Opinion
Civil Action No. SA-99-CA-1091-EP
December 20, 1999
ORDER
This is an appeal from a bankruptcy proceeding. Appellants, John and Tina Faish, complain that the bankruptcy judge improperly granted Appellee Judith Officer's motion for summary judgment. This Court will reverse the judgment of the bankruptcy court and remand this case for further proceedings.
Facts and Procedural History
The Faishes and Officer entered into a Contract for Deed for the purchase of the Faishes' home in March 1998. Officer made a down payment of $1,000 at the time she signed the contract and subsequently paid over $6,000 toward the purchase of the house. When she took possession of the home, Officer had new carpet installed, costing her almost $2,000. Officer made monthly payments to the Faishes of $681. Under the terms of the contract, a portion of each payment went into an escrow account to pay for homeowner's insurance.
It is unclear from this record what arrangements the parties entered into regarding insurance. The contract merely states, "[i]f insurance is not previously obtained and set in place by [the Faishes], [Ms. Officer] will maintain. . . an insurance policy." According to the Faishes, the parties agreed that the Faishes would cancel the insurance policy procured in their name in April, and Officer would then obtain her own policy. There is no summary judgment evidence directly refuting this version of events, although Officer does state in her affidavit that she was not informed when the "insurance coverage had lapsed or expired."
Officer claims that in June 1998 a plumbing leak caused extensive damage to portions of the home. She phoned the Faishes to advise them of the damage and to ask them to file an insurance claim. Tina Faish told Officer that the Faishes did not have a policy on the house. The parties do not dispute that Tina Faish believed this to be a true statement at the time she made it.
Officer attempted to verify that the policy had been canceled by contacting Allstate Insurance Company, who had issued the policy. According to Officer, she received conflicting information from Allstate and her mortgage holder, HomeSide Lending, Inc., regarding coverage. At one point, an Allstate representative told Officer that a policy did exist, to which a claim number had been assigned, but that the company could not proceed at Officer's request, because the policy was in the Faishes' name.
The parties apparently agree that at some point the Faishes learned that there was some insurance on the home on the date of loss. The Faishes claim that it was a hazard insurance policy; however the policy has not been admitted into evidence. . At any rate, it is undisputed that the Faishes did not inform Officer about the policy; nor did they attempt to file a claim for the alleged water damage. It is unclear from the evidence what happened to the monthly payments for insurance that were supposed to be held in escrow.
Officer's affidavit states that she was informed by her mortgage company that the monies had been deducted from her payment and that premiums had been paid through October 1998. While, if proven, this information might be relevant, it is clearly hearsay and, moreover, could not, by itself, change the result here.
In July, the Faishes mailed Officer a letter that claimed that Officer had breached the contract for deed by, among other things, failing to maintain insurance on the home after the Faishes canceled their policy. The Faishes called the defect "incurable" and ordered Officer to vacate the premises; she eventually did so on September 26, 1998.
On September 28, 1998, the Faishes filed for bankruptcy. Officer filed a petition to get a determination that the debt owed her by the Faishes is non-dischargeable under 11 U.S.C. § 523(a)(2)(A) or 523(a)(6). Officer moved for summary judgment, arguing that the undisputed facts supported her claim that the Faishes made omissions of material fact regarding the insurance coverage, that she relied on those omissions, and that she suffered monetary loss because of that reliance. The bankruptcy court agreed, declaring that the Faishes owed Office $12,613.70 and that this debt was nondischargeable. The Faishes appeal that ruling.
Standard of Review
On review of the granting of a motion for summary judgment, fact questions are reviewed with deference to the nonmovant; questions of law are reviewed de novo. Liberty Mutual Ins. Co. v. Pine Bluff Sand Gravel Co., Inc., 89 F.3d 243, 246 (5th Cir. 1996). Summary judgment is appropriate where there are no genuine issues of material fact, and the movant is entitled to judgment as a matter of law. Id.
Discussion
The Bankruptcy Code prevents the discharge of 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). To prevent the discharge of debt under this provision, a creditor must prove (1) that the debtor made a representation (2) with the intent and purpose of deceiving the creditor (3) that the debtor knew to be false at the time the statement was made, or made the statement with reckless disregard for the truth and (4) that the creditor relied on the representation and (5) sustained losses as a proximate result of the representation. Matter of Bercier, 934 F.2d 689 (5th Cir. 1991). In her original pleading, Officer complained that the Faishes either demonstrated a reckless disregard for the truth when they told her the home was not insured or they committed a misrepresentation by omission by failing to inform her that there was, in fact, insurance on the property.
