plaintiffs signed over insurance proceeds for the fire damage received from their insurance carrier, Country Mutual. Plaintiffs alleged that Defendant took the money and used the money for other matters not connected with Plaintiffs' project and failed to complete Plaintiffs' project. Plaintiffs alleged that Defendant supplied figures to Plaintiffs indicating that Defendant required an additional $16, 605.29 before work would proceed due to problems with Country Mutual and Plaintiffs. Plaintiffs attached a copy of Defendant's statement. Plaintiffs alleged that Defendant then abandoned the project. Plaintiffs alleged that Defendant breached his agreement with Plaintiffs and committed fraud, setting out a lengthy list of things Defendant failed to do, including failing to pay subcontractors and suppliers, failing to supply and install doors and hardware for the doors, failing to supply and install trim work, and failing to repair the concrete driveway damaged by Defendant. Plaintiffs asked for a judgment against Defendant in the amount of $134, 134.44, representing damages due to Defendant's fraud.
On March 28, 2014, the parties filed a Consolidated Pretrial Order with the Bankruptcy Court. For their statement of the case, Plaintiffs stated that Defendant breached his agreement with Plaintiffs and committed fraud by failing to pay subcontractors and suppliers, failing to provide a Contractor's Affidavit when requested by Plaintiffs, failing to provide lien waivers and failing to supply and install various items at the project. Plaintiffs stated that they had been damaged in the amount of $150, 000. In his statement of the case, Defendant stated that he, along with other contractors, was hired to preform repairs on Plaintiffs' home. Defendant stated that he received some funds for the work and performed or contracted for completion of the work. Defendant stated that, unfortunately, Plaintiffs were unsatisfied with the work performed and ultimately refused to allow Defendant to complete the work. Defendant stated that he did not breach the agreement with Plaintiffs or, if he did, he was unilaterally prevented from mitigating such a breach by Plaintiffs. The Pretrial Order set out the following undisputed facts:
Plaintiffs entered a contract with the Defendant on or around February 19, 2010 for repairs to their home located at 308 Ellen, Savoy, Illinois. Defendant undertook to make the repairs. Plaintiffs signed over insurance proceeds for the repairs, received from their insurance carrier, Country Mutual. Defendant advised Plaintiffs that almost all funds had been spent and that the only funds remaining were retainage. Defendant told Plaintiffs that an additional $16, 605.29 was required before work would proceed. Defendant did not finish the project. Defendant did not provide [a] Contractor's Affidavit or lien waivers after Plaintiff requested them. Defendant failed to pay subcontractors and suppliers.
On March 31, 2014, a trial was held on Plaintiffs' adversary Complaint before United States Bankruptcy Judge Gerald A. Fines. Plaintiffs called Defendant as their first witness. Defendant testified that he agreed to finish the work at Plaintiff's house as proposed in the original contract, which required the repair of the fire damage to the house. Defendant also testified that, when Plaintiffs signed over the last check from Country Mutual, it resulted in an overpayment to him. Defendant testified that he wrote Plaintiffs a check for about $3, 800 for the difference. Defendant stated that, at that time, Plaintiffs still owed the subcontractors almost $46, 000. Defendant testified that Plaintiffs did not take the check he gave them to the bank for almost a year. Defendant stated that, by that time, he had been out of work for seven months, went bankrupt and lost everything, so the check did not clear. The exhibits introduced at trial show that Defendant wrote a check to Bob Apperson for $3, 870.12 on September 28, 2010. The check was not presented to the bank until September 2011 and did not clear the bank on September 26, 2011.
Defendant testified that it was Plaintiffs' obligation to pay the subcontractors because they would not work with any of the subcontractors he provided and wanted to pick their own subcontractors. Defendant testified that he, Country Mutual and Plaintiffs met " and everybody knew that their subcontractors were far more expensive than what Country was allowing to pay." Defendant said that he told Plaintiffs that he had not worked with the subcontractors they wanted and, if they wanted to use them, they could pay them directly. Defendant agreed that he never completed the job and testified that his portion of what needed to be done was the trim and doors, the staining of the windows, standard punch list items, and the closet shelving. He stated that the rest would have been covered under the allowances for the subcontractors, which he was not paid for. Defendant agreed that he told Carol Apperson when she signed the last check over to him that he would finish the job. Defendant testified that he did not consider himself the general contractor on the job because a general contractor has his own subcontractors that work for him and, on this job, he did not even know the subcontractors. Defendant testified that Robert Apperson was at the job site just about every day.
