In re Bozzano
| Decision Date | 28 July 1994 |
| Docket Number | Bankruptcy No. B-91-11864C-7W. Adv. No. 91-2478. |
| Citation | 173 BR 990 |
| Court | U.S. Bankruptcy Court — Middle District of North Carolina |
| Parties | In re Carlo Mario BOZZANO, Debtor. Wayne T. PETERSON and wife, Cornelia G. Peterson, Plaintiffs, v. Carlo Mario BOZZANO, Defendant and Third-Party Plaintiff. |
Peter Juran, Winston-Salem, NC, for plaintiffs.
Michael R. Greeson, Winston-Salem, NC, for debtor/defendant and third-party plaintiff.
This dischargeability action arises out of a transaction in which the plaintiffs purchased a new residence from a corporation in which the debtor was the chief operating officer and one of the principal shareholders of the corporation. The plaintiffs contend that there were numerous defects in the structure and that they sustained substantial monetary damages in correcting these defects. The question presented in this case is whether the plaintiffs have a claim for a debt which is nondischargeable pursuant to 11 U.S.C. §§ 523(a)(2)(A) and (a)(6). The plaintiffs contend that they do have such a claim because they were induced to purchase the residence by false pretenses, false representations or actual fraud on the part of the debtor.
During the latter part of 1988 Mr. Peterson, the male plaintiff, accepted employment in Winston-Salem, North Carolina and moved from Richmond, Virginia to Winston-Salem. Initially, Mr. Peterson lived in an apartment in Winston-Salem while Mrs. Peterson remained in Richmond with their two children who were in school. The Petersons planned to purchase a new home in Winston-Salem and Mr. Peterson began looking at new homes in various neighborhoods. One of the residences which Mr. Peterson looked at was a new home located at 2504 Huntington Woods Drive in Winston-Salem. When Mr. Peterson first visited this residence it was not finished, although construction was nearly complete. Eventually Mrs. Peterson visited the residence on Huntington Woods Drive and also liked it.
On February 15, 1989, the Petersons entered into a contract to purchase the residence on Huntington Woods Drive at a price of $186,000.00. The contract, which was prepared by a realtor, listed the seller as "Carlo Bozzano and Ed Zotian." However, this was an error on the part of the realtor, since the lot on which the house was located was owned by Bozzano Construction Company, Inc. and the residence was being built by that corporation. Although the Petersons were not furnished any details regarding the exact connection between Bozzano and Zotian and the corporation, the Petersons did learn that the corporation owned the house and lot and that they were acquiring the property from the corporation and not from Bozzano and Zotian personally. This information became known to the Petersons at or shortly before the closing which took place on March 22, 1989. The deed which was delivered to the Petersons at the closing listed the grantor as "Bozzano Construction Co., Inc." and was executed by Mr. Bozzano as president of the corporation and by Mr. Zotian as secretary of the corporation.
Shortly after the closing and within a few weeks after moving into the house the Petersons began to experience problems with the house. Following a rainfall water leaked into the basement. When Fall arrived and heat was needed the furnace would not function properly. The first time that the Petersons tried to use the fireplace it malfunctioned and portions of the house filled with smoke. On top of these new and developing problems with the house, the Petersons could not get Mr. Bozzano and Bozzano Construction Company, Inc. to complete to their satisfaction a punchlist which had been agreed upon prior to the closing. Frustration on the part of the Petersons mounted. As time went on the Petersons found other defects in the house — some of them very minor and some of them very substantial. Initially, and for several months thereafter, Mr. Bozzano exerted some effort toward correcting the items on the initial punchlist as well as some of the new problems which developed such as the water problem in the basement and the problem with the fireplace. In approximately August or September of 1989, however, after becoming convinced that Bozzano was not using reliable people to handle the repairs and that he was dragging his feet in dealing with the problems the Petersons changed the locks on the house and refused to permit Bozzano to have free access to the house. The Petersons then proceeded on their own to arrange for the materials and labor required to correct the many defects which existed in the house. In the meantime the Petersons learned that neither Mr. Bozzano nor Bozzano Construction Company had a general contractor's license from the State of North Carolina at the time their residence was constructed and also that Bozzano Construction Company, Inc. had used the license number of another general contractor in order to obtain the building permit for their residence from the County. In July of 1990 the Petersons filed suit against Bozzano Construction Company and Mr. Bozzano individually in the Superior Court of Forsyth County. Shortly thereafter, and before any judgment was entered against him, Mr. Bozzano filed his Chapter 7 case. The remaining facts, as found by the court, are set forth in the next section of this opinion.
