Fuller v. Givens

IN THE UNITED STATES BANKRUPTCY COURT FOR THE

EASTERN DISTRICT OF TENNESSEE

In re

Case No. 3:20-bk-30700-SHB

CHARLES L. GIVENS Chapter 7

dba AMERICAN HOME BUILDERS

Debtor

RONALD D. FULLER and

JUDITH A. FULLER

Plaintiffs

v. Adv. Proc. No. 3:20-ap-3027-SHB

CHARLES L. GIVENS

Defendant

M E M O R A N D U M

APPEARANCES: KENNERLY, MONTGOMERY & FINLEY, P.C.

Michael S. Kelley, Esq.

Post Office Box 442

Knoxville, Tennessee 37901-0442

Attorneys for the Plaintiffs

LAW OFFICES OF MAYER & NEWTON

John P. Newton, Jr., Esq.

1111 Northshore Drive

Suite S-570

Knoxville, Tennessee 37919

Attorneys for the Defendant

SUZANNE H. BAUKNIGHT

UNITED STATES BANKRUPTCY JUDGE

Plaintiffs filed a Complaint for Determination That Debts Are Non-Dischargeable

(“Complaint”) on June 15, 2020 [Doc. 1], asking the Court to determine that a judgment granted

in their favor and against Defendant by the Sevier County Chancery Court in the amount of

$305,756.24 is nondischargeable pursuant to 11 U.S.C. § 523(a)(2) and/or (a)(6). Defendant

timely answered the Complaint on July 17, 2020 [Doc. 6], denying Plaintiff’s allegations of

fraud and Plaintiffs’ entitlement to a nondischargeable judgment against him.

Trial was held on May 12, 2021. Pursuant to the Joint Statement of the Parties filed on

May 3, 2021 [Doc. 25], the sole issue before the Court is whether Plaintiffs are entitled to a

determination that the state-court judgment is nondischargeable under § 523(a)(2)(A).1 The

record before the Court consists of fifteen stipulations [Doc. 25], eleven stipulated exhibits [Doc.

28],2 and the testimony of Plaintiffs and Defendant. The Court also takes judicial notice,

pursuant to Federal Rule of Evidence 201, of undisputed facts of record in Defendant’s Chapter 7

bankruptcy case.

For the reasons set forth in this Memorandum, the Court finds that Plaintiffs are not

entitled to a determination of nondischargeability under 11 U.S.C. § 523(a)(2)(A) and that the

Judgment entered by the Sevier County Chancery Court on April 3, 2018, was discharged on

August 11, 2020.

1 Counsel for Plaintiffs confirmed at the pretrial status conference held on May 4, 2021, that Plaintiffs were no longer

proceeding with a cause of action under 11 U.S.C. § 523(a)(6).

2 At trial, the parties agreed to the admissibility of the exhibits tendered pretrial and submitted supplements to two of

the stipulated exhibits.

I. FINDINGS OF FACT3

In 2014, Plaintiffs acquired real property located at 303 Allendale Lane, Sevierville,

Tennessee (“Property”). Plaintiffs found Defendant through his website for his DBA, American

Home Builders. The website represented that Defendant held a Tennessee contractor’s license,

had 35 years’ experience building homes of varying sizes, and was licensed and insured. [Ex. 1.]

Defendant affirmatively represented to Plaintiffs that he was insured during their in-person

consultation in February 2014, and Defendant carried a liability insurance policy as required by

the State of Tennessee. [See Ex. 4.] On April 3, 2014, Plaintiffs contracted with Defendant to

build a home on the Property for the “turn-key price of $189,800.00.” [Ex. 10 (“Contract”).] The

Contract includes no representation that Defendant would maintain insurance of any kind,

although it does require Plaintiffs “to have a fire policy in effect during construction.” [Ex. 10.]

Defendant constructed Plaintiffs’ home between April 2014 and March 2015, and

Plaintiffs paid him $179,310.00. [Ex. 9 at pp. 64-65.] After receiving a report from the structural

engineer, because there were a number of omissions or defects in the home after its construction,

Plaintiffs filed suit against Defendant in the Sevier County Chancery Court on November 20,

2015, captioned Ronald D. Fuller and Judith A. Fuller v. Charles L. Givens, dba American

Home Builders, No. 15-11-379 (“State Court Lawsuit”).4 Notwithstanding that the Contract

3 This is a core proceeding pursuant to 28 U.S.C. § 157(b)(2)(I), and this Memorandum constitutes the Court’s findings

of fact and conclusions of law as required by Rule 7052 of the Federal Rules of Bankruptcy Procedure (incorporating

therein Federal Rule of Civil Procedure 52).

