Bailey et al v. Tedeschi

UNITED STATES BANKRUPTCY COURT
EASTERN DISTRICT OF NORTH CAROLINA
RALEIGH DIVISION
IN RE:
CASE NO.
PATRICK ANTHONY TEDESCHI,
DEBTOR.
24-03362-5-PWM
CHAPTER 7
STEVEN BAILEY and TABITHA BAILEY,
ADV. PRO. NO.
PLAINTIFFS, 	25-00030-5-PWM
v.
PATRICK ANTHONY TEDESCHI,
DEFENDANT.
MEMORANDUM OPINION
The trial of this adversary proceeding to determine, pursuant to 11 U.S.C. § 523(a)(2)(A),
the dischargeability of a debt owed by the defendant, Patrick Anthony Tedeschi, to the plaintiffs,
Steven Bailey and Tabitha Bailey, was conducted on September 1, 2026 in Raleigh, North
Carolina. At issue is whether the funds paid by the Baileys to Mr. Tedeschi and his company for
furniture and other specialty household goods were obtained by Mr. Tedeschi by false pretenses,
false representations, or actual fraud. For the reasons that follow, the court concludes that they
were not, and the debt is not excepted from Mr. Tedeschi’s chapter 7 discharge.
SO ORDERED
__________________________________________________________
SIGNED this 16 day of September, 2026.
____________________________________
Pamela W. McAfee
United States Bankruptcy Judge
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JURISDICTION
This bankruptcy court has jurisdiction over the parties and the subject matter of this
proceeding pursuant to 28 U.S.C. § 1334. This is a statutorily core proceeding under 28 U.S.C.
§ 157(b)(1) that this court is authorized to hear and determine. The United States District Court
for the Eastern District of North Carolina has referred this case and this proceeding to this court
under 28 U.S.C. § 157(a) by its General Order of Reference entered on August 3, 1984. This
proceeding is constitutionally core, and this court may enter final orders herein. Venue is proper
pursuant to 28 U.S.C. §§ 1408 and 1409.
PROCEDURAL HISTORY
Patrick Anthony Tedeschi filed a voluntary petition for relief under chapter 7 of the
Bankruptcy Code on September 27, 2024. The Baileys filed the complaint in this adversary
proceeding on January 29, 2025, contending, as set forth below, that they are owed a debt for
money obtained by false pretenses, a false representation, or actual fraud that should be excepted
from Mr. Tedeschi’s discharge pursuant to 11 U.S.C. § 523(a)(2)(A).1
On April 21, 2025, the chapter 7 trustee advised that there were assets to administer and
requested the clerk to send a notice to file claims. On July 25, 2025, the Baileys filed a proof of
claim, Claim No. 15-1, asserting an unsecured claim in the amount of $171,000 for “money paid,
fraud.” The complaint in this adversary proceeding was attached to the proof of claim as the
documentary evidence to support the claim. On August 7, 2025, the chapter 7 trustee filed a report
1 The Baileys filed their complaint without the assistance of counsel, but they have been represented
in the adversary proceeding since April 3, 2025. Mr. Tedeschi, on the other hand, was represented by
counsel in his chapter 7 case and in this adversary proceeding until June 30, 2026, and has proceeded
without representation since that date including for the trial of this matter.
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of no distribution, indicating that there were no assets to be administered in the case. Mr.
Tedeschi’s discharge was entered on July 7, 2026, BR D.E. 54. 2
The court conducted a final pretrial conference on August 26, 2026, in Raleigh, North
Carolina, and entered the Final Pretrial Order on August 31, 2026, D.E. 81. The trial was conducted
on September 1, 2026. On September 8, 2026, Mr. Tedeschi filed a motion to reopen the evidence
and submitted a number of additional documents. See D.E. 84-89. Because the court has already
determined that the Baileys failed to meet their burden of proof, the court denies the motion to
reopen the evidence and has not reviewed or considered the additional documents.
EVIDENCE PRESENTED AND FINDINGS OF FACT 3
Mr. Tedeschi and his business partner, Andrew Paul Greer, owned and operated an interior
design firm called AG-PT Group, Inc. d/b/a AG Design (AG Design). In July 2019, the Baileys
engaged AG Design to provide design services for their home in Virginia. Mrs. Bailey testified
that the property was owned by Mr. Bailey prior to their marriage, and that they were conducting
extensive remodeling to make the home “theirs.” It was clear from the outset that this was a
substantial project and that AG Design would be working exclusively with the Baileys during the
project term.
AG Design presented the Baileys with a written proposal for the project, Ex. 2. The
proposal, dated July 19, 2019, included design services for renovating and expanding the Baileys’
10,000 square foot home to include the addition of a living room, conservatory, and pool house,
2 To the extent this opinion contains references to the docket in the underlying chapter 7 case, those
references will be denominated as “BR D.E. --.” Docket references within this adversary proceeding will
be denominated simply as “D.E. --.”
