Youssef v. Fogarty

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UNITED STATES BANKRUPTCY COURT
FOR THE
DISTRICT OF MASSACHUSETTS

OOO OOO OO OOO OOO OOO ON ieee

In re
CLEMENT FOGARTY, Chapter 7

Debtor Case No. 08-10564
FAROUK YOUSSEF,

Plaintiff
Vv. Adv. P. No. 08-1112
CLEMENT FOGARTY,

Defendant

MEMORANDUM

I. INTRODUCTION

The matters before the Court are the Amended Complaint filed by Farouk Youssef
(“Youssef”) against Clement Fogarty d/b/a/ Fogarty Construction (“Fogarty” or the
“Debtor”). Pursuant to his Amended Complaint, Youssef seeks a determination that a debt
owed to him by Fogarty arising out of a construction contract is nondischargeable pursuant
to 11 U.S.C. § 523(a)(2)(A) and (a)(6). The Court conducted a trial on December 9, 2009 at
which time four witnesses testified, including Youssef and Fogarty,’ and 14 exhibits were

introduced into evidence.

" Fogarty testified at the Court’s request for the limited purpose of clarifying his
relationship with Ed Lavelle, the person who executed the construction contract with
the Plaintiff on behalf of Fogarty Construction.

1

AUTHENTICATED
U.S. GOVERNMENT
INFORMATION

GPO

At the conclusion of the testimony presented by Youssef, counsel to the Debtor
moved for a directed verdict. At the conclusion of the trial, the parties filed briefs. The
issues presented include 1) whether the Plaintiff proved the elements of an exception to
discharge under 11 U.S.C. § 523(a)(2)(A); and 2) whether a contract which is breached in
so egregious a manner as to cause damage to property and emotional distress to the
Plaintiff can support a claim for a willful and malicious injury to property under 11 U.S.C.
§ 523(a)(6). The Court now makes its findings of fact and conclusions of law in accordance
with Fed. R. Bankr. P. 7052.
II. FACTS
The Debtor filed a voluntary Chapter 7 petition on January 28, 2008. On April 4,
2008, Youssef timely filed an adversary proceeding against the Fogarty to determine the
dischargeability of a debt owed to him by Fogarty.
Youssef testified about his employment history. Trained as an architect in Egypt,
Youssef is an experienced architect who has been employed by Stone & Webster or its
successor for over 40 years. During his distinguished career, Youssef became “the principal
architect for the whole company responsible for the corporation, managing all architectural
work for the corporation through the years.” Licensed as an architect in 26 states, Youssef
has managed and supervised a vast array of projects, including the construction and
renovation of residential, commercial and industrial buildings, such as the renovation of
the American Embassy in Panama.
Youssef testified that he interviewed several contractors with respect to the
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demolition of an existing house and the construction of a new, waterfront house located
at 53 Edgewater Drive, Hull, Massachusetts (the “property”). The scope of the project was
limited to ensuring that the building was “weather-tight,” meaning that the house would
be “framed, complete from the outside, including siding, windows, roof, [and] all interior
partitions.” Youssef explained that he intended to engage another contractor to do the
finish carpentry and other work necessary to complete construction.
Youssef testified that he was “looking for a licensed contractor, somebody has
certification [sic], has honesty and integrity to do the job I wanted to do.” Fogarty was
recommended to him by the owner of a construction company in Hingham, David Chase.
Youssef met with Ed Lavelle (“Lavelle”), who gave Youssef the impression that he was a
partner 	in 	Fogarty 	Construction, 	although, 	according 	to 	Fogarty, 	Lavelle 	was 	a
“representative as far as getting work for me” and an authorized agent. 	Youssef
ascertained 	that 	Lavelle 	was 	licensed, 	and 	he 	executed 	a 	contract 	with 	Fogarty
Construction on February 24, 2006. The contract was executed by Lavelle, whose capacity
as agent was not set forth on the signature line of the contract. Indeed, Youssef thought
that Lavelle was a principal of Fogarty Construction. At the time he executed the contract,
Youssef gave Lavelle a deposit in the sum of $15,000, which was cashed by Fogarty.
According to Youssef, Lavelle represented the project would be finished in eight weeks and
that he would be “doing the work himself as a knowledgeable person” and that Fogarty
Construction had done similar jobs which had turned out well.
The contract executed between Youssef and Fogarty Construction is captioned
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“Standard Form of Agreement Between Owner and Contractor for a Small Project (AIA
Document A105).” It provides that the “residence reconstruction” would be performed in
accordance with the “Contract Documents,” including architectural drawings (sheets 1-26)
