Tomlinson v. Clem (In re Clem)

• Decision Date: 21 December 2017
• Docket Number: ADVERSARY NO. 17–03021–sgj,CASE NO. 16–34788–sgj–7
• Citation: 583 B.R. 329
• Court: U.S. Bankruptcy Court — Northern District of Texas
• Parties: IN RE: Steven Andrew CLEM, Debtor. LaDainian & LaTorsha Tomlinson, Plaintiffs, v. Steven Andrew Clem, Defendant.

583 B.R. 329

IN RE: Steven Andrew CLEM, Debtor.LaDainian & LaTorsha Tomlinson, Plaintiffs,

v.Steven Andrew Clem, Defendant.

CASE NO. 16–34788–sgj–7

ADVERSARY NO. 17–03021–sgj

United States Bankruptcy Court, N.D. Texas, Dallas Division.

Signed December 21, 2017

Jeremy Beau Powell, Evan Lane Van Shaw, Law Offices of Van Shaw, Dallas, TX, for Plaintiffs.

John W. Bowdich, Bowdich & Associates, PLLC, Martin Keith Thomas, Dallas, TX, for Defendant.

FINDINGS OF FACT AND CONCLUSIONS OF LAW IN SUPPORT OF JUDGMENT ESTABLISHING A NONDISCHARGEABLE DEBT PURSUANT TO SECTION 523(a)(2)(A)

Stacey G. Jernigan, United States Bankruptcy Judge

CAME ON FOR TRIAL on August 23, 2017 and October 11, 2017 (the "Trial"), the above-referenced Adversary Proceeding (herein so called) filed by LaDainian and LaTorsha Tomlinson (collectively, the "Plaintiffs–Creditors" or the "Tomlinsons"), in which the Plaintiffs–Creditors objected to the dischargeability of a debt owed to them by the Defendant–Chapter 7 Debtor, Steven Andrew Clem (the "Defendant–Debtor"), pursuant to section 523(a)(2)(A) of the Bankruptcy Code. The court has determined that the Plaintiffs–Creditors have established a nondischargeable debt, pursuant to section 523(a)(2)(A) of the Bankruptcy Code, as further set forth herein. The court issues these Findings of Fact and Conclusions of Law in support of this decision, pursuant to Fed. R. Bankr. Pro. 7052. Any Finding of Fact that should more properly be characterized as a Conclusion of Law should be deemed as such, and vice versa .

I. INTRODUCTION.

The Adversary Proceeding is a nondischargeability action in which section 523(a)(2)(A) of the Bankruptcy Code is at issue. It involves a contract (the "Contract") entered into on April 30, 2015, between the Tomlinsons and Bella Vita Custom Homes, LLC ("Bella Vita"), for a $4,483,185.72 luxury, custom-built home (the "Home") in North Texas. The Defendant–Debtor was the "chief executive officer" of the homebuilder, Bella Vita, and was also the approximately 50% owner of Bella Vita (with his father and father-in-law collectively owning the remaining 50% of Bella Vita).¹ The Tomlinsons' Home (at 18,000 square feet) would be the largest house that Bella Vita ever contracted to build.

Things went significantly awry with the early construction efforts on the Home. Among other things, Bella Vita admittedly undertook undisclosed/unapproved construction changes. Specifically, Bella Vita made the decision to utilize helical steel piers on the large Home—something atypical and that the Defendant–Debtor and Bella Vita had no experience using in the past—instead of the concrete piers that were specified in the Contract's original design plans. Bella Vita made this decision after encountering subsurface water when drilling holes for the contemplated concrete piers (something that should have been foreseeable because of available reports), and after further realizing that the concrete piers would have to be "cased" because of instability in the holes Bella Vita had drilled. The Contract provided that any change in the building plans required written approval of the Plaintiffs–Creditors. Not only did Bella Vita not obtain written approval from the Plaintiffs–Creditors for the switch to helical piers (or disclose initially that helical piers were being substituted) but, while drilling for installation of the helical piers, Bella Vita and/or its subcontractors failed to locate and punctured a water line—causing extensive flooding on the building pad and adjacent land. The Tomlinsons learned (rather belatedly) about the flooding from a neighbor. In addition to these construction issues, the Tomlinsons grew frustrated with Bella Vita for its alleged failure to account for usages of the Tomlinsons' 10% initial deposit and subsequent draw requests. On August 7, 2015, after the Plaintiffs–Creditors had paid $655,318.57 toward the purchase price of the Home, they terminated the Contract. From there, the disputes between the Plaintiffs–Creditors and Defendant–Debtor escalated and evolved into many stages.

