Dewitt v. StewartDewitt v. Stewart
Nancy H. Michels, with whom David M. Stamatis and Parnell, Michels & McKay, PLLC were on brief, for appellant.
Daniel M. Deschenes, with whom Seth M. Pasakarnis and Hinckley, Allen & Snyder LLP were on brief, for appellees.
The DeWitts hired Stewart and his company, Boardwalk North (“BN“), in 2013 to remodel their New Hampshire home. During the course of their dealings, the DeWitts alleged that Stewart misrepresented, among other things, the financial health of his company and that he would use so-called “milestone payments” to both “fund” their renovation project and “leverage” subcontractors. As matters devolved, after the DeWitts had already paid ninety percent of the project costs but Stewаrt and his company had only completed forty-five percent of the renovations, Stewart abandoned the project in the summer of 2014. The DeWitts ultimately hired another company to finish the renovations for a cost of $736,786.30 — $558,335.38 in excess of their pending balance with Stewart and BN.
On September 29, 2014, BN filed for Chapter 7 bankruptcy. With his personal finances similarly underwater, Stewart also filed for relief under Chapter 7 on February 23, 2015. The DeWitts thereafter filed a proof of claim in Stewart‘s bankruptcy case, indicating that they held an unsecured claim for $558,335.38. On May 26, 2015, the DeWitts commenced an adversary proceeding against Stewart seeking to exempt their unsecured claim from discharge. The centerpiece of the DeWitts’ thirteen-count complaint was that their claim against Stewart was ineligible for discharge, per
For the following reasons, we now vacate the BAP‘s decision and remand with instructions that the case be returned to the bankruptcy court. First, the bankruptcy court misapplied the standard for fraudulent intent under
I.
A. Factual Background
We begin by offering an overview of the relevant facts, gleaned from five days of trial testimony and several hundred exhibits, noting disputes as they arise. Stewart owned BN, which was a design-build firm based in New Hampshire.1 Even though she had no formal training in accounting, Stewart‘s wifе Linda managed BN‘s accounts, while Stewart focused on the company‘s management and business development. Stewart left the finances to Linda and BN‘s accountant, Peter Pike. During the lean years of the Great Recession, starting in 2008, the Stewarts ceased taking personal salaries and loaned money to the company. It was not until April 2013 that the Stewarts began taking a salary from BN again, although at a reduced rate.
For their part, in early 2013, the DeWitts were looking to renovate and expand their home (“the project“) to better accommodate their community outreach activities. Sheila DeWitt, a scientist and entrepreneur, and her husband Joe DeWitt, a high school teacher with degrees in Divinity and Economics, had settled on an initial budget for the project between $700,000 and $1 million. Searching for the right contractor, the DeWitts attended a New Hampshire Home Builders Association home show on March 3, 2013. There, the DeWitts met Stewart at BN‘s company booth. The DeWitts described their project to Stewart, who indicated that BN was well qualified for the job. After this conversation, BN joined the shortlist of contractors the DeWitts would potentially hire for the project.
On March 23, 2013, as part of their vetting process, the DeWitts emailed Stewart with questions about BN‘s financials, including its revenues and number of projects for recent years, as well as its revenue projections for 2013 without the DeWitt project. According to the DeWitts, their purpose in asking these questions was to confirm that their project “would not be a large portion of [BN‘s] revenues and that [BN] was healthy and prospering.” In response to the DeWitts’ request for information, Stewart claimed that BN‘s revenue numbers were approximately as follows: $2.3 million in 2011; $1.7 million in 2012; and $1.2 million as of March 2013. Stewart projected that BN‘s 2013 revenue would be between $2.4 and $2.9 million without the DeWitts’ project. His reply did not answer the question about the number of projects. According to BN‘s tax returns submitted into evidence, BN‘s actual revenues for those years were approximately $1.95 million in 2011, $1.55 million in 2012, and only $335,000 through March 2013. At trial, Joe DeWitt testified that had BN disclosed the real numbers, it “would have dropped out of the running.”
During an in-person conversation around this time, according to the DeWitts’ testimony, they also inquired about Stewart‘s relationships with subcontractors, which Stewart described as “excellent.” Brian Lessard, the project lead, testified at trial that some of the relationships with subcontractors were “good, [and] some were bad” due to “payment history.”