prepared by Youssef. Fogarty Construction was to commence work on March 1, 2006 or
the date of receipt of the construction permit and to complete work “on or before May 1,
2006 for a total contract price of $120,400. Payments were to be made according to the
following schedule:
PORTION OF WORK 	VALUE
Deposit 	15,000
Demolition 	10,000
Addition of concrete block 8” high 	2,000
First floor deck complete 	18,000
Second floor deck complete 	18,000
Roof framing complete with plywood 	25,000
All interior stud partitions 	10,000
All windows and doors exterior installed 	3,000
Roof shingles 	6,000
All exterior siding, trim, & gutters 	13,400
The contract also contained the following pertinent provisions.
3.3 SUPERVISION AND CONSTRUCTION PROCEDURES
3.3.1 The Contractor shall supervise and direct the Work, using the
Contractor’s best skill and attention. 	The Contractor shall be solely
responsible for and have control over construction means, methods,
techniques, sequences and procedures, and for coordinating all portions of
the Work.
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3.3.2 The Contractor, as soon as practicable after award of the Contract, shall
furnish in writing to the Owner through the Architect the names of
subcontractors or suppliers for each portion of the Work. The Architect will
promptly reply to the Contractor in writing if the Owner or the Architect,
after due investigation, has reasonable objection to the subcontractors or
suppliers listed.
***
3.5 WARRANTY
The Contractor warrants to the Owner and Architect that (1) materials and
equipment furnished under the Contract will be new and of good quality
unless otherwise required or permitted by the Contract Documents; (2) the
Work will be free from defects not inherent in the quality required or
permitted; and (3) the Work will conform to the requirements of the Contract
Documents.
Youssef testified about the “empty promises,” including ones set forth in the
contract, about job completion in eight weeks, and the engagement and supervision of only
licensed professionals, rather than unsupervised and unlicensed “kids.”
Following execution of the contract, Fogarty Construction did nothing until the end
of April when it began demolition on a Saturday. According to Youssef, due to complaints
from neighbors and police and fire department personnel, as well as complaints from
representatives of the Board of Health for the Town of Hull, he traveled to the demolition
site. Youssef stated that he was not advised that the heavy equipment operator at the site
was a subcontractor. Additionally, neither Lavelle nor Fogarty produced an insurance
binder, but Youssef did not indicate when he asked for the binder.
According to Youssef,
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During demolition of the house, to start with, he was supposed to be
demolishing the house up to the first floor level, street level; and the rest to
be done by hand. When I arrived at the house, the machine was already in
the middle of the house. And the reason for that, there was a foundation
wall in the middle of the house which I wanted to maintain so I can do the
framing on the top of it; but the machine, [sic] he said, “We’ll demolish it,”
Fogarty said “Demolish it. Well, it’s easier and faster.”
Youssef added that because of the manner in which the machine operator was compacting
debris in the dumpster, the foundation wall of the house, which was not be disturbed,
buckled and collapsed. Additionally, a wall on the waterside of the property was damaged
when the machine operator pulled the wall into the water.
Despite the numerous problems associated with the demolition process, Youssef
paid Fogarty Construction another $10,000. He testified that he repeatedly called Fogarty
Construction to remove dirt and debris that was spilling into the street and violating the
order of conditions that he received from the Department of Environmental Protection, as
the house threatened to pollute the water. Accordingly to Youssef, Fogarty ignored his
calls and did not return to the job site until the beginning of June, at a time when the
contract was to have been completed.
During the first and second week of June, Fogarty Construction began construction.
Youssef was out of town on business and when he returned he “found that all the stuff
they’d 	done 	is 	absolutely 	against 	the 	Code, 	against 	anything 	you 	know 	about
construction.” The workmen at the site were not performing the work in accordance with
the architectural drawings, and Fogarty was not present to supervise the crew. Youssef
discovered that David Ryan, who was working at the site and whom he believed was an
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employee of Fogarty Construction, was actually a subcontractor. According to Youssef,
“he had no idea about construction, had no experience. . . .”
Youssef testified that he paid Fogarty Construction an additional $20,000 in June
