In re Kuranda, Bankruptcy No. 89-00032-AT
| Decision Date | 28 September 1990 |
| Docket Number | Adv. No. 89-0362-AT.,Bankruptcy No. 89-00032-AT |
| Parties | In re James E. KURANDA, Debtor. Robert C. TEATES, Plaintiff, v. James E. KURANDA, Defendant. |
| Court | Bankr. V.I. |
COPYRIGHT MATERIAL OMITTED
H. Jason Gold, Valerie P. Morrison, Gold & Stanley, P.C., Alexandria, Va., for plaintiff.
Roy B. Zimmerman, Alexandria, Va., for debtor/defendant.
The plaintiff Robert C. Teates brought this dischargeability adversary proceeding against the debtor pursuant to 11 U.S.C. § 523(a)(2)(B). Trial was held on November 3, 1989, at which time the court also heard argument on the debtor's motion for summary judgment. Following trial the parties have submitted briefs.
In addition to the adversary proceeding, the court has for consideration the plaintiff's motion for sanctions against the debtor based upon the debtor's failure fully to comply with the court's order to compel discovery entered on October 20, 1989.
The debtor was a real estate developer and builder during the time in which the events at issue took place. Under various contractual arrangements, the debtor built residential homes in a subdivision known as Whitewood Forest located in Fauquier County, Virginia.
The debtor conducted his real estate business in part through a corporation, Incline Corporation. However, at trial he conceded that there should be no legal distinction between himself and this corporation. Therefore, for purposes of this proceeding, the Incline Corporation is treated as synonymous with the debtor.
In Whitewood Forest subdivision the debtor purchased several lots on which he built homes, the last being on Lot 9. He contracted to sell this property to Mr. and Mrs. Michael Gorman.
The plaintiff, Teates, was the settlement attorney for the Gormans on Lot 9. On September 8, 1988, the debtor went to Teates' office to sign settlement documents required of him as the seller. Included in the documents executed by the debtor on that date was an affidavit (also known as a short form lien waiver) that included the following provision:
there has been no work done, services rendered or materials furnished in connection with repairs, improvements, development, construction, removal, alterations, demolition or such similar activity on or incident to the referred to property within Ninety (90) days prior to the date of this affidavit; and that there are no outstanding claims or persons entitled to any claim or right to a claim for mechanic\'s or materialmen\'s liens against said property. . . .
Teates had also advised the debtor that a long form lien waiver was necessary for settlement. This document was to be signed by all material providers and subcontractors on the construction project as a certificate that they had been fully paid by the debtor. In Teates' office on September 8, 1988, debtor promised the attorney that the long form waiver would be returned shortly. However, this document was never furnished to Teates.
Teates had had prior dealings with the debtor and believed that the long form lien waiver signed by material suppliers and subcontractors on Lot 9 would be furnished as debtor promised. Because he was under a time constraint to close the sale, Teates proceeded to settlement on Lot 9 on September 9, 1988, without having received the completed long form lien waiver. He relied on the short form lien waiver, despite his knowledge of the recent construction of the home.
From the settlement, the debtor received net cash in the amount of $36,343.11. Of this sum, he remitted the amount of $10,000.00 to James E. Harris, an engineer, under the terms of an assignment dated July 25, 1988; this was a payment on an indebtedness for engineering work in Whitewood Forest subdivision. The balance of the debtor's sale proceeds, $26,343.11, was far short of the amount needed by him to pay outstanding charges for materials and labor on Lot 9. Moreover, the debtor used a portion of the proceeds to pay other obligations unrelated to Lot 9.
Subsequent to the settlement, four Lot 9 subcontractors filed memoranda of mechanics' liens against the property, and at least two proceedings to enforce have been brought. Although there were other unpaid claims against the property, only these two have the potential to become liens against the property. The purchasers, Mr. and Mrs. Gorman, had indicated to Teates their intention to hold him liable to the extent they may suffer damages as a result of unpaid claims against Lot 9.
Teates seeks a declaration of nondischargeability of any amount he may pay out as a result of the potential claim against him by the purchasers of property. On the day of trial, this court heard argument on the debtor's motion for summary judgment and then took Teates' evidence. This opinion constitutes findings of fact and conclusions of law as required by Bankruptcy Rule 7052.