Ultimately, the DeWitts hired BN. First, the DeWitts and BN entered into a “Design Fee Purchase Agreement” on April 19, 2013. For a fee of $2,895, BN would come up with a conceptual drawing
Approximately two months later, the parties executed the Purchase Agreement with a price tag of $1,649,936. The day before, on June 26, 2013, the DeWitts had wired a $200,000 “good faith deposit” to Stewart, an amount in excess of the ten to fifteen percent deposit provided for in the design agreement. Having second thoughts because of the high final price, on July 2, 2013, Joe DeWitt informed Stewart that they wanted out of the agreement, which, Stewart testified, did not surprise him. Stewart also stated that, at that point, BN was prepared to return the $200,000 deposit, although the DeWitts never asked for it back.2 Despite the DeWitts’ misgivings, negotiations resumed, and on August 2, 2013, the parties settled on changes to the project‘s design that reduced costs to $1.3 million; this reduction was reflected in an amendment to the original contract.
The contract contained a “milestone” payments sсhedule so that at the start of most construction activities, a milestone was triggered, and the DeWitts were required to pay a uniform amount of $40,619.05. Stewart told the DeWitts that these “milestone payments” would allow them to “fund their own project.” The DeWitts testified that they interpreted the milestone payment scheme, in light of Stewart‘s representations, to mean that their payments would be used specifically for their own project and would never have given this money in advance if they had known it was going to pay off BN‘s existing debts. Stewart countered that he never said that the DeWitts’ payments would only go toward their project and, like with all of BN‘s projects, “the money went into the business” and “funded [the DeWitts‘] project indirectly.”
Stewart also offered the DeWitts a five percent discount on the milestone payments if they paid in advance of the corresponding construction phase. Stewart told the DeWitts that the prepayment of milestones would allow him to “leverage” subcontractors.3 The DeWitts opted for the prepayment discount, and on August 27, 2013, at Stewart‘s request, paid a second deposit of $172,000, plus the price of two milestones. The DeWitts presented evidence at trial that BN expended this payment within weeks primarily on “Non-DeWitt Project Costs.”
Work began in August, but from the get-go, the project suffered from delay and inefficiencies. Stewart and Lessard testified
When the DeWitts asked about delays, Lessard explained they were because the subcontractors had failed to show up, never disclosing to the DeWitts that certain products or services had not arrived beсause BN actually lacked the money to purchase them. Having witnessed the project unfold firsthand from the vantage of the basement apartment where the DeWitts resided during construction, Joe DeWitt testified to examples of what he believed to be improper sequencing of phases of the project, like the erecting of a stone veneer prior to completing electrical wiring which would have to go behind it, concluding that this progression “was geared to getting to the next milestone.” Lars Traffie, the head of Hutter Construction whom the DeWitts eventually hired to complete the project, also testified to this mis-sequencing, stating that, as he found it, the sequencing was “so inexplicable I guess that one could, you know, jump to the opinion then that it was more motivated by payment schedules and — and based on the contract than to quality of a construction project.” Countering these allegations of abusing the milestone payment scheme, Stewart, by way of Lessard, offered the following explanation: payments were triggered to “keep the business moving forward,” and it was better to make some progress than none at all. Stewart opined on the project schedule: “there‘s just too many reasons for things to go bump in the night in the remodeling business.”
Meanwhile, as the DeWitt project was playing out, BN‘s financial problems deepened, and in February 2014, Stewart met with Pike to explore a possible way forward, including a sale of the business, potential avenues for additional credit, or a bankruptcy filing. By July 2014, BN‘s coffers were entirely depleted. Unable to continue work on the DeWitts’ project, Stewart and Lessard met with the DeWitts on July 22, 2014 to inform them of the firm‘s financial collapse and that a subcontractor had placed a mechanic‘s lien on the DeWitts’ property. Two more liens from other subcontractors were to follow. Within the prior three weeks, the DeWitts had paid BN almost $80,000. From the inception of their tumultuous relationship up to that point, the DeWitts had paid BN $1,178,245.12, approximately ninety percent of the project price, for only forty-five percent of the work and a home that was reportedly in “shambles.” Two days after the July 22 meeting, Stewart emailed the DeWitts that BN‘s financial problems had been resolved; the DeWitts were unconvinced.