and subsequently paid an additional $18,000 on July 7, 2006 for a total of $63,000. Youssef
stated that when he made those payments, Fogarty represented that he would fix the
mistakes and finish the job.
The agreed exhibits reveal that, on July 24, 2006, Youssef prepared a list of structural
defects that had to be fixed “before additional loads [could] be added to the house.”
Youssef reasoned that he was “deep in the hole already with him [Fogarty], and that’s why
I was trying to see if things could be fixed, because it means delay, it means more pain for
me, more try to get somebody else . . . .” He testified that after he gave Fogarty the list, he
never returned to the job site. Youssef testified:
The house was wide open to deterioration for over two months. The floors
were sagging, the house is shaking. And as a mater of fact . . . to this day
. . . I am afraid that when we get hit with a big storm like the blizzard of ‘78
that the house would blow away. . . .
Youssef also testified that Fogarty never provided him with the name of subcontractors
and suppliers in violation of contract provisions, and he testified that he relied upon the
representations in the contract and that he suffered significant damages as a result.
Youssef added that the stress associated with the demolition and Fogarty’s lack of
responsiveness to his telephone calls resulted in his hospitalization for chest pains. He
explained:
I had no house, no place - - to stop at this point - - you know, I never believed
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that, you know, I’ll be one of the other statistics that you hear about about
[sic] general contractor taking a person to the cleaners, especially when they
felt, you know, - - I had full trust in the person, I had full faith in them; and
I thought, you know, maybe he had something else to do - - which I
understand it could be delayed a week or two weeks - - and, you know, after
all of this here - - I mean, a month went by, and already - - $25,000 already - -
was - - and he’s threatening me, “I cannot do the work unless I have the
money now,” you know, - - and I’m already under stress from the neighbors,
from the town, from the police for - - and maybe also the - - Mr. - - Gary
here can testify of the abuse we were getting from the neighbors because of
the - - they didn’t want me to build the house. . . . So I was just dragged into
a thing I could not get out - - was trapped.
Gary Stilphen (“Stilphen”) of Stilphen Construction Company and Gilbert Baptista
(“Baptista”), a civil engineer, also testified. 	Stilphen indicated that he was a licensed
contractor and that he corrected deficiencies and completed the work at the property. He
testified as follows:
[W]e had to re-level the whole house best we could, what was there; and it
was basically both upside down. There was no foundation on any of it. It
was held up by whatever they had to hold it up with. All the headers, all the
door openings were all in the wrong place, wrong sizes. 	Missing pieces
everywhere, so basically they had no idea what they were doing.
He stated that the house had not been built in accordance with the applicable building code
and that headers had to be removed. In the basement, he was required to make structural
changes because there were only a couple of posts - - two-by-fours and miscellaneous two-
by-eight posts “here and there” holding up the house, the framing of which was not tied
to the sill. Indeed, the corners of the house were not tied together, the staircases were not
built properly and had to be removed, and the plywood also was installed improperly in
violation of the building code.
Baptista testified as an expert witness. He indicated that he visited the job site
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during construction. He stated:
I was astounded. The first thing I recognized was the fact that the
construction of the house was being built above the first floor level with no -
- no meaningful support on the main carrying beams. The two main carrying
beams in the basement - - there was a hole chopped through - - placed in the
floor, and there was no footing in place. There were no columns in place. . .
I’ve never seen anything like this before. It was absolutely astonishing.
Baptista added that work of the type involved was required to be performed under the
direct supervision of a licensed contractor. He noted missing columns, missing footings,
notched beams at the foundations “well beyond any reasonable person’s understanding
of the transfer of loads,” and structural deficiencies that an after-the-fact foundation could2
not cure. 	He added: “the most astonishing thing to me was work that I saw that was
ongoing . . . was the fact that they were totally incompetent, that they were working on a
pier, and the work that they were doing showed me they had no comprehension of the
reinforcement material that they were putting in. It was astonishing.”
