B&W Remodeling, Inc. v. Cofield et al

UNITED STATES BANKRUPTCY COURT
EASTERN DISTRICT OF NORTH CAROLINA
WILSON DIVISION
IN RE:
SHARON VERNELL COFIELD,
DEBTOR.
CHAPTER 7
CASE NUMBER: 10-00007-8-RDD
B&W REMODELING, INC.,
Plaintiff
v.
SHARON VERNELL COFIELD,
Defendant
ADVERSARY PROCEEDING
NUMBER: 10-00070-8-RDD
ORDER HOLDING DEBT NONDISCHARGEABLE
Pending before the Court is the Complaint Objecting to Discharge of Debt, Claim to Funds
Held in Escrow, and Claim to Priority, filed by B&W Remodeling, Inc. (“B&W”) on March 31,
2010 (the “Complaint”), and the Answer to Complaint Objecting to Discharge of Debt, filed by
SO ORDERED.
SIGNED this 15 day of September, 2011.
________________________________________
Randy D. Doub
United States Bankruptcy Judge
____________________________________________________________
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Sharon Vernell Cofield (the “Defendant”) on June 4, 2010 (the “Answer”). The Court began a
hearing in Wilson, North Carolina on August 25, 2011 to consider the Complaint and the Answer.1
STATEMENT OF THE FACTS
The Defendant filed a petition for relief under Chapter 7 of the Bankruptcy Code on January
1, 2010. 	On March 31, 2010, B&W filed the Complaint initiating this adversary proceeding
objecting to the dischargeability of debt pursuant to 11 U.S.C. 523(a)(2)(A) and 11 U.S.C. §
523(a)(4), claiming right to payment of remaining funds held in restricted escrow account, and
seeking to have priority for its lien against real property. 	On April 7, 2010, the Defendant was
granted a discharge pursuant to 11 U.S.C. § 727 on all other dischargeable debts.
In 2005, the Defendant’s parents conveyed to the Defendant a lot located at 46 Cofield Drive
in Edgecombe County, North Carolina. The lot is located next door to the home of the Defendant’s
parents. 	The Defendant purchased and installed a double-wide mobile home on the lot. 	The
Defendant and the Defendant’s father executed a promissory note in favor of Branch Banking and
Trust Company (“BB&T”) to finance the purchase price of the double-wide mobile home. The
promissory note is secured by a deed of trust on the Defendant’s real property located at 46 Cofield
Drive. 	At all relevant times, the Defendant had homeowner’s insurance coverage with North
Carolina Farm Bureau Mutual Insurance Company (“Farm Bureau”). 	The policy included full
replacement loss coverage with dwelling loss limits of $92,000.00 and listed BB&T as the mortgage
loss payee.
On March 8, 2008, the Defendant’s home was significantly damaged by fire and smoke.
Farm Bureau’s adjuster inspected the Defendant’s home and prepared a Building Estimate dated
1The hearing commenced on August 25, 2011 and additional testimony was presented on
August 26, 2011.
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April 7, 2008, which included an itemized listing of the costs necessary to repair the home. Based
on the estimate, the Defendant was to receive both the Actual Cash Value (“ACV”) coverage—the
actual cost of repairs depreciated for the age of the house—and the Replacement Cost Value
(“RCV”) coverage—the difference between the actual cost of repairs and the amount reduced to
arrive at ACV. The Building Estimate included the following totals: ( a.) Replacement Cost Value:
$63,412.32; (b.) Actual Cost Value: $58,031.37; and (c.) Applicable Policy Deductible: $250.00.
On April 15, 2008, Farm Bureau issued a check payable jointly to “Sharon V. Cofield and Branch
Banking & Trust Company” in the sum of $57,781.37. This amount represented the the ACV for
the repairs less the Applicable Policy Deductible. The check was delivered to the Defendant and
deposited into a Restricted Escrow Account (the “Escrow Account”) referencing Defendant’s BB&T
mortgage. The Escrow Account was held, maintained and disbursed by BB&T’s Disbursement
Clearing Office. 	In addition to the RCV, the Defendant received the sums of approximately
$20,813.00 representing Personal Property Coverage for loss of personal property within the home,
$12,332.74 to cover the hotel expenses she incurred and $10,347.00 representing the cost of cleaning
services.
