Opinion
Case No. 03-10306-B7, Adversary No. 04-90053-B7.
September 27, 2006
MEMORANDUM DECISION
This matter came on for trial on the DeGuzmans' complaint that debtor Hawk owes them for damages they sustained as a result of Hawk's non-performance of a contract to build a house for them. They contend the debt comprised of those damages is nondischargeable pursuant to 11 U.S.C. § 523(a)(2)(A) and (a)(6).
Following trial, the Court invited the parties to submit written closing argument, which they did, after receipt of which the matter was taken under submission. The Court has had a difficult time reaching its decision in this matter, at least in part due to the excellent presentations of the lawyers for both sides. The Court has reviewed both the testimony and the received exhibits multiple times since the matter was taken under submission.
The Court has subject matter jurisdiction over this proceeding pursuant to 28 U.S.C. § 1334 and General Order No. 312-D of the United States District Court for the Southern District of California. This is a core proceeding under 28 U.S. § 157(b)(2)(I).
Applicable Law A. 523(a)(2)(A)
Section 523(a)(2)(A) of Title 11 provides:
(a) 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 —
(2) 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 Bankruptcy Code has long prohibited debtors from discharging liabilities incurred on account of their fraud, embodying the basic policy animating the Code of affording relief only to the "honest but unfortunate debtor." Cohen v. de la Cruz, 523 U.S. 213, 216 (1998).
The provision of the Bankruptcy Code which excepts from discharge debts arising from fraud is § 523(a)(2)(A). In applying § 523(a)(2)(A), courts in the Ninth Circuit employ a five-part test:
(1) that the debtor made . . . representations;
(2) that the debtor knew the representations were false when made;
(3) that the debtor made the representations with the intention and purpose of deceiving the creditor;
(4) that the creditor relied on such representations; and
(5) that the creditor sustained the alleged loss and damage as the proximate result of the misrepresentations having been made.
In re Hashemi, 104 F.3d 1122, 1125 (9th Cir. 1997); In re Apte, 96 F.3d 1319, 1322 (9th Cir. 1996). In order to prevail on a claim asserted under § 523(a)(2)(A), a creditor must establish each of the five elements by a preponderance of the evidence.
1. Representation
The first element, or part, of a cause of action under § 523(a)(2)(A) is that the debtor made one or more representations. The statute itself makes clear that any representation must be "other than a statement respecting the debtor's or an insider's financial condition".
Can the representation be about anything, or are there limits on what representations may be actionable under § 523(a)(2)(A)? As the Supreme Court recognized in Field v. Mans, 516 U.S. 59, 70 (1995), it must be a "representation of fact". The Ninth Circuit has recognized the same, and used to include the phrase "representation of fact" in stating the elements of a cause of action under § 523(a)(2)(A). In re Rubin, 875 F.2d 755, 759 (1989); In re Gertsch, 237 B.R. 160, 167 (9th Cir. BAP 1999).
Other courts have elaborated. In re Schwartz Meyers, 180 B.R. 416, 423 (Bankr. S.D.N.Y. 1991), the court stated:
To be actionable, the representation must be one of existing fact and not merely an expression of opinion, expectation or declaration of intention. [Citations omitted.] Also falling within the purview of nonactionable language are those statements which amount to no more than sales "puffery" upon which reliance should not be placed.
Similarly, in In re Spar, 176 B.R. 321, 326 (Bankr. S.D.N.Y. 1994), the court wrote:
In order for Spar's representations to be a false representation or false pretense under Code § 523(a)(2)(A), the representations must "encompass statements that falsely purport to depict current or past facts. [Citation omitted.] A promise to perform in the future is insufficient. . . . Representations as to opinion, expectation or declarations of intention do not relate to existing fact and are not actionable.
See, also Greenberg v. Chrust, 2002 WL 31444902 (S.D.N.Y. 2002).
In In re Evans, 181 B.R. 508, 512 (Bankr. S.D. Cal. 1995), that court stated:
To support a § 523(a)(2)(A) action, the creditor must establish that the debtor made a false representation with respect to an existing and ascertainable fact. [Citation omitted.] A representation of value generally is merely a statement of opinion and, as such, it "does not support a fraud claim either under common law or under the Bankruptcy Code."
