In re Ballard
| Decision Date | 07 February 1983 |
| Docket Number | Adv. No. 205-5-80-0035,205-5-80-0042.,Bankruptcy No. 5-80-00095 |
| Citation | 26 BR 981 |
| Court | U.S. Bankruptcy Court — District of Connecticut |
| Parties | In re Timothy J. BALLARD, Debtor. Robert JACOBS and Arleen Jacobs, Plaintiffs, v. Timothy J. BALLARD, Defendant. Wayne M. UPRIGHT and Linda M. Upright, Plaintiffs, v. Timothy J. BALLARD, Defendant. |
Joseph Dimyan, Coury & Dimyan, Danbury, Conn., for plaintiffs, Robert and Arleen Jacobs.
Kevin P. Thornton, Sturges & Mathes, Southbury, Conn., for plaintiffs, Wayne and Linda Upright.
Daniel Meister, Norwalk, Conn., for defendant.
ALAN H.W. SHIFF, Bankruptcy Judge.
The plaintiffs in both of the above-captioned adversary proceedings, which were tried together, seek exceptions to the debtor's discharge based on various allegations of fraud involving the debtor's home construction business.
On February 13, 1980, Timothy J. Ballard (debtor) filed a voluntary petition under Chapter 7 of the Bankruptcy Code and scheduled Wayne W. and Linda M. Upright (Uprights) as well as Robert and Arleen Jacobs (Jacobses) as unsecured creditors. The Jacobses seek to except their debt pursuant to 11 U.S.C. § 523(a)(2)(A) and (a)(4). The Uprights seek to except their debt pursuant to 11 U.S.C. § 523(a)(2)(A).
After considering the evidence adduced, the credibility of the witnesses and the applicable law, I conclude, for the reasons set forth below, that a debt owed to the Jacobses in the amount of $5,000.00 is nondischargeable and that a debt owed to the Uprights in the amount of $12,500.00 is nondischargeable.
During all relevant periods, the debtor was engaged in the general construction business. In the course of that business, the debtor customarily began the construction of a residence on a "speculation" basis and then locate a buyer for the property, after which construction was completed under an agreement between the parties.
During August, 1979, the Jacobses entered into a formal binder agreement to purchase one of the debtor's properties. At that time, the Jacobses paid $1,500 to a real estate broker pursuant to the binder agreement. At a date undetermined by the evidence, the $1,500 was transferred to the debtor by the real estate broker.
During September, 1979, the Jacobses and the debtor formally entered into a contract whereby the Jacobses would purchase a fully completed residence on the property. At that time, the residence was fifty to sixty-five percent completed. The contract provided that the Jacobses make an additional deposit of $13,500.00 upon the signing of the agreement with the balance of $135,000.00 to be paid upon the delivery of the deed to the property. On September 13, 1979, the Jacobses paid the debtor $13,500.00.
Thereafter, the debtor requested the Jacobses to make an advance payment on the basis that he needed additional money to make certain that various work on their home could be started immediately. On September 15, 1979, in reliance upon that representation, the Jacobses paid the debtor an additional $5,000.00 in cash.
It was undisputed that the residence was never completed by the debtor. There was contradictory testimony, however, as to how much work was done after September 15, 1979. Dr. Jacobs testified that virtually no work was done, and in support of that claim, the Jacobses offered two receipts which tend to show that the work promised to be done by the debtor was in fact done by others at the Jacobses request. The debtor, on the other hand, testified that the job was almost completed when he stopped work. Other than his uncorroborated testimony, there was no evidence that there was any significant work under the contract after September 15, 1979. In that regard, the debtor testified that he placed the $13,500.00 deposit into a general account and paid cash to subcontractors. The progress of those funds, however, cannot be traced from the documentary evidence or the debtor's testimony.
The fraud claimed by the Uprights also occurred in connection with the debtor's construction business. Like the Jacobses, Linda Upright entered into a contract with the debtor.
On October 12, 1979, at the time of the closing, the debtor presented the Uprights with an "Owners Affidavit" and an "Affidavit As To Mechanics' Liens," both of which were signed and sworn to by the debtor. The first affidavit provided in relevant part:
"This Affidavit is made for the purpose of inducing LINDA M. UPRIGHT and WAYNE N. UPRIGHT to purchase said premises and to induce First American Title Insurance Company to issue its policy or policies of title insurance, among other things insuring against unrecorded or inchoate mechanics liens, well knowing that they will do so only in complete reliance upon the truth and accuracy of the statements contained herein."