4 At trial here, Mrs. Fuller testified that Plaintiffs spent the summer of 2015 trying to get Defendant to fix the following

omissions or defects: the foundation and footers were built incorrectly; the foundation and garage were not

waterproofed; the driveway and sidewalk were not countered to prevent water infiltration; the attic was insufficiently

insulated; the masonry work was substandard; the porch and its foundation were not built correctly, and the front

porch steps were installed incorrectly; the basement door and windows were installed incorrectly; the trusses were not

cut and blocked correctly; the HVAC duct was improperly sized; the French doors were not properly installed to

prevent water infiltration; the concrete basement and garage floors were installed incorrectly; the wall supports and

roof were not installed properly; and water infiltrated the basement and crawl space, resulting in mold. Although the

Sevier County Building Department issued a Certificate of Occupancy on April 20, 2015 [see Ex. 8], Plaintiffs were

required to hire others to make repairs and were unable to move into the home until May 12, 2016.

price was only $189,980.00 and that Plaintiffs paid Defendant $179,310.00 towards the purchase

price, based on the Report and Recommendation of the Special Master dated January 23, 2017

(“Special Master’s Report”) [see Ex. 11], which was affirmed by the Chancellor [see Ex. A. to

Ex. 2 at p. 15, lines 15-16], Plaintiffs were awarded a judgment on April 3, 2018 (“Judgment”),

in the amount of $305,756.245 [Doc. 25 at ¶ 14; Ex. 2], consisting of damages of $248,748.99

(determined by the Special Master as the cost of repair to the house [Ex. 11 at p. 18]), plus

attorneys’ fees of $38,837.25 and expert fees of $18,170.00 [Ex. A to Ex. 2 at pp. 5-7, 16].

The Special Master’s Report details numerous defects with the construction and the costs

for repair, relying in large part on the testimony of Plaintiffs’ two expert witnesses, Jimmy

Taylor, a certified professional engineer, and Kenneth Guffey, a licensed contractor. [Ex. 11.]

The Special Master concluded that Plaintiffs provided “overwhelming proof that their house was

constructed with numerous defects.” [Ex. 11 at p. 12.] The Special Master found that, “[w]hile

[Defendant] did not personally create most of the defects, as the general contractor, he is

responsible for the work of his subcontractors.” [Id. at p. 14.] The Special Master expressly

concluded that “[D]efendant breached the contract by failing to build a house that met applicable

codes and that also revealed widespread poor workmanship.” [Id. at p. 12.]

Defendant filed a Chapter 7 bankruptcy petition on March 5, 2020, and received a

discharge on August 11, 2020. According to the trial testimony, as of the petition date, the

Judgment remained unsatisfied, except for approximately $15,865.00 that was paid from post-

5 The Chancellor also ordered Defendant to pay costs to the Clerk, including $4,680.00 for the fee of the Special

Master plus $2,733.00 for court reporter’s fees incident to the Special Master’s hearings. [Ex. 2 at ¶ 5; Ex. 3.] These

court costs are not at issue in this proceeding.

judgment executions against an RV and a bank account. Plaintiffs timely initiated this adversary

proceeding on June 15, 2020.

II. LAW AND ANALYSIS

Under § 523(a)(2)(A), a debtor is not discharged from any debt “for money, property,

services, or an extension, renewal, or refinancing of credit, to the extent obtained, by [] false

pretenses, a false representation, or actual fraud, other than a statement respecting the debtor’s or

an insider’s financial condition[.]” 11 U.S.C. § 523(a)(2)(A).6 In short, to satisfy the statutory

requirements, Plaintiffs must prove (1) that Defendant obtained money or property from or

belonging to them through false pretenses and/or material misrepresentations that Defendant

knew were false or that he made with gross recklessness or through actual fraud; (2) that

Defendant intended to deceive Plaintiffs at the time of any such false pretenses,

misrepresentations, and/or fraudulent conduct; (3) that Plaintiffs justifiably relied on Defendant’s

false pretenses, representations, and/or fraudulent conduct; and (4) that Plaintiffs’ reliance was

the proximate cause of their losses. See Lansden v. Jones (In re Jones), 585 B.R. 465, 502

(Bankr. E.D. Tenn. 2018). The Court construes § 523(a) liberally in favor of Defendant and

strictly against Plaintiffs, who bear the burden of proving all of the elements by a preponderance

of the evidence. Grogan v. Garner, 498 U.S. 279, 291 (1991); Rembert v. AT&T Universal Card

Servs., Inc. (In re Rembert), 141 F.3d 277, 281 (6th Cir. 1998). “Failure to prove a single

element requires a finding of dischargeability.” Signal Asset Mgmt. v. Rodriguez (In re

Rodriguez), No. 19-81378-CRJ-7, A.P. No. 19-80063-CRJ-7, 2021 WL 1219512, at *8 (Bankr.

N.D. Ala. Mar. 30, 2021). Although the parties do not dispute that Plaintiffs paid Defendant for

6 “The term ‘actual fraud’ in § 523(a)(2)(A) encompasses forms of fraud, like fraudulent conveyance schemes, that

can be effected without a false representation.” Husky Int’l. Elecs, Inc. v. Ritz, 136 S. Ct. 1581, 1586 (2016).

the construction of their home, thus satisfying the first element, they do dispute that the

remaining elements were satisfied.

