In re Mills

• Decision Date: 10 May 2006
• Docket Number: No. 05-3204.,05-3204.
• Citation: 345 B.R. 598
• Parties: In re James/Brenda MILLS, Debtors. Joseph Mack, et al., Plaintiffs, v. James/Brenda Mills, Defendants.
• Court: U.S. Bankruptcy Court — Northern District of Ohio

345 B.R. 598

In re James/Brenda MILLS, Debtors.

Joseph Mack, et al., Plaintiffs, v. James/Brenda Mills, Defendants.

No. 05-3204.

United States Bankruptcy Court, N.D. Ohio.

May 10, 2006.

COPYRIGHT MATERIAL OMITTED

John N. Graham, Toledo, OH, for trustee.

Eugene F. Canestraro, Toledo, OH, for debtors.

DECISION AND ORDER

RICHARD L. SPEER, Bankruptcy Judge.

This cause is before the Court after a Trial on the Plaintiffs' Complaint to Determine Dischargeability. The Plaintiffs bring their Complaint under the statutory exception to dischargeability set forth in 11 U.S.C. § 523(a)(2)(A). At the conclusion of the Plaintiffs' case-in-chief, the Defendants moved for a directed verdict. As to the Co-Defendant, Brenda Mills, the Court granted this Motion based upon her lack of involvement in the events which gave rise to the Plaintiffs' cause of action under § 523(a)(2)(A). As to the Defendant, James Mills, however, the Court Denied the Motion, finding that further consideration of the evidence was necessary. The Court has now had this opportunity, and finds, for the reasons herein explained, that the Defendant, James Mills, is also entitled to judgment in his favor. Accordingly, the Plaintiffs' Complaint to Determine Dischargeability will be Dismissed.

BACKGROUND

The Defendants/Debtors, James and Brenda Mills, are husband and wife. In March of 2005, the Debtors commenced a case in this Court under Chapter 7 of the United States Bankruptcy Code. In their petition, the Debtors set forth the Plaintiffs, Joseph and Jodie Mack, also husband and wife, as the holders of an unsecured claim. The origins of this claim arose from services Mr. Mills failed to perform as required by contract, and for which judgment in the amount of $42,000.00 was subsequently entered in an action brought by the Plaintiffs in state court. (Pl.Ex. 43). The Plaintiffs' Complaint seeks to have this claim held nondischargeable. With respect to this action, the succeeding discussion shall constitute this Court's findings of fact and conclusions of law pursuant to Bankruptcy Rule 7052.

FACTS

Prior to seeking bankruptcy relief, the Debtor, Mr. Mills, operated "Mills Constructing and Remodeling."¹ (Pl.Ex. No. 1). In the summer of 2002, Mr. Mills entered into a contractual relationship with the Plaintiffs to restore and renovate an old church which was to be turned into the Plaintiffs' residence. To save money on the project, the Plaintiffs were to personally perform a significant part of the restoration and renovation work; Mr. Mills' business operation was then to perform the remaining work, which included the erection of a garage and the installation of aluminum siding and windows. Although a written contract was executed, the specific details of the Parties' respective responsibilities were never committed to writing. (Def.Ex. F).

To fund the project, the Plaintiffs obtained bank financing from which they would receive periodic draws. During the course of the project, many delays and other problems arose. Of great significance in this matter, liens were placed against the Plaintiffs' property after Mr. Mills failed to properly remunerate funds received from the Plaintiffs to the proper materialmen. The total amount of the liens was approximately $11,000.00, and they were only removed after the Plaintiffs personally paid the materialmen, effectively causing the Plaintiffs to pay for the same materials twice. (Pl.Ex. 27). Although by this time their business relationship was already strained, it was this event which, after approximately one-half year into the project, precipitated the complete termination of any contact between the Parties.

Mr. Mills does not dispute that he failed to fully perform his contractual duties for the Plaintiffs, but testified that no fraud was intended. To this end, Mr. Mills ascribed his failure to perform his obligations for the Plaintiffs to the confluence of two circumstances. First, it is Mr. Mills' position that the Plaintiffs did not cooperate in holding up their end of the bargain, failing to satisfactorily complete their work-projects, thereby making it at times very difficult for Mr. Mills to perform his contractual duties.. The cumulative effect of these deficiencies caused, in Mr. Mills words, the Plaintiffs' project to go over budget

A particular point of contention here was the flooring the Plaintiffs, themselves, were to install. According to Mr. Mills, who testified that he has over 20 years of experience as a carpenter, the floor the Plaintiffs were required to install, and did eventually install, but in a dilatory manner, did not meet minimal building code standards-e.g., Lack of sufficient supports. Thus, according to Mr. Mills, until such problems were rectified, he could not in good conscious proceed with any of his contractual obligations where the integrity of the flooring would come into play.