On April 9, 2008, the Defendant entered into and signed a written contract with B&W.
Pursuant to the contract, B&W was to perform specific repairs to the Defendant’s home for the total
sum of $62,444.00 payable in three scheduled draws from the proceeds held in the Escrow Account.
The first and second draws were to be in the amount of $20,000.00. The last draw of $22,444.00 was
to be payable to B&W upon final completion. Farm Bureau reviewed and approved the contract
with B&W. B&W was aware that the Defendant had made an insurance claim with Farm Bureau
and that the claim covered the repairs it contracted to make. B&W however, was not aware that on
April 15, 2008, Farm Bureau issued a check payable jointly to the Defendant and BB&T in the
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amount of $57,781.37, which was deposited into the Escrow Account. Farm Bureau was to pay the
remaining balance of $5,380.95 upon completion of the repairs.
In April of 2008, B&W commenced work on the Defendant’s home. Pursuant to the terms
of the contract, on April 27, 2008, B&W invoiced the Defendant after completing the first six of
the seventeen tasks listed in the contract. The invoice was in the amount of $20,000.00 and detailed
the tasks completed by B&W. 	Prior to issuing the first draw, BB&T completed a progress
inspection of the Defendant’s home and noted that “the mortgagor is satisfied with the repairs to
date. The repairs appear to be of good workmanship.” The progress inspection was dated May 6,
2008 and stated that the repairs were seventy-five percent (75%) complete. Following the progress
inspection, BB&T issued and mailed to the Defendant a check, dated May 7, 2008, in the amount
of $19,260.46 payable to B&W and the Defendant, representing one-third of the funds held in the
Escrow Account. The Defendant paid this amount to B&W on May 19, 2008 in partial payment of
B&W’s first invoice.
Even though B&W had not yet invoiced the Defendant for the second $20,000.00 contract
draw, the Defendant contacted BB&T and requested that B&W be paid the second distribution in
the amount of $19,260.46 representing one-third of the ACV insurance proceeds held in the Escrow
Account. On May 8, 2008, the day following the first distribution, BB&T issued and mailed to the
Defendant a distribution check dated May 8, 2008 in the amount of $19,260.46 payable to B&W and
the Defendant. The Defendant presented the second check to B&W and represented to B&W that
Farm Bureau had authorized her to retain $1,646.00 from the second draw check in order for her to
purchase light fixtures and blinds. She informed B&W that Farm Bureau had told her that it would
reimburse B&W for these funds in the future. Accordingly, the Defendant paid to B&W $17,614.46,
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representing the balance of the second draw check, as an advance on the second invoice which had
not yet been billed to the Defendant.
On May 8, 2008, a third check was issued and written payable to the Defendant and the
Defendant’s father from the Escrow Account in the amount of $1,157.25 labeled “personal cont”.
Unknown to B&W the Defendant had requested that BB&T issue this third check. The Defendant
represented in her Answer that she requested this payment from BB&T to purchase a new
refrigerator. However, at the hearing, the Defendant testified that these funds were used to purchase
a sink. At the hearing, Farm Bureau’s Adjuster testified that the Defendant had already received
funds to purchase a new refrigerator from the Personal Property Coverage at the time she requested
the $1,157.25 payment from BB&T. Additionally, the Farm Bureau Estimate did not include the
purchase of new light fixtures.
In June 2008, the Defendant requested that additional work be done to her home. This
additional work was not provided for in the original contract. At the hearing, Jerry Wall (“Mr.
Wall”) testified on behalf of B&W. Mr. Wall testified that the Defendant asked B&W to perform
additional work in order to make her mobile home appear more like a home. 	Specifically, she
requested that crown molding be installed and that a portion of a wall be removed. Mr. Wall testified
that B&W agreed to do the additional work relying upon the Defendant’s representation that this
additional work would be paid for from insurance proceeds that she was to receive in the future.
