In re Davis

• Decision Date: 14 March 2011
• Docket Number: No. 10–2757.,10–2757.
• Citation: 638 F.3d 549
• Parties: In re Gerald W. DAVIS, Jr., Debtor.Linda Reeves, Appellant,v.Gerald W. Davis, Jr., Appellee.
• Court: U.S. Court of Appeals — Seventh Circuit

638 F.3d 549

In re Gerald W. DAVIS, Jr., Debtor.Linda Reeves, Appellant,

v.Gerald W. Davis, Jr., Appellee.

No. 10–2757.

United States Court of Appeals, Seventh Circuit.

Argued Jan. 10, 2011.Decided March 14, 2011.

Vincent S. Taylor (argued), Attorney, Bloomington, IN, for Debtor–Appellee.Jeanine Kerridge (argued), Attorney, Barnes & Thornburg LLP, Indianapolis, IN, for Appellant.Before FLAUM and WILLIAMS, Circuit Judges, and HERNDON, District Judge.^*FLAUM, Circuit Judge.

In 2007, Linda Reeves obtained a money judgment against Gerald Davis in Indiana state court for a violation of the Indiana Home Improvement Contracts Act (“the Act”), Ind. Code (“IC”) §§ 24–5–11–1 et seq. The Indiana Code provides that a home improvement supplier who violates the Act “commits a deceptive act.” IC § 24–5–11–14.

Davis filed for bankruptcy on October 25, 2007, before satisfying the Indiana state court judgment. As part of the bankruptcy proceedings, Reeves filed an adversary action against Davis, seeking to have the $77,000 judgment declared non-dischargeable pursuant to 11 U.S.C. § 523(a)(2)(A). Based on the Indiana court's finding that Davis had committed a “deceptive act,” Reeves alleged that Davis had engaged in fraudulent conduct. The bankruptcy court determined that the debt was dischargeable, finding that Davis lacked the requisite intent to deceive or defraud. On appeal, the district court affirmed, as do we, for the reasons set forth below.

I. Background

In 2006, Reeves hired Davis, who advertised himself as a “licensed and insured” contractor, to renovate her home in Monroe County, Indiana. Despite his advertisements, Davis held no license in Monroe County. Indeed, the county has no licensing requirement for contractors. Reeves paid Davis $57,250—most of the agreed-upon $63,000 price tag—and he began work on her home. In early October 2006, Davis walked off the job without completing the renovations.

Reeves sued Davis in Indiana state court to recover damages. Following a trial, the state court entered judgment in favor of Reeves, finding that Davis had violated Indiana Code § 24–5–11–10. That section of the Indiana Home Improvements Contracts Act requires home improvement suppliers to “provide a completed home improvement contract to the consumer before it is signed by the consumer.” Davis provided Reeves with only a very general description of the work to be done, which did not bear her signature. Pursuant to IC § 24–5–11–14, a home improvement supplier who violates the Act “commits a deceptive act that is actionable ... under IC § 24–5–0.5–4(a).” Thus, the court also found that Davis had committed a “deceptive act.”

The state court made a number of factual findings on which Reeves now relies. In particular, the state court found that Davis had agreed to construct a covered porch. That porch was never built. In reaching that conclusion, the court acknowledged Davis's testimony that the contract did not include a porch. However, in light of the contract's lack of specificity, the court elected to resolve any certainty regarding the contract against Davis. The court also found that Davis stopped working “without justification or excuse,” and that “much of the work he did complete is defective and must be replaced.” The state court entered judgment in favor of Reeves for $77,015.98.

Davis filed for bankruptcy before satisfying the state court judgment against him. Reeves initiated an action in the bankruptcy court pursuant to § 523(a)(2)(A) of the Bankruptcy Code, which precludes a debtor from receiving a discharge from any debt obtained by “false pretenses, a false representation, or actual fraud.” 11 U.S.C. § 523(a)(2)(A). Reeves argued that because the Indiana court found that Davis had committed a “deceptive act,” his debt to her was non-dischargeable under § 523(a)(2)(A). According to Reeves, principles of collateral estoppel require a finding of non-dischargability.