Material misrepresentations under § 523(a) are “substantial inaccuracies of the type

which would generally affect a lender’s or guarantor’s decision.” Haney v. Copeland (In re

Copeland), 291 B.R. 740, 761 (Bankr. E.D. Tenn. 2003) (citations omitted); see also McCallum

v. Pixley (In re Pixley), 456 B.R. 770, 782 (Bankr. E.D. Mich. 2011) (defining “material fact” to

require that it “must be of enough importance in the matter that a reasonable person would be

likely to rely on it” (citation omitted)). Additionally, “[s]ilence regarding a material fact can

constitute a false representation actionable under § 523(a)(2)(A).” Fee v. Eccles (In re Eccles),

407 B.R. 338, 342 (B.A.P. 8th Cir. 2009) (citation omitted).

False pretenses include:

“any intentional fraud or deceit practiced by whatever method in whatever manner[,

which] may be implied from conduct or may consist of concealment or non-

disclosure where there is a duty to speak, and may consist of any acts, work,

symbol, or token calculated and intended to deceive. . . . It is a series of events,

activities or communications which, when considered collectively, create a false

and misleading set of circumstances, or a false and misleading understanding of a

transaction, by which a creditor is wrongfully included by a debtor to transfer

property or extend credit to the debtor. . . . Silence or concealment as to a material

fact can constitute false pretenses.”

Ga. Dep’t of Labor v. Pruitt (In re Pruitt), No. 16-6-862-BEM, Adv. Proc. No. 16-5237-BEM,

2017 WL 3499282, at *2 (Bankr. N.D. Ga. Aug. 14, 2017) (quoting Taylor v. Wood (In re

Wood), 245 F. App’x 916, 918 (11th Cir. 2007) (citations omitted)); see also Lenchner v. Korn

(In re Korn), 567 B.R. 280, 300 (Bankr. E.D. Mich. 2017) (“A ‘false pretense’ involves an

implied misrepresentation or conduct intended to create or foster a false impression. . . . It has

also been described as ‘usually, but not always, the product of multiple events, acts or

representations undertaken by a debtor which purposely create a contrived and misleading

understanding of a transaction.’” (citations omitted)); Argento v. Cahill (In re Cahill), Adv. No.

15-08298-reg, 2017 WL 713565, at *6 (Bankr. E.D.N.Y. Feb. 22, 2017) (defining “false

pretenses” under § 523(a)(2)(A) as “conscious, deceptive, or misleading conduct calculated to

obtain, or deprive another of property” (citations omitted)).

By contrast, a false representation is “an expressed misrepresentation.” Jennings v.

Bodrick (In re Bodrick), 509 B.R. 843, 855 (Bankr. S.D. Ohio 2014) (citation omitted)); see also

Cody Farms, Inc. v. Deerman (In re Deerman), 482 B.R. 344, 367 (Bankr. D.N.M. 2012)

(defining false representations as “representations knowingly and fraudulently made that give

rise to the debt” (quoting Adams Cnty. Dep’t of Soc. Servs. v. Sutherland-Minor (In re

Sutherland-Minor), 345 B.R. 348, 354 (Bankr. D. Colo. 2006) (citations omitted)). “A court can

find a false representation if the plaintiff presents proof that the defendant (1) made a false or

misleading statement; (2) with the intent to deceive; and (3) in order for the plaintiff to turn over

money or property to the defendant.” Varble v. Chase (In re Chase), 372 B.R. 133, 137 (Bankr.

S.D.N.Y. 2007) (citations omitted). The false statement also must be material, i.e., it must

contain “substantial inaccuracies of the type which would generally affect a lender’s or

guarantor’s decision . . . [but] is not material if the creditor knows it is false or possesses

information sufficient to call the representation into question.” In re Copeland, 291 B.R. at 791

(citations and quotation marks omitted). “[T]he test for materiality is not whether the [creditor]

actually relied on the false statement, but whether the statement was capable of influencing, or

had a natural tendency to influence, the [creditor’s] decision.” United States v. Keefer, 799 F.2d

1115, 1127 (6th Cir. 1986).

Both “‘[f]alse representations and pretenses encompass statements that falsely purport to

depict current or past facts[,]’” In re Copeland, 291 B.R. at 760 (quoting Peoples Sec. Fin. Co.,

Inc. v. Todd (In re Todd), 34 B.R. 633, 635 (Bankr. W.D. Ky. 1983)). Courts, however,

“ordinarily distinguish a knowing misstatement of a prior fact, which ordinarily falls within §

523(a)(2)(A), and a promise of future performance that is subsequently not performed, which

ordinarily does not.” Bohannon v. Horton (In re Horton), 372 B.R. 349, 357 (Bankr. W.D. Ky.

