Czech v. Sieber

UNITED STATES BANKRUPTCY COURT
FOR THE DISTRICT OF MARYLAND
at Greenbelt
In re: 	:
:
Stephen C. Sieber, 	: 	Case No.: 07-21192-WIL
: 	Chapter 11
Debtor. 	:
:
David E. Czech, 	:
:
Plaintiff, 	:
:
v. 	: 	Adversary Proceeding No.: 08-00119
:
Stephen C. Sieber, 	:
:
Defendant. 	:
____________________________________________________________________________
MEMORANDUM OF DECISION IN SUPPORT OF ORDER
DETERMINING DEBT TO BE DISCHARGEABLE
Stephen C. Sieber (hereinafter, the “Debtor” or “Defendant”) filed a voluntary petition
under Chapter 11 of the United States Bankruptcy Code (the “Bankruptcy Code”) on November
7, 2007 (the “Petition Date”). On February 14, 2008, David E. Czech (hereinafter, the
“Plaintiff”) filed a Complaint of David Czech Against Steven [sic] Sieber for
Nondischargeability of Debt Pursuant to 11 U.S.C. § 523(a)(2) (the “Complaint”). The Debtor
filed an Answer to the Complaint on March 11, 2008. After the disposition of several pre-trial
Date signed March 30, 2009
Entered: March 30, 2009 Case 08-00119 Doc 86 Filed 03/30/09 Page 1 of 9

1 As SCS is an unincorporated entity, the Complaint was filed against the Defendant, who was the
sole owner of SCS. This Memorandum refers to the Debtor and SCS interchangeably.
2
motions, the Court conducted a two-day trial on November 3, 2008 and November 4, 2008. The
Court has reviewed the pleadings submitted by the parties, listened to the testimony presented at
the trial and examined the exhibits admitted into evidence. For the reasons set forth below, the
Court holds that the debt owed by the Debtor to the Plaintiff is dischargeable.
I. 	Facts
The Complaint is based on a home-improvement agreement dated January 27, 2004
between The SCS Contracting Group (“SCS”) 1 and the Plaintiff (the “Agreement”). Pursuant to
the Agreement, SCS was to make substantial improvements to a parcel of improved real property
owned by the Plaintiff (the “Property”), including redesigning and constructing the front facade
of the Property, redesigning the kitchen, finishing the basement, and remodeling and refinishing
the remaining interior areas of the Property. The Agreement states that the improvements to be
made “shall upgrade the value of the property to the $1,000,000 range.” Key provisions of the
Agreement include:
1. 	SCS agrees to provide all the materials and labor for the project as
specified.
2. 	Both the Customer (defined as the Plaintiff in the Agreement) and
SCS, on the Customer’s behalf, shall seek to obtain short term financing
for the Customer during the bridge period between when the construction
starts and when the house sells. In the event that best efforts are used by
both parties and financing cannot be acquired, SCS agrees to defer receipt
of the final payment until the sale of the Property.
3. 	SCS shall supply a registered AIA Architect/James Gerrety (the
“Architect”) to work with the Customer to perfect all of the critical design
areas of the project. The Architect, on SCS’s behalf, shall provide the
Customer with a set of design drawings, that include plan view and/or
three-dimensional renderings of the effected areas, which shall be
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incorporated into the Agreement. The complete design-drawing phase
shall consist of the Architect working closely and diligently with the
Customer and SCS to arrive at a completed scope of work.
4. 	The Customer shall make the final decision on the scope of the
work and the amount of money spent.
5. 	The “cost not to exceed budget” for the project shall be $250,000
for all of the labor and material services required to complete the project.
6. 	The Customer agrees to pay SCS a retainer of $40,000.00 towards
the construction contract. Once the Customer accepts the final design and
associated cost, a construction contract shall be provided that shall include
all the drawings and specifications agreed upon by the Architect, SCS and
the Customer.
The Agreement provides the following deadlines:
Starting date for design drawings: Within 7 days of the execution of this
agreement. (The architect shall meet with the owner to acquire
information necessary to conceive the design and complete the design
drawings.)
Completion date for design drawings: Within 10 days of signing date.
Start Date for Construction: Within 20 days.
Completion date for Construction: Within 60 working days from the
beginning of construction, weather permitting.
In contemplation of work to be performed under the Agreement, and pursuant to the
Agreement, the Plaintiff paid SCS a $40,000.00 retainer via personal check dated January 27,
2004 (the “Retainer”). It is undisputed that Defendant received and negotiated the Retainer.
Thereafter, Plaintiff alleges that SCS failed to perform any work under the Agreement.