3 This opinion sets forth the testimony and documentary evidence, much of which is undisputed.
To the extent the evidence is conflicting, this recitation of the evidentiary presentation separately notes the
court’s findings of fact.
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and renovations to the kitchen, entrance, master suite, master closet, upstairs bedrooms and baths,
and downstairs game area. The proposal itemized the fees for services as follows:
Description 	Item 	Quantity 	Price
Design Fee 	$8.00 	10061 Sq. Ft. 	$80,488.00 	
Procurement
(Variable/Optional based on
clients needs)
$0.25 	201220 total
Project Management –
Optional
$500.00 	20 Week
Travel Expense at $.54 per
mile
$0.54 	0 Mile
Total Excluding Tax 	$80,488.00
Id. at 13. An email exchange between the parties from July 20-22, 2019 revised the terms to
provide for a 20% procurement fee rather than the customary 25%, and noted that line items that
were “either variable or completely optional” were zeroed out to leave approximately $80,000 in
fees “over the next year to cover the design deliverables, expenses, and our time.” Ex. 3 (emphasis
added). Mr. Greer also wrote that he “spoke with [Mr. Tedeschi] today regarding the project
management phase (he typically leads that phase), and we are going to include that. Like we all
discussed at some point, it does run smoother, the vision stands a much safer chance of not being
compromised, and we want to [ensure] that everything is done as perfectly as possible for you
guys.” Id. The Baileys relied on the portion of the email exchange reducing the procurement fee
as part of the contractual agreement at trial; accordingly, the court considers this and the other
points in the email to the extent they further reflect the terms of the final agreement.
The Baileys testified that they did not agree to pay a project management fee because a
general contractor was overseeing the entire project and the Baileys did not need an additional
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project manager. Instead, they maintain, they agreed to a flat design fee of $8/square foot (the only
item in the proposal that has a “checkmark” next to it), a fee of 20% of all items procured by AG
Design calculated on vendor-discounted prices, and mileage to and from their Virginia property,
which is located approximately 1:45 hours from AG Design’s location in Raleigh, North Carolina.
Mr. Tedeschi testified that Mr. Bailey expressed discomfort with the project management fee
because it was variable, and that it was “zeroed out” on that basis; i.e., to accommodate Mr.
Bailey’s preference to avoid a variable fee, but not because there would be no charge for time spent
on the project. In other words, it was never Mr. Tedeschi’s understanding that there would be no
compensation beyond the flat design fee and the percentage procurement fee. He noted that
although there is no “checkmark” next to the project management fee, there is also no “checkmark”
next to mileage, which Mr. Bailey acknowledged that he agreed to pay. In short, the signed
agreement does not reflect the entirety of the terms upon which the parties agreed, the signed
agreement plus the email exchange likewise does not reflect the terms upon which the parties
agreed, and there is no other written document that reflects the full agreement or any modification
of the agreement for the initial term or for any term beyond twelve to eighteen months. It is
apparent to the court and the court finds as a fact that there was no meeting of the minds related to
the project management fee beyond what appears to be a waiver of a fee for project management
for the first year.
The project started slowly. The agreement was signed in July 2019, but, early in the project
planning, the Baileys decided to construct a pool house, and after some period of deliberation
chose to build the pool house first so they could reside in it while the main house was renovated.
The pool house project did not begin until November 2019. Although the Covid pandemic slowed
things down, the pool house project was successfully completed and paid for, and the Baileys
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moved into the pool house and started work on the main house. The timeline for the completion
of the pool house and initial work on the main house is not clear to the court but the main house
work was under way at least in mid-2023. During this time, the Baileys and Mr. Greer and Mr.
Tedeschi became close friends, particularly Mrs. Bailey and Mr. Greer.
The testimony was consistent that the initial agreement contemplated a project of
approximately eighteen months in duration; however, as the scope of work changed, the project
continued for over five years. No new written contract was ever negotiated to reflect the changed
scope or term. At some point in the project, Mr. Bailey scheduled weekly meetings at the property
that required Mr. Tedeschi and Mr. Greer to travel between Raleigh and the Virginia property.
Mrs. Bailey testified that when work started on the main house, furniture was delivered to
a warehouse for storage until various rooms in the house were ready to receive the furniture. At
some time in 2023 or 2024, she came to believe that there was less furniture in the warehouse than
she thought she had ordered, and when it was delivered to the house there were entire rooms of
furniture missing. She also testified that she was being told that items were not “coming in” and
“fabric was not available,” which could cause delays, but she still felt pressure to order furniture
quickly because there was a sale price or a deal on shipping. Mrs. Bailey identified two specific
incidents that underlie the Baileys’ claim: first, an issue with custom window treatments, and
second, an unplaced furniture order.
The custom window treatments were to be fabricated and installed by Nina Zheler, a
seamstress who works exclusively with interior designers. Ms. Zheler testified that she requires a
50% deposit at the placement of an order so that she may acquire materials, with the balance due
at installation. Because of the scope of the project, it was divided into two or three phases. The
first phase was for the master suite. Ms. Zheler received a deposit of $32,000 from AG Design.