III. DISCUSSION
A. Count I - - Section 523(a)(2)(A)
Section 523(a)(2)(A) excepts from discharge a debt of an individual debtor “for
money, property, services, or an extension, renewal, or refinancing of credit, to the extent
He explained that if “there is a notch taking away, in engineering terms, the2
sheer force, the loads that get accumulated to the support point - - the material, the
strength of the material in the cross-section was totally removed to the – at least three-
quarters of the material was removed so that the beam would not have the capacity to
transfer the shear of the foundation. And that’s a Code violation. . . .”
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obtained, by-- (A) 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). In Blacksmith Investments, LLC v. Woodford (In re Woodford), 403 B.R. 177
(Bankr. D. Mass. 2009), aff’d, 418 B.R. 644 (B.A.P. 1st Cir. 2009), this Court stated:
The United States Court of Appeals for the First Circuit has addressed issues
under section 523(a)(2)(A) on multiple occasions, observing that, as with all
exceptions to discharge under section 523(a), they are “narrowly construed
. . . and the claimant must show that its claim comes squarely within an
exception enumerated in Bankruptcy Code § 523(a).” McCrory v. Spigel (In
re Spigel), 260 F.3d 27, 32 (1st Cir.2001)(citing Century 21 Balfour Real Estate
v. Menna (In re Menna), 16 F.3d 7, 9 (1st Cir. 1994)). 	In Spigel, the First
Circuit, while noting that the Supreme Court overruled its formulation of the
reliance 	element 	of 	the 	test 	for 	nondischargeability 	under 	section
523(a)(2)(A), articulated the following requirements for establishing an
exception to discharge under section 523(a)(2)(A):
[W]e have said that the statutory language does not “remotely
suggest that nondischargeability attaches to any claim other
than one which arises as a direct result of the debtor’s
misrepresentations or malice.” Century 21 Balfour Real Estate,
16 F.3d at 10. Thus, in order to establish that a debt is
nondischargeable because obtained by “false pretenses, a false
representation, or actual fraud,” we have held that a creditor
must show that 	1) 	the debtor 	made a knowingly false
representation or one made in reckless disregard of the truth,
2) the debtor intended to deceive, 3) the debtor intended to
induce the creditor to rely upon the false statement, 4) the
creditor actually relied upon the misrepresentation, 5) the
creditor’s reliance was justifiable, and 6) the reliance upon the
false statement caused damage. Palmacci v. Umpierrez, 121
F.3d 781, 786 (1st Cir.1997). Though the first two elements of
the Palmacci test describe the conduct and scienter required to
show fraudulent conduct generally, the last four embody the
requirement 	that 	the 	claim 	of 	the 	creditor 	arguing
nondischargeability in an adversary proceeding must arise as
a direct result of the debtor’s fraud.
Spigel, 260 F.3d at 32 (footnotes omitted).
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In re Woodford, 403 B.R. at 183-84 (footnote omitted).
In Woodford, this Court also discussed the decision of the United States Court of
Appeals for the Seventh Circuit in McClellan v. Cantrell, 217 F.3d 890 (7th Cir. 2000). See
also Mellon Bank, N.A. v. Vitanovich (In re Vitanovich), 259 B.R. 873, 877 (B.A.P. 6th Cir.
2001)(“actual fraud as used in 11 U.S.C. § 523(a)(2)(A) is not limited to misrepresentations
and misleading omissions. . . . When a debtor intentionally engages in a scheme to deprive
or cheat another of property or a legal right, that debtor has engaged in actual fraud and
is not entitled to the fresh start provided by the Bankruptcy Code.”); K-B Building Co. v.
Barber (In re Barber), 281 B.R. 617, 624 (Bankr. W.D. Pa. 2002); and Gentry v. Kovler (In re
Kovler), 249 B.R. 238, 260-61 (Bankr.S.D.N.Y.2000). In Woodford, this Court observed:
The Seventh Circuit began its analysis of applicable law under section
523(a)(2)(A) by noting that “[n]othing in the Supreme Court’s opinion [in
Field v. Mans, 516 U.S. 59, 68, 116 S.Ct. 437, 133 L.Ed.2d 351 (1995) ] suggests
that misrepresentation is the only type of fraud that can give rise to a debt
that is not dischargeable under section 523(a)(2)(A).” Id. It also observed that
although most frauds do involve misrepresentations, section 523(a)(2)(A) is
not limited to “fraudulent misrepresentations,” id. at 893, adding that by
distinguishing between “a false representation” and “actual fraud,” the
statute makes clear that “actual fraud is broader than misrepresentation.” Id.
(citing 4 Collier on Bankruptcy ¶ 523.08[1][e], p. 523-45 (15th ed., Lawrence
P. King ed., 2000)) (section 523(a)(2)(A) defines “actual fraud” as “any deceit,
artifice, trick, or design involving direct and active operation of the mind,
used to circumvent and cheat another”).
The Seventh Circuit also stated that the type of conduct of which McClellan
