579 B.R. 231
Bankr. D. Or.2017Background
- Plaintiff Suzanne Kunda contracted with debtor-contractor Mickey Shaul (dba Mick Shaul Construction) to remodel an early-1900s house; the written proposal was a flat-fee bid of $210,842.67 plus an unspecified contractor percentage and tax.
- Kunda paid draws and contractor fees totaling $260,206 (including ~$20,000 contractor fee); the project was delayed, changed repeatedly without written change orders, and left incomplete in May 2012 after disputes over the roof line.
- Kunda sued in Washington state court asserting breach of contract, unjust enrichment, conversion, fraud, and consumer protection claims; the jury found for Kunda on breach of contract/unjust enrichment/conversion and awarded $153,251.80 (including fees/costs).
- Kunda filed this adversary action under 11 U.S.C. § 523(a)(2)(A) seeking a determination that the state-court judgment is nondischargeable as fraud. The parties submitted portions of the state trial transcript and exhibits; no live testimony was taken in bankruptcy court.
- Key disputed facts: whether (1) the proposal/accountings/receipt of draws contained false representations, (2) Mickey had intent to deceive (e.g., diverted funds to personal use), and (3) Kunda justifiably relied on any such representations.
Issues
| Issue | Plaintiff's Argument | Defendant's Argument | Held |
|---|---|---|---|
| Whether the project proposal contained misrepresentations amounting to fraud under § 523(a)(2)(A) | Proposal misrepresented cost/ability to complete and change-order process; Mick intended to divert funds | Proposal disclosed it was not all-inclusive; contractor fee and some line items covered Mick's labor; no intent to deceive | Court: No actionable fraudulent misrepresentation in the proposal; sloppy but not shown to be intentional fraud |
| Whether the June and August handwritten accountings were materially false and made to induce payment | Accountings falsely overstated construction expenditures and hid diversion to personal use | Accountings were disorganized but some line items reflected liabilities or unpaid items; labor by Mick may not appear as construction expense | Court: Minor inaccuracies (permits/tree) were immaterial; accountings not proved intentionally false by preponderance |
| Whether acceptance of draws constituted false pretenses (i.e., representation funds would be used only for construction) | Checks were notations for construction; using draws for personal expenses was false pretenses | Contract did not impose a trust or restrict draws to construction-only; Mick entitled to contractor fee and to spend funds for his labor | Court: No false pretenses; acceptance of draws did not equate to fraudulent representation about exclusive use |
| Whether plaintiff justifiably relied and whether intent to deceive existed so debt is nondischargeable | Reliance was reasonable given requests for itemization and vulnerability after an accident; intent can be inferred from diversion and financial distress | Reliance was not justifiable given notice of sloppy accountings and continued payments despite misgivings; financial distress alone does not establish intent | Court: Reliance not justifiable; intent to deceive not established; § 523(a)(2)(A) not satisfied |
Key Cases Cited
- In re Deitz, 760 F.3d 1038 (9th Cir. 2014) (elements and burden for nondischargeability under § 523(a)(2)(A))
- In re Eashai, 87 F.3d 1082 (9th Cir. 1996) (intent to deceive may be inferred from totality of circumstances)
- Field v. Mans, 516 U.S. 59 (1995) (justifiable reliance is contextual and plaintiff-focused)
- Husky Int’l Electronics, Inc. v. Ritz, 136 S. Ct. 1581 (2016) (actual fraud under § 523(a)(2)(A) includes deceit or trickery beyond misstatements)
- In re Apte, 180 B.R. 223 (9th Cir. BAP 1995) (discussing standards for justifiable reliance)