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Although there were delays in the installation, the window treatments were completed and installed
over three days, and all but a small balance of $2,500 was paid by AG Design – the balance
representing an amount that exceeded the initial, estimated quote based on actual costs.
Ms. Zheler testified that she never received a deposit for the second phase from AG Design;
instead, Mr. Tedeschi gave her a check in the amount of $17,500 and asked her not to deposit it.
According to Ms. Zheler, Mr. Tedeschi told her that he was delivering furniture to the Bailey house
the next day, at which time he would obtain the funds from Mrs. Bailey to cover the deposit. Ms.
Zheler testified that the next day, Mr. Tedeschi told her that the Baileys were not home, and to
continue to hold the check. Ms. Zheler testified that she never received the deposit required to
order the fabric for the second phase from AG Design. She also noted that Mr. Tedeschi talked to
her about some of his and Mr. Greer’s financial challenges, and that he had shared with her that
he was trying to get a loan; Ms. Zheler thought the loan sounded “fishy.”4
Ultimately, Ms. Zheler agreed to work directly with Mrs. Bailey to finish the project. The
final cost exceeded the original estimate due to “added items.” However, Ms. Zheler also disclosed
her invoices to AG Design to Mrs. Bailey, at which time Mrs. Bailey became upset that AG Design
charged her more for the window treatments than Ms. Zheler had invoiced AG Design. Ms.
Zheler’s testimony, however, was consistent in establishing that it is standard in the industry for
designers to “mark up” costs, and that one of the reasons she generally does not work directly with
the clients is the professional courtesy within the industry not to disclose or undercut a designer’s
specific markup. The court finds that if Mrs. Bailey had any expectation that AG Design would
4 Based on the entirety of the evidence, the court understands the referenced loan to be a merchant
cash advance loan.
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simply be a “pass-through” of items and services procured at cost, that expectation was not
reasonable or realistic.5
Mrs. Bailey testified that she paid $85,000 to AG Design for the window treatments, but
then had to pay another $65,000 to Ms. Zheler for the fabrication and installation of the second
phase. She did not clearly articulate the timing of these transactions. There was no documentary
evidence presented to clarify what amounts were paid by Mrs. Bailey to AG Design for the window
treatments and how those amounts align with what Ms. Zheler charged or received, or when.
With respect to furniture orders, Mrs. Bailey testified that she and Mr. Greer and Mr.
Tedeschi went to the furniture market together, and that upon returning from the market there were
incentives to ordering furniture quickly. She said that she believed the funds would be used to
order the items identified at market, and that the payment was time sensitive to take advantage of
market-related cost and shipping discounts. She specifically testified about a July 2023 invoice
itemizing furniture for the sunroom and recliners for the bedroom and living room to be procured
from a number of vendors totaling $163,097, Ex. 17. Mrs. Bailey paid the amount on the invoice,
as evidenced by an entry in the bank account records of a deposit on July 25, 2023 in the amount
of $163,097.05, see Ex. 4, but did not receive all of the items. As noted above, Ms. Bailey testified
that she became concerned when the warehouse they were using to store furniture during the
renovation seemed not to have the amount of furniture she ordered, and when “entire rooms” of
furniture seemed to be missing. When she asked Mr. Tedeschi about this furniture, he admitted
5 To the extent the Baileys understood that the procurement fee was to be applied to AG Design’s
discounted cost, as opposed to AG Design’s charges with the benefit of the discount, that, too was
unrealistic. Assuming that an interior designer has a 100% markup (which is purely an assumption for
purposes of an easy example), a 100% markup of a discounted item results in the clients receiving the
benefit of the discount, even if the clients are not paying the designer’s cost. A procurement fee based on
the amount charged to the client would similarly be based on the discounted cost, plus the markup. No
business could operate as a pass-through at cost with only a marginal commission, which the Baileys’
testimony suggested they expected.
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that it had not been ordered. No clear timeline was identified, but it appears to the court based on
documents surrounding the project that these discussions took place in the spring of 2024. There
was no evidence that there was anything unusual about the manner in which the invoice was
presented to Mrs. Bailey listing the items she wished to order, their prices, and the shipping/freight
costs that would have to be paid to finalize the order.
Mr. Greer and Mr. Tedeschi also testified about this specific furniture order. Mr. Greer
testified that he and Aaron (a person who was not fully identified at the trial but who appears to
have worked with AG Design for a short time in 2023 or 2024) started to place the order and that
Mr. Tedeschi stopped them. Mr. Greer testified that he understood the reason Mr. Tedeschi wanted
to delay the order was a concern that Mrs. Bailey might change her mind, which made sense to
Mr. Greer based on their history with the project. Mr. Tedeschi testified that he stopped them from
placing the order for two reasons: one, that Aaron started using systems that AG Design had never
used before – specifically, Google spreadsheets – and that Mr. Tedeschi did not believe orders
would be properly tracked if they were on this different system; and two, that the funds were not
available to pay for the order, partly because funds were being taken from the account by a
merchant cash advance lender.
