607 B.R. 270
Bankr. N.D. Tex.2019Background
- Debtor Stephen C. Jenkins (a longtime home remodeler) sold real property in Mansfield, TX to James and Mary Dare in October 2015. Jenkins completed a seller "Sewer System Disclosure" stating the property had an Aerobic Treatment on-site sewer system installed by "Peter Gross Plumbing & Septic."
- The Dares discovered within months post-closing that the property did not have a functioning aerobic system: the controller box was unpowered, sprinklers were insufficient, no permit/registration existed, and the controller was registered to a different property.
- The Dares spent $17,486.72 to replace and properly install an aerobic system, sued Jenkins in Texas state court for fraud and related claims, and obtained a default judgment on December 16, 2016 (the Prepetition Judgment) awarding actual damages and interest.
- Jenkins later filed Chapter 7 bankruptcy on June 13, 2017. The Dares filed an adversary proceeding seeking a determination that the Prepetition Judgment debt is nondischargeable under 11 U.S.C. § 523(a)(2)(A) as money obtained by false pretenses, false representation, or actual fraud.
- At trial the bankruptcy court found the Dares’ testimony credible and Jenkins’ testimony not credible, concluding Jenkins knowingly misrepresented the existence of a functioning aerobic system, intended inducement, and that the Dares actually and justifiably relied on the disclosure.
Issues
| Issue | Plaintiff's Argument (Dare) | Defendant's Argument (Jenkins) | Held |
|---|---|---|---|
| Whether the Prepetition Judgment is entitled to preclusive effect in this nondischargeability proceeding | Prepetition Judgment resolved fraud; collateral estoppel should bind Jenkins in bankruptcy | Default judgment lacks express findings on fraud; preclusion inappropriate; res judicata bars re-litigation | Neither res judicata nor collateral estoppel discharged the matter; default judgment lacked the necessary explicit findings to fully preclude this court’s §523 inquiry |
| Whether Jenkins’ sewer-disclosure misrepresentations meet §523(a)(2)(A) (false pretenses/false representation/actual fraud) | Misrepresentations about an aerobic system were knowing and intended to induce purchase; Dares relied and suffered loss | Jenkins lacked knowledge; believed system was functioning; no intent to defraud | Court found Jenkins knowingly misrepresented, intended to induce reliance, Dares justifiably relied, and suffered proximate loss; debt is nondischargeable under §523(a)(2)(A) |
| Whether the contract "as-is" clause negates Dares’ reliance on the disclosures | Disclosures induced the Dares despite "as-is"; "as-is" cannot shield fraudulent inducement | "As-is" clause negates justifiable reliance; buyers had opportunity to inspect | "As-is" does not bar claims based on fraud; the court held Dares’ reliance was justifiable and not patently discoverable, so clause did not defeat §523 claim |
| Whether "actual fraud" under Husky requires intent or a false representation | Dares argued statutory fraud (possibly without intent) supports nondischargeability | Jenkins argued actual fraud requires wrongful intent; some statutory claims without intent do not equate to §523 standard | Court required wrongful intent for "actual" fraud; found intent here and therefore concluded debt nondischargeable under false pretenses, false representation, and actual fraud |
Key Cases Cited
- Husky Int’l Elecs., Inc. v. Ritz, 136 S. Ct. 1581 (2016) ("actual fraud" may include schemes without a false representation; distinguishes "actual" from implied fraud)
- Field v. Mans, 516 U.S. 59 (1995) (discusses justifiable reliance standard and limits where falsity is patently discoverable)
- Grogan v. Garner, 498 U.S. 279 (1991) (nondischargeability is a matter of federal bankruptcy law)
- Saenz v. Gomez (In re Saenz), 899 F.3d 384 (5th Cir. 2018) (plaintiff bears preponderance burden in §523(a)(2)(A) cases)
- Gober v. Terra+ Corp. (In re Gober), 100 F.3d 1195 (5th Cir. 1996) (issue preclusion requires issues actually litigated, properly raised and determined)
- Prudential Ins. Co. of Am. v. Jefferson Assocs., Ltd., 896 S.W.2d 156 (Tex. 1995) (an "as-is" clause does not bar fraud-based claims when buyer was induced by seller’s misrepresentations)