Opinion
Case No. 97-15645-SSM, Adversary Proceeding No. 98-1258
December 7, 1999
Dawn C. Stewart, Esquire, Mitterhoff, Henrichsen Stewart, PLLC, Washington, DC, Of Counsel for the plaintiff
George Holmes, Jr., Sterling, VA, for Defendant, Pro Se
Patricia Nimmo-Holmes, Sterling, VA, for Defendant, Pro se
MEMORANDUM OPINION
A hearing was held in open court on November 30, 1999, on the motion for summary judgment filed by the plaintiff. The plaintiff was present by counsel. The defendants, although given notice of the motion and hearing, did not file a response and did not attend the hearing. The court ruled from the bench that the motion would be granted as to defendant George Holmes, Jr., on Count II with respect to the Virginia State University project only and otherwise denied. Following the hearing, and after further review of the file, the court entered an order denying the summary judgment motion with respect to defendant Patricia Nimmo-Holmes but taking the motion under advisement as to defendant George Holmes, Jr. Having further considered the motion, the court concludes that the plaintiff is entitled to summary judgment against defendant George Holmes on Count I in addition to the partial summary judgment on Count II. The purpose of this memorandum opinion is to set forth briefly the basis for the court's ruling.
Counsel for the defendants has been permitted to withdraw, and the defendants are currently unrepresented. The defendants have filed several change of address notices with the clerk in their bankruptcy case, and the court has verified that the motion and notice of hearing were mailed to the most recent address.
Background
This is an action to determine the dischargeability of a debt. The defendants, George Holmes, Jr. and Patricia Nimmo-Holmes (collectively, "the debtors") filed a joint voluntary petition under chapter 13 of the Bankruptcy Code in this court on July 30, 1997. They voluntarily converted the case to chapter 7 on March 17, 1998, and were granted a discharge of their dischargeable debts on July 2, 1998.
An earlier chapter 13 petition filed on May 2, 1997, had been dismissed on July 14, 1997, for failure to commence payments.
At the time they filed their petition, the debtors were liable to International Fidelity Insurance Company ("IFIC") under the terms of an Agreement of Indemnity dated March 16, 1995. In that agreement, the debtors agreed to personally indemnify IFIC with respect to any payment and performance bonds IFIC might issue on behalf of AMR Group, Inc., trading as Landmark-Allied, a construction company owned by debtor George Holmes, Jr. ("Mr. Holmes"). The agreement also contained the following language:
FOURTH: If any of the Bonds are executed in connection with a contract which by its terms or by law prohibits the assignment of the contract price, or any part thereof, the Contractor and Indemnitors covenant and agree that all payments received for or on account of said contract shall be held as a trust fund in which the Surety has an interest, for the payment of obligations incurred in the performance of the contract and for labor, materials and services furnished in the prosecution of the work provided in said contract[.]
The company — then known simply as The AMR Group, Inc. — had been founded in early 1993 by Joseph F. Jennings, II, and William M. Wagner, who between them owned 500 shares. In 1995, Mr. Jennings offered to sell the company to Mr. Holmes. In February 1995, 10 shares were issued to Mr. Holmes, who also contemporaneously purchased the 500 shares belonging to Messrs. Jennings and Wagner, thereby becoming the sole owner and president of the company. It was at this time that the company adopted the trade name Landmark-Allied. Mr. Jennings, although he no longer had an ownership interest, remained on for some period of time after the purchase as vice-president and also personally signed the indemnity agreement.
Relevant to the present motion, IFIC issued performance and payment bonds in 1995 and 1996 on four projects on Landmark-Allied's behalf: the HUD Plaza Renovations and Enhancements; Hanger Additions and Alterations, Fort Belvoir; Woodland Job Corps Center; and Foster Hall Renovations at Virginia State University. Landmark-Allied did not complete the HUD Plaza, Fort Belvoir, and Virginia State University jobs, and IFIC, as surety, has made payments totaling $6,502,354.39 under the performance and payment bonds it issued. Although the Woodland Job Corps Center project was apparently completed, a number of subcontractors and suppliers were not paid, and IFIC made payments of $267,101.61 under the payment bond it issued.
