592 B.R. 414
1st Cir. BAP2018Background
- Homeowners Sheila and Joseph DeWitt contracted with Boardwalk North (owned/operated by Edward T. Stewart Jr.) to renovate their home; total contract reduced by change order to $1,300,000. Boardwalk began work but abandoned the project ~45% complete after the DeWitts had prepaid about $1,175,350 and later paid a new contractor much more to finish.
- DeWitts alleged Stewart induced them by misrepresentations (Boardwalk was solvent, had good subcontractor relationships, and would "fund"/"leverage" their prepayments for their project), and that Stewart diverted funds to corporate and personal uses.
- DeWitts sued in an adversary complaint including claims under 11 U.S.C. § 523(a)(2)(A) (fraud/false pretenses/false representation) and § 523(a)(6) (willful injury), and state-law claims including veil-piercing to hold Stewart personally liable for Boardwalk’s obligations.
- The bankruptcy court found Stewart’s statements too general, rejected the § 523(a)(2)(A) and § 523(a)(6) nondischargeability claims, and entered judgment for Stewart; the court assumed (without deciding) veil-piercing for purposes of analysis.
- On appeal the BAP reviewed the trial record de novo for legal issues and for clear error as to factual findings, concluded the bankruptcy court clearly erred on the § 523(a)(2)(A) findings, found facts supporting veil-piercing under New Hampshire law, reversed as to § 523(a)(2)(A), and remanded for further proceedings (including entry of judgment in favor of the DeWitts as to those counts).
Issues
| Issue | Plaintiff's Argument | Defendant's Argument | Held |
|---|---|---|---|
| Whether debt is nondischargeable under § 523(a)(2)(A) (false representation/false pretenses/actual fraud) | DeWitts: Stewart knowingly misrepresented Boardwalk's condition and that deposits/milestone payments would fund/be used exclusively for their project and to leverage subcontractors; they relied justifiably and were harmed | Stewart: Statements were general, not knowingly false; "fund" and "leverage" were explanations, discounts were provided, and he did not promise exclusive use of funds | Reversed bankruptcy court: record supports that Stewart made express and implied misrepresentations, intended to deceive, DeWitts relied justifiably and were harmed; § 523(a)(2)(A) elements met; remand for entry of judgment/remedies |
| Whether debt is nondischargeable under § 523(a)(6) (willful and malicious injury) | DeWitts: conduct caused intentional injury | Stewart: lacked requisite intent or substantial certainty project would fail | BAP did not reach merits because reversal on § 523(a)(2)(A) dispositive; bankruptcy court had found no willfulness |
| Whether Boardwalk's corporate veil can be pierced to hold Stewart personally liable under New Hampshire law | DeWitts: Stewart used corporate form to perpetrate fraud/injustice (diverting funds, commingling, paying personal debts), so veil should be pierced | Stewart: (challenged veil-piercing; argued insufficient proof) | BAP: record supports piercing under NH law (sole shareholder/officer, diversion of funds, injustice to DeWitts); personal liability may be imposed and converted to nondischargeable debt under § 523(a)(2)(A) |
Key Cases Cited
- Palmacci v. Umpierrez, 121 F.3d 781 (1st Cir.) (elements and standard for § 523(a)(2)(A) false representation claims)
- Husky Int'l Elecs., Inc. v. Ritz, 136 S. Ct. 1581 (U.S.) (actual fraud under § 523(a)(2)(A) encompasses schemes beyond express misrepresentations)
- Field v. Mans, 516 U.S. 59 (U.S.) (standard for justifiable reliance in fraud cases)
- Merchants Nat'l Bank & Trust Co. v. Pappas (In re Pappas), 661 F.2d 82 (7th Cir.) (entrusted funds for a specific purpose can support nondischargeability if debtor had no intent to use them for that purpose)
- Segala (In re Segala), 133 B.R. 261 (Bankr. D. Mass.) (advances to builder entrusted for a specific project can imply representation that funds would be used on the job and support § 523(a)(2)(A) relief)