On August 5, 2014, Stewart borrowed $50,000 from his 401(k) account to put into the company after trying to access the entire amount for this purpose. But this and any other last-ditch effort to save BN and the DeWitt project would eventually fail. After a complete breakdown of communications, BN sent the DeWitts, on or around August 15, 2014, an “as-built policy invoice” charging them $183,629.45 ostensibly for unbilled time. The DeWitts did not render any payments on account of this invoice.
On September 29, 2014, BN filed for Chapter 7 bankruptcy. Stewart followed suit, filing personally for Chapter 7 in February 2015.
On May 26, 2015, the DeWitts filed an adversary proceeding against Stewart opposing the dischаrge of a debt pursuant to
funds instead to debts unrelated to the project and for Stewart‘s personal enrichment. The complaint requested the corporate veil be pierced because Stewart had used BN, of which he was the sole shareholder, President, and Treasurer, as his “alter ego” to “wrongfully obtain funds from the DeWitts” and “to perpetuate injustice and fraud.” A series of decisions by the bankruptcy judge reduced the issues for trial.5 The trial proceeded over five days in February and March 2017, and the court heard testimony from each of the DeWitts, the Stewarts, Lessard, Pike, and Hutter. The bankruptcy court issued a final judgment and opinion on August 18, 2017.
The memorandum opinion began with the court explaining that it would “assume, without deciding, that the corporate veil ha[d] been pierced . . . [to] allоw[] the Court to cut straight to the heart of the dispute” because if the debts to the DeWitts were in fact dischargeable, it would be unnecessary to determine whether the corporate veil should be pierced. DeWitt v. Stewart (In re Stewart), Adv. No. 15-1032-JMD, 2017 WL 3601196, at *9 (Bankr. D.N.H. Aug. 18, 2017). Then, after stating the legal framework for finding a debt non-dischargeable under
The DeWitts appealed to the BAP on September 1, 2017. They argued that the bankruptcy court‘s factual findings were riddled with “critical clear errors,” including “crediting Stewart‘s self-serving testimony,” and that the court had ignored
For the most part, the BAP agreed with the DeWitts. According to the BAP, on appeal, Stewart did not meaningfully challenge the DeWitts’ arguments, except as to whether Stewart had made express misrepresentations. DeWitt v. Stewart (In re Stewart), 592 B.R. 414, 434 (B.A.P. 1st Cir. 2018). Departing from the bankruptcy court‘s reasoning, the BAP found that Stewart made at least three sets of express misrepresentations and that many of the bankruptcy court‘s factual findings were “contrary to the testimony of the DeWitts, Lessard, Pike, Traffie, and Stewart, himself.” Id. at 437. Additionally, the BAP decided the bankruptcy court had erred by not addressing implied misrepresentations under the theory of false pretenses and that “the record, viewed as a whole, supports a conclusion that [Stewart] impliedly made such false representations.” Id. at 439. The BAP next found that Stewart had acted with the intent to deceive. Id. It considered any challenge to the DeWitts’ contention that they had relied on Stewart‘s false representations as waived by Stewart on appeal, and in any event, that the record demonstrated that the DeWitts had satisfied their burden to show actual and justifiable reliance. Id. at 349-40, 440 n.17. Finally, the BAP deemed that the DeWitts had suffered harm, the final piece of the puzzle allowing Stewart‘s liability to the DeWitts to be excepted from discharge under
II.
A. Section 523(a)(2)(A): False Pretenses, False Representation, and Actual Fraud
We review “the bankruptcy court‘s findings of fact for clear error and afford[] de novo review to its conclusions of law.” Smith v. Pritchett (In re Smith), 586 F.3d 69, 73 (1st Cir. 2009) (quoting Werthen v. Werthen (In re Werthen), 329 F.3d 269, 272 (1st Cir. 2003)). Because we owe no formal deference to the BAP decision, “we look through that decision and directly review the bankruptcy court‘s findings” ourselves. de Benedictis v. Brady-Zell (In re Brady-Zell), 756 F.3d 69, 72 n.2 (1st Cir. 2014) (citing In re Smith, 586 F.3d at 73); Privitera v. Curran (In re Curran), 855 F.3d 19, 24 (1st Cir. 2017). The clear error standard of review “plainly does not entitle a reviewing court to reverse the finding of the trier of fact simply because it is convinced that it would have decided the case differently.” Dev. Specialists, Inc. v. Kaplan (In re Irving Tanning Co.), 876 F.3d 384, 389 (1st Cir. 2017) (quoting Anderson v. City of Bessemer City, 470 U.S. 564, 573 (1985)). A finding of fact is only clearly erroneous when “the reviewing court on the entire evidence is lеft with the definite and firm conviction that a mistake has been committed.” Id. (quoting Anderson, 470 U.S. at 573); see Toye v. O‘Donnell (In re O‘Donnell), 728 F.3d 41, 46 (1st Cir. 2013) (declining to find clear error where the judge‘s view was “not ‘wrong with the force of a 5 week old, unrefrigerated, dead fish‘” (quoting S Indus., Inc. v. Centra 2000, Inc., 249 F.3d 625, 627 (7th Cir. 2001))). “Deference to the findings of the bankruptcy court is especially appropriate where a determination depends upon an assessment of credibility” and the assignment of weight to the witness‘s testimony. In re Irving Tanning Co., 876 F.3d at 389 (citing Palmacci, 121 F.3d at 785).