Although there was general testimony about “missing furniture,” there was no further
evidence of furniture or other items that were paid for and not delivered, with the exception of a
cabana. Mrs. Bailey testified that AG Design quoted her $20,000 for a cabana. She said she thought
that was too expensive and told Mr. Greer that she would wait and order it directly at a later date.
According to Mrs. Bailey, Mr. Greer convinced her to order it through AG Design because it would
“help the company,” and offered to waive the procurement fee. Mrs. Bailey wrote AG Design a
check for $14,000 but did not receive the cabana. Mr. Greer, on the other hand, testified that AG
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Design accepted the money for the cabana even though it was not receiving a procurement fee,
because they were ordering it as a favor to the Baileys. Mrs. Bailey testified that she later paid
$12,000 to purchase it directly. Although the testimony is directly contradictory, there is no
evidence that Mr. Tedeschi made any representation to Mrs. Bailey that induced her to pay AG
Design for the cabana. The matter before the court is an allegation that Mr. Tedeschi obtained
funds through his false representations, and the evidence does not support that allegation with
respect to the cabana.
After the Baileys realized that the furniture reflected on Ex. 17 had not been ordered, Mrs.
Bailey met with Mr. Tedeschi. He explained some of the financial struggles both he and Mr. Greer
had experienced, and tried to find a solution. On July 10, 2024, Mr. Greer sent Mrs. Bailey an
email, Ex. 22, that apologized for the errors, acknowledged that their small business should have
engaged a bookkeeper to allow them to track expenditures, provided a spreadsheet of all purchases
including what had been paid for, items that were canceled, discontinued, or not ordered, and
proposed a way forward that could include a refund, but also suggested that the more practical
resolution would be for the Baileys to move forward directly with A. Hoke, one of the suppliers,
to proceed with the furniture already in process with that vendor. The Baileys rejected the
proposals made by Mr. Greer and Mr. Tedeschi to resolve the matter, but did work directly with
A. Hoke to order some of the selected items. Mrs. Bailey testified that she paid another $90-95,000
for that furniture.
Finally, as the issues with the furniture order came to light and the Baileys made clear that
they wished to terminate the relationship with AG Design, Mr. Tedeschi and Mr. Greer generated
a “final invoice,” Ex. 23. Although the document presented to the court by the Baileys reflected
only a final dollar amount showing nothing owed without a breakdown or explanation of the
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figures, Mr. Tedeschi testified that he and Mr. Greer went through all of the documents to
determine what amounts had been paid by the Baileys for items not received (which is included in
Mr. Greer’s email to the Baileys admitted as Ex. 22), then applied credits and offsets against what
Mr. Tedeschi calculated to be amounts owed to AG Design for work performed (which is detailed
in Ex. H). At the end of the day, Mr. Tedeschi maintained that the Baileys still owed AG Design
a balance of approximately $10,000, and AG Design waived that amount as a courtesy. The
Baileys, on the other hand, characterized the final invoice as “fraudulent.”
Bank statements and credit card summaries were also presented. At the trial, bank
statements for 2023 and 2024 were examined to demonstrate a number of cash transactions,
transfers to Mr. Tedeschi and Mr. Greer individually, and personal bills including credit cards paid
by AG Design. Mr. Tedeschi was unable to testify as to the specifics of the transactions but
acknowledged that there were many personal expenses paid from the account, noting that neither
Mr. Tedeschi nor Mr. Greer was paid a salary. Similarly, a credit card summary for a credit card
held by Mr. Tedeschi’s father, on which Mr. Tedeschi was an authorized user, showed numerous
personal charges that ultimately were paid by AG Design, as well as significant charges for what
appears to be the Baileys’ furnishings. There appear to be other bank accounts and credit cards
that were not offered into evidence, leaving the court without a complete picture of the finances of
either AG Design or Mr. Tedeschi. However, the documents that are in evidence show that from
2022 through the petition date, both business and personal expenses were paid from the AG Design
bank account and charged to Mr. Tedeschi’s father’s credit card.
The Baileys suggested that Mr. Tedeschi used their funds to take lavish vacations and
obtain luxury items, but the evidence was that Mr. Tedeschi’s spouse moved to Mexico, and Mr.
Tedeschi visited him there approximately twelve times during the five-year project. There was no
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evidence of any particularly lavish expense but, as noted above, there was no real evidence of what
any of the funds were used for, only that funds were transferred to Mr. Tedeschi and Mr. Greer or
to pay the credit card bill. As noted below, many of the charges on the credit card were
demonstrably business expenses, so a payment from AG Design’s bank account to the credit card
is not necessarily evidence of the business paying personal expenses.