Defendant admitted that he received checks from Country Mutual and had no records related to this project. He stated that he paid his suppliers in cash and was not able to provide a contractor's affidavit or lien waivers. Defendant testified that he did not complete his portion of the job because, once Plaintiffs realized Country Mutual was not paying for all of the extras, they kicked him off the job and wouldn't let him finish. Defendant stated that he was more than willing to come back and finish the project, but he was not allowed to. He testified that he was never allowed to go back. Defendant testified that he purchased and stained doors and trim for the project, but they sat around in a storage unit for two years and got ruined. Defendant testified that he was not allowed to return, had an accident, then went bankrupt and lost everything. He testified that's why things were not done and stated, " It's not like I maliciously took their money. I never intended on deceiving these people." Defendant denied that he damaged the concrete driveway at the house. He admitted there were problems with the drywall but testified that he was not allowed to come back to correct it. Defendant admitted that he did not pay most of the subcontractors, but again stated that it was Plaintiffs' responsibility to pay them. Defendant admitted he sent Plaintiffs a letter stating that they owed him another $16, 605.29 and owed the subcontractors around $46, 000. Defendant testified, however, that it is his position that, if he were to return to the project, Plaintiffs would not owe him money, they would owe the subcontractors money.
Plaintiffs' next witness was Laura Earl, who had previously worked for Country Mutual. Earl testified that she took over claims adjustment for Plaintiffs after their file was assigned to her. Earl testified that she suggested Defendant as a possible contractor for Plaintiffs. She said she had worked with Defendant on prior projects for insureds through Country Mutual, with no complaints about Defendant. Earl testified that, on this project, most subcontractors were chosen by Plaintiffs, which is not typical. Earl testified that Plaintiffs made changes to the project. She stated that it was clearly made known to Plaintiffs " that it would be their responsibility for anything over and above what Country was authorizing." Earl testified that Country Mutual would issue a certain amount up front and then release additional amounts as job pieces were completed. Earl testified that she actually went to the project to see whether percentages of the work had been completed. Earl testified that she was no longer the adjuster on the project when the last checks were issued by Country Mutual. Earl stated that Country Mutual would not have issued checks for the project if it did not feel the work had been performed.
Plaintiff Carol Apperson (Carol) was the next witness. She testified that the home they owned in Savoy was rental property that was rented at the time of the fire. Carol stated that they selected Defendant as their contractor because he was highly recommended by Earl. Carol testified it was their understanding that their contract with Defendant would cover all the work that needed to be done on the project. She testified that they understood that anything that was over and above Country Mutual's allowances was their responsibility. She testified that she thought the subcontractors that were selected would be paid out of Country Mutual's checks and that Defendant, as contractor, would pay the subcontractors. She stated that she understood that they would pay the excess. Carol testified that they began to have problems with Defendant when he brought things out of the attic for them to go through and then threw everything in the dumpster. The next problem was that he took part of the roof off and then it rained for ten days, causing damage. Carol testified that they reported problems to Defendant and to Earl.
Carol testified that, when she signed portions of Country Mutual checks over to Defendant, it was her understanding that the money was to be used to pay the subcontractors and the suppliers. Carol testified that Defendant told them that, if they would sign the last check over to him, he would give them a check for $3800 and then he would be paid in full. She testified that her understanding was he was coming back to finish the project. She stated that he told her he would finish the job. Carol testified that Defendant's last day on the job was in mid-November 2010. Carol testified that she did not throw him off the job and he did not return to do the work. She testified that the work was never finished and they have been paying to keep the heat on in the house in order to maintain it the best they can. Carol testified that they have not finished the project because they do not have the money to do it. Carol testified that there are liens against the property filed by subcontractors who have not been paid. Carol testified about numerous problems with the project, including that the spindles on the deck were turned upside down so now water collects there. She also testified that the drywall has some gouges in it and the seams are busting loose and separating. Carol testified that there is no insulation under the floors and the concrete in the driveway was broken where the dumpster sat on it. Carol testified that Defendant never came back so they could talk to him about the problems. Carol testified that she never called him to find out if he was coming back. She testified that Defendant never made any kind of accounting to them for how he applied the payments on this project. Carol testified that, after Defendant started the job, he told her that he had lost " about $30, 000 on his last job and he wasn't going to lose it on this one." 