Despite the clear requirement that the representation be of an existing or past fact, some courts have evaded the element. InEvans, after stating what is quoted above, the court added: "However `this rule presupposes that such a representation does in fact represent the declarant's opinion.'" It is not at all clear why an opinion of value, which is not actionable because it is not a representation of an existing fact, somehow becomes actionable if the declarant doesn't believe in its truth. Nevertheless, as the Evans court wrote:
When the debtor represented that the lot had a value in excess of the existing $65,000 deed of trust and the plaintiff's $65,000 deed of trust, he knew that the representation was false. He made the representation with reckless indifference to the truth solely to induce the plaintiff to make the loan. Representations of value "which the declarant does not, in fact, hold or declarations made with reckless indifference for the truth may be found to be fraudulent." [Citations omitted.] "A false statement regarding the value of property, which is not made in good faith, and which is not warranted by the knowledge or belief of the owner, may furnish the basis of an action for rescission on the ground of fraud or deceit."
In Spar, the court considered the same issue, and stated:
Only when the debtor "does not hold these opinions or utters them with reckless indifference for their truth" can the requisite fraud be found. . . . When, at the time a representation is made, the debtor has no intention of performing as promised, a debtor's misrepresentation of his intentions will constitute a false representation under Code § 523(a)(2)(A).
In In re Lund, 202 B.R. 236, 130-31 (9th Cir. BAP 1996), the appellate court observed:
However, if the Debtors made false representations regarding payment for the purpose of inducing Kuan to permit them to stay longer without paying rent, then the Debtors obtained "property" (possession of the house without presently making rent payments) through "false pretenses, false representation, or actual fraud" within the meaning of 11 U.S.C. § 523(a)(2)(A). . . .
Further, the representation that the Debtors would pay the debt upon receiving the proceeds of a lawsuit is a promise, not a statement of fact. A debtor must make a promise while knowing it to be false at the time in order to support a nondischargeability action under 11 U.S.C. § 523(a)(2)(A).
In 1989, the Ninth Circuit made similar statements in In re Rubin, 875 F.2d 755, 759, where the court quoted from a Florida bankruptcy decision, the court repeated:
"[O]pinions as to future events which the declarant does not, in fact, hold or declarations made with reckless indifference for the truth may be found to be fraudulent." [Citation omitted.] Moreover, even though Rubin can characterize the second representation as a promise, a promise made with a positive intent not to perform or without a present intent to perform satisfies § 523(a)(2)(A).
Curiously, Rubin says that at the same time that it recognizes that a representation must be a representation of fact.
The cases are, at the least, confusing. If a statement of opinion, for instance, of value, is not actionable because it is not a representation of an existing fact, how does the lack of a good faith belief in its accuracy transform it into a representation of fact? It does not. Rather, the lack of good faith belief or reckless disregard for the truth goes to the second element of a § 523(a)(2)(A) cause of action — whether the declarant knew it was false. That is a separate and independent requirement, but proof of the known falsity does not make a statement of opinion into an existing fact. The first element still is that the representation, to be actionable, must be one of an "existing and ascertainable" fact. Some suggest that the false representation is the express or implicit representation that the speaker "believes" it to be so. This Court disagrees. Whether the speaker believes the statement or not does not turn a non-actionable opinion into one a listener can sue on unless there is some other duty on the speaker.
To return to the beginning, the first element of a cause of action under § 523(a)(2)(A) is that debtor made a representation of an existing or past fact. Such a representation may be made affirmatively, or may be inferred by omission when the debtor has a duty to disclose it.
2. Falsity of the Representation
The second element of a cause of action under § 523(a)(2)(A) is that the debtor knew the representation was false when made. As already noted, some courts appear to have elided the first and second elements, suggesting that any kind of representation is actionable if the declarant lacked a good faith belief in its accuracy. See, In re Evans, 181 B.R. 508, 512 (Bankr. S.D. Cal. 1995); In re Spar, 176 B.R. 312, 327 (Bankr. S.D.N.Y. 1994); In re Lund, 202 B.R. 127, 130-31 (9th Cir. BAP 1996); In re Rubin, 875 F.2d 755, 759 (9th Cir. 1989).
This Court believes the language of the foregoing cases really focuses on satisfaction of the second element — that the debtor knew the representation was false at the time it was made. The opinion of the Bankruptcy Appellate Panel in In re Kong, 239 B.R. 815, 816-27 (1999) lays it out fairly well. There, the court wrote:
The Ninth Circuit, as well as other appellate courts, have recognized that "reckless disregard for the truth of a representation satisfies the element that the debtor has made an intentionally false representation in obtaining credit." . . . The Ninth Circuit uses the phrase "reckless indifference to his actual circumstances" interchangeably with "reckless disregard for the truth of a representation." . . . [R]eckless conduct must involve more than simple, or even inexcusable negligence; it requires such extreme departure from the standards of ordinary care that it represents a danger of misleading [those whom [sic] rely on the truth of the representation]." . . . Fraudulent misrepresentation is established where the maker of a statement chooses to assert it as a fact even though he is conscious that he has neither knowledge nor belief in its existence "and recognizes that there is a chance, more or less great, that the fact may not be as it is represented." . . . "This is often expressed by saying that fraud is proved if it is shown that a false representation has been made without belief in its truth or recklessly, careless of whether it is true or false." . . . ("`[R]eckless indifference to the actual facts, without examining the available source of knowledge which lay at hand, and with no reasonable ground to believe that it was in fact correct' [is] sufficient to establish the knowledge element . . . which completely bar[s] a discharge of all debts if the bankrupt made a materially false statement in order to obtain property on credit.")