Only the first three of these bonds are pleaded in the complaint. The complaint, moreover, does not (contrary to counsel's suggestion at oral argument) use language referring to "bonds" in general. Paragraph 6 of the complaint alleges, "IFIC issued the following payment and performance bonds on behalf of AMR: [HUD Plaza, Fort Belvoir, and Woodland Job Corps] . . . [T]he performance and payment bonds are hereinafter collectively referred to as `the Bonds.'" (emphasis added). Thus "Bonds" is a defined term specifically referring to payment and performance bonds issued in connection with three named projects. Virginia State University is not one of those projects. Nevertheless, the present action is not one to recover on the bonds themselves but on a separate indemnity agreement covering all bonded projects. Further, it would not appear that the variance between the pleading and proof has misled or prejudiced the defendants. Rule 15(b), Federal Rules of Civil Procedure, which is incorporated by Federal Rule of Bankruptcy Procedure 7015, permits the pleadings to be amended to conform to the evidence. As noted, there has been no response by the defendants to the summary judgment motion. In the absence of a timely objection that the evidence concerning the Virginia State University project is outside the issue made by the pleadings, the court will consider the evidence related to that project.
Prior to agreeing to issue bonds on Landmark-Allied's behalf, IFIC reviewed a "Contractor Questionnaire," upon which it claims to have justifiably relied in issuing bonds to Landmark-Allied. This form was signed by Mr. Holmes and is dated March 11, 1995. Relevant to the present action, Question 20 asked, "Has your firm or any of its principals ever petitioned for bankruptcy, failed in business or defaulted so as to cause a loss to a surety." That question was answered "No." In deposition testimony, Mr. Holmes acknowledged that he had filed a chapter 7 petition "way back in `79 or `80." The questionnaire also asked, in Questions 59 through 63, for five of the company's largest contracts, five major suppliers, five subcontractors the company had done business with, and three architects the company had done business with. Tellingly, only a single contract was listed in response to Question 59. That was a contract on which AMR had worked, as part of a joint venture, prior to Mr. Holmes' buying the company. Mr. Holmes testified that the names listed in the questionnaire for the major suppliers, subcontractors, and architects were furnished to him by Messrs. Jennings and Wagner — primarily the former — and that he had no independent knowledge concerning them. Attached to the questionnaire is a two-sentence "History of the Business," which states in part: "The AMR Group, Inc., [was] founded in 1992 to provide general contracting service and for utilizing all the years of experience I have had in managing other businesses successfully." Mr. Holmes testified at his deposition that the history had been prepared by Mr. Jennings, and that Mr. Jennings was the "I" referred to in the sentence quoted above. There is no suggestion in the affidavit by Ardath Jameison, IFIC's vice-president for underwriting, that any effort was ever made by IFIC to contact any of the companies listed in response to Questions 59 through 60 or how the answers to those questions actually impacted on the underwriting process.
The form does not reflect on its face that it was to be submitted specifically to IFIC. The letterhead at the top of the form is that of R. B. Brown and Associates, whom Mr. Holmes understood to be an insurance broker.
In this connection, the court notes that the Jamieson affidavit is a vivid illustration of a summary judgment affidavit that is largely worthless, since it consists primarily of bare conclusions. See Fed.R.Civ.P. 56(e) ("Supporting and opposing affidavits shall be made on personal knowledge, shall set forth such facts as would be admissible in evidence, and shall show affirmatively that the affiant is competent to testify to the matters stated therein.") (Emphasis added).
After a notice of default was issued to Landmark-Allied in connection with the Virginia State University project, an agreement was drawn up between IFIC and Landmark-Allied dated June 10, 1997. The agreement provided for a "special trust bank account" to be set up into which all contract funds were to be deposited, and from which no withdrawals were to be made except upon checks signed by both IFIC and Landmark-Allied. The funds were to be used solely to pay labor, material and equipment suppliers, and subcontractors on the project, with an allowance of $27,000 per progress payment for Landmark-Allied's administrative expenses. Notwithstanding the escrow arrangement, apparently a number of suppliers and subcontractors were not paid, and it was not clear what happened to the contract funds. IFIC served on the debtors three requests for admission concerning the escrow funds, which the debtors objected to as "beyond the scope of discovery." When IFIC attempted at deposition to question Mr. Holmes concerning withdrawals from the account, he invoked the Fifth Amendment. On IFIC's motion, this court entered an order on October 26, 1999, deeming the requests admitted. The matters deemed admitted were that withdrawals from the trust account had been made at the request or direction of Mr. Holmes; that some of the withdrawals were completed without seeking and/or obtaining authorization from IFIC; and that Mr. Holmes requested or directed withdrawals from the trust account of funds that were either retained by him or his wife or were transferred to a person or entity other than a subcontractor or supplier of Landmark-Allied.