complained turned bankruptcy into “an engine for fraud” and that while
exceptions to discharge should be construed narrowly, the exceptions do
“serve vital functions,” such as preventing fraud. Id. It thus determined:
Fraud is a generic term, which embraces all the multifarious
means which human ingenuity can devise and which are
resorted to by one individual to gain an advantage over
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another by false suggestions or by the suppression of truth. No
definite and invariable rule can be laid down as a general
proposition defining fraud, and it includes all surprise, trick,
cunning, dissembling, and any unfair way by which another is
cheated.
Id. (citing Stapleton v. Holt, 207 Okla. 443, 250 P.2d 451, 453-54 (Okla.1952)).
In re Woodford, 403 B.R. at 186. This Court added:
The court in McClellan distinguished between actual and constructive
frauds. It observed that “[t]o transfer property for less than adequate
consideration may be desperate, foolish, or imprudent, and the receipt of
such a transfer a pure windfall, . . . neither the transfer nor the receipt is in
and of itself dishonest, and so neither is an appropriate ground for refusing
to allow the debtor to discharge the debt arising from the transfer.”
McClellan, 217 F.3d at 894. It further explained the ramifications of the
distinction:
[W]hen a conveyance is merely constructively fraudulent, in
the sense that having transferred the property that secured the
debt without obtaining adequate consideration the debtor is
now unable to pay his creditor, the transferee is not guilty of
an actual fraud against the creditor and so the creditor cannot
use 	section 	523(a)(2)(A) 	to 	prevent 	the 	transferee 	from
discharging the debt in bankruptcy. And so in this case, if
though the debtor’s brother intended to thwart McClellan and
was thus committing actual fraud, his sister was innocent-if she
had no intention of hindering any creditor-the debt that
McClellan is seeking to collect from her would not have been
obtained by her by actual fraud. But she is alleged to have been
a full and equal participant in her brother's fraud, to have been
in effect his accomplice, as in Cenco v. Seidman & Seidman,
686 F.2d 449, 452-453 (7th Cir. 1982). The debt that McClellan
is 	seeking 	to 	collect 	from 	her 	(and 	prevent 	her 	from
discharging) arises by operation of law from her fraud. That
debt arose not when her brother borrowed money from
McClellan but when she prevented McClellan from collecting
from the brother the money the brother owed him.
Id. at 894-95.
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Woodford, 403 B.R. at 185-86. The United States Court of Appeals for the First Circuit has
neither adopted nor rejected the McClellan formulation. It stated:
Though there are differences between McClellan and Palmacci - the most
significant of which concerns whether reliance is required - we do not decide
whether we would adopt the Seventh Circuit’s reasoning. McClellan is
consistent with our existing precedent in that it also requires a direct link
between the alleged fraud and the creation of the debt.
Spigel, 260 F.3d at 32 n. 7 (emphasis supplied).
While the First Circuit has focused its test on the “false representation” component
of section 523(a)(2)(A), and the Seventh Circuit formulated a different approach for the
“actual fraud” component, other courts have fashioned a slightly different test for the
“false pretenses” component. For example, in Ostertag v. Overall (In re Overall), 248 B.R.
146 (Bankr. W.D. Mo. 2000), the court observed:
The concept of false pretenses is especially broad. It includes any intentional
fraud or deceit practiced by whatever method in whatever manner. False
pretenses “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
intended to deceive.” Black’s Law Dictionary 602 (6th ed.1990). 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 wrongly induced by
a debtor to transfer property or extend credit to the debtor.” Sterna v.
Paneras (In re Paneras), 195 B.R. 395, 406 (Bankr. N.D. Ill.1996). Silence or
concealment as to a material fact can constitute false pretenses. Bank of
Miami v. Quintana (In re Quintana), 4 B.R. 508, 510 (Bankr .S.D. Fla.1980). In
short, false pretenses “can be made in any of the ways in which ideas can be
communicated.” First Nat. Bank of Webster v. Aetna Cas. & Sur. Co., 256
F.Supp. 266, 272 (D. Mass.1966).
In re Overall, 248 B.R. at 150 (footnote omitted). In First Nat’l Bank of Webster v. Aetna
Cas. & Sur. Co., a case referenced by the Missouri bankruptcy court, the United States
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District Court for the District of Massachusetts stated:
“to constitute the crime of larceny by false pretenses (G.L. c. 266 § 30), it
must appear that there was a false statement of fact known or believed by the