Mr. Tedeschi testified that working for only the bottom-of-the-market $8/square foot
design fee and the reduced 20% procurement fee, for five years, with the Baileys as their only
client was unsustainable financially. His effort to generate a final invoice showing the hours spent
on the project reflected 5-10 hours of “extra” work each week that was never intended to be
uncompensated. Mr. Tedeschi presented a document that itemized his calculations for the “final
invoice,” which included an $8/square foot fee for the total square footage of the house at 14,061,6
totaling $112,488; mileage between Raleigh and the Baileys’ home in Virginia for meetings from
2019 through June 20247 with a total value of $24,026.03; and a weekly project fee totaling
$79,000 based on $500 per week from March 2021 to June 1, 2024, noting that the fee had been
waived for the first 18 months of the project consistent with Mr. Greer’s email to Mr. Bailey at the
contract’s inception. See Ex. H. The final invoice credited the Baileys with the $40,000 deposit
paid in July 2019, identified a balance of $175,514.03 against which AG Design offset the amount
of $161,742.26 for undelivered furniture, and waived the approximately $10,000 difference,
resulting in the document offered into evidence by the Baileys showing a zero balance, Ex. 23.
6 There was some disagreement about whether the “extra 4,000 square feet” was the pool house,
for which AG Design had been paid, or the design for the basement of the main house, which Mr. Tedeschi
contends was designed even though they did not proceed with the renovation, and which Mrs. Bailey says
they did not do. The court need not reach a decision on which of these is correct, as the answer is not
essential to this decision.
7 Specifically, he listed 23 meetings in 2019-2020 at $0.54 per mile; 26 meetings in 2021 at $0.56
per mile; 91 meetings in 2022 at $0.63 per mile; 74 meetings in 2023 at $0.66 per mile; and 24 meetings in
2024 at $0.67 per mile.
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Mr. Tedeschi testified that he was surprised that the Baileys did not expect to pay for his and Mr.
Greer’s time. He denied any intent to defraud the Baileys, instead describing the entire project as
an “endeavor of love” that he was surprised they were unable to fix.
Mr. Greer testified that once the weekly meetings began, he and Mr. Tedeschi spent
Tuesdays preparing for the meetings, Wednesdays driving to and attending the meetings, and
Thursdays implementing the items discussed at the meetings. For most of the project, AG Design
had no additional staff beyond Mr. Greer and Mr. Tedeschi. Mr. Greer’s testimony was consistent
with that of Mr. Tedeschi: they worked having received only the $40,000 deposit, and the 20%
procurement fee was not enough to compensate them for the work they were doing. Had he known
the scope that the project would eventually encompass, he testified, AG Design might not have
taken the job because it required more resources than they had, encompassed all of their time, and
prevented them from taking on additional clients. Mr. Greer testified that he used his trust funds
to sustain the business (a fact supported by his July 2024 email to the Baileys, Ex. 22), and that
the project was “always almost finished” to the point that he repeatedly thought they could “last a
little longer,” which ultimately would counterbalance some of the rising costs and burdens in that
they could use the project to establish new clients and a new stream of income.
Significantly, both Mr. Tedeschi and Mr. Greer testified that they expected to be able to
use photos from the Bailey project – which was projected to be, and by all accounts was, a
showpiece – for marketing purposes to develop future business at the completion of the project,
and that having that opportunity was a key component to doing the job on reduced fees. Because
of the deterioration of the relationship, that did not happen.
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Mr. Greer also testified that he did not believe at the time that Mr. Tedeschi was misleading
the Baileys or that he was acting fraudulently or inappropriately, and that he still has seen nothing
to change that view.
DISCUSSION AND CONCLUSIONS OF LAW
Section 523(a)(2)(A) of the Bankruptcy Code excepts from the debtor’s discharge liability
for any debt: “(2) for money, property, services, or an extension, renewal, or refinancing of credit,
to the extent 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. . . .” The burden of proof is
on the plaintiffs, who must establish each element by the preponderance of the evidence. Grogan
v. Garner, 498 U.S. 279 (1991).
False Pretenses
The elements necessary to establish false pretenses under § 523(a)(2) are (1) a fraudulent
misrepresentation; (2) that induced the plaintiff to act or refrain from acting; (3) that caused harm
to the plaintiff; and (4) upon which the plaintiff justifiably relied. See Andresen & Arronte, PLLC
v. Hill (In re Hill), 425 B.R. 766, 775 (Bankr. W.D.N.C. 2010) (citing Foley & Lardner v. Biondo
(In re Biondo), 180 F.3d 126, 134 (4th Cir. 1999)). The first element, fraudulent misrepresentation,
is satisfied “if the debtor’s representation was known to be false or recklessly made without
knowing whether it was true or false.” Hill, 425 B.R. at 775 (citing Boyuka v. White (In re White),
128 Fed. Appx. 994, 998 (4th Cir. 2005) (unpublished opinion) (citing In re Woolley, 145 B.R.
830, 834 (Bankr. E.D. Va. 1991))). “And, a debtor’s misstatement of intention is only ‘fraudulent
if he does not have that intention at the time he makes the representation.’” Id. (citing Palmacci v.
Umpierrez, 121 F.3d 781, 786 (1st Cir. 1997) (quoting Restatement (Second) of Torts § 530(1)
(1976))).