2007). Additionally, false representations and false pretenses are exclusive causes of action

because “a ‘false pretense’ involves implied misrepresentation or conduct intended to create and

foster a false impression, as distinguished from a ‘false representation’ which is an express

misrepresentation.” Ozburn v. Moore (In re Moore), 277 B.R. 141, 148 (Bankr. M.D. Ga. 2002)

(quoting Sears Roebuck & Co. v. Faulk (In re Faulk), 69 B.R. 743, 750 (Bankr. N.D. Ind. 1986))

(emphasis added).

The element distinguishing a false representation from a false pretense is an

explicit, definable statement by the debtor that results in a misrepresentation. A

false pretense, on the other hand is conduct by the debtor that implies or promotes

a scheme that is misleading. While most times both conduct and explicit statements

by the debtor exist, thereby establishing a fraud under both false pretenses and false

representation, the creditor may be able to establish the debtor’s conduct without a

showing of explicit statements or explicit statements without a showing of the

debtor’s conduct and still be successful under § 523(a)(2)(A).

In re Cahill, 2017 WL 713565, at *6 (citations omitted).

Notably, mere breach of contract, even intentional, does not rise to the level required for

a determination of nondischargeability under § 523(a)(2). Thus, “a contractor’s failure to

perform as promised, standing alone, gives rise to a claim for breach of contract, but not

actionable fraud, misrepresentation or false pretenses under section 523(a)(2)(A) . . . . [I]f[,

however,] a debtor makes an intentional misrepresentation, such as overstating his qualifications

when soliciting or obtaining the work, a subsequent breach of the contract may result in a

nondischargeable debt.” Clark v. McCurdy (In re McCurdy), No. 17-80033, Adv. No. 17-8016,

2019 WL 2343773, at *6 (Bankr. C.D. Ill. May 31, 2019). As recently summarized by the

Bankruptcy Court for the District of New Jersey:

In cases involving a debtor-contractor, . . . courts . . . have generally recognized

“two ways to establish misrepresentations or fraud under section 523(a)(2)(A): (1)

to show that the contractor executed the contract never intending to comply with its

terms; or (2) to demonstrate that the contractor intentionally misrepresented a

material fact or qualification when soliciting the work.” Boccella v. Purington (In

re Purington), No. 11-11617/JHW, Adv. No. 11-1757, 2012 WL 1945510, at *10

(Bankr. D.N.J. May 30, 2012) (citing Merritt v. Wiszniewski (In re

Wiszniewski), No. 09-11102, Adv. No. 09-00524, 2010 WL 3488960, *5 (Bankr.

N.D. Ill. Aug. 31, 2010)); see also e.g., Dunlop v. Chung-Hwan Kim (In re Chung-

Hwan Kim), No. 12-30363 VFP, Adv. No. 12-2140 VFP, 2018 WL 671467, at *22

(Bankr. D.N.J. Jan. 31, 2018); Stevens v. Antonious (In re Antonious), 358 B.R. 172

(Bankr. E.D. Pa. 2006). In the debtor-contractor context, general representations

about expected work performance or poor quality of work (without something

more) merely give rise to a breach of contract action and will not suffice to

constitute misrepresentation under § 523(a)(2)(A). See In re Chung-Hwan Kim,

2018 WL 671467, at *22; Lewandowski v. Moeller (In re Moeller), No. 09-17417

(GMB), Adv. No. 11-1008 (GMB), 2014 WL 1315854, at *6 (Bankr. D.N.J. Mar.

31, 2014); In re Purington, 2012 WL 1945510, at *10.

Coluccio v. Sevatakis (In re Sevastakis), 591 B.R. 197, 203 (Bankr. D.N.J. 2018).

In their Complaint, Plaintiffs alleged the following concerning Defendant’s purported

misrepresentations and their reliance thereon:

12. At all relevant times, Defendant maintained a website (the “Website”) on which

his business was advertised.

13. The website touted the qualifications and experience of Defendant. Among the

statements on the Website was the following:

We have been building homes for over 35 years and as a family owned and

operated business, we keep family and Godly values at the center of our

business. We ensure friendly customer service, quality work, and value in

all we do.

14. In addition, the Website represented: “We are [‘]experienced and know what

it takes to complete a home of all shapes and sizes with excellence.[’]”

15. Of particular relevance to this case, the Website assured potential customers

that Defendant was not only licensed but also insured. The Website stated: “We

are licensed and insured, giving you peace of mind.” This representation was

repeated on the side panel of this page using the words Licensed & Insured.

16. During late February[] 2014, Plaintiffs became aware of Defendant, read the

information contained on the Website, and met with Defendant in person. In the

meeting, Plaintiffs expressly asked Defendant if he had insurance. Consistent with

the representation on the Website, Defendant affirmatively and unequivocally

represented that he did, in fact, have insurance. That statement was false.

17. Having had no previous experience with Defendant, Plaintiffs were particularly

sensitive to the need for insurance in the event of problems with the construction

of their new home. But for this representation, Plaintiffs never would have hired

Defendant as their builder.

