Matter of Armstrong

• Citation: 54 BR 399
• Decision Date: 22 October 1985
• Docket Number: Bankruptcy No. 85-02494,Adv. No. 85-0325.
• Parties: In the Matter of Dewey R. ARMSTRONG and Helen M. Armstrong, Debtors. M.P. CASH and Jennie G. Cash, Plaintiffs, v. Dewey R. ARMSTRONG and Helen M. Armstrong, Defendants.
• Court: United States Bankruptcy Courts. Eleventh Circuit. U.S. Bankruptcy Court — Northern District of Alabama

54 B.R. 399 (1985)

In the Matter of Dewey R. ARMSTRONG and Helen M. Armstrong, Debtors M.P. CASH and Jennie G. Cash, Plaintiffs, v. Dewey R. ARMSTRONG and Helen M. Armstrong, Defendants.

Bankruptcy No. 85-02494, Adv. No. 85-0325.

United States Bankruptcy Court, N.D. Alabama, S.D.

October 22, 1985.

Arthur Green, Jr. and R. Shan Paden of Paden, Green, Paden & Bivona, Bessemer, Ala., for plaintiffs.

Walter W. Furner and Robert C. Boyce, III of Furner, Boyce & Nave, Birmingham, Ala., for defendants.

James G. Henderson, Trustee, Birmingham, Ala.

B. Jack Rivers, U.S. Trustee.

OPINION

CLIFFORD FULFORD, Bankruptcy Judge.

Judgment creditors, Mr. and Mrs. Cash, ask this Court to except their state court fraud judgment against the Debtors, Mr. and Mrs. Armstrong, from discharge under the "false representation, or actual fraud" and "willful and malicious injury" provisions of the Bankruptcy Code, 11 U.S.C. §§ 523(a)(2)(A) and 523(a)(6).¹ The issues in this case arose out of representations made by the Armstrongs concerning the chimney of the residence they sold to the Cashes, and the problem the Cashes later had with it.

This is a core proceeding. 28 U.S.C. § 157(b)(2)(I). The following constitute findings of fact and conclusions of law pursuant to Bankruptcy Rule 7052 and Rule 52 of the Federal Rules of Civil Procedure.

By a motion for summary judgment, the Cashes first contended that their state court judgment foreclosed the issue of dischargeability for fraud under the principle of collateral estoppel. They supported their motion with parts of the record of the state court case, and the Armstrongs supplied other parts; however, the entire record was never before the Court. From the parts of the record made available, it was clear that the Cashes' case was submitted to the jury on a single count that charged the Armstrongs with false representation and fraud.²

The transcript of Mrs. Cash's testimony on the state court trial contained her account of contacts with the Armstrongs during the two weeks before August 10, 1978 when she and her husband signed a contract to buy the property. On her first visit to the house with a real estate agent, only Mrs. Armstrong was there. On her second visit, accompanied by Mr. Cash and the agent, both Mr. and Mrs. Armstrong were present. On this visit, Mrs. Cash asked about the fireplace and chimney. She was concerned because a nephew's chimney had fallen away from his house. Mr. Armstrong told her, "I'm an expert on chimneys and you don't have any worries there." He also told the Cashes that he had had no trouble whatsoever with the chimney or the fireplace. Mr. Armstrong also told Mrs. Cash he had built the house.

Mrs. Cash testified that she had no expertise in the building of chimneys or fireplaces. She said she and her husband looked at the chimney and did not see anything wrong with it, although a reinforcing pad around it did not appeal to them. Two days after their last visit, they signed the contract to buy the house.

The transcript of Mr. Cash's testimony generally confirmed his wife's recollection of Mr. Armstrong's statements. He also testified that after moving in the home, he had some problems which included mortar coming out from between the bricks and falling into the ashes. He had this fixed at a cost of $169.00. He was reimbursed by the Armstrongs.

In January, 1982, Mr. Cash noticed that the chimney was separating from the house. He contracted the repairs which were completed in March, 1982. The Cashes filed suit against the Armstrongs in the Bessemer Division of the Circuit Court of Jefferson County, Alabama on July 6, 1982.

There was other testimony in the state court trial, but only the transcripts of the evidence given by Mr. and Mrs. Cash were furnished to this Court for its consideration of the motion for summary judgment. Other witnesses testified, but the transcripts of their testimony were not before the Court. The transcripts submitted did contain the state court's instructions to the jury, including the following excerpts critical to this Court's determination whether or not the judgment debt is dischargeable for fraud:

The plaintiff sic in this case is claiming damages from the defendants for an alleged legal fraud practiced upon them by the defendants. The fraud charged in the plaintiffs\' complaint is that the defendants represented that this chimney was in good condition and was not damaged and was constructed in a good and workmanlike manner. The defendants, for answer to the complaint, say that they are not guilty of the charge contained in the plaintiffs\' complaint.

