Matthews v. Nealon (In re Nealon)
| Decision Date | 02 July 2015 |
| Docket Number | Adversary Proceeding No. 14–4069,Case No. 14–40719 |
| Citation | 532 B.R. 412 |
| Parties | In re: Christian Nealon, Debtor Theresa Matthews, Plaintiff, v. Christian Nealon, Defendant |
| Court | U.S. Bankruptcy Court — District of Massachusetts |
Richard N. Gottlieb, Law Offices of Richard N. Gottlieb, Boston, MA, for Debtor.
Before the Court are two dispositive motions: a motion requesting summary judgment, filed by plaintiff Theresa Matthews (the “Summary Judgment Motion”), and a motion requesting entry of judgment on the pleadings, filed by the defendant (and debtor in the underlying Chapter 7 bankruptcy case) Christian Nealon (the “Debtor”; the “Motion for Judgment on the Pleadings”). Both motions require this Court to determine whether a prepetition arbitral award has a preclusive effect in the present nondischargeability action and, if not, whether Matthews has sufficiently stated claims for relief under §§ 523(a)(2)(A) and (a)(4) of the United States Bankruptcy Code (the “Bankruptcy Code” or the “Code”).1
In May 2011, Theresa Matthews contracted with Christian D. Nealon Builders, Inc. (“CNB”)—a company wholly owned and operated by the Debtor—as a general contractor to oversee extensive construction and renovation work to be done on her home.3 At the time she executed the contract with CNB, Matthews provided the Debtor with a check in the amount of $101,020.00 (the “Initial Deposit”). The time frame for completion of the work was originally estimated at 6 to 8 months; however, by the spring of 2012, the work was not complete, nor was it ever completed by the Debtor.
When work on the project had not begun nearly a month after she had provided the Debtor with the Initial Deposit, Matthews became concerned. According to Matthews, she Arbitration Post–Hearing Brief 8–9 ¶ 16, Complaint Exhibit A, July 18, 2014, ECF No. 1. The Debtor did, indeed, open a separate account on June 27, 2011, into which he transferred an amount essentially equal to the Initial Deposit (the “Matthews Account”). Matthews later discovered, however, that the Initial Deposit had been held in the Debtor's general business account from May 26, 2011 through June 27, 2011, and that the Debtor had used nearly $50,000 of the deposit to pay various expenses, some or all of which were wholly unrelated to the Matthews project. Matthews says that this pattern of using her payments for expenses unrelated to the Matthews project continued for many months thereafter; that is, while her ongoing payments were deposited into the Matthews Account, the Debtor continued to withdraw substantial amounts of money from that account for matters having no relationship to the project. By September of 2011, the Matthews Account was essentially drawn dry and (according to Matthews, against her express direction) the Debtor thereafter deposited Matthews's payments into a general operating account.
The original contract price was $673,463.75 and was eventually increased up to $743,211.79. By May of 2012, Matthews had paid the Debtor $639,197.04, the project was not complete and completion was substantially overdue. Unhappy with this state of affairs, Matthews asked the Debtor not to return. Apparently, the Debtor was equally as unhappy with his termination. CNB initiated an arbitration action against Matthews seeking recovery of additional amounts allegedly due, and Matthews counter-claimed for damages on account of the Debtor's alleged breaches of contract, including overcharges on invoices and incomplete and faulty work.
After a full hearing, the arbitrator (“Arbitrator”) issued a written decision (the “Arbitration Award”), which was mailed to the parties on April 1, 2014. In his decision, the Arbitrator wholly rejected the Debtor's and CNB's monetary demands, and instead found in favor of Matthews. His written findings noted poor workmanship and management of sub-contractors, which resulted in substantially defective and incomplete work that remained outstanding. The Arbitrator found that Matthews's actual losses—“calculated on the amount of additional money that [Matthews] has to expend to correct [the] construction errors” —amounted to $281,265.91. With the addition of arbitration fees, the Arbitration Award totaled $285,752.86.
While most of the Arbitration Award findings focused on the defective and substandard work performed by CNB and the Debtor, the Arbitrator also made the following statement:
... [The Debtor] was given $101,020 deposit by Theresa Matthews. It was given with the understanding that an ESCROW ACCOUNT would be opened with said funds.