[Doc. 1 at ¶¶ 12-16.]

Mr. Fuller testified at trial that he first met Defendant in March 2014, when Plaintiffs

toured a home that Defendant was building for others. Mr. Fuller testified that he spoke with

Defendant about a number of things, including whether Defendant had been involved in prior

lawsuits and whether Defendant was insured for workmanship, and Defendant told Mr. Fuller

“not to worry about it” because he was covered. During her testimony about this meeting, Mrs.

Fuller stated that Mr. Fuller and Defendant stepped away from her during their discussion and

that although she could not hear what they were saying, Mr. Fuller later relayed to her that

Defendant said that he stood by his work and was insured. Additionally, both Plaintiffs testified

that Defendant’s representations on his website about Godly values and that he was family-

oriented meant that they could trust him, that they did not think that he would act fraudulently,

and that his claim that he was insured gave them “peace of mind.” Mrs. Fuller also testified that

she did not believe that she would have signed the Contract without an assurance from

Defendant that he was insured, and Mr. Fuller likewise testified that he would not have entered

into the Contract had Defendant not made the representations about being insured.

During his testimony, Defendant stated that he has never had workmanship insurance and

that he was not sure if that type of insurance even exists. He stated that all of his references to

insurance related to liability insurance that he was required to maintain by the State of

Tennessee. [See Ex. 4.] Defendant also testified that although he met Mr. Fuller once in March

before the Contract was signed in April, most of his communications and dealings before and

during construction occurred with Mrs. Fuller, and he introduced into evidence a collective

exhibit of emails between himself and Mrs. Fuller defining what Plaintiffs wanted in the house,

price changes, and general information. [See Ex. 7A.]

In Sims v. Roggasch (In re Roggasch), 494 B.R. 398 (Bankr. E.D. Ark. 2013), the court

examined similar facts and determined that the plaintiffs did not meet their burden of proof at

trial as to a representation about workmanship insurance. There, the plaintiffs had filed a state-

court lawsuit against the defendant-debtor, who was a contractor, alleging breach of contract,

breach of implied warranties, negligence, and violation of the Arkansas Deceptive Trade

Practices Act because he had “misrepresented that he had insurance that covered ‘negligent

workmanship’ and that he, in fact, had no such insurance[.]” Id. at 404. Following a jury verdict

in favor of the plaintiffs, judgment was entered against the defendant-debtor. Id. After the

defendant-debtor filed for bankruptcy, the plaintiffs sought, among other things, a determination

of nondischargeability based on the judgment, arguing false misrepresentation with an intent to

deceive and specifically arguing that the defendant-debtor “misrepresented . . . that his work was

covered ‘under insurance and bond[.]’” Id. at 405.

In its analysis under § 523(a)(2)(A), the bankruptcy court first rejected the plaintiffs’

argument that because the state court found the defendant-debtor had violated the Arkansas

Deceptive Trade Practices Act, the requisite findings of fraud had been established. The

bankruptcy court found that other than a reference to the deceptive-trade-practice theory, the jury

was not instructed on the elements of fraud so that “a determination of fraud was not essential to

the judgment[.]” Id. at 407. The court then reiterated that “breach of contract or negligence

alone, are not a basis for finding a debt nondischargeable pursuant to 11 U.S.C. § 523(a)(2)(A)”

and “evidence of negligence or shoddy workmanship does not establish false representation with

intent to deceive.” Id.

The bankruptcy court then specifically examined the issue of workmanship insurance,

relying on the following facts presented at the bankruptcy court trial:

[Sims] stated that during that first meeting she asked the Debtor if he was “insured

and bonded and had all of his licenses and everything.” (Tr. at 174.) The Debtor

responded that he had everything that was needed to build a house. She specifically

recalled that she stated to the Debtor,

And I said, “Let me ask you this,” and I said—I leaned across the

table, and I said, “Not that I think that you're going to do a bad job

or anything, but there's been so many people out here that have had

so many problems building houses.” I said, “Do you have

workman insurance, so that if you do something wrong with the

house, it is going to be fixed?” And he said, “Yes.” And I said, “So,”

I said, not that I think you’re going to do anything wrong, I’m sure

you’re a good contractor, I’m sure there won’t be a problem.” He

said, “I treat all of my clients like family.” He said, “I bend over

backwards for them. I am there. I will do whatever has to be done.

And I do have insurance, so that if there’s some kind

of workmanship issue, it would be covered.”

(Tr. at 174–175.)

The Debtor recalled Sims asking if he had the necessary license and insurance to

build a house and he stated that he did. He said there was no discussion of a

builder’s risk policy at the meeting but that it was discussed later on. (Tr. at 357.)

According to the Debtor, when it came up later, he stated that, “It was not possible

for us to be able to provide a builder’s risk policy” because he was not the owner

of the property and did not have a mortgage on the property. (Tr. at 357–358.) He

said he never told Sims he had workmanship insurance and the issue of being

bonded was never discussed.