defendant to be false made [sic] with the intent that the person to whom it
was made should rely upon its truth and that such person did rely upon it
as true and parted with personal property as a result of such reliance.” 256
F.Supp. at 272 (citing Commonwealth v. Louis Construction Co., 343 Mass.
600, 604 (1962)).
First Nat’l Bank of Webster, 256 F.Supp. at 272. The court added: “According to Mass .G.L.
c. 277, § 39, false pretenses can be made by acts as well as words. They may in fact be made
in any of the ways in which ideas may be communicated. A misrepresentation as to a
person’s present intention may be a false pretense.” 256 F.Supp. at 272 (citing
Commonwealth v. Morrison, 252 Mass. 116, 122, (1925), and Commonwealth v. Walker, 108
Mass. 309, 312 (1871)).
In U.S. v. Hampton (In re Hampton), 396 B.R. 28 (Bankr. N.D. Iowa 2008), a case in
which the debtor received unemployment benefits to which she was not entitled, the court,
citing Caspers v. Van Horne (In re Van Horne), 872 F.2d 1285 1288 (8th Cir. 1987), abrogated
on other grounds by Grogan v. Garner, 498 U.S. 279 (1991), stated:
“Bankruptcy courts have overwhelmingly held that a debtor’s silence
regarding a material fact can constitute a false representation actionable
under section 523(a)(2)(A). Clearly, the Bankruptcy Code did not intend to
protect property obtained by ‘deceit, artifice, trick [or] design.’ ” Van Horne,
823 F.2d at 1288 (citations omitted). For purposes of § 523(a)(2)(A), a
“misrepresentation” denotes not only written or spoken words but also any
other conduct that amounts to an assertion not in accordance with the truth.
In re Moen, 238 B.R. 785, 791 (8th Cir. BAP 1999). “False pretenses”
contemplates “a series of events, activities or communications which, when
considered collectively, create a false and misleading set of circumstances, or
false and misleading understanding of a transaction, in which a creditor is
wrongfully induced by the debtor to transfer property or extend credit to the
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debtor.” In re Beza, 310 B.R. 432, 437 (Bankr. W.D. Mo. 2004).
In re Hampton, 396 B.R. at 30.
Although this Court has cited numerous cases with varying permutations of the
First Circuit’s articulation of the elements required to establish a claim under 11 U.S.C. §
5233(a)(2)(A), this Court simply cannot find, based upon the existing record, that the
Debtor obtained money from Youssef by false pretenses, false representations or actual
fraud. 	Under any of the tests referenced above, section 523(a)(2)(A) requires proof of
scienter, and Youssef did not sustain his burden of proof with respect to that element. As
the court in Wolf v. McGuire (In re McGuire), 	248 B.R. 481 (Bankr. D. Colo. 2002),
recognized, “regardless of whether they adopt different definitions or tests for the three
operative terms, courts uniformly require proof of the elements of scienter and justifiable
reliance in order to establish any of the three possible claims under Section 523(a)(2)(A).”
284 B.R. at 490. According to the court in McGuire,
The fraudulent intent element of § 523(a)(2)(A) . . . may be inferred from the
totality of the circumstances. The bankruptcy court must consider whether
the totality of the circumstances “presents a picture of deceptive conduct by
the debtor which indicates an intent to deceive the creditor.” The court may
consider not only the debtor’s conduct at the time of the representations, but
may consider subsequent conduct, to the extent that it provides an indication
of the debtor’s state of mind at the time of the actionable representations.
Id. at 492 n. 32 (emphasis supplied)(quoting Groetken v. Davis (In re Davis), 246 B.R. 646,
652 (B.A.P. 10th Cir. BAP 2000), aff’d in part and vacated in part by 35 Fed.Appx. 826 (10th Cir.
2002)).
Under any of the formulations set forth above, and based upon the evidence
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presented, this Court finds that Youssef failed to satisfy the two critical elements of scienter
and justifiable reliance, both with respect to his initial $15,000 deposit and subsequent
payments. In other words, the Court has insufficient evidence from which it can conclude
that Fogarty had no intention of employing licensed subcontractors at the time the contract
was executed or otherwise completing the contract in accordance with its terms. Indeed,
the Court has no evidence of specific representations, false or otherwise, that were different
from the contract terms, and “[g]enerally, a promise of future results ‘cannot be a basis for
fraud because it is not a representation, there is no right to rely on it, and it is not false
when made.’” Vinson v. Cozart, 417 B.R. 116, 128 (Bankr. W.D. Ark. 2009)(quoting Miller
v. Premier Corp., 608 F.2d 973, 981 (4th Cir.1979)).
Not only did Youssef fail to call Fogarty as a witness, Youssef failed to testify or3