In addition to these particular problems, Mr. Mills also ascribed his breach of contract with the Plaintiffs to the overall problems being encountered by his contracting business. In further detail, Mr. Mills related that, while he was performing services for the Plaintiffs, his business, which was involved in multiple projects, was "hemorrhaging money." As a result, Mr. Mills acknowledged that, in order to keep his business afloat, he did not segregate his accounts, instead using funds received on one project to pay for the immediate needs of another project. Furthermore, according to Mr. Mills, the problems he was experiencing with his contracting business were only exacerbated by the Plaintiffs' project going over budget. In fact, Mr. Mills depicted the Plaintiffs' project as the one which pushed his business over the edge, explaining that of the hundreds of projects he has undertaken to perform, the Plaintiffs' project was the only one he was never able to complete.

After the termination of their business relationship, the Plaintiffs commenced suit against Mr. Mills. (Def.Ex. A). However, just prior to Trial, Mr. Mills consented to the entry of a judgment in the Plaintiffs' favor in the amount of $42,000.00. (Pl.Ex. 43). According to the testimony elicited from the Plaintiff, Mr. Mack, this amount was based upon damages incurred as the result of the mechanics liens being filed against his property together with Mr. Mills only completing about 60% of the work for which he was contracted. Mr. Mills, although agreeing that he did not fully perform his contractual duties, put his performance figure somewhat higher, at between 65-85%.

DISCUSSION

The Plaintiffs' complaint to determine dischargeability is brought pursuant to § 523(a)(2)(A) which provides:

(a) A discharge under section 727, 1141, 1228(a), 1228(b), or 1328(b) of this title does not discharge an individual debtor from any debt —

(2) for money, property, services, or an extension, renewal, or refinancing of credit, to the extent obtained by —

(A) false pretenses, a false representation, or actual fraud, other than a statement respecting the debtor's or an insider's financial condition[.]

Proceedings to determine the dischargeability of particular debts, such as that brought by the Plaintiff under this provision, are deemed core proceedings pursuant to 28 U.S.C. § 157(b)(2)(I). Accordingly, this Court has the jurisdictional authority to enter final orders and judgments in this matter. Id.; 28 U.S.C. § 1334.

Section 523(a)(2)(A) of the Bankruptcy Code implements the long-standing bankruptcy policy that only those debts which are honestly incurred are entitled to the benefits of a bankruptcy discharge. However, so as to also further the fresh-start policy of the Bankruptcy Code, this exception to discharge is narrowly construed. In conformance therewith, the moving party bears the ultimate burden of persuasion to establish, by a preponderance of the evidence, the applicability of § 523(a)(2)(A). Graffice v. Grim (In re Grim), 293 B.R. 156, 162-63 (Bankr. N.D.Ohio 2003).

In partial support of their burden under § 523(a)(2)(A), the Plaintiffs raised in their PreTrial brief what must be construed to be a purely legal argument: that the doctrine of res judicata applied to the "terms and conditions of the underlying contract and action."(Doc. No. 17, at pg. 3). While not entirely clear from its context, to the extent that the Plaintiffs offer this argument for the limited purpose of establishing their standing to bring this action, they are correct. Federal law provides that state court judgments are to be afforded res judicata effect in the federal courts. 28 U.S.C. § 1738 ("judicial proceedings ... shall have the same full faith and credit in every court within the United States . . . as they have by law or usage in the courts of such State ... from which they are taken.") Thus, the state court judgment entered in the Plaintiffs' favor, which established Mr. Mills' liability — and hence now affords the Plaintiffs a "claim" in bankruptcy for which they may seek a dischargeability determination² — is incapable of being collaterally attacked in this Court.

At the same time, the state court judgment entered in the Plaintiffs' favor has no res judicata effect for purposes of this Court making an independent determination of dischargeability. Determinations concerning fraud under § 523(a)(2)(A) are within the exclusive jurisdiction of this Court, while the doctrine of res judicata extends only to previous "claims" — that is, a prior cause of action. 11 U.S.C. § 523(c). Consequently, by definition, the res judicata doctrine is incapable of being applied from a state court judgment to a dischargeability proceeding in bankruptcy court.³ Brown v. Felsen, 442 U.S. 127, 99 S.Ct. 2205, 60 L.Ed.2d 767 (1979). The Court accordingly now turns to address the weight of the evidence on the Plaintiffs' § 523(a)(2)(A) complaint.

It is well-established that for the moving party to sustain their

§ 523(a)(2)(A) evidentiary burden, the existence of all these...