On June 30, 2008, B&W invoiced the Defendant for the second scheduled draw of
$20,000.00. B&W credited the Defendant for the partial payment of $17,614.46 it received on May
28, 2008. Accordingly, B&W demanded payment in the total amount of $5,246.20 representing the
unpaid balance of $739.54 due on draw one, the unpaid balance of $2,385.54 due on draw two, and
the $2,121.12 owed for the additional work not provided for in the original contract.
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In July 2008, B&W informed the Defendant that the remaining balance of $5,246.20 was
required to be paid if B&W was to continue working on the home. The Defendant called Farm
Bureau and represented that she needed a check in the amount of $5,246.20 in order for B&W to buy
carpet for her house. Farm Bureau denied the Defendant’s request. 	Once again, the Defendant
represented to B&W that she did not have the funds available in order to make payment and that she
did not have access to the insurance money. She represented that the insurance company would not
release the funds in order to pay B&W, but she assured B&W that payment would be made from the
insurance funds that she was to receive when the contract was completed. 	Relying on the
Defendant’s assurances, B&W continued working on the house. During this time, B&W purchased
a new central heating and air conditioning system and kitchen cabinets. 	Despite Defendant’s
representations to B&W that she did not have the funds available to make the payments as required
under the contract, on July 18, 2008 and July 29, 2008, two checks were issued from the Escrow
Account payable to the Defendant and the Defendant’s father in the amounts of $4,917.51 and
$4,983.99 respectively. This left a remaining balance $8,201.70 in the Escrow Account. B&W was
still owed for the third scheduled contract draw of $22,444.00, in addition to $5,246.20 representing
the amount due on draws one and two and the extra work performed, for a total sum due to the B&W
of $27,690.20.
Although, the contract with B&W included removing and replacing both the vinyl flooring
and the carpet, the Defendant chose to personally pay for and install both the vinyl flooring and
carpet in her home. 	At this point, B&W had not finished painting and preparing the house for
installation of floor coverings. B&W informed the Defendant that it was unable to do anymore
painting and touch up work once the carpet was installed and gave the Defendant a $1,500.00 credit
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as B&W would be unable to sand and paint. Additionally, B&W gave the Defendant a $9,901.09
credit representing the cost of the carpet. The final balance due and owing to B&W was $16,289.11.
On August 7, 2008, BB&T completed a progress inspection of Defendant’s home. The
report stated that the repairs were “ninety-five percent (95%) complete. . . . [t]he mortgagor is
satisfied with the repairs to date. The repairs appear to be of good workmanship.”
At the hearing, the Defendant presented a video as evidence that the repairs were not
completed on her home. At the time when the Defendant started recording the video, B&W had not
yet completed its repairs. When the video was playing at the hearing, knocking at the door of the
Defendant’s home could be heard. 	Mr. Wall testified that on August 11, 2008, at the time the
Defendant was recording the video, he and other employees of B&W were knocking on the
Defendant’s door because they were there to complete work on the Defendant’s home. On August
11, 2008, the Defendant had prepared a list of minor tasks for B&W to complete. B&W completed
these tasks and on August 13, 2008, BB&T completed its final progress inspection of the
Defendant’s home. At this inspection, the Defendant represented to the BB&T inspector that the
repairs were satisfactory to her. The inspection report showed that the repairs were “100% complete
and that the repairs appeared to be of good workmanship.” Two days later, on August 15, 2008,
BB&T released the remaining funds from the Escrow Account in the amount of $8,201.70 made
payable jointly to B&W and the Defendant. 	After these funds were released, the Defendant
complained to B&W as to the quality of the workmanship and that the repairs were incomplete.
Subsequently, the Farm Bureau Inspector made his final inspection of the home and upon finding
that the work was complete offered to disburse the Depreciation funds in the amount of $5,380.95
as provided for in the building estimate to the Defendant so she could pay these funds to B&W. The
Defendant refused to accept payment of this amount and demanded that the Farm Bureau Inspector
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pay her additional money than she had originally agreed to accept. Eventually, Farm Bureau issued
a check payable jointly to the Defendant and BB&T in the amount of $5,380.95 representing the
Depreciation funds. The Defendant never informed B&W that she had received this check and she
did not pay B&W any funds from this check.