Similarly, the second affidavit provided:
There is no serious dispute that the above representations regarding claims of mechanic lienors were false, that the Uprights relied on the false representations, and that mechanics' liens were placed on the property by Stevenson Lumber Co., Inc. a/k/a Stelco, Inc. (Stelco) securing a debt in excess of $16,000.00 and by Builder's Carpet, Inc. (BCI) securing a debt of $1,500.00. The Uprights settled the Stelco claim for $11,000.00. The BCI claim remains unresolved. The real controversy here centers on the question of the debtor's knowledge of the misrepresentation at the time he presented the false affidavits.
Prior to the alleged fraud, the debtor's financial affairs and records were in disarray. On or about October 1, 1979, the debtor made a check payable to Stelco in the amount of $16,516.47, which, shortly thereafter but prior to the closing, was returned for insufficient funds. Stelco advised the debtor of this fact. Thus, within approximately one week of the closing, the debtor knew of an outstanding obligation to Stelco. He also knew that at that time, he had insufficient funds in his checking account to cover the Stelco debt. The debtor testified, however, that a representative of Stelco, named "Scott," met with him prior to the closing and instructed him to post-date the check and redeposit it, but the testimony of Scott directly contradicted the debtor. The debtor further testified that he expected proceeds from the closing as well as other proceeds to cover the check, which was allegedly post-dated to October 12, 1979, but he did not recall any funds being placed in the account prior to the closing, and there is no documentary evidence of any such deposit. Moreover, although the debtor was paid by his attorney, who acted as disbursing agent, no money was ever paid to Stelco.
There was little evidence as to the debtor's knowledge of BCI's claim. The debtor merely testified that he did not think BCI had done any work prior to the closing. Mr. Upright, however, testified that a carpet had been installed prior to the closing.
I will first consider whether the debt owed to the Jacobses should be excepted from discharge pursuant to 11 U.S.C. § 523(a)(4) which states in pertinent part: "(a) A discharge under section 727 . . . does not discharge an individual debtor from any debt—(4) for fraud or defalcation while acting in a fiduciary capacity, embezzlement or larceny." The Jacobses claim that the debtor, while acting in a fiduciary capacity, fraudulently misapplied the funds he received from them, as noted above. The debtor counters, inter alia, that there was no fiduciary relationship within the meaning of section 523(a)(4).
Under Act § 17(a)(4),1 which was the predecessor of Code § 523(a)(4), the term fiduciary was construed to apply only to express or technical trusts, existing prior to any act of wrongdoing. The section did not encompass trusts which arose out of the misconduct of the bankrupt. See Davis v. Aetna Acceptance Co., 293 U.S. 328, 333, 55 S.Ct. 151, 153-154, 79 L.Ed. 393 (1934); In re Pedrazzini, 644 F.2d 756 (9th Cir.1981); In re Angelle, 610 F.2d 1335 (5th Cir.1980). This construction has been applied equally in cases arising under Code § 523(a)(4). See, e.g., In re Paley, 8 B.R. 466 (Bkrtcy.E. D.N.Y.1981). In determining whether the requisite trust exists, the court should consult state law, although the issue ultimately remains a federal question. See In re Angelle, supra; In re Paley, supra.
In the instant case, the Jacobses offer no documents that show an express trust existed. There is, for instance, no suggestion in the contract between the parties that a trust was thereby created, nor was there an oral promise to hold the funds in trust. Furthermore, the Jacobses do not refer to any Connecticut statute under which the requisite trust might have arisen.
In support of their position that the debtor owed them a fiduciary obligation, however, the Jacobses cite a number of cases involving similar facts.2 These cases are all readily distinguishable from the instant case because in the cited cases, the courts found that applicable state law had established a trust.3 As noted, no such state law applies here. The Connecticut cases relied on by the Jacobses are cited merely for the proposition that a constructive trust will be imposed after a wrongdoing under certain circumstances.4 Constructive trusts, however, fall outside the scope of 11 U.S.C. § 523(a)(4). See, e.g., In re...
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