3. Intent to Deceive
The third element of a § 523(a)(2)(A) cause of action is an intent on the part of the debtor to deceive the creditor. It has become axiomatic that direct proof of an intent to deceive is rarely available. So courts have recognized that the requisite intent to deceive may be inferred from proof of the surrounding circumstances "if the facts and circumstances of a particular case present a picture of deceptive conduct by the debtor." In re Eashai, 87 F.3d 1082 (9th Cir. 1996).
4. Reliance
Even where a creditor can prove a knowingly false representation was made, and further establish an intent to deceive, a creditor generally cannot succeed unless the creditor also can prove reliance on the false representation. Field v. Mans, 516 U.S. 59 (1995). While § 523(a)(2)(A) does not, on its face, expressly require reliance, the requirement has been inferred from the fact that the debt must have been "obtained by" the fraud or misrepresentation. Field, 516 U.S. at 66. That is, the fraud must have caused the debt which, in turn, requires that the claimant have relied upon the misrepresentation.
In Field, the Supreme Court addressed the level of reliance required under (a)(2)(A). The Court held that reliance need not be reasonable, as expressly required in § 523(a)(2)(B), but it must be justifiable. The Court explained that "a person is justified in relying on a representation of fact `although he might have ascertained the falsity of the representation had he made an investigation.'" Id. at 70 [quoting § 540 Restatement (Second) of Torts (1976)]. Unlike reasonable reliance, this is a subjective standard — that is, it depends upon the knowledge and experience of the person to whom the representations were made. Citing to the Restatement of Torts, the Supreme Court in Field explained:
[A] person is "required to use his senses, and cannot recover if he blindly relies upon a misrepresentation the falsity of which would be patent to him if he had utilized his opportunity to make a cursory examination or investigation. Thus, if one induces another to buy a horse by representing it to be sound, the purchaser cannot recover even though the horse has but one eye, if the horse is shown to the purchaser before he buys it and the slightest inspection would have disclosed the defect. On the other hand, the rule stated in this Section applies only when the recipient of the misrepresentation is capable of appreciating its falsity at the time by the use of his senses. Thus, a defect that any experienced horseman would at once recognize at first glance may not be patent to a person who has had no experience with horses." [Restatement (Second) of Torts (1976) § 541, Comment a].
A missing eye in a sound" horse is one thing; long teeth in a "young" one is perhaps another.
Field, 516 U.S. at 71.
The Ninth Circuit Court of Appeals explains: "Although one cannot close his eyes and blindly rely, mere negligence in failing to discover an intentional misrepresentation is no defense for fraud." Apte, 96 F.3d at 1322.
Notwithstanding that "reasonable" reliance is not required to succeed under § 523(a)(2)(A), it still has a role in the analysis of a court in determining nondischargeability. The Supreme Court observed in Field
As for the reasonableness of reliance, our reading of the Act does not leave reasonableness irrelevant, for the greater the distance between the reliance claimed and the limits of the reasonable, the greater the doubt about reliance in fact. Naifs may recover, at common law and in bankruptcy, but lots of creditors are not at all naive. The subjectiveness of justifiability cuts both ways, and reasonableness goes to the probability of actual reliance.
5. Causation
Finally, to prevail under 11 U.S.C. § 523(a)(2)(A), a creditor must establish that a claim sought to be discharged arose from an injury proximately resulting from its reliance on a representation that was made with the intent to deceive. In re Britton, 950 F.2d 602, 604 (9th Cir. 1991). "Proximate cause is sometimes said to depend on whether the conduct has been so significant and important a cause that the defendant should be legally responsible." Id. at 604. The United States Supreme Court explained in Field, a court may turn to the Restatement (Second) of Torts, "the most widely accepted distillation of the common law of torts", for guidance on this issue. Field, 516 U.S. at 68-70, 116 S.Ct. at 443.
The Restatement (Second) of Torts (1976) explains that proximate cause entails (1) causation in fact, which requires a defendant's misrepresentations to be a substantial factor in determining the course of conduct that results in loss (§ 546); and (2) legal causation, which requires a creditor's loss to "reasonably be expected to result from the reliance." (§ 548A). In determining the presence of proximate cause, however, courts must refrain from relying on speculation to determine whether and to what extent a creditor would have suffered a loss absent fraud. In re Siriani, 967 F.2d 302, 306 (9th Cir. 1992).