elicit 	testimony 	from 	others 	from 	which 	this 	Court 	could 	either 	find 	that
misrepresentations were made by the Debtor or Lavelle, or infer that, at the time Lavelle
and Youssef executed the contract, Fogarty had no intention or ability to successfully
complete the contract. Indeed, the Court has no evidence whether Fogarty was, or was not,
a licensed contractor, and whether he or his company was insured. In addition, although
Lavelle, as Fogarty’s agent for purposes of procuring construction contracts, gave Youssef
the false impression that he was Fogarty’s partner, Youssef did not call Lavelle as a witness
for purposes of eliciting testimony from him about his specific statements to Youssef prior
As noted, the Court called Fogarty for the limited purpose of ascertaining his3
business relationship with Lavelle.
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to the execution of the contract.
In addition, Youssef did not produce evidence from which this Court could infer
that the Debtor did not intend to perform the contract in accordance with any
representations made by Lavelle or to abide by any of its terms at its inception. For
example, Youssef did not call as witnesses the heavy equipment operator or David Ryan
who did carpentry work for Fogarty Construction as subcontractors. 	The Court was
presented with no evidence as to the number and experience of the Debtor’s employees,
if any, and whether Fogarty Construction regularly engaged the heavy equipment operator
or David Ryan or other subcontractors to perform contracts procured by Lavelle. Had the
Court been presented with evidence that Fogarty routinely used unlicensed subcontractors,
and, in particular, engaged Ryan for other jobs, this Court could infer that he did not
intend, at the outset, to use only licensed subcontractors or notify Youssef that he was
engaging subcontractors so that Youssef could assess their qualifications.
The Court also was presented with no evidence as to the Debtor’s financial
condition. If the Debtor had financial difficulties at the time Youssef executed the contract,
it would be plausible for this Court to infer that he utilized cheap, unlicensed, and
inexperienced laborers to perform tasks that would have been more costly if performed by
licensed and experienced subcontractors, thereby maximizing his profits. The Court also
was presented with no evidence to suggest that the Debtor had more work than he was in
a position to perform or that Fogarty Construction, contrary to Lavelle’s representation
that it had built houses that came out well, had built houses that were defective. The Court
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was presented with no evidence of other disgruntled customers or complaints filed against
Fogarty Construction. Youssef did not call the Debtor or Lavelle to inquire about other
home owners who may have been victimized by the incompetence of Fogarty Construction
employees or subcontractors, licensed or otherwise. 4
In addition to the absence of evidence as to misrepresentations made by Fogarty
with the intent to deceive, the Court finds Youssef relied, at least in part, on the
recommendation of a builder from Hingham, David Chase, in selecting Fogarty
Construction rather than on any particular representations made by Fogarty or Lavelle.
The Debtor did not even meet Fogarty until late April when demolition began at the
property. Under these circumstances, the Court finds that Youssef failed to satisfy critical
elements of his burden of proof under section 11 U.S.C.§ 523(a)(2)(A), namely scienter and
justifiable reliance.
Moreover, after the initial deposit of $15,000, Youssef did not establish justifiable
reliance for any subsequent payments. Youssef was present when the existing home was
demolished and at that time knew of Fogarty Construction’s unreliability and poor work
performance. 	Indeed, the poor performance became a public hazard necessitating the
involvement of local officials. The demolition work resulted in damage to the foundation,
and Youssef’s concerns were brushed aside by Fogarty. The demolition work presented
The Court observes that the failure of counsel to the Plaintiff to call the Debtor,4
who was present in the courtroom, to the stand, and the failure to subpoena and call
Lavelle as a witness during the trial, may have adversely affected the outcome of the
Plaintiff’s case.
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a “red flag” as to future problems. 	Of course, hindsight is always 20/20, but after the
demolition fiasco, Youssef could not justifiably rely on any representations made by
Fogarty.
B. Count II - -Section 523(a)(6)
In Kawaauhau v. Geiger, 523 U.S. 57 (1998), a unanimous Supreme Court performed
the following analysis:
We confront this pivotal question concerning the scope of the “willful and
malicious injury” exception: Does § 523(a)(6)'s compass cover acts, done