Since the request for admission is phrased in the disjunctive, even when deemed admitted it does not establish that Patricia Nimmo-Holmes retained the funds, let alone participated in or knew of their improper withdrawal. There is no evidence whatsoever in the summary judgment record that Ms. Nimmo-Holmes had any role in the company, any input into the Contractor Questionnaire, or any involvement in diversion of contract funds to uses other than the payment of workers, subcontractors, or suppliers. Hence, the dismissal of the summary judgment motion as it related to her.
Discussion I.
IFIC's complaint, which is pleaded in two counts, asserts that the debtors' liability under the indemnity agreement is nondischargeable based both on a false written financial statement (Count I) and on fiduciary defalcation (Count II). Under Federal Rule of Civil Procedure 56(c), as incorporated by Federal Rule of Bankruptcy Procedure 7056, summary judgment is appropriate "if the pleadings, depositions, answers to interrogatories, and admissions on file, together with the affidavits, if any, show that there is no genuine issue as to any material fact and that the moving party is entitled to a judgment as a matter of law." In ruling on a motion for summary judgment, a court should believe the evidence of the non-movant, and all justifiable inferences must be drawn in his favor. Anderson v. Liberty Lobby, Inc., 477 U.S. 242, 255, 106 S.Ct. 2505, 2513, 91 L.Ed.2d 202 (1986). At the same time, the Supreme Court has instructed that summary judgment "is properly regarded not as a disfavored procedural shortcut, but rather as an integral part of the Federal Rules as a whole, which are designed `to secure the just, speedy and inexpensive determination of every action.'" Celotex Corp. v. Catrett, 477 U.S. 317, 327, 106 S.Ct. 2548, 2555, 91 L.Ed.2d 265 (1985). Additionally, not every dispute as to the facts will preclude the entry of summary judgment, but only those disputes over facts that might affect the outcome of the suit under the governing law. Anderson at 248, 106 S.Ct. at 2510.
II.
Under § 523(a)(2)(B), Bankruptcy Code, a chapter 7 discharge does not discharge an individual debtor from a debt
(2) for money, property, services, or an extension, renewal, or refinancing of credit, to the extent obtained by —
* * *
(B) use of a statement in writing —
(i) that is materially false;
(ii) respecting the debtor's or an insider's financial condition;
(iii) on which the creditor to whom the debtor is liable for such money, property, services, or credit reasonably relied; and
(iv) that the debtor caused to be made or published with intent to deceive;
The court will assume the Contractor Questionnaire constituted, in the broadest sense, a statement respecting Landmark-Allied's financial condition. See Engler v. Van Steinburg (In re Van Steinburg), 744 F.2d 1060 (4th Cir. 1984). And, of course, Landmark-Allied was an "insider" of the debtor. § 101(31)(a)(iv), Bankruptcy Code. With respect to the statements concerning the company's prior experience, the court cannot find from the summary judgment record that the statements were necessarily false, let alone knowingly false. All that is shown is that Mr. Holmes did not have personal knowledge of whether they were true or false. His explanation that he relied on Mr. Jennings's input is certainly plausible, given that he had just purchased the company and had no preexisting familiarity with its affairs. Indeed, given that only a single job was listed in response to the question asking for five of the company's largest jobs, it is difficult to see how IFIC could have relied on the questionnaire as indicative of any significant experience whatsoever. Additionally, it is difficult to see how IFIC could have "reasonably" relied on a listing of references when IFIC did not even attempt to contact any of them. Finally, Mr. Holmes's explanation that the one-year error in the dates of his current and prior employment on his resume was apparently a typographical error is not inherently incredible.
