In re Heilman
| Decision Date | 26 October 1999 |
| Docket Number | Bankruptcy No. 94-5-5320-JS. Adversary No. 95-5401-JS |
| Citation | 241 BR 137 |
| Parties | In re Robert E. HEILMAN and Randi S. Heilman, Debtors. Joseph J. Spinoso, et ux, Plaintiffs, v. Robert E. Heilman, et ux, Defendants. |
| Court | U.S. Bankruptcy Court — District of Maryland |
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Howard M. Heneson, Law Offices of Howard M. Heneson, P.A., Baltimore, Maryland, for plaintiffs.
Michael R. McCann, Funk and Bolton, P.A., Baltimore, Maryland, for defendants.
Terry L. Musika, Baltimore, MD, Chapter 7 Trustee.
The instant complaint to determine dischargeability of debt was brought by homebuyers against a homebuilder. At the conclusion of the plaintiffs' case, the defendants' motion to dismiss the complaint was granted.
This opinion answers the following questions: Did the owner of a custom home construction company which failed to deliver a completed house to the plaintiffs as promised commit fraud or defalcation while acting in a fiduciary capacity, or larceny or embezzlement? Did Maryland statutory law convert him into a fiduciary for purposes of preventing him from discharging the debt his company incurred to the plaintiffs? May State law expand the meaning of the term "fiduciary capacity" employed in Section 523(a)(4) as interpreted by the Federal courts? What factors must a Federal court sitting in bankruptcy consider in determining whether a debtor was acting in a "fiduciary capacity" for the purpose of excepting from discharge a debt incurred through fraud or defalcation by a fiduciary?
Robert Heilman was the chief operating officer of Specialty General Contractors, an unincorporated sole proprietorship that he founded in 1973, which was engaged in new home construction in Maryland. His wife, Randi Heilman, was an art teacher in a public elementary school.
Joseph J. Spinoso and his wife, Christine Anderson Spinoso "Spinosos" are the plaintiffs in this lawsuit who contracted with Mr Heilman's company for the construction of a custom home. Mr. Spinoso, who was employed for more than twenty years by a public utility company as a distribution analyst, had a high school education and one year of college. Mrs. Spinoso was employed since 1978 as a sales representative for an aluminum manufacturing company, and before that had worked at a hospital as a phlebotomist.
During the summer of 1991, Joseph and Christine Spinoso admired a house that they later learned had been built by a company owned by Robert Heilman. Before that time, they had neither met Mr. Heilman, nor had they ever had any business dealings with him or his company. They found out where Mr. Heilman lived, called him on the telephone, and arranged to meet him at his home, where they introduced themselves to him and his wife, Randi Heilman. While Mrs. Heilman served them milk and cookies in the kitchen, Mr. Heilman showed the Spinosos the plans for the house they had admired.
By a contract dated July 14, 1991, the Spinosos agreed that Mr. Heilman's company would build them a house similar to the one they had admired. On behalf of Specialty, Mr. Heilman promised to construct a house for the Spinosos on a lot located at 10 Darney Court in Kingsville, Maryland, for a price of & 210,000, pursuant to a contract between the Spinosos and Specialty. Joint Ex. 1. The Spinosos paid a $10,000 deposit to Mr. Heilman on behalf of Specialty.
On September 30, 1991, the Spinosos and Mr. Heilman executed a second, more detailed contract for the construction of the same house for a price of $214,400. Joint Ex. 2.
On May 6, 1992, the contract was amended, at which time the Spinosos paid an additional deposit of $10,000. Joint Ex. 3.
The business of building custom homes,1 in which Specialty General Contractors was engaged,2 was governed by the Maryland Custom Home Protection Act, Md. Real Prop.Code Ann. ?? 10-501 to 10-509, which the Maryland General Assembly enacted in 1986. The Act required that custom home contracts contain a number of provisions, including disclosures and certifications by the builder. The contracts entered into by the parties in this case did not contain any such disclosures or certifications.3 In fact, the sloppy, hand-written This Page Contains Footnotes. contracts drafted by Mr. Heilman did not even bear the title of "contract" but were each entitled "Proposal."4 They did not set forth a date when construction of the house would commence or be completed. The contracts made no reference to any applicable statutory requirements.