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However, “a promise or declaration, standing alone, is insufficient to support a
claim under § 523(a)(2)(A), because a promise to perform some act in the future,
without more, does not constitute a representation for purposes of § 523(a)(2)(A).”
Riddle Farm Equi. v. Boles (In re Boles), Ad. Pro. No. 04–6027, 2005 WL 1288106
(Bankr. M.D.N.C. 2005) (unpublished) (citing Allison v. Roberts (In re Allison),
960 F.2d 481, 484 (5th Cir. 1992)) (“[A] promise to perform acts in the future is
not 	considered 	a 	qualifying 	misrepresentation 	merely 	because 	the 	promise
subsequently is breached.”) Finally, a breach of contract, even an intentional
breach, is not a fraud as contemplated by § 523(a)(2)(A). See Strum v. Exxon Co.,
15 F.3d 327, 331 (4th Cir. 1994).
Id.
The court finds that the elements necessary to support a § 523(a) claim were not
established. First, it is not clear to the court that Mr. Tedeschi made any affirmative representation
to the Baileys that “induced” their payments. The Baileys did not identify a particular statement
made by Mr. Tedeschi, but instead said they felt general “pressure” to make the payment needed
to place orders to take advantage of discounts. The written invoice is simply a list of items, the
price per unit, and the additional costs required to fulfill an order: taxes and freight. See Ex. 17.
There is no email accompanying the invoice, and there is no evidence of a contemporaneous phone
call or similar communication expressing urgency. Significantly, there is no evidence that this
transaction differed from any other during the prior four years of the project. The testimony
established that time-limited discounts on merchandise and shipping are standard components of
the home goods and design industries. Because there is no evidence of a specific misrepresentation,
the court cannot find that the Baileys met their burden of proof to establish false pretenses.
Notwithstanding the absence of any identifiable representation by Mr. Tedeschi, the court
also finds that any statements that may have been made by Mr. Tedeschi with respect to the
payments for furniture, window treatments, and other items that AG Design was to procure for the
Baileys do not qualify as misrepresentations because there is simply no evidence that Mr. Tedeschi
did not intend to purchase the items at the time the payments were requested and made. Again,
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there is no evidence that this transaction differed from any other during the prior four years, until
the items were not actually ordered and paid for. The fact that AG Design had for the duration of
the relationship always invoiced items in precisely the same manner and ordered and delivered the
furniture, while also paying personal expenses out of the business bank account, strongly suggests
that there was no intent not to order the items paid for in July 2023 in the same way as they always
had. In short, the court is not persuaded that after a multi-year relationship, Mr. Tedeschi decided
to solicit funds from the Baileys with the intent to abscond with them. Accordingly, the court finds
that the plaintiffs have not met their burden of proof to establish that the debt was obtained by false
pretenses.
Actual Fraud
The elements necessary to establish actual fraud under § 523(a)(2) are (1) that the debtor
made a representation; (2) that the debtor knew the representation was false at the time it was
made; (3) that the debtor intended to deceive the creditor; (4) that the creditor relied on the
representation; and (5) that the creditor sustained a loss as a result of that reliance. Hill, 425 B.R.
at 766; see also Winston-Salem City Employees’ Federal Credit Union v. Casper (In re Casper),
466 B.R. 786, 793 (Bankr. M.D.N.C. 2012); Randle v. Highfill (In re Highfill), 336 B.R. 701, 706
(Bankr. M.D.N.C. 2006). As noted by Hill,
The intent requirement for actual fraud parallels the knowledge requirement for
misrepresentation- “A false representation made under circumstances where [the
maker] should have known of the falsity is one made with reckless disregard for
the truth.” See Medlock v. Meahyen (In re Meahyen), 422 B.R. 192, 202 (Bankr. D.
Minn. 2010) (citing The Merchants Nat’l Bank of Winona v. Moen (In re Moen),
238 B.R. 785 (8th Cir. BAP 1999)). Further, the Restatement (Second) of Torts
states, “[a] misrepresentation is fraudulent if the maker (a) knows or believes that
the matter is not as he represents it to be, (b) does not have the confidence in the
accuracy of the representation that he states or implies, or (c) knows that he does
not have the basis for his representation that he states or implies.” Id. (citing Rest.
(2d) Torts § 526 (1977)).
Hill, 425 B.R. at 766.
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As stated above, the court finds that to the extent any actual representation was made,
which is not apparent to the court, there is no evidence that Mr. Tedeschi did not believe or know
that AG Design would not order and pay for the items to be procured on behalf of the Baileys.