Id. at 402. In its analysis, the court focused on the following additional evidence presented at

trial:

Sims testified that she asked the Debtor if he had insurance which would

cover workmanship and he responded that he did. This testimony was corroborated

by her friend, Vivian Griffith. In fact, according to Sims’ testimony the issue of

whether the Debtor had workmanship insurance was one of the first issues she

discussed with the Debtor even before she had procured a set of plans. (Tr. at 174.)

The Debtor denied that he ever made such a representation. Even though Sims

testified she was immediately concerned that workmanship insurance be procured

she failed to insist that this request be added to the written contract. The Debtor

said he has never heard of workmanship insurance. (Tr. at 357.)

Mark Pruitt, an independent insurance agent, testified for the Debtor. He

sold insurance to the Debtor in connection with his house construction business. He

stated the Debtor needed general liability and worker’s compensation insurance for

a home construction business and the Debtor purchased this type of insurance from

his agency. (Tr. at 300–301.) He explained that a builder’s risk insurance is like a

homeowners policy and is purchased by whoever has taken out the loan. During the

course of construction it covers the dwelling itself as it is being built from the

ground until it is completed and sold to the homeowner or converted to a

homeowner policy. (Tr. at 308.)

He also stated that “a lay person sometimes confuses insured and bonded, just

because they’ve heard that advertised by people in the construction industry....

Usually, bonding means that they’re—they’re allowed to get permits through a city

or state requirement.... Usually, it’s—bonds are required with larger construction

jobs, commercial construction jobs. I don’t ever do them for residential, except for

maybe city permit bonds.” (Tr. at 309–310.)

. . . .

Sims’ testimony concerning insurance on the other hand, seemed confused. She

said the Debtor stated he already had builder’s risk insurance (Tr. at 200), then she

said she did not have to have builder’s risk (Tr. at 202) because “Ryan had all

the insurance that he was supposed to have.” (Tr. at 201.) She admitted she was not

sure what a performance bond was nor was there any discussion with the Debtor

about the cost. (Tr. at 205.) She said the requirement for workmanship insurance

was not in the written contract but there was an oral agreement that he would carry

this type of insurance. (Tr. at 206–207.) Sims’ testimony about the workmanship

insurance is not persuasive. The only corroboration comes from the testimony of

Sims’ friend. The insurance agent testified that a performance bond is not used in

home construction and Sims’ never offered proof that “workmanship insurance”

existed. Sims testified that she never saw any insurance, that it went directly to her

bank and since the bank never said anything to her, she just assumed they had all

the required insurance. (Tr. at 207.)

Id. at 407–08.

Based on the trial testimony, the court concluded that the plaintiffs had not met their

burden of proof to show that the defendant-debtor had made the alleged misrepresentation about

workmanship insurance in the written contract or as part of an oral agreement and that “the

evidence [did not] establish[] that any statement about insurance caused the Plaintiffs’ damage.

The Plaintiffs’ evidence established that the damage was the result of negligent or shoddy

workmanship.” Id. at 408.

Here, although the record reflects that the only reference to insurance within the Contract

is the requirement for Plaintiffs to maintain a fire policy during construction, misrepresentations

under § 523(a)(2)(A) are not required to be in writing, and verbal representations that Defendant

made to Plaintiffs concerning insurance qualify under the statute. The proof presented is

sufficient to support Plaintiffs’ allegations that Defendant made representations about being

insured, both on his website and during the initial meeting he had with Plaintiffs. The Court is

also satisfied that Mr. Fuller expressly asked Defendant about being insured and that Defendant

expressly answered that he was insured, which was true as to the general liability policy required

by the State of Tennessee.

Whether that conversation was explicit as to the type of insurance Defendant maintained,

however, is unclear, and a misunderstanding about a material fact does not equate to a

misrepresentation of that fact. The Court is not convinced that Defendant expressly

misrepresented to Plaintiffs that he maintained insurance on his workmanship, especially when

Defendant testified that he knows of no such type of insurance. Mrs. Fuller testified that when

she signed the Contract, her understanding about insurance was based on the website

information. She also testified that she relied on the conversation that she had had with Mr.

Fuller after he spoke to Defendant – specifically, that Defendant would stand by his work just

like his website said. Mr. Fuller testified that he asked Defendant about insurance for

workmanship and that Defendant responded, “Don’t worry about it.” Mr. Fuller testified that

although he clearly understood from Defendant that he had workmanship insurance and that it

was “very significant” to Mr. Fuller’s decision to enter into the Contract, the Contract itself

contains nothing about Defendant carrying any kind of insurance. In addition, Mrs. Fuller signed

the Contract for Mr. Fuller under a power of attorney. The testimony from all three parties leads

the Court to conclude that Plaintiffs misunderstood and not that Defendant fraudulently

misrepresented facts.