Section 523(a)(2)(A) of the Bankruptcy Code states that a debt will be excepted from discharge:
(2) for money, property, services, or an extension, renewal, or refinancing of credit, to the extent obtained by—
(A) false pretenses, a false representation, or actual fraud, other than a statement respecting the debtor‘s or an insider‘s financial condition.
To make out a claim for false representation, the plaintiff must prove by a preponderance of the evidence that:
- the debtor made a knowingly false representation or one made in reckless disregard of the truth,
- the debtor intended to deceive,
- the debtor intended to induce the creditor to rely upon the false statement,
- the creditor actually relied upon the false statement,
- the creditor‘s reliance was justifiable, and
- the reliance upon the false statement caused damage.
Sharfarz v. Goguen (In re Goguen), 691 F.3d 62, 66 (1st Cir. 2012) (quoting In re Spigel, 260 F.3d at 32); Grogan v. Garner, 498 U.S. 279, 291 (1991) (holding that standard of proof for dischargeability exceptions is by a preponderance of the evidence). Each of the six elements constitutes a finding of fact, and failure to prove any one of them defeats the claim. Palmacci, 121 F.3d at 787-88 (citing Commerce Bank & Tr. Co. v. Burgess (In re Burgess), 955 F.2d 134, 139 (1st Cir. 1992)). “Thе requirements for false pretenses ‘are largely the same, except that requirement of a false representation is replaced by a requirement of a false pretense, which is an implied misrepresentation or a false impression created by conduct of the debtor.‘” Curran, 554 B.R. at 285 (quoting Meads v. Ribeiro (In re Ribeiro), Adv. No. 11-1188, 2014 WL 2780027, at *9 (Bankr. D. Mass. June 19, 2014)). False pretenses may “arise when the circumstances ‘imply a particular set of facts, and one party knows the facts to be otherwise’ but does not correct the counter-party‘s false impression.” In re Curran, 855 F.3d at 28-29 (quoting Old Republic Nat‘l Title Ins. Co. v. Levasseur (In re Levasseur), 737 F.3d 814, 818 (1st Cir. 2013)) (affirming a denial of the plaintiff‘s motion to amend her complaint to add claims under
While “[t]he statutory requirements for a discharge are ‘construed liberally in favor of the debtor,‘” Palmacci, 121 F.3d at 786 (quoting Boroff v. Tully (In re Tully), 818 F.2d 106, 110 (1st Cir. 1987)), the law limits discharge to “the honest but unfortunate debtor,” In re O‘Donnell, 728 F.3d at 42 (quoting Grogan, 498 U.S. at 286-87).
