564 B.R. 6
Bankr. D. Mass.2017Background
- Andrew and Hyeson Levitsky contracted with contractor Brian McPherson in 2010 to renovate their Needham, MA home; the agreed contract (with a change order) matched the construction loan amount of $369,100.
- The project was severely delayed and McPherson was terminated on March 29, 2012; arbitration awarded the Levitskys a net breach-of-contract judgment (including attorneys’ fees and damages) and confirmed in state court, totaling approximately $149,515.54.
- The Levitskys advanced $48,000 to McPherson by checks to keep work moving; two of McPherson’s repayment checks were later dishonored, leaving an asserted unpaid $43,000 reimbursement balance.
- McPherson filed Chapter 13, obtained plan confirmation and is on track to receive a §1328(a) discharge after plan completion (presently paying a small percentage of the Levitskys’ judgment).
- The Levitskys sued in the bankruptcy court seeking nondischargeability of their state-court judgment under 11 U.S.C. § 523(a)(2)(A), (a)(4), and (a)(6). After trial, the court found their proofs insufficient and declined to except the debt from discharge.
Issues
| Issue | Plaintiff's Argument | Defendant's Argument | Held |
|---|---|---|---|
| Whether debt is nondischargeable under § 523(a)(2)(A) (fraud/false representation) | Levitskys: McPherson made false statements about causes of delay (bank/permitting), quality of materials, and issued repayment checks knowing they would not be honored, inducing them to advance funds. | McPherson: Statements about bank delays and permits were truthful/justified; checks were intended to be honored when bank paid final requisition; funds were used for the project as intended. | Held: Levitskys failed to prove the elements of § 523(a)(2)(A); court credited McPherson’s testimony and found no proven false representations or fraudulent intent. |
| Whether debt is nondischargeable under § 523(a)(4) (fiduciary defalcation, embezzlement, larceny) | Levitskys: By accepting $48,000 and issuing repayment checks, McPherson acted as an escrowee/fiduciary and defalcated/embezzled funds. | McPherson: No escrow or trust was created; payments were advances/loans to be used on the project; he intended to repay upon receiving bank disbursement; funds were used for the work. | Held: No express or technical trust existed under federal law; no fiduciary duty within § 523(a)(4). No embezzlement or larceny because funds were voluntarily advanced and used for the agreed purpose; no fraudulent conversion proven. |
| Whether debt is nondischargeable under § 523(a)(6) (willful and malicious injury) | Levitskys: Contract breaches, failure to repay advances, and dishonored checks demonstrate willful and malicious injury. | McPherson: Breaches resulted from delays, change orders, and lack of bank payment; dishonored checks were not intentional as repayment condition (bank disbursement) never occurred. | Held: Even assuming an injury, Levitskys failed to show willfulness and malice. § 523(a)(6) claims dismissed; also §1328(a) discharge presently excludes §523(a)(6) debts but court adjudicated merits to avoid relitigation. |
| Burden and scope of relitigation of arbitration findings | Levitskys: Arbitration award establishes wrongdoing supporting nondischargeability. | McPherson: Arbitration findings addressed contract breach and damages but did not find fraud; arbitration determinations on breach do not automatically establish nondischargeability elements. | Held: Arbitration findings were admitted and binding on factual matters, but they did not establish the mental-state elements required for § 523 claims; nondischargeability requires separate proof. |
Key Cases Cited
- Grogan v. Garner, 498 U.S. 279 (burden of proof for nondischargeability is preponderance of the evidence)
- Palmacci v. Umpierrez, 121 F.3d 781 (exceptions to discharge narrowly construed; fraudulent promise can support § 523(a)(2)(A))
- McCrory v. Spigel (In re Spigel), 260 F.3d 27 (elements required to establish § 523(a)(2)(A) by false representation)
- Field v. Mans, 516 U.S. 59 (justifiable reliance standard for § 523(a)(2)(A))
- Kawaauhau v. Geiger, 523 U.S. 57 (definition of willful under § 523(a)(6))
- Williams v. United States, 458 U.S. 279 (a check is not a factual representation; dishonored check alone does not establish fraud)