Moreover, even if the Court accepted Mr. Fuller’s testimony about Defendant’s

representations concerning “workmanship insurance,” Plaintiffs must also prove that Defendant

possessed fraudulent intent in making any representation about such insurance. A defendant’s

fraudulent intent may be “inferred as a matter of fact” based on the totality of the circumstances,

i.e., defendant “can be fairly said to be ‘blameworthy’” when he “makes a false representation

which [he] knows or should have known would induce another to advance goods or services.” In

re Copeland, 291 B.R. at 759, 765-66 (citations omitted). In the Sixth Circuit, intent is

determined under a subjective standard, In re Rembert, 141 F.3d at 281, which “requires that the

trier-of-fact focus solely on the individual characteristics of the debtor . . . [but] still entails the

utilization of circumstantial evidence given that a debtor will rarely, if ever, admit to acting in a

fraudulent manner; helpful in this regard are many of the traditional indicia of fraud.” EDM

Mach. Sales, Inc. v. Harrison (In re Harrison), 301 B.R. 849, 854 (Bankr. N.D. Ohio 2003)

(citations omitted).

Circumstantial evidence of fraud is sufficient, but the court must have some

evidence of the deceit or scheme to find fraudulent intent. Cash Am. Fin. Servs. v.

Fox (In re Fox), 370 B.R. 104, 116–17 (B.A.P. 6th Cir. 2007). Badges of fraud

from which intent may be inferred include:

(1) the suspicious timing and chronology of events; (2) a debtor’s

lack of financial health at the time of the transaction (e.g.,

insolvency); (3) the failure to keep adequate records; and (4) the

existence of unusual transfers. In utilizing such indicia, however,

the Sixth Circuit has cautioned against “factor-counting,” instead

holding, “[w]hat courts need to do is determine whether all the

evidence leads to the conclusion that it is more probable than not

that the debtor had the requisite fraudulent intent.”

Weaver v. Vollberg (In re Carlton Mark Vollberg), Adv. No. 1:17-ap-01009-SDR, 2017 WL

2787600, at *3 (Bankr. E.D. Tenn. June 27, 2017) (quoting In re Marroquin, 441 B.R. 586, 593-

94 (Bankr. N.D. Ohio 2010) (internal quotations and citations omitted)). Thus, “a broken

promise to repay a debt, without more, will not sustain a cause of action under § 523(a)(2)(A).”

In re Harrison, 301 B.R. at 854. The intent analysis often comes down to a debtor’s conduct

before, during, and after the representations at issue and to the court’s credibility determinations.

See In re Copeland, 291 B.R. at 766.

Simply, the record here does not unambiguously reflect that Defendant made a false

material misrepresentation to Plaintiffs concerning insurance, and the evidence weighs in favor

of a finding that Plaintiffs understood their questions about insurance to mean one thing and

Defendant understood those same questions to mean another. In fact, Defendant did have

insurance, as required by the State of Tennessee. Also, although Plaintiffs presented a great deal

of evidence concerning the poor workmanship of the home, that evidence does not prove that

Defendant possessed fraudulent intent when he entered into the Contract with Plaintiffs.

Although § 523(a)(2)(A) does not require Plaintiffs to have pleaded fraud in their breach-of-

contract case in the State Court Lawsuit, there are no references to fraud in the inducement,

workmanship insurance, or misrepresentations by Defendant in the Special Master’s Report,

which expressly states, “There was no testimony or proof offered of any warranties offered by

the defendant.” [Ex. 11 at p. 2.]7 Additionally, the Special Master determined that “[w]hile

[Defendant] did not personally create most of the defects, as the general contractor, he is

responsible for the work of his subcontractors, and it is the view of the Special Master that his

subcontractors exhibited very poor workmanship on the construction of [Plaintiffs’] home.” [Id.

at p. 14.] Plaintiffs have not directed this Court “to any case precedent that equates proof of the

performance of substandard work with proof of fraudulent intent. Moreover, such a precedent

could not feasibly exist without elevating every breach of contract action to a level of actionable

fraud, as inherent in most contractual obligations for services is some guarantee as to the quality

of the work to be performed.” In re Horton, 372 B.R. at 358. Under the totality of the

circumstances from the proof presented at trial, the Court is inclined to conclude that Plaintiffs

raised the alleged promise of workmanship insurance as a post hoc theory for purposes of §

523(a)(2)(A).

Further, Plaintiffs must prove justifiable reliance, i.e., that they actually relied on false

representations made by Defendant; that, based on the facts and circumstances they knew at the

time, their reliance was justifiable; and that their reliance was the proximate cause of their

losses.8 In re Morgan, 415 B.R. at 649. As with intent, a court’s determination of whether the

7 The Special Master’s Report discusses Plaintiffs’ requested relief under the Tennessee Consumer Protection Act and,

in recommending that Plaintiffs not be awarded treble damages, states that Defendant “made representations to the

Fullers that the house was properly constructed . . . . This was simply not the case, and Mr. Givens knew, or should

have known, that it failed to comply with standards of workmanship expected of new home construction. It was a

close call on whether the Defendant willfully tried to cover up the multiple defects in the construction.” [Ex. 11 at p.