On appeal, Stewart defends the bankruptcy court‘s opinion allowing the discharge of the DeWitts’ claims and charges that the BAP erred when it reweighed the evidence, decided arguments not properly preserved below, and conducted its own fact-finding. Meanwhile, the DeWitts present their position that the bankruptcy court‘s findings were clearly erroneous and its interpretations of the evidence implausible. They posit that the “uncontested” facts in evidеnce — the false revenue numbers and misrepresentation of subcontractor relationships, the “misappropriation” of falsely induced deposit payments, and finally, the project mis-sequencing aimed at eliciting additional payments — are sufficient to meet their burden of proof under
First, we address the issue of false pretenses or implied misrepresentations, which Stewart claims was not properly before the lower courts. The bankruptcy court acknowledged that the DeWitts were seeking exception to discharge for either “false pretenses or representations,” but did not differentiate between the two when laying out the legal framework or walking through its analysis. In re Stewart, 2017 WL 3601196, at *10. The BAP found that “[t]he bankruptcy court committed clear error when: (1) it did not analyze whether Stewart obtained the DeWitts’ money through false pretenses; and (2) it did not find that the DeWitts proved that Stewart obtained their money through false pretenses.” In re Stewart, 592 B.R. at 439. Stewart now argues on appеal that the DeWitts did not clearly present this theory to the bankruptcy court (or to the BAP for that matter), other than by citing the entirety of
false representations and actual fraud. Therefore, he claims the BAP effectively decided an issue not before the bankruptcy court. The DeWitts counter this waiver argument by pointing out that the claim for false pretenses is nearly identical to that for false representation, “lumped together” if you will, and “‘mirrors’ the argument before the trial court.”
We note that a “legal theory may not be preserved by bare reference in a pleading if it is thereafter abandoned until, freshly discovered on appeal, it is raised anew.” Banco Bilbao Vizcaya Argentaria v. Wiscovitch-Rentas (In re Net-Velázquez), 625 F.3d 34, 40 (1st Cir. 2010). Yet, having parsed the DeWitts’ closing brief submitted to the bankruptcy court, as
The DeWitts’ briefs below contain several references to “false pretenses,” and while these references are rather conclusory, the DeWitts did explicitly state that they were advancing a false pretenses argument. In addition, the DeWitts cited and discussed many cases that found both false pretenses and/or false representations that reflect the overlap of these arguments. See, e.g., Fornet v. Miller (In re Miller), 5 B.R. 424, 428 (Bankr. W.D. La. 1980) (finding “the debtor made a false pretense or representation in order to obtain money to pay other creditors” (emphаsis added)). Perhaps most helpful for their cause is their mention of Fensick v. Segala (In re Segala), 133 B.R. 261 (Bankr. D. Mass. 1991), where the bankruptcy court found that when “funds are deemed to have been entrusted to the debtor for a specific purpose, the debtor is regarded as impliedly representing his intention to use the funds accordingly.” Id. at 264. There, the plaintiffs had hired the debtor to update their home, and despite no formal payment schedule, id. at 262, the plaintiffs had made payments in response to the debtor‘s non-specific assertion that he needed the funds to continue the job, “impliedly represent[ing] that the funds would be used on the job,” id. at 264. Although the court‘s conclusion in In re Segala did not actually use the term “false pretenses,” that was clearly its meaning.6 In light of the overlap between the theories of false pretenses and false representation, the DeWitts’ curt references to false pretenses, along with their detailed discussion of various false representations, sufficiently preserved the issue of implied misrepresentation. Accordingly, we decline to find the false pretenses argument waived and agree with the BAP that it was error not to address whether Stewart obtained the DeWitts’ money through conduct amounting to implied misrepresentations. In re Stewart, 592 B.R. at 439.
This, however, is where our agreement with the BAP on the issue of false pretenses ends. After drawing this conclusion, the BAP proceeded to find that “the record, viewed as a whole, supports a conclusion that [Stewart] impliedly made such false representations.” Id. Given the complexity of the record and the contested nature of the testimony, we leave this sort of fact-finding to the trier of fact. See In re Irving Tanning Co., 876 F.3d 384, 389-90 (1st Cir. 2017) (“If a trial court‘s findings are too meager to allow review, the decision has run afoul of
the maker of the misrepresentation “(a) knows or believes that the matter is not as he represents it to be; (b) does not have the confidence in the accuracy of his representation that he states or implies; or (c) knows that he does not have the basis for his representation that he states or implies.”
Palmacci, 121 F.3d at 787 (quoting Restatement (Second) of Torts § 526). A “false representation as to one‘s intention, such as a promise to act, can qualify as a misrepresentation under
On appeal to the BAP, the DeWitts — then appellants, now appellees — focused their arguments on Stewart‘s representations regarding the use of their payments which would go to “fund their project” and “leverage subcontractors.” Thus, we limit our ensuing analysis to those reрresentations.7
The bankruptcy court dealt with the DeWitts’ claims that Stewart misrepresented the milestone payment structure to “fund their project” and that BN would use these advance payments to “leverage subcontractors” as distinct issues. In re Stewart, 2017 WL 3601196, at *14. As to the first issue, the court rejected that Stewart “either intended to convey false information to the DeWitts or to deceive them.” Id. It proceeded to find the representations too general to be false and accepted as plausible Stewart‘s explanation that Stewart only meant that BN would not be able to perform the project without the milestone payment scheme. Id.