In October 2008, the Defendant unilaterally cashed the Depreciation check in the amount of
$5,380.95, without B&W ever knowing that the check had been received by the Defendant. In a
letter sent to BB&T dated December 19, 2008, the Defendant requested, due to unforseen
circumstances, that BB&T return the check in the amount of $8,201.70 to her account.
The Defendant refused to pay B&W the remaining amount owed. On October 14, 2008, in
accordance with N.C. Gen. Stat. § 44A-12, B&W filed and served Notice of Clam of Lien for non-
payment for labor and materials in repair made to the Defendant’s home. On January 9, 2009, B&W
filed suit on the Claim of Lien in the civil action captioned “B&W Remodeling, Inc. v. Sharon V.
Cofield”, Edgecombe County, Case No. 09-CVS-39. One week prior to the trial, the Defendant filed
a petition for relief under Chapter 7 of the Bankruptcy Code on January 1, 2010.
In her petition, the Defendant listed the $4,000.00 returned to the Escrow Account by the
Defendant in Defendant’s Schedule B - Personal Property - Amended in paragraph 2 as “BB&T -
Insurance proceeds for home repairs.” In paragraph 8 of the Defendant’s Amended Schedule C-1 -
Property Claimed as Exempt, the Defendant claimed $4,000.00, one-half of the $8,000.00 funds
representing the insurance proceeds as exempt. B&W objects to this exemption.
STATEMENT OF THE CASE
B&W requests that the Defendant be denied discharge of the debt owed to B&W for labor
and materials to repair damage caused by fire and smoke to Debtor’s home pursuant to 11 U.S.C.
§ 523(a)(2)(a) and (4). B&W argues that pursuant to 11 U.S.C. § 523(a)(2)(A), the debt owed by
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the Defendant to B&W is nondischargeable because the Defendant obtained the services and
property by false pretenses, a false representation, or actual fraud. Additionally, B&W contends that
pursuant to 11 U.S.C. § 523(a)(4) the debt owed by the Defendant to B&W is nondischargeable
because the debt was for fraud or defalcation while acting in a fiduciary capacity, embezzlement
or larceny. The Defendant argues that B&W has failed to meet the elements of nondischargeability
under both § 523(a)(2)(A) and § 523(a)(4) and that at most, the Defendant has raised a claim for
breach of contract, which indebtedness would be dischargeable.
DISCUSSION
Pursuant to 11 U.S.C. § 523(a)(2)(A), an individual will not be discharged of 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 . . . .” A creditor seeking to exempt a debt
from discharge must establish all of the elements of fraud: “(1) false representation, (2) knowledge
that the representation was false, (3) intent to deceive, (4) justifiable reliance on the representation,
and (5) proximate cause of the damages.” Nunnery v. Rountree (In re Rountree), 478 F.3d 215, 218
(4th Cir. 2007). Obtaining property or services by false pretenses is shown when: (1) a false
representation is made by Defendant to Plaintiff, (2) calculated and intended to deceive, (3) which
in fact deceived Plaintiff, and (4) Defendant obtained money, property or services from the Plaintiff.
N.C.P.I. — Crim. 219.10. Obtaining Property by False Pretenses. Section 523(a)(4) excepts from
discharge a debt “for fraud or defalcation when acting in a fiduciary capacity, embezzlement or
larceny.” A creditor seeking to exempt a debt from discharge must establish the existence of both:
(a) a fiduciary relationship, and (b) fraud or defalcation while acting in that fiduciary capacity.