Plaintiff Robert Apperson (Robert) was the last witness at the hearing. Robert testified that they selected Defendant as contractor based upon Earl's recommendation. He testified that it was his understanding that they were responsible for any charges over and above the allowances made by Country Mutual. Robert testified that they chose some of the subcontractors for the project. He testified that he assumed that the amounts to be paid to subcontractors were included under the contract. He testified that they pay to heat the house in the winter and cool the house in the summer to protect the house. Robert testified that, as far as he knew, Defendant told them if they signed the last check over to him he'd be paid in full and would complete the work. Robert testified about the work that was not completed and also stated that there were problems with the siding on the house.
Following the presentation of evidence, Plaintiffs' counsel argued that Plaintiffs signed the checks over to Defendant on the representation that he would take those checks and give them a repaired house. Plaintiffs' counsel argued that, when somebody makes those representations, someone relies on those representations and they don't follow through, that's a classic case of fraud. Plaintiff's counsel argued that Defendant took the money and they still, to this day, do not know where the money went. Plaintiff's counsel argued that there was only one conclusion, that Defendant committed a massive fraud. Defendant's counsel argued in response that he did not think a case of fraud had been proven, but instead a series of misunderstandings and confusion. Defendant's counsel stated that it was their position that Defendant did perform work on the project and that Plaintiffs removed him from the job and did not allow him to come back. Defendant's counsel argued that Defendant offered to repair the defects and that was not taken advantage of. Defendant's counsel argued that there was no fraudulent intent on the part of Defendant. In rebuttal, Plaintiff's counsel argued that " [w]hat's particularly troubling is even according to his own figures and the figures from Country he should have had ample money to set aside to pay those subcontractors and they weren't paid." She argued that Defendant's excuse that they weren't his subcontractors is a pretty unbelievable statement.
Judge Fines then stated:
Okay, I'm going to make a finding of fact and conclusion of law pursuant to a Bankruptcy Rule procedure 7052 and I'm able to do that. This trial has only lasted about three and a half-hours. We've had four witnesses. We've had 16 exhibits. It's not complicated and I'm able to rule. I think the attorneys - - each attorney for plaintiff[s] and for the defendant got the evidence in that they wanted to get in. And because of that, I'm able to rule. In fact . .., they pretty much stipulated to a good part of the evidence and that makes it easier.
The plaintiffs [have] the burden of proof by a preponderance of the evidence. They have to show all the elements under 11 U.S.C. 523(a)(2)(A). That's a Supreme Court case Grogan v. Garner, 498 U.S. 279, 111 S.Ct. 654, 112 L.Ed.2d 755 (1991). The plaintiff[s] must show that the debtor made the representation to the plaintiff[s, ] that the debtor's representation was false, that the debtor possessed an intent to deceive, that the plaintiff relied on the debtor's misrepresentation resulting in a loss to the plaintiffs and that the plaintiffs had justifiable reliance. Another Supreme Court case on that is Field v. Mans, 516 U.S. 59, 116 Supreme Court 437, 133 L.Ed.2d 351 (1995).
In considering the testimony in this case, as I indicated, most of the facts were stipulated to so this is really a case of credibility. Based on his demeanor, his appearance, what he said, how he said it, how what he said related to what the other witnesses testified to and how his testimony related to the documents that were entered into evidence, I find that the defendant was a credible witness. I find accordingly judgment is entered in favor of the defendant. The debt to the plaintiffs is discharged.
Judge Fines entered a written order on April 1, 2014, stating that judgment was entered in favor of the Debtor/Defendant and the debt to Plaintiffs was determined to be dischargeable pursuant to the provisions of 11 U.S.C. § 523(a)(2)(A).
On April 14, 2014, Plaintiffs filed their Notice of Appeal and appealed Judge Fines' ruling to this court. The Bankruptcy Appeal was docketed on May 13, 2014, and the record before the Bankruptcy Court, including the complete trial transcript and trial exhibits, was filed (#1, #2). Plaintiffs filed their Brief (#4) on June 16, 2014. Defendant's Brief (#6) was filed on July 2, 2014, and Plaintiff's Reply Brief (#7) was filed on July 11, 2014.