intentionally, that cause injury . . ., or only acts done with the actual intent to
cause injury . . .? The words of the statute strongly support the [latter]
reading.
The word “willful” in (a)(6) modifies the word “injury,” indicating that
nondischargeability takes a deliberate or intentional injury, not merely a
deliberate or intentional act that leads to injury. Had Congress meant to
exempt debts resulting from unintentionally inflicted injuries, it might have
described instead “willful acts that cause injury.” Or, Congress might have
selected an additional word or words, i.e., “reckless” or “negligent,” to
modify “injury.” Moreover, . . . the (a)(6) formulation triggers in the lawyer's
mind the category “intentional torts,” as distinguished from negligent or
reckless torts. Intentional torts generally require that the actor intend “the
consequences of an act,” not simply “the act itself.” Restatement (Second) of
Torts § 8A, comment a, p. 15 (1964) (emphasis added).
Id. at 61-62 (footnote omitted, emphasis in original). The Court held that, “debts arising
from recklessly or negligently inflicted injuries do not fall within the compass of §
523(a)(6).” Id. at 64.
Geiger involved an incident of medical malpractice and a malpractice judgment, but
the Court’s holding is germane to the second count of Youssef’s Complaint. In order to
prevail on that count Youssef had to present evidence, not that Fogarty’s actions were
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voluntary or intentional, but that he intended to injure the property.
The Court finds that Youssef failed in his burden of proof, but he is not alone in his
attempt to establish willful and malicious injury by a construction contractor. 	See, e.g.,
Vinson v. Cozart (In re Cozart), 417 B.R. 116, 130-31 (Bankr. W.D. Ark. 2009); Prewett v.
Iberg (In re Iberg), 395 B.R. 83 (Bankr. E.D. Ark. 2008); In re Rapp, 375 B.R. 421, 436-37
(Bankr. S.D. Ohio 2007). In Iberg, the court observed:
A dischargeability determination under § 523(a)(6) has been considered in
the context of home construction contracts. [Vaughn v. Quinn (In re]
Quinn[)], 180 B.R. [550]at 552-54 [(Bankr E.D. Mo. 1995)] (citing Vaughn v.
Quinn (In re Quinn), 170 B.R. 1013 (Bankr. E.D. Mo. 1994)) (finding that
although the debtor breached a construction contract by rendering poor
workmanship on the roof of the house as well as other areas-using low
quality paint, installing a crawl space access door backwards, venting a sink
vent improperly, and completing certain plumbing work improperly
resulting in the flooding of the basement-the debtor’s actions did not rise to
the 	level 	of 	malice 	required 	to 	find 	the 	creditor’s 	judgment
nondischargeable); Stevens v. Anconeous (In re Anconeous), 358 B.R. 172,
187 (Bankr. E.D. Pa. 2006) (citations omitted) (finding that the negligent
performance of a home repair contract fell outside the scope of § 523(a)(6));
Rezin v. Barr (In re Barr), 194 B.R. 1009, 1024 (Bankr. N.D. Ill. 1996)
(concluding that plaintiffs' failure to present sufficient evidence that the
debtor intended to build the house with defects warranted a finding of
dischargeability even though the debtor was “obviously negligent in
building the [p]roperty and breached the contract and building code in many
ways.”).
395 B.R. at 92. Like the cases cited above, the Court finds that Youssef failed to establish
a willful and malicious injury. There was simply no evidence that Fogarty intended or
desired to damage the property or Youssef. 	Because section 523(a)(6) contemplates an
intentional tort, which requires the actor to intend the consequences of the act, rather than
an intentional act with unintended consequences, Geiger 523 U.S. at 62, a breach of
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contract, no matter how extensive and egregious, is not the type of injury addressed by
section 523(a)(6).
Having 	determined that 	Youssef failed 	in 	his burden of 	proof under 	the
preponderance of the evidence standard set forth in Grogan v. Garner, 498 U.S. 279, 291
(1991), the Court is compelled to observe that it has no doubt that Fogarty’s breaches of the
construction contract was extensive, egregious, and inexcusable and that his building
practices, if routinely employed, pose a menace to unsuspecting customers. Had Youssef
been able to proceed against the Debtor in state court, he would likely have succeeded on
a claim under Mass. Gen. Laws ch. 93A. The exceptions to discharge under 11 U.S.C. §
523(c), however, have different elements than claims under ch. 93A, which Youssef failed
to satisfy.
IV. CONCLUSION
In view of the foregoing, the Court shall enter judgment in favor of the Debtor and
against Youssef. The Motion for a Directed Verdict is moot.
By the Court,
Joan N. Feeney
United States Bankruptcy Judge
Dated: March 10, 2010
cc: Stephen K. Midgley, Esq., Audrey Botros, Esq.
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