Stage One: Prepetition Arbitration . On September 8, 2015, the Plaintiffs–Creditors filed a lawsuit against both Bella Vita and the Defendant–Debtor in the 153^rd Judicial District Court of Tarrant County, Texas (the "State Court"). That court ordered the parties to participate in arbitration with the American Arbitration Association (the "Prepetition Arbitration"). The Plaintiffs–Creditors asserted numerous causes of action in the Prepetition Arbitration including at least the following: breach of contract/breach of warranty (Count A); negligence and malice/gross negligence (Count B); negligent misrepresentation (Count C); violations of numerous provisions of the Texas Deceptive Trade Practices Act ("DTPA")² (Count D); fraud and fraud in the inducement or by nondisclosure (Count E); fraud in a real estate transaction (Count F); unconscionable, knowing, or intentional course of action (Count G); conversion (Count H); and various other doctrines or remedies were pleaded (estoppel, alter ego, and joint enterprise).³ Approximately a year later, on September 26, 2016, the Plaintiffs–Creditors were awarded damages by an arbitration panel (the "Arbitration Panel") against both the Defendant–Debtor and Bella Vita, jointly and severally, in the amount of $744,711—which was later adopted into a Final Judgment Confirming Arbitration Award entered by the State Court on September 30, 2016 (the "Arbitration Award").⁴

The Arbitration Award is somewhat confusing. It recited various instances in which Bella Vita and the Defendant–Debtor failed to comply with the Contract. More importantly (for purposes of this section 523(a)(2)(A) Adversary Proceeding), the Arbitration Award also recited various examples of false representations made by Defendant–Debtor (for example, the Defendant–Debtor falsely represented that he would put a full-time superintendent, full-time project manager, and full-time project liaison on the Plaintiffs–Creditors' job and he did not; and he represented that a builder's risk insurance policy had been purchased when, in fact, it had not ). The Arbitration Award stated that the evidence presented supported "both a breach of contract cause of action and a DTPA cause of action against Bella Vita ." Although the Plaintiffs–Creditors had cited in their "Statement of Claims" filed with the Arbitration Panel⁵ more than a half-dozen specific provisions of the DTPA that Bella Vita and Defendant–Debtor allegedly violated,⁶ the Arbitration Award did not state which specific provisions of the DTPA may have been violated. Then, the Arbitration Award went on to award "economic damages" for DTPA violations jointly and severally against both Bella Vita and the Defendant/Debtor in the amount of $677,053.50 (another $67,657.50 was added to this award for arbitration fees and expenses of the American Arbitration Association previously incurred by the Plaintiffs–Creditors, bringing the total of the award to $744,711). The Arbitration Award did not explain the basis for joint and several liability against both Bella Vita and the Defendant–Debtor. However, this court notes that, under the DTPA, a consumer may bring suit against any person whose false, misleading, or deceptive acts, or other practices enumerated in the Act are the producing cause of the consumer's harm.⁷ The DTPA broadly defines "person" as "an individual, partnership, corporation, association, or other group, however organized." ⁸

The DTPA is a consumer protection statute, and according to the Texas Legislature, is to be construed liberally to promote its central purpose.⁹ The Texas Supreme Court has stated that, if there is evidence that an agent of a separate legal entity personally made misrepresentations, then that agent can be held personally liable under the DTPA.¹⁰ In fact, the Texas Supreme Court has concluded that when corporate officers make affirmative misrepresentations in connection with the sale of a home, the agents are personally liable under the DTPA even though they were acting on behalf of the corporation.¹¹ Liability attaches because the officers themselves made the misrepresentations . In any event, the Arbitration Award stated that the "actions of Clem and Bella Vita do not constitute a knowing violation of the DTPA."¹² Further, the Arbitration Award went on to deny the Tomlinsons' claims for negligence and gross negligence as "barred by the economic loss rule." The Arbitration Award also stated that the Tomlinsons' claims for "misrepresentation, fraud , fraud in the sale of real estate, conversion, estoppel, alter ego, and joint enterprise were not sustained by a preponderance of the evidence and are, therefore, denied. "¹³

Stage Two: The Bankruptcy Case and Questions About the Preclusive Effect of the Tomlinsons' Arbitration Award. The Defendant–Debtor filed a Chapter 7 bankruptcy case on December 14, 2016. Soon thereafter, the Plaintiffs–Creditors filed the above-referenced Adversary Proceeding. On May 25, 2017, the Plaintiffs–Creditors filed an Amended Complaint in this Adversary Proceeding,¹⁴ arguing, among other things, that the debt owed to the Plaintiffs–Creditors pursuant to the Arbitration Award is not dischargeable pursuant to 11 U.S.C. § 523(a)(2)(A), as the Defendant–Debtor allegedly made numerous false representations to the Plaintiffs–Creditors in connection with the Contract, on which Plaintiffs–Creditors relied to their detriment. These allegedly false representations included such things as: representing that the Defendant–Debtor's company was qualified to perform the work under the Contract; representing that the work would be performed in a good and workmanlike manner and in accordance with first-class custom home building practices; representing that the work would be in compliance with design plans; representing that a builder's risk insurance policy was in place on Plaintiffs–Creditors' project, and charging the...