I. STANDARD OF REVIEW
When a party appeals a bankruptcy court's order, the bankruptcy court's conclusions of law are reviewed under a de novo standard and its findings of fact are reviewed for clear error. Stamat v. Neary, 635 F.3d 974, 979 (7th Cir. 2011). " If the bankruptcy court's account of the evidence is plausible in light of the record viewed in its entirety, " this court will not reverse its factual findings even if it would have weighed the evidence differently. See Id., quoting Freeland v. Enodis Corp., 540 F.3d 721, 729 (7th Cir. 2008).
In this case, Plaintiffs claimed that Defendant owed them money for his failure to complete the work on their house and that this debt was not dischargeable in bankruptcy based upon fraud. On appeal, Plaintiffs argue that the Bankruptcy Court misapplied the law to the facts of this case in finding that Plaintiffs did not prove their case and that the debt owed by Defendant is dischargeable. Plaintiffs contend that the testimony and exhibits presented at trial clearly demonstrate that Defendant committed fraud by promising to use funds received by Plaintiffs from their insurance carrier for repair of a fire-damaged home when, in fact, Defendant used the money for other purposes, could not explain where the funds went, had no records to support his version of events and left the project unfinished, with a number of mechanics liens filed against the property. Plaintiffs also argued that there were substantial problems with the work that had been done.
In arguing that the evidence they presented was sufficient to show that Defendant engaged in fraud, Plaintiffs particularly rely on Defendant's admission at trial that, on the occasion when Plaintiffs signed over the last insurance check to Defendant, he told them if they signed over the check he would finish the job. Plaintiffs also pointed out that Defendant admitted that he did not pay any of the subcontractors, at least in the amount of the allowances Country Mutual had provided, with the exception of a $5, 000 payment to Block Electric. Plaintiffs also noted that Defendant admitted that he had no records for the project, kept no time sheets, had no project folder, and maintained no invoices. Further, Defendant admitted that he left numerous items undone on the job and did not provide Plaintiffs any credit for those items. Plaintiffs argued that Defendant said he would return and finish the job but failed to do so. They argued that he never contacted them about returning to finish the work. Plaintiffs also relied on Carol's testimony that Defendant told her that he had lost $30, 000 on a prior job and had no intention of losing money on this job. Plaintiffs argued that they met their burden of proof and showed that Defendant committed fraud.
In his Brief in response, Defendant pointed out that he repeatedly testified at trial that Plaintiffs prohibited him from returning to finish the project. He testified that he and the drywaller were willing to return to correct the flaws in the drywall, but were not allowed to. Defendant also testified that he bought and stained the doors and trim for the project. He was not allowed to return to install them and they were ruined. Defendant argued there was no evidence to support a finding that he made any representations to Plaintiffs with the intent and purpose to deceive them. He argued that Plaintiffs did not prove that their damages were a result of a fraudulent misrepresentation by Defendant.
The applicable statute provides:
A discharge under section 727, 1141, 1228(a), 1228(b), or 1328(b) of this title does not discharge an individual debtor from any debt . . . for money, property, services, or an extension, renewal, or refinancing of credit, to the extent obtained by . . . false pretenses, a false representation, or actual fraud.
11 U.S.C. § 523(a)(2)(A). Although three independent grounds for nondischargeability are listed in the statute, " courts have historically applied a single, unified test to actions brought under this section." In re Beetler, 368 B.R. 720, 728 (Bankr. C.D. Ill. 2007). " The traditional analysis contains the following elements: (1) the debtor made a representation to the creditor; (2) the debtor's representation was false; (3) the debtor possessed scienter, i.e., an intent to deceive; (4) the creditor relied on the debtor's misrepresentation, resulting in a loss to the creditor; and (5) the creditor's reliance was justifiable." Id., citing Field v. Mans, 516 U.S. 59, 116 S.Ct. 437, 133 L.Ed.2d 351 (1995); see also Ojeda v. Goldberg, 599 F.3d 712, 716-17 (7th Cir. 2010). " As with all exceptions to discharge, the burden is on the creditor to establish these facts by a preponderance of the evidence." First Weber Group, Inc. v. Horsfall, 738 F.3d 767, 774 (7th Cir. 2013), citing Grogan v. Garner, 498 U.S. 279, 287, 111 S.Ct. 654, 112 L.Ed.2d 755 (1991).