In reviewing the record, the Court finds three possible grounds for the bankruptcy court's decision that the Faishes owed Officer a debt and that the debt was nondischargeable under the Bankruptcy Code. The first would be a finding that the Faishes misrepresented to Officer that their insurance policy had lapsed or been canceled. However, the parties apparently agree that the Faishes believed this to be the case when they made the statement; therefore, this cannot be a basis for section 523(a)(2)(A) nondischargeability.
As discussed below, the only specific mention by the court of its reasoning is provided in the motion for reconsideration. In the interest of refining the issues to be explored on remand, the Court will provide its analysis of the facts and its view of what facts are material.
The second ground would be a finding that the Faishes had made a misrepresentation by omission when they did not report to Officer their knowledge that some coverage did in fact exist on the home at the time of the incident and did not claim the damage on the existing policy. This question was explored in depth at the hearing on the motion for summary judgment. However, the trial court apparently found that point in favor of the Faishes. In his denial of the Faishes' motion for reconsideration, the court stated, "[D]efendant already prevailed on this point because plaintiff had no evidence that there was insurance to support her motion for summary judgment. The Court did not base its ruling on the existence or absence of the policy." This Court agrees with this conclusion.
The parties themselves virtually ignore this language in their arguments to this Court, focusing instead on whether Officer was reasonable in relying on the Faishes' alleged omission. Nonetheless, the bankruptcy court was clear that the omission did not firm the basis of its ruling.
To the extent that the court based its finding on the Faishes duty to determine whether coverage existed, a slightly different, but related, question, the Court finds that if this omission served, in part or in whole, as the basis for granting the summary judgment motion, the bankruptcy court erred. Material issues of fact exist as to whether any duty to disclose owed by the Faishes had already been discharged.
The Contract for Deed provided for monthly payments toward the purchase of the home. These payments, according to the contract, include an amount to be applied to maintain insurance on the property. Under a portion of the agreement entitled Buyer's Obligations, the contract recites that "[i]f insurance is not previously obtained and set in place by Seller, Buyer will maintain, in a form acceptable to Seller, an insurance policy that. . . names Seller as owner and insured and has a contract of sale endorsement in favor of Buyer. . . and contains such other coverage as Seller may reasonably require." The policy further requires that the Buyer "deliver the policy to Seller. . . and deliver renewals of it at least ten days before it expires."
Officer argues that the Faishes' failure to inform her of the existence of some insurance on the home was a material misrepresentation by omission. Certainly, the contract does not explicitly place a duty to disclose on the Faishes. Although the contract is poorly written, the only explicit duty it establishes with regard to insurance is placed on the purchaser. That duty, as articulated by the contract, is to obtain insurance if the seller does not maintain it and to deliver the insurance policy to the Seller.
Assuming, however, that the contract places an implicit duty on the Faishes to maintain insurance and/or to inform Officer when they ceased doing so, the Court finds that material fact questions remain on whether the Faishes discharged this duty. According to Tina Faish's affidavit, which was part of the summary judgment evidence, the real estate agent handling this purchase informed the Faishes at the time of closing that they should maintain their homeowner's insurance until it lapsed, in the spring of 1998. Faish's affidavit alleges that the agent informed her that the agent would assist Officer in procuring insurance for the home. This information, itself, may not suffice to raise a fact issue, as it is not clear from this record to whom the insurance agent owed his allegiance. However, according to Mrs. Faish, Officer told her during a telephone conversation that she would be obtaining insurance for the house. That evidence raises a fact issue, in the Court's view, about whether the Faishes were under any duty, from that point forward, to inform Officer of the status of the homeowners' insurance. If, as Tina Faish claims, everyone knew that the Faishes would be relinquishing coverage in the spring, then it would seem to this Court that any duty of notice imposed on the Faishes may have been discharged. It would then become Officer's duty, under the language of the contract, to obtain insurance and to deliver a policy to the Faishes. If, on the other hand, the parties left the question of who would maintain insurance unresolved at closing, then there may have been some duty on the Faishes' part to notify Officer that they decided, at some later point, to cancel their insurance. If the Faishes failed to so notify Officer, then it is arguable that they had a duty to at least notify her when they discovered that some residual coverage did exist on the home.