I will charge you, first of all, on deceit. If you are reasonably satisfied from the evidence that the defendants deceived the plaintiffs by a willful representation of a material fact as true which they knew to be untrue to induce the plaintiffs to act and plaintiffs did act thereon to their injury, the defendants are guilty of a deceit, which is legal fraud.

I further charge you that the defendants\' knowledge of the falsehood is an element of deceit. A fraudulent or reckless representation of the facts as true, which the defendant sic did not know to be false, if intended to deceive the plaintiffs, is equivalent to the knowledge of the falsehood.

I will now charge you on willful misrepresentation. If you are reasonably satisfied from the evidence that the defendants willfully misrepresented a material fact to the plaintiffs with the intent to induce the plaintiffs to act thereon, and the plaintiffs did, without knowledge of its falsity, act upon said willful misrepresentation to their injury, then the defendants are guilty of legal fraud.

The plaintiffs in this case are claiming damages from the defendants for an alleged fraud. If you are reasonably satisfied by the evidence that the defendants were guilty of a legal fraud as charged by the plaintiffs and that the plaintiffs were damaged thereby, the plaintiffs will be entitled to recover for such actual damage as you find from the evidence that they did suffer.

In addition to actual damages, the law authorizes a jury to award punitive damages in fraud and deceit actions if it is shown to the reasonable satisfaction of the jury by the evidence that the fraud or deceit was malicious, oppressive, or gross or a misrepresentation made with the knowledge of its falseness and committed with the intent to injure and defraud.

If you are reasonably satisfied from the evidence that the defendants were guilty of a fraud or deceit as charged by the plaintiffs and that such fraud or deceit was malicious, oppressive, or gross, and made with the intent to injure and defraud the plaintiffs, and the plaintiffs did suffer damage as a proximate result of such fraud or deceit, then, in your discretion, you may award the plaintiffs punitive damages in addition to any actual damages you find from the evidence the plaintiffs did suffer.

On the other hand, if you are not reasonably satisfied from the evidence that the defendants were guilty of a fraud or deceit which was malicious, oppressive, or gross, and made with knowledge of its falseness with the intent to injure the plaintiff, you cannot award the plaintiffs punitive damages.

If you are reasonably satisfied by the evidence that the defendants were not guilty of legal fraud as charged by the plaintiffs or that the plaintiffs suffered no damage as a proximate consequence of a legal fraud, the plaintiffs would not be entitled to recover.³

On the basis of these instructions, the jury returned a verdict for the Cashes in the amount of $10,000.00, and the state court entered its judgment on the verdict on October 30, 1984. No appeal was taken. The judgment is final.

The Armstrongs filed their voluntary petition under Chapter 7 of the Bankruptcy Code on April 22, 1985.⁴ The Cashes timely filed their complaint to determine the dischargeability of their judgment and moved for summary judgment which the Court denied. The question of collateral estoppel was carried over for further consideration on the trial.⁵

On the trial of the dischargeability complaint, the Cashes supplied evidence, not available in support of their motion for summary judgment, which clearly established that their judgment debt should be excepted from Mr. Armstrong's discharge.

The evidence is clear and convincing that Mr. Armstrong's representations about the chimney were false, and that he knew they were false when he made them to the Cashes. After the Armstrongs placed their residence on the market for sale but before they entered into a sales contract with the Cashes, Mr. Armstrong complained to his insurance company that strip mine blasting two miles away had caused his chimney to crack along its intersection with the exterior wall of the residence. On July 19, 1978, Mr. Logan R. Ritchie, Jr., a professional engineer engaged by Alabama Farm Bureau Insurance Company, the insurer of the Armstrongs' residence, visited Mr. Armstrong to determine the validity of the complaint. Mr. Ritchie found part of the exterior chimney dismantled, and Mr. Armstrong showed him separations at the upper portion of the chimney from the rear brick wall of the residence. He found that part of the brick veneer was loose from the stud walls of the residence.

Mr. Ritchie questioned Mr. Armstrong about the method of his construction of the house. He asked Mr. Armstrong to show him some "brick ties" used to "tie" a chimney to an exterior wall. He could not, and Mr. Ritchie could not find any in the chimney, in the wall, or in the debris from the dismantling operation. Additionally, Mr. Ritchie did not see any evidence that the chimney was bonded in any way to the brick veneer. He found that the chimney was built out of almost solid brick, particularly at the upper portion.

It was Mr. Ritchie's opinion that the cracks at the intersection of the chimney and the exterior brick veneer wall were due to improper construction and not to...