B. 523(a)(6)
Section 523(a)(6) of Title 11 provides:
(a) A discharge under section 727 . . . does not discharge an individual debtor from any debt —
. . .
(6) for willful and malicious injury by the debtor to another entity or to the property of another entity
. . . .
The United States Supreme Court had occasion to consider the reach of § 523(a)(6) in Kawaauhau v. Geiger, 523 U.S. 57 (1998). There, the Court noted:
The word "willful" in (a)(6) modifies the word "injury," indicating that nondischargeability takes a deliberate or intentional injury, not merely a deliberate or intentional act that leads to injury.
523 U.S. at 61. Accordingly, the Court held "that debts arising from recklessly or negligently inflicted injuries do not fall within the compass of § 523(a)(6)." 523 U.S. at 64.
The facts in Geiger help explain the holding. The plaintiff sought treatment for a foot injury from Dr. Geiger. He admitted her to the hospital for treatment and intentionally chose a course of oral penicillin over intravenous because of the plaintiff's desire to minimize cost, although he knew intravenous administration was more effective. Dr. Geiger left plaintiff in the care of other physicians and went on a business trip. On his return he found the doctors had referred the plaintiff to an infectious disease expert. He cancelled the referral and ordered the antibiotics discontinued because he thought the infection had subsided. Plaintiff lost her leg, sued, and obtained a judgment. Dr. Geiger carried no malpractice insurance, so the plaintiff chased him into bankruptcy. There, the bankruptcy court found the debt nondischargeable and the district court affirmed.
A panel of the Eighth Circuit reversed, and the court en banc agreed, and held that § 523(a)(6) was "confined to debts `based on what the law has for generations called an intentional tort.'" 523 U.S. at 60. Before the Supreme Court plaintiff argued that "Dr. Geiger intentionally rendered inadequate medical care to [plaintiff] that necessarily led to her injury." Id. at 61. Plaintiff contended that Dr. Geiger "deliberately chose less effective treatment because he wanted to cut costs, all the while knowing that he was providing substandard care." Id. The Supreme Court affirmed the Eighth Circuit's decision and rejected the plaintiff's argument that Dr. Geiger's conduct met the `willful and malicious injury" standard of § 523(a)(6).
Subsequent to Geiger, in In re Jercich, 38 F.3d 1201 (2001), the Ninth Circuit explained:
In Geiger, the U.S. Supreme Court held that debts arising out of a medical malpractice judgment, i.e., "debts arising from reckless or negligently inflicted injuries," do not fall within § 523(a)(6)'s exception to discharge. In so holding, the Court clarified that it is insufficient under § 523(a)(6) to show that the debtor acted willfully and that the injury was negligently or recklessly inflicted; instead, it must be shown not only that the debtor acted willfully, but also that the debtor inflicted the injury willfully and maliciously rather than recklessly or negligently.
238 F.3d at 1207.
The Ninth Circuit next examined "the precise state of mind required to satisfy § 523(a)(6)'s `willful standard.'" Id. The court concluded:
We hold . . . that under Geiger, the willful injury requirement of § 523(a)(6) is met when it is shown either that the debtor had a subjective motive to inflict the injury or that the debtor believed that injury was substantially certain to occur as a result of his conduct.
23 F.3d at 1208. The court then defined the separate requirement of § 523(a)(6), maliciousness, as follows:
A "malicious" injury involves "(1) a wrongful act, (2) done intentionally, (3) which necessarily causes injury, and (4) is done without just cause or excuse."
23 F.3d at 1209.
Still more recently, the Ninth Circuit looked at § 523(a)(6) again, this time in In re Su, 290 F.3d 1140 (2002). There, debtor was driving a van in downtown San Francisco during the morning rush hour. He went speeding into an intersection when the light was already red, crashed into another car, then hit plaintiff, a pedestrian lawfully crossing the street. Plaintiff prevailed in state court and Mr. Su filed bankruptcy. The bankruptcy court found the debt nondischargeable under § 523(a)(6), but the BAP reversed, holding the court applied the wrong legal standard. The Ninth Circuit affirmed the BAP. As the Ninth Circuit put it:
The question presented on appeal is whether a finding of "willful and malicious injury" must be based on the debtor's subjective knowledge or intent or whether such a finding can be predicated upon an objective evaluation of the debtor's conduct.
290 F.3d at 1142. The court then stated its conclusion:
We hold that § 523(a)(6)'s willful injury requirement is met only when the debtor has a subjective motive to inflict injury or when the debtor believes that injury is substantially certain to result from his own conduct.
Id.