Even if Mr. Tedeschi knew that some of the funds would be used for other things, there is no
evidence that Mr. Tedeschi knew that none of the funds would be used as intended. Indeed,
although there were certainly other, personal expenses being paid from the business bank account,
there were also transactions that were clearly business expenses including furniture, wallpaper,
fabric, and other interior-design related payments throughout the bank statements provided as
Ex. 4 and the credit card summaries provided as Ex. 8, including approximately $30,000 to
A. Hoke, one of the suppliers of the furniture in question, in August 2023 – just weeks after the
Baileys made the payment to AG Design based on the invoice in question. Based on the evidence
presented to it, the court finds that Mr. Tedeschi did not make any representation that he knew was
false, and the plaintiffs have not met their burden of proof to establish that the debt was obtained
by actual fraud.
Further Analysis of the Evidence
Having found that there was no fraudulent misrepresentation or actual fraud, the court need
not go further, but in the interest of thoroughness and in hopes of bringing some sense of closure
to the parties, the court will briefly address the other “red flags” identified by the Baileys to explain
why they do not change the result. The Baileys contend that the fact that personal expenses were
paid from the business account demonstrates an intent to misappropriate the Baileys’ funds.
However, the documentary evidence is clear that Mr. Greer and Mr. Tedeschi always paid their
personal expenses from the business account, at least as far back as the 2022 bank statements
provided to the court at Ex. 4, in lieu of receiving a salary. They had no other source of income for
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the entirety of the relationship. That did not change upon receipt of the $163,000 furniture payment
from the Baileys, and there was no evidence of any dramatic increase in the amount of expenses
paid in that timeframe from any time in the past. And although paying personal expenses from the
business account and paying business expenses with a personal credit card demonstrate an
unfortunate failure to maintain corporate formalities, they do not lead to a finding of fraud. 8
The Baileys also contended that Mr. Tedeschi was using their funds to maintain an
extravagant lifestyle including numerous trips to Mexico and a Gucci belt.9 As noted, Mr.
Tedeschi’s spouse moved to Mexico during the time he was working on the Bailey project, and
twelve trips to see one’s spouse over five years is not extravagant. There was no evidence of Mr.
Tedeschi using the Baileys’ funds to pay for expensive flights or high-end resorts. There was no
evidence of luxurious items purchased at all, much less in a questionable manner. Mr. Tedeschi
testified that after his spouse moved to Mexico, he moved in with Mr. Greer, which also is
inconsistent with the kind of reckless and profligate spending that may occur when an individual
is spending money that is not theirs to spend. The evidence demonstrated a lack of attention to the
books, but not overspending or a luxurious lifestyle that would support a finding of intent to ‘steal’
the Baileys’ money.
Mr. Tedeschi also testified that one reason the funds were not available to pay for the items
at the time they were to be ordered was that AG Design had taken out a business loan from a
merchant cash advance (MCA) lender, and the MCA lender was drafting funds from the bank
account. The bank records from April 2024 show a cash infusion followed by funds being drafted
8 Indeed, absent a finding of fraud, there is no basis upon which Mr. Tedeschi could be personally
liable for the amounts owed by AG Design to the Baileys unless the “corporate veil” is pierced – a claim
that was not raised, and, if it had been, would still have only established a dischargeable breach of contract
claim. 9 There was no evidence about a Gucci belt, or any other luxury item, other than Mrs. Bailey’s
offhand remark that she knew he had one.
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by an MCA lender on a daily basis, but it is not clear from the evidence before the court whether
there was an earlier MCA advance, nor can the court identify the source of deposits to the account
during 2022-2024 other than the few traceable to the Baileys. Accordingly, while the court credits
Mr. Tedeschi’s testimony regarding the additional constraints the MCA loan put on the business,
it cannot conclude that an MCA loan is the only reason, or a specific reason, that the funds were
not available to pay for the furniture in the July-September 2023 timeframe. The evidence was less
than clear about the timing of any of the events in question, including whether the MCA loan may
have impacted the second window treatment transaction, except the date on which the Baileys paid
the $163,000 to AG Design, July 25, 2023. Written communications about the problem and how
to resolve it did not occur until roughly June 2024.
Ultimately, the court found Mr. Tedeschi to be credible. “Issues of intent and reliance are
factual determinations and . . . ‘[i]t is highly unlikely that a situation would ever arise under which
summary judgment would be appropriate in [an] adversary proceeding brought under section
523(a)(2).’” Lexington State Bank v. Coles (In re Coles), No. 02-52908, 2003 WL 22399721, at
*3 (Bankr. M.D.N.C. Oct. 14, 2003) (quoting United States v. Earhart (In re Earhart), 68 B.R. 14,
17 (Bankr. N.D. Iowa 1986)). This is so because findings of intent largely turn on credibility and
the demeanor of a party on the witness stand. Here, the court is persuaded that Mr. Tedeschi had
no intent to deceive the Baileys at any time, and no intent not to order the furniture in the usual
way at the time the funds were paid. The reality of any business is that some funds are used to
operate, including to pay employees for their services. For these parties, as finances became
complicated, things clearly did not go as planned, with unfortunate results for all involved. Having
heard the testimony and reviewed all evidence of record, the court is sympathetic to the Baileys’
frustration and understands their distress at the design project not concluding as they planned.