21.] These statements notwithstanding, nondischargeability under § 523(a)(2)(A) applies only to any representations

that were made before Plaintiffs and Defendant entered into the Contract.

8 Although these are separate elements, courts often analyze them together.

plaintiff actually relied and whether the reliance was justified is subjective, “based on the facts

and circumstances surrounding each individual case.” In re Copeland, 291 B.R. at 766-67. “To

constitute justifiable reliance, the plaintiff’s conduct must not be so utterly unreasonable, in the

light of the information apparent to him, that the law may properly say that his loss is his own

responsibility.” Stewart Title Guar. Co. v. Roberts-Dude, 497 B.R. 143, 151 (S.D. Fla. 2013)

(citation, quotation marks, and brackets omitted). “Under this standard, a creditor will be found

to have justifiably relied on a representation even though [it] might have ascertained the falsity

of the representation had [it] made an investigation.” Com. Bank & Tr. Co. v. McCoy (In re

McCoy), 269 B.R. 193, 198 (Bankr. W.D. Tenn. 2001) (citations and quotation marks omitted).

After weighing the evidence presented at trial, the Court is not convinced that Plaintiffs’

actually relied on any representation by Defendant about insurance. Mrs. Fuller testified that

when they bought the Property, they talked with another builder about building a house.

Because that builder required architectural drawings, which Plaintiffs discovered would cost at

least $15,000.00, Plaintiffs searched the Internet and found Defendant, who did not require

Plaintiffs to purchase architectural drawings. Instead, Mrs. Fuller testified that Defendant told

Plaintiffs to draw what they wanted and he would build it. She also stated that she showed

Defendant a book of house plans from which she identified three possibilities, and after

Defendant told her which was the least expensive, she picked that plan. Notably, although the

Special Master’s Report includes a recommendation as to damages, it does not include any

reference to what Plaintiffs now claim was detrimental reliance on Defendant’s representations.

It states, based on Mrs. Fuller’s testimony there, that “she and her husband selected Mr. Givens

as General Contractor after finding him via an Internet search. After meeting with him, Ms.

Fuller stated that Mr. Givens told her that he did not require architectural drawing[s] and that he

told her to draw a plan for her.” [Ex. 11 at 1.] As previously discussed, the Special Master’s

Report also expressly states that “[t]here was no testimony or proof offered of any warranties

offered by the defendant.” [Id. at 2.] The Court concludes from the trial record here that

Plaintiffs’ choice of Defendant to construct their house met Mrs. Fuller’s primary goal of

reducing expenses.

Critically, neither the Contract nor the numerous emails between Mrs. Fuller and

Defendant reference any obligation of Defendant as to any kind of insurance. Although the

absence of any reference to insurance in their communications is not fatal to the reliance element

of § 523(a)(2)(A), the failure to memorialize the understood promise in writing does not comport

with Plaintiffs’ approach to the relationship both before and after the Contract was executed so

that the evidence weighs against a finding of justifiable reliance. Plaintiffs’ due diligence before

entering into the Contract included a tour of one of Defendant’s nearly completed projects. Mrs.

Fuller also emailed daily with Defendant during the construction of Plaintiffs’ home, and she

visited the construction site approximately four times each week, when she would instruct the

workers if she saw issues that needed to be addressed. Given Mrs. Fuller’s active engagement

with Defendant and attention to details, it seems incongruous that Plaintiffs would not have

included the workmanship insurance as a material term of the Contract if it was as important then

as they now say it was.

Based on the evidence presented at trial, after weighing the credibility of the witnesses,

the Court concludes that Plaintiffs have failed to meet their burden to prove that Defendant

actually made any misrepresentation, that Defendant possessed any fraudulent intent when he

stated to Plaintiffs that he carried insurance, or that Plaintiffs justifiably relied to their detriment9

on any such statement.

III. CONCLUSION

Plaintiffs have not satisfied the elements of 11 U.S.C. § 523(a)(2)(A), and the Judgment

entered on April 3, 2018, in the Sevier County Chancery Court was discharged on August 11,

2020. A Judgment consistent with this Memorandum will be entered.

FILED: August 30, 2021

BY THE COURT

s/ Suzanne H. Bauknight

SUZANNE H. BAUKNIGHT

UNITED STATES BANKRUPTCY JUDGE

9 Because the Court finds that Plaintiffs failed to prove other elements of their fraudulent misrepresentation claim, the

Court need not reach the final element -- the requirement that justifiable reliance be the proximate cause of the loss.

See Sheen Falls Strategies, LLC v. Keane (In re Keane), 560 B.R. 475, 489 (Bankr. N.D. Ohio 2016) (stating that

“proximate cause may be established by showing the conduct was a substantial factor in the loss, or the loss may be

reasonably expected to follow”).