In rejecting the objective standard used by the bankruptcy court, the appellate court stated its view:
[T]hat failure to adhere strictly to the limitation expressly laid down by In re Jercich will expand the scope of nondischargeable debt under § 523(a)(6) far beyond what Congress intended. By its very terms, the objective standard disregards the particular debtor's state of mind and considers whether an objective reasonable person would have known that the actions in question were substantially certain to injure the creditor. In its application, this standard looks very much like the "reckless disregard" standard used in negligence. That the Bankruptcy Code's legislative history makes it clear that Congress did not intend § 523(a)(6)'s willful injury requirement to be applied so as to render nondischargeable any debt incurred by reckless behavior reinforces application of the subjective standard. The subjective standard correctly focuses on the debtor's state of mind and precludes application of § 523(a)(6)'s nondischargeability provision short of the debtor's actual knowledge that harm to the creditor was substantially certain.
290 F.3d at 1145 — 1146.
Discussion
As noted, this case arises from a dispute between the DeGuzmans and the debtor, Mr. Hawk, concerning a contract to build the DeGuzmans' home on 9 — 10 acres of raw land. At a point in the process, the DeGuzmans fired Mr. Hawk as the contractor and hired a replacement. Thereafter, the successor contractor had the home 80 — 90% finished when it was destroyed in a major area wildfire. This case concerns whether Mr. Hawk's conduct was of the kind sufficient to render any debt owed by him to the DeGuzmans nondischargeable.
Certain basic facts are not in dispute. Well prior to any contact with Mr. Hawk the DeGuzmans acquired title to a sizeable piece of raw land, with ingress and egress from the west side. While there was no testimony about it, at some point they had plans for the house drawn up. A friend, who was a contractor, Mr. Loftus, helped them put together a package for a construction loan with IndyMac Bank, although it was never their intention that he would accomplish the construction. IndyMac approved the loan in the Spring of 2002, and the loan agreement gave them one year to have the house built.
Sometime in the next few months they employed Mr. Spear to develop a site grading plan to submit to obtain a grading permit from the County. He did so, and the permit was apparently issued around July 26, 2002 (Ex. 62). It is not clear when the DeGuzmans had their first contact with Mr. Hawk. He testified he thought it was about one month before the contract date of October 18, 2002. Mr. Hawk testified he drove them around to see several of the projects he had completed or was working on. Mrs. DeGuzman testified that they got references from Mr. Hawk and talked with two of them. The references were favorable. They also checked to see whether he had a contractor's license, which he did. Mrs. DeGuzman testified they met with Mr. Hawk at least two times before hiring him.
On October 11, 2002 the DeGuzmans gave Mr. Hawk a check for $1,000 as a "down payment". Mr. Hawk gave them a receipt so indicating (Ex. 1). A week later, they signed a contract (Ex. 2). Mrs. DeGuzman testified that although the contract provided for Prime Construction, Mr. Hawk's dba, to provide labor and materials, Mr. Hawk told them the process would go faster if he had money in his hands rather than having to apply to the bank for each disbursement. While he asked for $50,000, she gave him a check for $10,000 on October 28 (Ex. 3). On the same date, she paid $8,893 to San Diego Gas Electric for hookup (Ex. 4).
The very next day, October 29, the DeGuzmans and Mr. Hawk signed an addendum to the original contract. It provided for four changes to the original and, most relevant, it provided, for the first time, a completion date, March 5, 2003. Specifically, paragraph 1 stated:
1. Prime Construction will have the Deguzman's residence in Poway built according to provided approved set of plans by 3/05/03.
Change orders, County of San Diego delays, and stormy weathers will cause a delay to this date of completion.
The record is unclear about what, if anything, took place over the next three weeks or so. On November 22, Mr. Hawk applied to the City of Poway to have water turned on at the property and paid a $700 deposit (Ex. 53). A week later, on November 29, Prime Construction purchased silt fencing, rice straw fibre rolls, and bags of gravel — so called BMP materials. Prime paid $700 in cash and another $201.27 on its MasterCard.
Mr. Hawk testified that the November delay in getting started was caused by the DeGuzmans wanting him to create an East entrance to the property, in conjunction with a neighbor on that side. The County had approved the grading plan with the West driveway, but there had been no approval for an East drive. Mrs. DeGuzman testified that a neighbor did want an East entrance and while the DeGuzmans were not opposed, they did not plan to pay for it. Why grading did not start in late October or early November is not clear on the record, unless it was something like an issue with an East entrance. Abetting the confusion is a modification to the earlier addendum to the contract dated December 14 (Ex. 10). Paragraph 1 of that document states:
1. Due to the delay before grading, the DeGuzmans are allowing a 1-month extension for the house to be build. Barring any delays caused by the acts of God, delays by the city, stormy weather, uncontrollable or unforeseen circumstances, the DeGuzman residence MUST be built by April 30, 2003.