Consequently, Plaintiff filed an Amended Complaint against the Defendant in the Superior Court
for the District of Columbia for fraud, breach of contract, consumer protection violations and
rescission (Civil Action 2007-ca-000523-B) (the “Superior Court Action”). The Superior Court
Action was stayed upon the filing of the Debtor’s bankruptcy case and the litigation between the
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parties resumed in this adversary proceeding. The one-count Complaint seeks a determination
that the debt owed to the Plaintiff by the Debtor is nondischargeable under 11 U.S.C. §
523(a)(2)(A) and judgment in the amount of $40,000, plus consequential damages including
attorney fees, costs and other expenses incurred by the Plaintiff.
II. 	Discussion
A. 	Dischargeability
11 U.S.C. § 1141(d)(2) provides that a discharge under Chapter 11 does not discharge an
individual debtor from any debt excepted from discharge under Section 523 of the Bankruptcy
Code. Section 523(a)(2)(A) of the Bankruptcy Code excepts from discharge 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). To succeed in an action
under Section 523(a)(2)(A), a plaintiff must prove the following elements by a preponderance of
the evidence:
(i) 	the defendant made a representation;
(ii) 	the defendant knew at the time he made the representation that it was false;
(iii) the defendant made a representation with the intent and purpose to deceive
the plaintiff;
(iv) the plaintiff justifiably relied on the false representation; and
(v) 	the plaintiff suffered damages as a proximate result of the representation.
Guaranty Residential Lending, Inc. v. Koep (In re Koep), 334 B.R. 364, 371-372 (Bankr. D. Md.
2005) (citing Spinoso v. Heilman (In re Heilman), 241 B.R. 137, 149 (Bankr. D. Md. 1999)).
Exceptions to discharge are strictly construed against creditors to protect a debtor’s fresh start.
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Id. at 371.
“‘Actual fraud,’ as the term is employed in Section 523(a)(2)(A), is defined as ‘any
deceit, artifice, trick or design involving direct and active operation of the mind, used to
circumvent and cheat another-something said, done or omitted with the design of perpetrating
what is known to be a cheat or deception.’” In re Heilman, 241 B.R. at 150 (quoting Wilcoxon
Constr., Inc. v. Woodall (In re Woodall), 177 B.R. 517, 523 (Bankr. D. Md. 1995)).
Misrepresentation under Section 523(a)(2)(A) can be express or implied and can be any words or
conduct that produce a false or misleading impression of fact in the mind of another. In re Koep,
334 B.R. at 372; Parker v. Grant (In re Grant), 237 B.R. 97, 113 (Bankr. E.D. Va. 1999). “A
false representation is an express misrepresentation, while a false pretense refers to an implied
misrepresentation or ‘conduct intended to create and foster a false impression.’” Id. (quoting In
re Newmark, 20 B.R. 842, 854 (Bankr. E.D.N.Y. 1982)). The fraud or misrepresentation must
have existed at the time of, and been the methodology by which, the money, property or services
were obtained. In re Heilman, 241 B.R. at150. “Later misrepresentations are irrelevant for
purposes of determining dischargeability under Section 523(a)(2)(A).” Id. A breach of contract,
by itself, does not render a debt nondischargeable under Section 523(a)(2)(A), even when the
breach is wrongful. Id.; see also In re Grant, 237 B.R. at 112-113. “However, if a debtor enters
into a contract with no intent to fulfill the terms of the contract and later defaults, the contract
may provide a basis for a nondischargeability claim based on fraud.” Id.
Intent to deceive under Section 523(a)(2)(A) may be inferred from the circumstances of
the particular case, “including whether the defendant knowingly or recklessly made false
representations, which she should know would induce the plaintiff to rely on them.” In re Koep,
334 B.R. at 372; see also In re Heilman, 241 B.R. at 150 (“For a breach of contract to result in a
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nondischargeable debt, the debtor must have misrepresented his or her intention to perform
contractual duties, which may be inferred if the debtor failed to begin performance.”).
Reliance is also based on the circumstances of the case and a plaintiff’s reliance must be
justifiable rather than reasonable. In re Koep, 334 B.R. at 372.
In this case, the Plaintiff alleges that the Defendant obtained the Retainer by false
pretenses, a false representation, or actual fraud. Specifically, the Complaint avers that “the
Defendant connived to receive $40,000.00 from the Plaintiff, which the Defendant admitted was
used for another business of the Defendant, at a time when the Defendant could not and did not
intend to perform the services contemplated in the Contract.” The only specific instances of fraud
alleged in the Complaint are that the Defendant was not licensed in the District of Columbia to
perform the services contemplated by the Agreement and that the Defendant used the Retainer for
another one of his businesses. Based on these allegations, the Plaintiff argues that the Defendant
never intended to do the work contemplated under the Agreement. As further proof of the
Defendant’s fraudulent intent, the Plaintiff alleges that no work was performed under the
Agreement nor were any of the associated services referenced therein ever performed.