The bankruptcy court conducted its own trial, at which Reeves presented a drawing Davis had given her that included a porch. Davis testified (as he had in the state court trial) that he did not agree to build a porch, and that, consequently, he never intended to build one. With respect to the drawing, Davis testified that the porch was on Reeves's “wish list,” but was not included in the contract price.

The bankruptcy court rejected Reeves's collateral estoppel argument, reasoning that a finding of non-dischargability under § 523(a)(2)(A) requires fraudulent intent, an element not required for a violation of the Indiana Home Improvement Contracts Act. The bankruptcy court also found that the state court had made no finding regarding Davis's intent. Over Reeves's objection, the bankruptcy court made its own findings of fact. Relevant to this appeal is the bankruptcy court's finding that the contract may not have included a porch. In addition, the bankruptcy court credited Davis's testimony that he took the job intending to finish it, but that he eventually refused to do so because Reeves was a difficult customer. On December 9, 2009, the bankruptcy court ruled that Davis's debt was dischargeable.

On appeal to the district court, Reeves argued that the bankruptcy court erred in finding that Davis lacked the intent necessary for the application of § 523(a)(2)(A). Reeves also argued that Davis acted fraudulently by misrepresenting himself as a “licensed” contractor, when in fact he held no license in Monroe County. The district court declined to address the licensing argument, on the grounds that it was neither sufficiently pled in the complaint, nor raised before the bankruptcy court. The district court went on to affirm. It agreed with the bankruptcy court that the state court had made no finding regarding Davis's state of mind, and concluded that the bankruptcy court's factual finding as to Davis's intent was not clearly erroneous.

II. Discussion

To receive an exception from discharge under 11 U.S.C. § 523(a)(2)(A), Reeves was required to show the following: (1) that Davis made a false representation or omission, which he either knew was false or made with reckless disregard for the truth; (2) that Davis possessed an intent to deceive or defraud; and (3) that Reeves justifiably relied on the false representation. See Ojeda v. Goldberg, 599 F.3d 712, 716–17 (7th Cir.2010); Matter of Maurice, 21 F.3d 767, 774 (7th Cir.1994). At issue here is the second element—Davis's intent. The question of Davis's intent has its origins in the bankruptcy court. Therefore, our review focuses on the bankruptcy court's actions. Ojeda, 599 F.3d at 716. Like the district court, we review the bankruptcy court's findings of fact for clear error and conclusions of law de novo. Id. Whether the issue of intent was litigated and resolved in the state court action, as required for application of collateral estoppel, is question of law. E.B. Harper & Co., Inc. v. Nortek, Inc., 104 F.3d 913, 922 (7th Cir.1997). Whether Davis possessed the requisite intent is a question of fact, which is subject to the highly deferential “clearly erroneous” standard of review. See Carini v. Matera, 592 F.2d 378, 380 (7th Cir.1979) (citations omitted).

As noted above, Reeves must demonstrate that Davis made a false representation or omission. In the bankruptcy court, she relied on Davis's failure to fulfill his alleged promise to construct a porch to satisfy that element. Now, she relies on four additional incidents: (1) Davis's misrepresentation of his status as a licensed contractor; (2) the fact that the work Davis did perform was defective; (3) Davis's failure to complete the job; and (4) the fact that Davis took payment from Reeves for work he never performed and materials he never bought.

We begin with the primary basis for Reeves's fraud claim—Davis's failure to build the porch, which she maintains was part of the home renovation contract. According to Reeves, collateral estoppel principles required the bankruptcy court to credit the state court's factual finding that Davis agreed to construct a porch. Reeves maintains that that finding, together with Davis's testimony that he never intended to build the porch, is sufficient to establish fraudulent intent.

Reeves is correct that the findings made by the Indiana state court were entitled to collateral estoppel effect in the subsequent bankruptcy proceeding....