Mrs. DeGuzman testified she did not recall what "delay before grading" referred to.
Meanwhile, on December 5 Mrs. DeGuzman paid a development fee to the Poway school district of over $8,700 (Ex. 6). While that was going on, the soils engineers, the C.W. La Monte Co., were at work on the site starting December 3, according to their invoice (Ex. 15). So, also, was Spear Associates, the company that did the grading plan and initial stakes for grading months before Mr. Hawk met the DeGuzmans. Apparently, the grading company needed additional staking done, which appears to have been accomplished on December 3, and another part on December 10 (Ex. 14).
The grading company, Dirt Works, started their grading work on December 2, and billed for full days on December 2, 3, 4, 5, 6, 9, 20, 22, 12, 13, 14 and 16. It is not clear exactly when they finished. Mrs. DeGuzman testified she wrote a $20,000 check (Ex. 12) payable to Dirt Works and Prime Construction on December 21 at the property site, and that Dirt Works had been grading that week. Mr. Hawk testified that additional grading was necessary because the DeGuzmans wanted the pad cut lower for the back side yard to fit the pool.
Once the grading was completed it had to be inspected by the County. Mr. Hawk testified that took several weeks. He said they had to complete the BMP to be included in the inspection. The first time the inspector came out he wanted more wattles. Once those were placed, grading was approved.
In the meantime, Mrs. DeGuzman had written a check to the County for a building permit (Ex. 9), while at the same time she wrote the County a check to extend the life of the earlier plan check (Ex. 8). It appears that the receipt for the building permit fee is dated January 29, 2003, although the check was dated December 11, 2002.
In early January, Mr. Hawk ordered windows from Dixieline and block from RCP. Mr. DeGuzman gave him checks payable to each of those entities. The check to RCP was dated 1/9/03 and their invoice shows they received it (Ex. 18). Dixieline Receipted for theirs on January 10 (Ex. 19). Prime Construction rented equipment to jackhammer some of the large boulders found on the property that needed to be dealt with in trenching for the foundations. That equipment rental started at least by January 23 (Ex. 57). According to the testimony, the jackhammers proved inadequate to the task, and Mr. Hawk found it necessary to rent a backhoe, which was used between February 19 and February 25 (Ex. 59).
In the interim, the DeGuzmans had lost confidence in Mr. Hawk and Prime Construction. According to Mrs. DeGuzman, friends of theirs told them Mr. Hawk was not handling the bills the way other contractors did. She said she tried to get an accounting from Mr. Hawk, but to no avail. They received bills from subcontractors such as Dirt Works, Spear, and La Monte, for which they thought they had already provided to Mr. Hawk the money to pay them. The DeGuzmans contacted Mr. Fennema, who was a licensed contractor and did a lot of work as a contractor's representative on job sites. They asked him to review both the plans and the progress, and advise them on how they should proceed. After meeting with them at their residence, he sent them a proposal, and they decided to hire him.
On February 19 the DeGuzmans sent a letter to Mr. Hawk advising him that they had hired Mr. Fennema, at their own expense, to represent them on the job, and that he was the person Mr. Hawk should deal with (Ex. 22). Mr. Hawk responded the next day, apparently enthusiastically (Ex. 23). On February 22 Mr. Fennema met with Mr. Hawk at the building site. Mr. Hawk's new site supervisor, Bill Krall, was also present. Mr. Fennema memorialized the meeting in his letter dated February 24 (Ex. 24), in which he set out a number of items they had discussed that constituted a "to do" list. In addition, he noted that Mr. Hawk's contractor's license had been suspended for lack of a current bond. That same date, in response to Mr. Fennema's notice, Mr. Hawk sent him a copy of the bond application and check for the premium (Ex. 69). Mr. Fennema testified he considered it a technical breach and not of consequence.
On February 25, Mr. Hawk sent the DeGuzmans a note indicating they could not work that day because of heavy rain, and hoped to return to work on 2/26, if the rain stopped. On February 27, Mrs. DeGuzman sent Mr. Hawk a letter demanding a detailed accounting of all money spent on their project by March 3 (February 27 was a Thursday and March 3 was the following Monday). Mrs. DeGuzman also demanded that Mr. Hawk pay the outstanding bills of Spear and La Monte Co. by Friday, February 28 (Ex. 27).
Neither bill was paid by Mr. Hawk, then or later. On March 6, the DeGuzman's attorney sent Mr. Hawk a letter telling him that because of his failure to provide an accounting, as well as the suspension of his license, they were terminating the construction contract (Ex. 18). So far as the record reveals, Mr. Hawk never provided the DeGuzmans with a written accounting.