The Plaintiff testified at length at the trial. The Plaintiff testified that he made several
trips to the District of Columbia’s Department of Consumer and Regulatory Affairs to obtain a
copy of the Defendant’s home improvement license but he was unable to find proof that the
Defendant was duly licensed. The Plaintiff testified that his previous attorneys also attempted to
get a copy of the Defendant’s home improvement license but were unable to do so. At trial,
however, the Defendant produced certified copies of Certificates issued by the Government of the
District of Columbia Department of Consumer and Regulatory Affairs. The Certificates indicate
that The SCS Contracting Group, LP was licensed as a Home Improvement Salesman and Home
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Improvement Contractor for the period between April 10, 1996 and December 31, 2006. The
Certificates were admitted into evidence and the Court determined that the Defendant was a
licensed home improvement contractor at the time of the Agreement.
With regard to the allegation that the Defendant used the Retainer for another one of his
businesses, the Plaintiff testified that he met with the Defendant on March 18, 2004. At this
meeting, the Plaintiff states that the Defendant said he could not return the Retainer because he no
longer had it. The Plaintiff testified that the Defendant told him that the Retainer had been
comingled with funds from another one of his businesses and the Defendant offered the Plaintiff
the opportunity to invest in his other business. On re-direct examination, the Plaintiff testified
that it was at this time that he first thought the Defendant took the Retainer and never intended to
do the work under the Agreement. Despite this testimony, however, the Plaintiff admitted to
receiving timely design drawings by the Architect as contemplated by the Agreement. The
Plaintiff also admitted to participating in several meetings with the Defendant and/or some of the
Defendant’s employees regarding the work to be performed under the Agreement. Although the
Court believes that no actual construction took place at the Property, the Court finds that some
services were provided pursuant to the Agreement and the timing of those services coincided with
the payment of the Retainer. Further, the Agreement contemplated that the Parties would enter
into a subsequent contract after the Plaintiff accepted the final design and associated cost for the
project. This never occurred. Design drawings were prepared by the Architect but the final
design was never approved by the Plaintiff. Thus, a final contract or agreement was never
presented to the Plaintiff.
Based on (i) the fact that the Defendant was a licensed home improvement contractor
during the time period in question, (ii) the uncontroverted testimony that some services were
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provided pursuant to the Agreement, and (iii) the evidence showing that the architectural design
drawings were prepared pursuant to the Agreement, the Court finds that the Plaintiff failed to
establish the fraudulent intent required under Section 523(a)(2)(A). At most, the Plaintiff
demonstrated that the Defendant breached the Agreement. A breach of contract, however, is
insufficient to render a debt nondischargeable. In re Grant, 237 B.R. at 112-113; In re Heilman,
241 B.R. at 150.
Alternatively, the Court determines that the alleged fraudulent representations made by
the Defendant and relied upon by the Plaintiff concerned the financial condition of the Defendant.
As such, they cannot form the basis for a nondischargeability determination under Section
523(a)(2)(A). Specifically, the Plaintiff and his wife, Beth Ann Wood, testified that the
Defendant made the following representations on which he relied: (i) the Defendant represented
that SCS had the ability to financially carry the project; (ii) the Defendant represented that SCS
had a $3 million line of credit with Wells Fargo; (iii) the Defendant represented that SCS had the
financial means to pay its employees for work performed under the Agreement and could wait to
be paid from the Plaintiff; (iv) the Defendant represented that SCS had over two hundred
employees and that no subcontractors would be used for the project and (v) the Defendant
represented that SCS had the ability to complete the project within sixty days.
The Defendant denied making these representations while testifying at the trial.
Assuming arguendo that these representations were made, they concerned the financial
wherewithal of the Defendant to fund and complete the project. In other words, the alleged
representations relate to the financial condition of the Defendant. Fourth Circuit precedent makes
clear that statements concerning a debtor’s financial condition cannot serve as the basis for
nondischargeability unless the statements are in writing and all of the other elements of 11 U.S.C.
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§ 523(a)(2)(B) are met. See Blackwell v. Dabney (In re Blackwell), 702 F.2d 490 (4th Cir. 1983).
Here, the Complaint does not allege, and the facts do not evidence, a representation in writing
regarding the Debtor’s financial condition to support a finding of nondischargeability under
Section 523(a)(2)(B). Because the representations the Plaintiff asserts he relied on concerned the
Debtor’s financial condition, they are explicitly excluded by the statutory language as a basis for
nondischargeability under Section 523(a)(2)(A).
III. 	Conclusion
For the above-stated reasons, the Court finds that the Plaintiff failed to carry his burden of
proof under 11 U.S.C. § 523(a)(2)(A). Accordingly, the debt owed to the Plaintiff by the
Defendant is dischargeable. A separate order will issue.
cc: 	Plaintiff
Plaintiff’s Counsel - John D. Burns, Esq.
Defendant
End of Memorandum
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