For their part, the Spinosos were naive, uninformed and gullible. They made no inquiry into the financial condition or fiscal responsibility of Specialty or Mr. Heilman before paying him two deposits totalling $20,000. Despite their lack of familiarity with the formalities required in agreements for the construction of custom homes, including the built-in protections for custom home buyers provided by State law, the Spinosos entered into the first three agreements and a later agreement without obtaining expert legal advice in advance.
The Spinosos alleged that none of the $20,000 in deposits they paid to Mr. Heilman went into the construction of the house. Mr. Heilman disagreed and contended that some of the money went to pre-construction expenses, including assisting the buyers in selecting an appropriate piece of ground upon which to build the house. Nevertheless, in June, 1992, in response to Mr. Spinoso's inquiry as to the reason construction had not yet begun, Mr. Heilman told him that he did not have any funds.
Meanwhile, the Spinosos applied to Patapsco Federal for a construction loan, which was approved. However, two weeks after they had paid Mr. Heilman the second $10,000 deposit, the Spinosos were informed by Patapsco that it would not approve Mr. Heilman's company as the builder. At that time, Mr. Heilman was building a house for a Dr. and Mrs. Joseph P. Connelly, Jr., for which Patapsco was the construction lender. Patapsco would not agree to permit Mr. Heilman's company to begin building the Spinosos' house until the Connellys house was finished. By this time, the Spinosos were well aware that Mr. Heilman was having financial difficulties because he had informed them that he had no funds on hand to begin construction of their house and because of Patapsco's refusal to lend them money based upon their choice of Mr. Heilman's company as the builder.
Nevertheless, the Spinosos obtained a $190,000 construction loan from Northfield Federal Savings Bank to finance the construction of the house by Mr. Heilman's company. Joint Ex. 6. Before the Northfield loan was obtained, Mr. Heilman told the Spinosos that he had spent the two deposits totaling $20,000 on the construction of the Connellys' house.
Ronald Jobson, the executive vice president and loan officer for Northfield testified at trial that the parties presented him an executed contract and a draw schedule that had been drafted by Mr. Heilman and agreed to by the parties. The draw schedule seemed unusual to Mr. Jobson because it appeared that the builder's profit had been paid up front in the form of the $20,000 deposit, rather than being paid at the end in the last draw as a retainage, and also because some of the earliest draws appeared to be excessive. He said that the draws should only be enough to cover the costs of materials, payments to subcontractors, and a small salary for the builder. Mr. Jobson estimated that a typical profit for the builder on a $210,000 construction contract would be in the range of 16-19% of the contract price. He said that he communicated his concerns to the Spinosos, who nevertheless proceeded with their request to fund a construction loan in accordance with the contract and draw schedule.
The loan amount was disbursed periodically to Specialty as construction proceeded, according to the draw schedule, pursuant to which eight payments were to be made to Specialty during the course of construction. These payments ranged from $11,000 to $45,000. Joint Ex. 8.
On July 13, 1992, the parties executed a third contract. Joint Ex. 4. Appended to the contract was the draw schedule, which identified eight draws totaling $190,000. The Spinosos executed a fixed rate note to Northfield and a Construction Trust Agreement dated September 1, 1992. Joint Ex. 6 and 7.
More than a year after the first contract was signed, construction on the house had not yet commenced. By this time the Spinosos began to be worried and finally decided to seek legal advice. They showed the contracts they had signed to Jeffrey D. Silverberg, Esquire, an attorney, who advised them to take action to protect their interests in light of the vagueness of the agreements with Specialty. Part of his advice to them was that they insist that the Heilmans personally guarantee the successful completion of the house.
Accordingly, on August 27, 1992, at the Spinosos' demand, Mr. and Mrs. Heilman executed an indemnity mortgage drafted by Mr. Silverberg as an encumbrance upon their residence in favor of the Spinosos in the principal sum of $200,000. Joint Ex. 5. The mortgage recited the fact that the property was already encumbered by a first lien in favor of Statewide Capital Corporation. The purpose of the mortgage was set forth in paragraphs 2 and 3:
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