" A cause of action under any prong of § 523(a)(2)(A) requires a showing that the debtor acted with an intent to deceive." In re Aguilar, 511 B.R. 507, 512 (Bankr. N.D.Ill. 2014); In re Blundy, 2012 WL 4506663, at *9 (Bankr. C.D. Ill. 2012). " Intent to deceive is measured by the debtor's subjective intention at the time the representation was made." Aguilar, 511 B.R. at 512-13; see also In re Kucera, 373 B.R. 878, 884 (Bankr. C.D. Ill. 2007). " A determination of intent to deceive focuses on circumstantial evidence and is generally inferred if the totality of the circumstances presents a picture of deceptive conduct by the debtor which indicates an intent to deceive or cheat the creditor. If there is room for an inference of honest intent, the question of nondischargeability must be resolved in the debtor's favor." In re Hemken, 513 B.R. 344, 354 (Bankr. E.D. Wis. 2014), quoting In re Kakde, 382 B.R. 411, 427 (Bankr. S.D. Ohio 2008).
A mere breach of contract by the debtor, without more, does not imply the existence of actual fraud for purposes of the exception to discharge under § 523(a)(2)(A). In re Guy, 101 B.R. 961, 978 (N.D. Ind. 1988); see also In re Gilbert, 2013 WL 1829654, at *7 (Bankr. D. Mont. 2013); In re Storer, 380 B.R. 223, 235 (Bankr. D. Mont. 2007) (debtor's inability to complete construction project was breach of contract, not fraud). " A debt is not rendered nondischargeable by a failure to perform a promised act, unless the debtor had no intention to perform at the time the promise was made." Blundy, 2012 WL 4506663, at *8.
Here, Judge Fines noted that many of the facts of this case were undisputed and then found Defendant's testimony credible, based " on his demeanor, his appearance, what he said, how he said it, how what he said related to what the other witnesses testified to and how his testimony related to the documents that were entered into evidence." Judge Fines therefore determined that, as far as the facts that were disputed, he found Defendant's testimony credible. Defendant testified that he worked on the project and intended to complete the work, including correcting the problems with the drywall. Defendant testified that Plaintiffs kicked him off the job and would not let him return to finish the project. Defendant also testified that it was Plaintiffs' responsibility to pay the subcontractors because they added extras to the project and chose their own subcontractors. This court notes that Plaintiffs did not contest that they chose most of the subcontractors. In addition, Earl corroborated Defendant's testimony when she testified that it was not typical for insureds to chose their own subcontractors and that Plaintiffs were informed that they were responsible for paying for the changes they made to the project. This court therefore concludes that Judge Fines' factual finding that Defendant's testimony was credible was plausible in light of the record viewed in its entirety. See Stamat, 635 F.3d at 979. Therefore, this court finds that Judge Fines did not commit clear error in finding Defendant's testimony to be credible. See First Weber Group, Inc., 738 F.3d at 777.
Because Judge Fines found Defendant's testimony credible, the evidence shows that Defendant did not intend to deceive Plaintiffs and, when he told Plaintiffs he would finish the work if they signed over the last check to him, he intended to finish the work and did not complete the project because Plaintiffs did not let him return. Plaintiffs therefore did not prove that Defendant acted with an intent to deceive. Therefore, they did not prove that Defendant's debt to them was not dischargeable in bankruptcy because of fraud. See Aguilar, 511 B.R. at 512 (a cause of action under any prong of § 523(a)(2)(A) requires a showing that the debtor acted with an intent to deceive); see also Storer, 380 B.R. at 235.
Plaintiffs obviously are dissatisfied with the work performed by Defendant and strongly believe Defendant was required by the contract to pay the subcontractors. This court concludes that Plaintiffs may well have shown that Defendant breached their contract. However, this is not sufficient to show fraud. This court concludes that Judge Fines properly found that Defendant's debt to Plaintiffs was dischargeable in bankruptcy.
IT IS THEREFORE ORDERED THAT:
(1) The Order of the Bankruptcy Court entered on April 1, 2014, as to Bankruptcy Case No. 13-90326, is affirmed.
(2) This case is terminated.