Mr. Hawk testified that his business failed in mid 2004, that they were evicted from the office space, and that he has very few records of the business' operations.
The DeGuzmans have made many allegations against Mr. Hawk which, they contend, demonstrate that he perpetrated a fraud upon them by representing that he was competent and capable of building the home he contracted to build. Based on the record adduced at trial, the Court would not want to employ Mr. Hawk to build a house for it. But that begs the question.
Mr. Hawk began work in construction around 1992, working for others. Over time, he took a number of courses on various facets of the trade. While working, he was involved in construction of several single family residences, including one on a hillside in Spring Valley. He earned his contractor's license in 2000. The DeGuzmans contacted him, met with him, checked with at least two references, and saw projects that he identified as his.
To be actionable under § 523(a)(2)(A), plaintiffs must show that Mr. Hawk made a false representation about a fact, and he must have known it was false when made. The Court finds and concludes that plaintiffs have failed to establish either of those elements by a preponderance of the evidence.
In support of their argument, they assert indicia of Mr. Hawk's lack of business skills. An example is Mr. Hawk's testimony that in his practice change orders were generally oral, even though the basic contract calls for them to be in writing. In the main, change orders come from the owners, and requiring them to be in writing is often for the protection of the contractor, to ensure the contractor can be compensated for the extra or different work entailed. Dealing with change orders on an oral basis may not be smart business, but it does not establish that Mr. Hawk made a false representation about his competence as a contractor, assuming such a claim is even actionable.
The same is true for the supposedly premature purchase of windows from Dixieline. Mr. Hawk testified windows normally took about six weeks to arrive after ordering. He wanted to make sure they were on site and would not hold up progress. In fact, the windows were on site, paid for, and were used by the successor contractor on the project.
One of the central arguments advanced by plaintiffs concerned the representation of an ability to build the house by a date certain. That representation was first made, so far as the record shows, in the addendum dated October 29, 2002 (Ex. 5). There, it was agreed the completion date would be March 5, 2003, over five months later. A similar representation was made on December 14 when the date was extended to April 30, 2003, four and one-half months later. Even there the written agreement only provided for a relatively nominal penalty if it was not completed on time (Ex. 10).
In February, 2003 the DeGuzmans hired Mr. Fennema, who testified that he initially thought continuing with Mr. Hawk was the preferred course, particularly because of the new job site superintendent, Mr. Krall. However, after he received a proposed construction schedule, which he concluded was unrealistic, he changed his mind. He testified he spoke with Mr. Krall about his concerns about the schedule and understood Mr. Krall disagreed with him. Whatever the merits of their respective positions, plaintiffs have proffered no evidence of any representation by Mr. Hawk about a completion date after December 14, much less one on which they relied at all. It is doubtful that a representation about a future date is even actionable under § 523(a)(2)(A), especially one like an expected completion date. That is even more the case when the written contract expressly recognizes there may be delays for Acts of God, delays by public authorities, "stormy weather" or other unforeseen or uncontrollable circumstances.
One of the more confusing aspects of this case concerns how payments to suppliers, subcontractors, and others were handled. On the one hand, the October 18 contract (Ex. 2) provided that Prime Construction would "furnish all materials and perform all labor necessary", and was "responsible to pay and pull the permits from the county." (The contract referenced a progress payment schedule, which was not provided to the Court as part of the exhibit.) Mrs. DeGuzman complained at the outset of her testimony that notwithstanding the language of the contract she had to write checks to get the necessary approvals to move the project along. On October 28 she wrote the check to San Diego Gas Electric for hookup. On December 5, she paid the development fee to the Poway Unified School District.
In addition to the testimony about plaintiffs making money available to Mr. Hawk and then getting reimbursed from the construction lender, both Mr. DeGuzman and Mr. Hawk testified about discussing the DeGuzmans paying third party suppliers directly, at least those that could assert a lien on the property. Mr. DeGuzman wanted to do that.
Consistent with the foregoing, Mrs. DeGuzman wrote the check to the County on December 11, 2002 to obtain an extension on the plan check by the County. On the same day she also wrote the County the check for the building permit. She testified she was not sure who took the checks to the County, her husband or the home designer, Mr. Filiponi.
On December 21, on the job site, the plaintiffs wrote a check for $20,000 jointly payable to Dirt Works and Prime Construction. That money was delivered by someone to Dirt Works, apparently on December 21. According to the invoices from Dirt Works (Ex. 11), approximately $4,350 remained owing. Mr. Hawk testified it was not good practice to pay the entire grading bill until the grading had passed inspection, which did not happen for some weeks after December 21.