The paradigmatic case for application of § 523(a)(2)(A) is one in which a debtor makes false representations to a creditor in order to obtain a loan and the creditor is induced to make the loan as a result of the debtor's false representations. Such a situation easily fits within the literal language of § 523(a)(2)(A), i.e., there is a "debt . . . for money . . . obtained by false representation" by the debtor. However, the cases involving § 523(a)(2)(A) illustrate that the applicability of § 523(a)(2)(A) is much broader than the case in which the debt is for loan proceeds which are not repaid. See Grogan v. Garner, 498 U.S. 279, 111 S.Ct. 654, 112 L.Ed.2d 755 (1991) (); In re Rubin, 875 F.2d 755 (9th Cir.1989) (); In re Dallam, 850 F.2d 446 (8th Cir.1988) (). It also has been applied in cases in which the debtor was a builder seeking to discharge debts owed to purchasers. In re Kaufman, 57 B.R. 644 (Bankr. E.D.Wi.1986); In re Piercy, 96 B.R. 953 (Bankr.W.D.Mo.1989). In these and similar cases, § 523(a)(2)(A) has been interpreted to make nondischargeable the loss or damage sustained by a creditor as a result of being induced into virtually any type of business transaction by fraud, false representations or false pretenses on the part of the debtor. This is the view of § 523(a)(2)(A) adopted by the plaintiffs in the present case. Thus, the plaintiffs' theory is that the debtor induced them to pay $186,000.00 for the purchase of a home which they would not have purchased but for the false pretenses and false representations of the debtor, Mr. Bozzano. They seek to make nondischargeable the "debt" owed by the debtor for the loss they sustained as a result of having been induced by false pretenses to part with their $186,000.00 in exchange for a defective, poorly constructed house. This is a permissible theory under the language of § 523(a)(2)(A), which leads to the question of what must be shown by the plaintiffs in order to establish such claim.
Section 523(a)(2)(A) is operative where there has been "false pretenses, a false representation, or actual fraud" on the part of the debtor. Generally, the elements which must be established in order to prevail on a claim under § 523(a)(2)(A) are: (1) that the debtor made representation; (2) that at the time of making the representations, the debtor knew they were false; (3) that the debtor made them with the intention and purpose of deceiving the creditor; (4) that the creditor relied on the representation; and (5) that the creditor sustained a loss as a result of that reliance. E.g., In re Booker, 165 B.R. 164 (Bankr.M.D.N.C.1994); In re Criswell, 52 B.R. 184 (Bankr.E.D.Va.1985); In re Showalter, 86 B.R. 877 (Bankr.W.D.Va. 1988).
As used in § 523(a)(2)(A), "false pretenses" means implied misrepresentations or conduct intended to create and foster a false impression. In re Schnore, 13 B.R. 249 (Bankr.W.D.Wi.1981); In re Shipe, 41 B.R. 584, 586 (Bankr.D.Md.1984); In re Garthe, 58 B.R. 62 (Bankr.M.D.Fla.1986); In re Herwig, 77 B.R. 662, 664 (Bankr.S.D.Ill.1987); In re White, 130 B.R. 979, 985 (Bankr.D.Montana 1981).
The elements of false representation and false pretense do not necessarily require overt misrepresentations. Instead, omissions or a failure to disclose on the part of the debtor can constitute misrepresentations for purposes of nondischargeability where the circumstances of the case are such that omissions or failure to disclose create a false impression which is known by the debtor. In re Booker, supra.
Finally, the creditor is required to establish the elements required under § 523(a)(2)(A) only by a preponderance of the evidence and not by clear and convincing evidence or any other heightened burden of proof. See Combs v. Richardson, 838 F.2d 112 (4th Cir.1988); and Grogan v. Garner, supra.
The next question is whether the evidence offered by the plaintiffs in this case established all of the requisites under § 523(a)(2)(A). In dealing with this question, the court recognizes that a primary purpose of bankruptcy law is to provide a fresh start for honest debtors. Combs v. Richardson, 838 F.2d 112, 116 (4th Cir.1988); Lines v. Frederick, 400 U.S. 18, 91 S.Ct. 113, 27 L.Ed.2d 124 (1970). In order...
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