Arbitration Award, Complaint Exhibit C (emphasis in original).
On April 9, 2014, the Debtor filed a petition for relief under Chapter 7 of the Bankruptcy Code. On Schedule B (both as originally filed and as later amended) and in the Statement of Financial Affairs, he indicated that he is the owner of CNB, described as a “contracting business” with no other employees or shareholders. On Schedule F, he listed Matthews as a creditor holding an unsecured claim in the amount of $281,265.91, which he describes as “Arbitration Award–Disputed Claim.” He further disclosed in the Statement of Financial Affairs that a collection proceeding filed by Matthews was pending in state court.
On July 18, 2014, Matthews timely commenced an adversary proceeding objecting to both the discharge of her particular claim and to the Debtor's discharge in its entirety. Through Counts I and II of the Complaint, Matthews objects to the dischargeability of her claim under §§ 523(a)(2)(A) () and (a)(4) (as a debt incurred as a result of fraud or defalcation while acting in a fiduciary capacity, embezzlement or larceny), respectively.4
Thereafter, the Debtor and Matthews filed their respective motions under consideration here. Central to both the Motion for Judgment on the Pleadings and the Summary Judgment Motion is the question of whether the statement in the Arbitration Award referencing an “escrow account” is binding on the parties and this Court in the present nondischargeability action.
Matthews's argument is simple. Because, as the Arbitrator found, the “parties agreed” that the initial $101,020.00 deposit “would be placed in escrow pending [the Debtor's] performance of work on the project,” the Debtor “owed Matthews a fiduciary obligation and assumed a position of trust with respect to said escrow funds.” Pl. Opp. 2, Dec. 12, 2014, ECF No. 26. The Arbitrator's finding that an escrow account was established is binding in the present proceeding, according to Matthews, and the undisputed use of the funds for matters other than the Matthews project constituted either (or both) defalcation while acting in a fiduciary capacity and embezzlement under § 523(a)(4).
The Debtor maintains, however, that the Arbitrator's characterization of the Matthews Account as an escrow account is not binding on this Court. First, he argues, the Arbitrator's statement was not a finding that an escrow account was actually created, but was merely a reference to the understanding of Matthews that an escrow account would be opened. Next, the Debtor says that even if the Arbitrator did find that an escrow account was opened, that finding has no preclusive effect in the current action because that finding was not essential to the Arbitrator's judgment, which was instead premised solely on damages caused by the Debtor's negligence and shoddy workmanship.
But in his Motion for Judgment on the Pleadings, the Debtor goes even further, maintaining that this entire action should be dismissed and judgment entered for the Debtor because Matthews has not stated a plausible claim for nondischargeability under §§ 523(a)(2)(A) or (a)(4). The Debtor characterizes the claims asserted by Matthews as entirely dependent upon her assertion that the Initial Deposit was placed in an escrow account—an assertion that the Debtor says is devoid of any factual basis. The Debtor maintains that the funds deposited by the Debtor into the Matthews Account did not create an “escrow account.” In support of this contention, he refers to the contract between the parties as referencing only an initial deposit; it did not contain an escrow agreement or contain any contractual limitations on how the funds could be spent. Accordingly, the Debtor contends, there is no factual basis for Matthews's asserted belief that an escrow account was created, that it was never the Debtor's intention to do so, and that this version of the truth is best evidenced by the language of the contract between the parties. Therefore, because the Debtor concludes that Matthews has failed to sufficiently plead the existence of an escrow agreement, which forms the basis for all of her remaining claims, the adversary proceeding must be dismissed.
“In order to prevail on a motion for summary judgment, the moving party must show ‘that there is no genuine dispute as to any material fact’ and that it ‘is entitled to judgment as a matter of law.’ ” OneBeacon Am. Ins. Co. v. Commercial Union Assur. Co. of Canada, 684 F.3d 237, 241 (1st Cir.2012) (quoting Fed. R. Civ. P. 56(a) ). “A fact is material if it carries with it the potential to affect the outcome of the suit under applicable law.” Id. (internal citations omitted). On the other hand, “ ‘[t]he nonmovant may defeat a summary judgment motion by demonstrating, through [ ] submissions of evidentiary quality, that a trial worthy issue persists,’ ” by “point[ing] to specific,...
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