The Court will refrain from reaching legal conclusions at this stage, but will instead leave it to the bankruptcy court to develop this record more fully and then resolve the legal questions on the basis of its factfinding.
The cases cited by Officer in her motion for summary judgment both acknowledge the relevance of the questions of duty and notice. While both of these cases involved dischargeability under 11 U.S.C. § 523(a)(6), the reasoning supporting the opinions is also relevant under the fraud exception. In Wright v. Bujnowski, the district court found willful and malicious conduct where an employer allowed his employees' health insurance to lapse and did not notify the employees that they were no longer insured. Bujnowski, 209 B.R. 276, 280 (E.D.N.Y. 1997). The court based its ruling, in part, on a finding that the employer had continued to deduct insurance payments while never notifying the employees "that [the employer] was having trouble making payments or that the insurance policy repeatedly had been suspended." Id. at 278. In this case, as discussed above, there is a fact issue regarding whether the Faishes provided notice to Officer that they were relinquishing their policy and whether such notice sufficiently discharged any duty they owed under the agreement.
Similarly, in Barnett Bank of Southeast Georgia, N.A. v. Ussery, 179 B.R. 737 (S.D. Ga. 1995), the trial court found that a debtor behaved willfully and maliciously when he canceled his auto insurance. However, that court noted that the debtor had canceled the insurance "with knowledge of his obligation to insure." Id. Here, however, there is a fact issue regarding whether Officer knew that her duty to obtain insurance had been triggered and thus what duty bound whom at the time of the alleged water leak. Without findings on these questions, the cases cited by Plaintiff are not persuasive.
The third ground for a finding that the debt at issue is nondischargeable could be the Faishes' eviction of Officer from the home. In its Order on the Faishes' motion for reconsideration, the bankruptcy court stated that this act, in fact, was the basis for his granting summary judgment in favor of Officer. According to the bankruptcy court, failure to obtain insurance was not a proper ground for eviction, and the Faishes knew or should have known of this fact because they were represented by counsel at the time of the eviction. According to the court, Officer exhibited reliance on the "misrepresentation" by complying with the eviction notice and moving out of the home she had purchased. Accordingly, the Faishes obtained the money Officer had spent on the home fraudulently or at least on the basis of false pretenses, and that debt was thus nondischargeable.
On the record before it, the Court finds that there are not sufficient facts to support this conclusion. That the eviction itself might form the basis for a finding of nondischargeability is hardly evident from the hearing transcript. At the hearing, the Court and the parties focused largely on the Faishes' failure to inform Officer that insurance might have existed at the time of the plumbing leak. There are little, if any, facts in this record regarding the Faishes' knowledge and/or intent when they served the eviction notice on Faish.
The Court rejects the claim that the Faishes "should have known" that their eviction notice was improper because they had counsel. If the Faishes acted in good faith reliance on the advice of counsel, they cannot be held to have made knowing misrepresentations or omissions to Officer regarding the basis for eviction. If that were the case, all clients could be held responsible for the legal errors or misrepresentations committed by their lawyers. Cf Judin v. United States, 110 F.3d 780, 785 (Fed. Cir. 1997) (Rule 11 sanctions are imposed against attorney, not client, where violation is a misrepresentation of the law rather than of underlying facts).
Based on the Court's de novo review of this record, the Court finds that several material fact issues remain to be resolved before the issue of nondischargeability may be determined. To rely on the Faishes' failure to inform Officer that insurance did exist on the home, the bankruptcy court must determine whether Officer in fact knew that she would be responsible for obtaining insurance in the late spring of 1998 and whether such knowledge discharged any duty the Faishes owed Officer under the Contract For Deed. To rely on the eviction as a basis for nondischargeability, the court must determine whether, in evicting Officer from the home, the Faishes acted with an intent to defraud Officer or whether, instead, they acted in good faith reliance on their attorney's representations regarding the law. Based on that factual determination, the court must determine whether the eviction is the sort of conduct that will render debt nondischargeable.
Because these questions focus the court's attention on the Faishes' knowledge and intent in acting as they acted, they would also be necessary to support a finding of nondischargeability pursuant to 11 U.S.C. § 523(a)(6), which allows nondischargeability where the debtor has caused "willful and malicious injury."
CONCLUSION
ACCORDINGLY, it is ORDERED that the bankruptcy court's determination is REVERSED, and this matter is REMANDED for further factfinding and conclusions in accordance with the facts.