Next, the court turned to statements about “leveraging subcontractors,” finding no actual reliance by the DeWitts and insufficient evidence of an intent to mislead because Stewart “was simply providing an explanation of why BN was offering the discount,” which the DeWitts ended up receiving. Id. The problem with the court‘s reasoning that Stewart lacked the intent to deceive because these statements were merely explanations of a discount is that it fails to consider whether Stewart actually planned to keep his promise to invest the milestone payments to the benefit of the DeWitts’ project. For all its thoroughness, the bankruptcy court failed to take into consideration whether Stewart recklessly disregarded the truth of these representations. And the correct analysis to answer this question would focus on the totality of the circumstances surrounding these statements, particularly in tandem with testimony from the DeWitts that Stewart represented that the payments would be used “to fund [their] project,” along with other evidence that the funds were being spent elsewhere. Palmacci, 121 F.3d at 789 (“Among the circumstances from which scienter may be inferred are: the defendant‘s insolvency or some other reason to know that he cannot pay, his repudiation of the promise soon after made, or his failurе even to attempt any performance.“). In addition, the accusations that the project was missequenced for the purposes of generating milestone payments might serve as helpful context that bear on these alleged misstatements.8
As for what the court found Stewart meant when he said the payment scheme was to “fund your own project” (i.e., provide cash flow to the company), we doubt this reading squares with our analysis of what constitutes a misrepresentation in Palmacci. Id. at 788 (finding an express misrepresentation because “[a]n ordinary lay person like [the creditor] would not think, nor would it be reasonable to expect him to think, that [the debtor‘s] representation that he would invest ‘his own personal funds’ in the . . . project could be read to include funds he borrowed from a bank secured by a mortgage on the project property itself“). We wager that a lay person presented with a payment scheme, whereby payments are triggered at the start of certain construction milestones so as to “fund your own project,” would not think that this instead means that the money would be used to pay off a company‘s old debts and extraneous expenses. However, we do not belabor this point. Instead, we hold that, while the “fund your own project” statements might not amount to express misrepresentations in their own right, as the bankruptcy court found, they still might serve to elucidate Stewart‘s intent when assuring the DeWitts that the advance payments were being used to leverage subcontractors. Finally, while perhaps the initial representation about the goals of the milestone payments to leverage subcontractors may have been a theoretical explanation of the payment plan‘s goals, as Lessard and Stewart testified, BN‘s subsequent requests for early milestone payments, and the specificity offered by Lessard as to how the DeWitts’
Also relevant to this analysis, the bankruptcy court separately addressed the DeWitts’ arguments related to the solicitation of payments at the end of the project. In re Stewart, 2017 WL 3601196, at *15-16. It concluded that the DeWitts’ evidence on this point, i.e., the amounts owed to vendors on the DeWitts’ project at the end of 2014 and exchanges between subcontractors illustrating BN‘s inability to pay, was “insufficient for the Court to conclude that Stewart either knew that BN would not be able to complete the project or recklessly disregarded the truth of that fact with an intent to deceive the DeWitts.” Id. at *16. However, rather than disposing of this evidence as support for a stand-alone argument insufficient to show fraudulent intent, this evidence should have been viewed as context for the aforementioned misrepresentations. To be clear, intent under
That still leaves us with the bankruptcy court‘s alternаtive ground for finding no misrepresentation with respect to the leveraging statements — i.e., that “there is no evidence that the DeWitts actually relied on [them].” In re Stewart, 2017 WL 3601196, at *15; see Palmacci, 121 F.3d at 788 (“[A] factual finding that negates one element of the plaintiff‘s prima facie case renders findings concerning other elements unnecessary.“). The court found that the DeWitts made the prepayments in order to secure the discount that Stewart offered and ultimately provided and that there was no evidence that the DeWitts believed that they would receive an additional discount if BN could leverage its subcontractors. In re Stewart, 2017 WL 3601196, at *15. In reversing, the BAP found that Stewart had waived all arguments with respect to actual and justifiable reliance by not countering the DeWitts’ argument on appeal that “the DeWitts actually did rely on Stewart‘s representations.”9 In re Stewart, 592 B.R. at 439-40. However, on appeal to the BAP, we find