Debtor argues in his motion for summary judgment that Teates has not suffered a loss and therefore cannot make a claim against the estate.1 Under Virginia law, asserts the debtor, there is "no actual loss or damage" suffered by a party claiming indemnification or contribution until that person has actually made payment on a debt. Allied Productions v. Duesterdick, 217 Va. 763, 766, 232 S.E.2d 774, 776 (1977). The debtor's position is that until Teates pays a claim on Lot 9, he has suffered no loss and, therefore, cannot make a claim against debtor for non-dischargeability under § 523(a)(2)(B).
The question presented by the debtor's argument is whether the language of Allied Productions should control this court's dischargeability analysis. In Allied Productions, a default judgment had been entered against the plaintiff, who then sued his attorney for malpractice based on the judgment. In ruling that the plaintiff had not stated a cause of action under Virginia law, the Virginia Supreme Court relied on the fact that plaintiff had not paid the judgment.
In bankruptcy dischargeability litigation, results turn on federal bankruptcy law and not state law although relevant state law may be considered. See Long v. West (In re Long), 794 F.2d 928, 930 (4th Cir.1986); 3 King, Collier on Bankruptcy, par. 523.151, pp. XXX-XXX-XXX-XXX (15th Ed.1989) (concerning determination of dischargeability of obligations as alimony under § 523(a)(5)).
Section 523(a) enumerates certain "debts" excepted from discharge. The Bankruptcy Code defines the term "debt" as "liability on a claim." 11 U.S.C. § 101(11). Section 101 defines a "claim" as a:
right to payment, whether or not such right is reduced to judgment, liquidated, unliquidated, fixed, contingent, matured, unmatured, disputed, undisputed, legal, equitable, secured, or unsecured . . . "
11 U.S.C. § 101(4)(A). It is apparent from this that Congress intended a very broad definition of the term debt, and Teates cites to legislative history affirming this intent: "all legal obligations of the debtor, no matter how remote or contingent, will be able to be dealt within the bankruptcy case." H.R.Rep. No. 595, 95th Cong., First Sess. 309 (1977), U.S.Code Cong. & Admin.News 1978, pp. 5787, 6266.
Given the broad definition of the term "debt" in the bankruptcy context, it is irrelevant whether Teates has satisfied all the technical elements for a cause of action law for indemnity at state law. See Grady v. A.H. Robbins, Co. Inc., 839 F.2d 198 (4th Cir.), cert. denied, 487 U.S. 1260, 109 S.Ct. 201, 101 L.Ed.2d 972 (1988). All that is necessary is that a "right to payment" may arise. It makes no difference that the claim is presently unmatured, contingent, or disputed.
This court, therefore, denies the debtor's motion for summary judgment.
Having concluded that the bankruptcy code deals with the type of claim presented here, this court turns to the question of whether Teates' claim satisfies the requirements of § 523(a)(2)(B).
Section 523(a)(2)(B) provides in pertinent part:
11 U.S.C. § 523(a)(2)(B).
Five requirements must be satisfied in order to establish nondischargeability under § 523(a)(2)(B): 1) that the debt was obtained by the use of a statement in writing, 2) that it is materially false, 3) respecting the debtor's financial condition, 4) on which the creditor reasonably relied, and 5) that the debtor published with intent to deceive. United Leasing Corp. v. Roop, 48 B.R. 310 (E.D.Va.1985). The burden of proof is on the plaintiff to satisfy each of the five elements by a preponderance of the evidence. See Coombs v. Richardson, 838 F.2d 112, (4th Cir.1988); Seery v. Basham (In re Basham), 106 B.R. 453 (Bankr. E.D.Va.1989).2
In this case, the parties stipulated that the debtor knew the proceeds of the sale would be insufficient to pay off all of the contractors' and materialmen's liens and that the debtor signed the affidavit for the purpose of inducing the Gormans to settle. These stipulations, combined with the facts set out above, convince the court that all elements necessary to nondischargeability under § 523(a)(2)(B) have been established with the exception of the Teates' reasonable reliance. Thus, the critical issue here is whether Teates reasonably relied on the debtor's lien waiver...
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