Central Bank, Inc. v Burton (In re Burton), 416 B.R. 539, 542 (Bankr. N.D. W.Va. 2009) (citations
omitted). The “standard of proof for dischargeability exceptions in 11 U.S.C. §523(a) is the
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preponderance-of-the-evidence standard.” 	Grogan v. Garner, 498 U.S. 279, 291 (1991). B&W
concedes that Defendant was not acting in a fiduciary capacity. Therefore, B&W solely relies on
11 U.S.C. § 523(a)(2)(A).
The primary issue here is whether the debt was obtained by false pretenses, false
representation or actual fraud. The creditor’s level of reliance on the debtor’s false representation
requires justifiable, but not reasonable reliance. Field v. Mans, 516 U.S. 59, 74-75 (1995). Quoting
the Restatement (Second) of Torts (1976), the United States Supreme Court stated that “a person is
justified in relying on a representation of fact ‘although he might have ascertained the falsity of the
representation had he made an investigation.’” Id. at 70 (quoting the Restatement (Second) of Torts
§ 1976)). 	The Court went on and noted that “[a]lthough the plaintiff’s reliance on the
misrepresentation must be justifiable . . . this does not mean that his conduct must conform to the
standard of the reasonable man. Justification is a matter of the qualities and characteristics of the
particular plaintiff, and the circumstances of the particular case, rather than the application of a
community standard of conduct to all cases.” Id. at70-71 (quoting the Restatement (Second) of
Torts §545A(1976)).
The creditor is not required to show direct evidence of the debtor’s intention to deceive.
“Because direct proof of intent is seldom available, the court in a dischargeability proceeding may
infer the debtor’s intent or lack of intent from the surrounding facts and circumstances.”Randle v.
Highfill (In re Highfill), 336 B.R. 701, 707 (Bankr. M.D.N.C. Jan. 26, 2006).
Here, the Court finds that the Defendant obtained property or services by false pretenses,
false representation and actual fraud. The Court finds that B&W has met its burden of proof to
establish the debt as nondischargeable. Throughout the course of dealings between the Defendant
and B&W, the Defendant made numerous false representations upon which B&W justifiably relied.
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On April 9, 2008, the Defendant entered into and signed a written contract with B&W. The contract
required the Defendant to pay B&W the sum of $62,444.00 payable in three scheduled draws. At
the hearing, the Defendant testified that throughout her course of dealings with B&W, she told B&W
the insurance company would pay for the repairs.
The Defendant represented to B&W that Farm Bureau Insurance had authorized her to
receive $1,646.00 from the second draw of the insurance funds paid jointly to the Defendant and
B&W in order for her to purchase light fixtures and blinds. She assured B&W that Farm Bureau
told her it would reimburse B&W for releasing these funds to her. In fact, the insurance company
never authorized the Defendant to use the ACV insurance proceeds to pay for light fixture nor did
it agree to reimburse B&W for the distribution. 	B&W justifiably relied on the Defendant’s
representation. B&W had no relationship with the insurance company and justifiably believed the
Defendant was being truthful. After all, there was significant fire damage and it was reasonable to
assume the Defendant had insurance.
B&W never received reimbursement for the $1,646.00 it released to the Defendant from the
second draw. At this point B&W was owed the total amount of $5,246.20 representing the unpaid
balance of $739.54 due on draw one, the unpaid balance of $2,385.54 due on draw two, and the
$2,121.12 owed for the additional work that B&W performed and was not provided for in the
contract. B&W demanded payment in full of the $5,246.20 amount. Defendant told B&W that Farm
Bureau refused to release the funds to pay for the work on her home. She assured B&W that she
would call the Farm Bureau office and get the checks issued. In fact, the Defendant did call Farm
Bureau and represented that she needed a check in the amount of $5,246.20, the exact amount due
to B&W, in order for B&W to buy carpet for her house. 	Farm Bureau denied the Defendant’s
request. The Defendant then told B&W that the balance due on draws one and two, plus payment
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for the extra non-contract work B&W performed in June 2008, would be paid from the insurance
proceeds and that the Defendant would receive payment once the job was finished.
Unknown to B&W, the Defendant already had the ACV funds on deposit in the Escrow
Account and was using her access to the account to withdraw funds. The Defendant never requested
payment from the ACV insurance funds to pay B&W for its contract work. The Defendant did
however have a check issued and written payable to the Defendant and the Defendant’s father in the
amount of $1,157.24 dated May 8, 2008. Additionally, on July 18, 2008 and on July 29, 2008, the
Defendant had two checks issued from the Escrow Account in the amounts of $4,917.51 and
$4,983.99, respectively. 	The checks were written payable jointly to the Defendant and the
Defendant’s father. This left a balance of $8,201.70 left in the Escrow Account. Based on the false
representations of the Defendant, B&W continued performing contract work on the Defendant’s
home and continued obtaining and paying for materials in the house, and continued engaging and
paying subcontractors to install systems throughout the home, justifiably relying on these false
representations that the insurance company would pay the balance, when the Defendant had already
received the funds to pay B&W.