It is true that the DeWitts’ claims must “arise[] as a direct result of the debtor‘s misrepresentations or malice.” In re Spigel, 260 F.3d at 34 (quoting In re Menna, 16 F.3d 7, 10 (1st Cir. 1994)). “[I]f a party has not in fact relied on the misrepresentation in entering into a transaction in which he suffers pecuniary loss, then the misrepresentation is not in fact a cause of the loss.” In re Goguen, 691 F.3d at 69 (second alteration in original) (internal quotation marks omitted) (quoting
Justifiable reliance, on the other hand, “is a matter of the qualities and characteristics of the particular plaintiff, and the circumstances of the particular case, rather than of the application of a community standard of conduct to all cases.” Field v. Mans, 516 U.S. 59, 71 (1995) (quoting
evidence and announce its own findings of fact. Here, the BAP found that the bankruptcy court had “excessively discounted the testimony of the DeWitts, seemingly in favor of Stewart‘s testimony that he transferred $50,000 in August 2014 from his 401(k) retirement account to
Therefore, in summary, we remand to the BAP with instructions to return the case to the bankruptcy court to consider only the statements pertaining to “leveraging subcontractors” as express misrepresentations and to apply the aforementioned standards for intentionality and actual and justifiable reliance. In conducting the intent analysis, the bankruptcy court should consider the totality of the circumstances, including Stewart‘s nonactionable statements (e.g., “fund your own рroject“), BN‘s dire financial situation, and evidence of missequencing the construction stages.
Lastly on the subject of
B. Section 523(a)(6): Willful and Malicious Injury
The Bankruptcy Code also excepts from discharge any debt that is “for willful and malicious injury by the debtor to another entity or to the property of another entity.”
C. Piercing the Corporate Veil
Finally, Stewart points out on appeal that it was inappropriate for the BAP to determine that the corporate veil should be pierced without the bankruptcy court first having conducted fact-finding on this issue. See In re Stewart, 592 B.R. at 440-41. We agree that the appropriate remedy is remand for the bankruptcy court to determine whether the corporate veil should be pierced in accordance with New Hampshire state law. See In re Irving Tanning Co., 876 F.3d at 389-90; see also Martínez v. Petrenko, 792 F.3d 173, 181 (1st Cir. 2015) (explaining the findings that New Hampshire state law requires for piercing the corporate veil under Druding v. Allen, 451 A.2d 390, 393 (N.H. 1982)).
III.
In conclusion, we hold that the bankruptcy court erred in three respects: (1) by failing to consider whether Stewart had committed false pretenses through implied misrepresentation; (2) by failing to consider whether Stewart was acting without confidence in the accuracy of his representation or with knowledge that he did not have the basis for his representation in its analysis of his intent to deceive, see Palmacci, 121 F.3d at 787; and (3) by applying a standard of reliance that was too narrow and did not take into consideration continuing transactions post-contract-formation. As an appellate court, it is beyond our purview to make factual determinations on the elements of a
Reversed and Remanded.
Notes
As far as the pre-payment goes, as you imagine in order for us to offer this discount the idea is that we are leveraging your money to save money. So we would need to leverage your money for more then [sic] a couple days to off set [sic] the ($20,000.00 over all [sic]) discount being applied. This program was designed with the intention that there would be multiple payments made at a time and that would allow us plenty of time to leverage and save money, with time being the catch. Having the benefit of your funds for a mere few days in return for such a large amount of money would be ill advised by even the most liberal accounts . . . .
Q: So he told you he would use your money in advance to leverage subcontractors?
A: He did.
...
Q: And did you believe him?
A: Yes, we believed him.
Q: If the money wasn‘t going to your project would you have agreed to pay everything in advance?
A: Never.
Trial Transcript 2/8/2017 70:9-20.Q: Did you rely on Mr. Stewart‘s statement that you were, in fact, funding your own project?
A: We did.
Q: Did you rely on that in terms of agreeing to this payment schedule?
A: We did.
Q: Did you rely on that statement in terms of following the payment schedule?
A: Yes.
Q: And you did follow it, didn‘t you?
A: Yes. We paid every milestone.
Trial Transcript 2/8/2017 77:10-20.