Also on December 21, Mrs. DeGuzman wrote a check to Prime Construction for $3,000, with nothing indicated on the memo line. In her testimony she said it may have been to pay the bills for both Spear and La Monte, but that seems unlikely since their bills were dated January 2 and January 6, respectively. Moreover, it is inconsistent with the DeGuzmans' preference to pay third parties directly. On the other hand, the total of the two bills is close to $3,000.
The most puzzling day, though, is January 9, 2003. On that date, Mr. DeGuzman wrote three checks, and a cover memo, and shoved them under the door after hours at Prime Construction. Check No. 506 was made payable to Dixieline Lumber; Check No. 507 was made payable to RCP Block and Brick; and Check No. 508 was made payable to Prime Construction and/or Mike Hawk, and was in the amount of $10,882.12. Written on the memo line of Check No. 508 are the words "4,350.00 should be paid to Dirt Works". The cover memo indicated that Mr. Hawk had requested the checks. Mr. DeGuzman indicated he wanted receipts "from Dixieline and RCP showing they were paid". It then says: "The check I wrote to you (ck #508) — $4,350.00 must go to Dirt Works to pay the balance. I need the lien release from Dirt Works for my files!"
It is puzzling that Mr. DeGuzman did not write a check for $4,350 directly payable to Dirt Works, or at least jointly payable to Dirt Works and Prime Construction, like the $20,000 check written on December 21, just twenty days before. It is even more puzzling when the check to Prime (No. 508) is put next to the ones to Dixieline and RCP, written at the same sitting. Add to that Mr. DeGuzman's testimony that he wrote two of the checks directly to the suppliers because he was concerned Mr. Hawk was not accounting for funds paid to him. Regardless of that puzzlement, it is uncontroverted that Check No. 508 was deposited in the Prime Construction account, and that neither Prime Construction nor Mike Hawk ever paid $4,350 to Dirt Works.
So then the question is whether Mr. Hawk knew of the instructions contained in the cover memo or on the memo line of Check No. 508. Mr. Hawk testified he did not see the cover memo until after litigation started. He said someone from the office received Check No. 508 and deposited it. He testified he could not say that the endorsing signature on the back of the check was his. He said he had authorized Caroline of his office to sign his name, including on checks. That was corroborated by another employee of Prime, who testified.
Conclusion
When all the evidence is considered, the Court finds and concludes that plaintiffs have failed to meet their burden of showing that Mr. Hawk made false representations or otherwise committed fraud on the plaintiffs sufficient to make any debt he might owe to them nondischargeable. They have failed to show that his implicit representation that he could build their house was known to him to be false when he made it. The DeGuzmans performed a measure of due diligence and were satisfied with what they learned. None of that has been shown to be false. Similarly, there was no showing that he did not believe he could complete the house when he represented on October 29, 2002, and then on December 14, 2002 that he would. There was no showing of any representation after that date, and even Mr. Fennema testified that he initially thought the DeGuzmans' better option was to have Mr. Hawk finish the job, especially with the new project supervisor, Mr. Krall on site.
Mr. Hawk and/or Prime Construction did receive funds from the DeGuzmans. There was a $1,000 down payment on October 11, 2002 and $10,000 on October 28. There is no evidence to suggest that Mr. Hawk made any false representation to induce the DeGuzmans to part with those funds, much less that he knew the representations were false when made. The next monies shown to go to him or his company were the December 21 checks for $20,000 and $3,000. The $20,000 did go to the co-payee, Dirt Works. There is no evidence that the $3,000 was specifically earmarked for any particular bill, aside from Mrs. DeGuzman's thought that it might be to pay Spear and La Monte, although they had not even issued their invoices at the time. The January 9 checks to Dixieline and RCP Block both were received by those businesses. So the only check remaining is Check No. 508, which has been discussed. While its circumstances are puzzling, there is no showing that Mr. Hawk induced them to part with the funds while intending not to use them for the stated purpose.
In short, there is no basis on which the Court could find that any debt Mr. Hawk might owe the DeGuzmans is nondischargeable under 11 U.S.C. § 523(a)(2)(A). The same is even more true under § 523(a)(6), the claim under which is predicated on fraud. The Court finds and concludes that plaintiffs have failed to show willful and malicious conduct by Mr. Hawk within the meaning of § 523(a)(6).
For all the foregoing reasons, the Court finds and concludes that judgment shall be entered in favor of defendant Hawk, and any pre-petition debt owing from Mr. Hawk to the DeGuzmans is dischargeable in this bankruptcy.
Counsel for Mr. Hawk shall prepare and lodge, or obtain approval as to form, of a separate form of judgment consistent with the foregoing within twenty-one (21) days of the date of entry of this Memorandum Decision.
IT IS SO ORDERED.