On August 13, 2007, BB&T completed its final progress inspection of the Defendant’s
house. 	The Defendant stated to BB&T’s inspectors that she was satisfied with B&W’s work.
Accordingly, two days later on August 15, 2008, BB&T released the remaining funds from the
Escrow Account in the amount of $8,201.70 made payable jointly to B&W and the Defendant.
Although, the Defendant represented to BB&T that she was satisfied with B&W’s work, she
contemporaneously complained to B&W that the work on her house was defective. The Defendant
received the ACV insurance funds in the amount of $8,201.70, but refused to pay B&W. Upon its
inspection of the Defendants home, Farm Bureau eventually released the Depreciation check in the
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amount of $5,380.95. The check was payable jointly to the Defendant and BB&T. The Defendant
never informed B&W that she received this check and she did not pay B&W any funds from this
check. In October 2008, the Defendant unilaterally cashed and deposited the Depreciation check
into her personal account, without B&W ever knowing that the check had been received by the
Defendant. At the hearing, the Defendant was questioned by the Court as to why she believed that
the check belonged to her even though it was payable jointly to her and B&W. The Defendant was
unable to answer this question.
The Defendant made numerous false representations upon which B&W justifiably relied. The
aggregation of these representations results in false pretenses, a false representation or actual fraud
and in actuality were a fraudulent scheme by the Defendant to keep the funds for herself rather than
pay B&W. In furtherance, of this fraudulent scheme, the Defendant never applied for a Certificate
of Occupancy, when only a few very minor items were required to be fixed including loose
receptacle plates, lack of access to hot water heater, shower surround not properly installed, and a
loose electrical receptacle in the kitchen, all of which could have been fixed for little money. No
testimony was received as to the amount necessary to complete these minor repairs. Additionally,
these items were noted in the inspection which was conducted on January 21, 2011, nearly two and
a half years after B&W completed its work on the home. B&W had substantially performed under
the contract. 	There was no material default to justify not making payment to B&W when the
Defendant had the funds to do so and had intentionally diverted some of the funds for her personal
use. Even though B&W gave the Defendant a credit of $1,500.00, the Court credits the total amount
due and owing an additional $1,444.88 for any minor punch list items B&W was unable to complete.
The Court finds the final balance due and owing to B&W is $14,844.23.
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Therefore B&W is entitled to recover from and have judgment entered against the Defendant
the sum of $14,844.23 plus interest as allowed by law from August 25, 2011. BB&T is ordered to
turnover to B&W the sum of $8,201.70. The Defendant’s exemption of any amount of the funds
remaining in the Escrow Account is DISALLOWED and Defendant’s objection to this claim of
exemption is SUSTAINED. B&W’s materialmen’s lien pursuant to N.C. General Statutes § 44A
is perfected as of the date of the first furnishing of labor or materials at the site of the Debtor’s home
pursuant to N.C. General Statutes §44A-10 and is not avoidable pursuant to 11 U.S.C. § 522(f).
B&W is awarded reasonable attorneys’ fees in the amount of $56,037.71.2 All damages awarded and
reasonable attorneys’ fees are NOT DISCHARGED.
The Clerk of Court is directed to enter judgment accordingly.
SO ORDERED.
END OF DOCUMENT
2On September 7, 2011, attorney for B&W filed an affidavit stating the reasonable
attorneys’ fees and costs. The reasonable out-of-pocket expenses and court costs incurred on
behalf of B&W was $1,002.71. The reasonable attorneys’ fees incurred and billed to B&W in
this matter was $55,035.00. The reasonable attorneys’ fees and costs incurred by B&W in
prosecuting this case against eh Defendant was $56,037.71. 	The effective hourly rate charged
by the attorney for B&W was $160.00 per hour. No objection was filed to the affidavit.
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