Section 523's Fraudulent Intent Element Was Not Established By State Court's Finding Of "Deceptive Act"
REEVES v. DAVIS (March 14, 2011)
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Linda Reeves hired Gerald Davis to help her with some home renovations. Although he represented himself to be licensed and insured, he was not. After she paid him almost $60,000, Davis left the job incomplete. A state court entered judgment in Reeves' favor, concluding that Davis violated the Indiana Home Improvements Contracts Act. The court specifically found that Davis committed a "deceptive act" under the statute. The court also made a factual finding that the contract covered the construction of a porch, although it did so by concluding that the contract lacked specificity and that any uncertainty should be resolved against Davis. Before Reeves collected any money, Davis petitioned for bankruptcy. Reeves filed an action asserting that the debt was non-dischargeable under § 523(a)(2)(A), which does not discharge a debt that is obtained by "false pretenses, a false representation, or actual fraud." The bankruptcy court rejected her collateral estoppel argument, held its own trial, found that the contract may not have included a porch, concluded that Davis did not have the requisite § 523 fraudulent intent, and ruled the debt discharged. Judge Magnus-Stinson (S.D. Ind.) affirmed. Reeves appeals.
In their opinion, Circuit Judges Flaum and Williams and District Judge Herndon affirmed. The Court stated that § 523 requires, among other things, a showing that Davis possessed an intent to deceive. Reeves argued that the state court's factual finding that the contract included the porch coupled with Davis' admission that he never intended to build one established that intent. The Court agreed with Reeves on the first point and concluded that the bankruptcy court should have deferred to the state court’s factual finding. But the state court did not make a finding regarding his intent. The Court noted that his own testimony that he never intended to build a porch must be taken in context with his testimony that he did not believe the contract called for one. The bankruptcy court did not clearly err when it concluded that Davis did not possess fraudulent intent.
Michael Rigney practices in the law offices of GVC Ltd. in Chicago. In this blog, he reports on select