Tuesday, March 15, 2011

Fraudulent Intent Required for Objection to Discharge

Linda Reeves hired a contractor in Indiana to perform numerous home remodeling tasks, including the construction of a covered porch.  They did not execute a written contract.  When the contractor walked off the job, Ms. Reeves filed suit under the Indiana Home Improvement Contracts Act.  The Act, which I haven't read but which sounds similar to Illinois' Home Repair and Remodeling Act, requires a written contract for home improvements, among other things.  The Act also provides that any person who violates the Act commits a "deceptive act." 

The contractor alleged that the porch was not a part of the contract, but rather only on Ms. Reeves' "wish list."  The state court disagreed and found in Ms. Reeves' favor to the tune of $77,000.  Shortly after entry of the judgment, the contractor filed bankruptcy.  Ms Reeves objected to discharge under Section 523(a)(2)(A) of the Bankruptcy Code, which requires evidence (1) that the debtor made a false representation or omission, which he either knew was false or that was made with reckless disregard for the truth; (2) that the debtor possessed an intent to deceive or defraud; and (3) that the injured person justifiably relied on the false representation.  See Ojeda v. Goldberg, 599 F.3d 712, 716-717 (7th Cir. 2010).

Ms. Reeves argued that the principles of collateral estoppel required a finding of non-dischargability because a judgment under the Act constitutes a "deceptive act" under Indiana law.  The bankruptcy court disagreed, as did the 7th Circuit.

The issue of the case came down to the debtor's intent.  The 7th Circuit acknowledged that the findings made by the Indiana state court were entitled to collateral estoppel in the subsequent bankruptcy proceeding, but they also noted that there was never a specific finding of fraudulent intent by the trial court.  Rather, the state court case basically involved a miscommunication between Ms. Reeves and contractor.  The contractor testified that he did not believe that the porch was included in the contract.  Ms. Reeves would have had to prove that he knew the porch was part of the deal, took payment for the porch, and never intended to build it.

Although there was a judgment entered against the contractor under the Act, and that judgment by extension constitutes a deceptive act, there was no evidence of the contractor's fraudulent intent entered at trial in the state court, or at trial in the bankruptcy court.  So, Ms. Reeves' objection to the contractor's bankruptcy failed. 

In Re Davis, No. 10-2757, slip op. (March 14, 2011).


makati condo said...

This is the reason why you have to draft a written contract whenever hiring home remodeling services.

fitted kitchen supplies said...

Surveying and researching your contractor will never hurt you. You just have to be careful when choosing your contractor.