With respect to the question concerning prior bankruptcy filings by the business "or any of its principals," however, there is no question that the "no" response was false, since Mr. Holmes had previously filed a bankruptcy, and, as 100% shareholder and president, was unquestionably a principal. Mr. Holmes's explanation during his deposition that he was thinking about the prior principals and not himself makes no sense. Furthermore, while he identified during his deposition a number of questions as to which he relied on Mr. Jennings for the answers, Question 20 was not one of them. The Jamieson affidavit asserts that IFIC relied on the answer to Question 20 in issuing bonds for Landmark-Allied, and that, had the question been correctly answered, IFIC would not have issued the bonds. While the court is somewhat skeptical — could it really be true that IFIC has never knowingly issued a bond when one of the bonded company's principals had filed a personal bankruptcy more than ten years previously? — nevertheless on the present record the affidavit stands unrebutted and uncontradicted. Accordingly, the court concludes that, with respect to the response given to Question 20, IFIC has carried its burden of showing that there are no material facts in dispute. Summary judgment will therefore be entered against Mr. Holmes on Count I based on the false response to Question 20.
III.
Under § 523(a)(4), Bankruptcy Code, a chapter 7 discharge also does not discharge an individual debtor from a debt "for fraud or defalcation while acting in a fiduciary capacity, embezzlement, or larceny." The term "fiduciary" as used in § 523(a)(4) is restricted to "the class of fiduciaries including trustees of specific written declarations of trust, guardians, administrators, executors or public officers and, absent special considerations, does not extend to the more general class of fiduciaries such as agents, bailees, brokers, factors, and partners." Sager v. Lewis (In re Lewis), 94 B.R. 406, 410 (Bankr. E.D. Va. 1988) (Shelley, J.); Matter of Marchiando, 13 F.3d 1111 (7th Cir. 1994), cert. denied sub nom Illinois Dept. of the Lottery v. Marchiando, — U.S.-, 114 S.Ct. 2675, 129 L.Ed.2d 810 (constructive, resulting, or implied trusts do not come within reach of § 523(a)(4); hence, lottery ticket seller not "fiduciary" within meaning of § 523(a)(4) so as to make debt from failure to turn over proceeds from ticket sales nondischargeable). See also Davis v. Aetna Acceptance Corp., 293 U.S. 328, 55 S.Ct. 151, 79 L.Ed. 393 (1934) (Cardozo, J.) (automobile dealer's failure to remit proceeds of sale from floorplanned automobile to lender did not constitute "defalcation while acting . . . in any fiduciary capacity" under former Bankruptcy Act of 1898 even though dealer had executed "trust receipt" for vehicle in favor of secured lender).
With respect to the projects other than the Virginia State University project, the evidence does not show that a "fiduciary" relationship was created in the narrow sense in which that term has been construed in the dischargeability context. The court declines to find a "fiduciary" relationship within the meaning of § 523(a)(4) based solely on boilerplate language within the Agreement of Indemnity. With respect to the Virginia State University project, however, the situation is different. Here an actual escrow account was set up expressly for IFIC's benefit, with any withdrawals requiring IFIC's signature. Somehow money left the account without IFIC's approval, and the deemed admissions point to Mr. Holmes as the person responsible. Since there are no material facts in dispute, IFIC is entitled to summary judgment against Mr. Holmes on Count II with respect to the Virginia State University project.
For all that, there is no evidence as to what funds, if any, were paid from the owners to Landmark-Allied, let alone evidence that they were diverted to some other purpose than payment of workers, suppliers, and subcontractors. All that is shown is that IFIC paid claims. But if, for example, Landmark-Allied had underbid the job, claims would have resulted even if all funds received had been applied to payment of workers, suppliers, and subcontractors.
IV.
An order has been previously entered denying the motion for summary judgment as to Ms. Nimmo-Holmes. A separate order will be entered granting summary judgment against Mr. Holmes on Count I in the amount of $6,769,456.00 and on Count II on the issue of liability with respect to the Virginia State University project only.
The measure of damages on Count II is not the amount of the surety paid out but the amount that was improperly siphoned out of the escrow account. The summary judgment record is inadequate to determine those amounts — indeed, there is no evidence in the record as to what amounts were paid to Landmark-Allied by the owner following the establishment of the escrow account. In any event, the damages under Count II would be merely duplicative of those awarded under Count I.