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Although the parties certainly were engaged in a contract dispute, there is no evidence of an
affirmative intent on the part of Mr. Tedeschi to induce the Baileys to pay funds that would be
redirected to his benefit.
The last invoice does not persuade the court otherwise. Although the Baileys characterized
the invoice as “fraudulent,” the court views it as an effort to document the financial reality that
AG Design found itself in at the end of a relationship that had deteriorated past the point of saving,
well after it surpassed its initial scope. Whether AG Design could contractually recover all of the
project management fees it asserted as charges and offsets in that document is not before the court,
but the other amounts were largely agreed to by the Baileys and apparently never paid.
Finally, and as noted previously, there was no specific evidence that anyone from AG
Design represented to the Baileys that the Baileys’ funds would be directly and specifically used
to pay for their furniture orders. The testimony made clear to the court that the Baileys assumed
that the exact funds from their payment would be used to order their furniture, and while that
assumption is reasonable on the surface, it is inconsistent with the general treatment of deposits in
the context of consumer goods, including in this case. That understanding – or, rather,
misunderstanding – is precisely the issue Congress addressed when it gave priority to consumer
deposits for undelivered purchases where those deposits would otherwise be general unsecured
claims. As described in In re P.J. Nee Co., 36 B.R. 609, 611 (Bankr. D. Md. 1983):
The priority of § 507(a)(5) was established for the first time in the 1978 Code. As
described in King, Collier on Bankruptcy, 15th ed., ¶ 507.04 [5], the priority
reflected the solicitude of Congress for the problems encountered by consumers
who made deposits with retailers that later became bankrupt. As the House
Judiciary Report noted:
A consumer that pays money on a lay-away plan or as a deposit on
merchandise, or that buys a service contract or a contract for lessons or a
gym membership, is a general unsecured creditor of the business to which
he has given his money. Very few consumers are aware of their status as
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general unsecured creditors. If the merchant involved files under the
bankruptcy laws, the consumer is usually left holding the bag. Though he
assumed his deposit was tantamount to a trust fund, he gets nothing from
the estate of the debtor, because the assets available provide little return to
unsecured creditors. Because of his ignorance and his inability to bargain
with a retail merchant, he is unable to do a credit investigation or obtain
special terms from the merchant, as a true creditor may do. A recent
example is the W.T. Grant bankruptcy. All customers who held “Grant’s
script” have essentially lost their deposits.
H.R. Rep. No. 595, 95th Cong. 1st Sess. at 188 (1977), U.S. Code Cong. & Admin.
News 1978, pp. 5787, 6148–49. Clearly the intention of Congress was to protect
the individual creditor who was unable to protect himself and who was the last to
receive the news of an impending insolvency.
P.J. Nee Co., 36 B.R. 609 at 611. The court in In re Util. Craft, Inc., No. 06-10816, 2008 WL
5429667, at *2–3 (Bankr. M.D.N.C. Dec. 29, 2008), further explained the priority claim provided
by § 507(a)(7), which allows a seventh priority status to “allowed unsecured claims of individuals,
to the extent of $[3,800] for each such individual, arising from the deposit, before the
commencement of the case, of money in connection with purchase, lease, or rental of property, or
the purchase of services, for the personal, family, or household use of such individuals, that were
not delivered or provided.” 11 U.S.C. § 507(a)(7).
A deposit is “the act of giving money or property to another who promises to
preserve it or to use it and return it in kind.” Blacks’s Law Dictionary (8th ed. 2004).
Section 507(a)(7) allows priority status for “persons who made deposits for goods
or services to be provided to them by the debtor for essentially consumer goods or
services, when those goods or services were not provided by the debtor.” In re
Globe Bldg. Materials, Inc., 345 B.R. 619, 628 (Bankr. N.D. Ind. 2006).
Util. Craft, Inc., 2008 WL 5429667, at *2–3. Here, the funds in question were deposits for goods
that ultimately were not provided by AG Design.
To be clear, the court does not condone the failure of AG Design to ensure sufficient funds
were in its account to pay for the items ordered by the Baileys. However, this matter ultimately is
a contract dispute. AG Design was contractually obligated to order the furniture for which the
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Baileys paid, it breached that contract, and the Baileys were damaged by that breach.10 To the
extent the shareholders of AG Design may be responsible for the corporate debts, Mr. Tedeschi
might have been liable for that breach of contract, but a breach of contract is not fraud. The debt
at issue, therefore, is dischargeable.
CONCLUSION
Based on the court’s findings of fact, the court concludes as a matter of law that the debt
owed to the Baileys by Mr. Tedeschi, as asserted in their proof of claim in the amount of $171,000,
was not obtained through fraudulent misrepresentation or actual fraud and therefore is not excepted
from discharge pursuant to 11 U.S.C. 523(a)(2)(A). The court further finds that, in the absence of
fraud, there is no claim asserted in this adversary proceeding that would establish personal liability
of Mr. Tedeschi for a contractual obligation of AG Design. Because there was no distribution to
creditors in the underlying chapter 7 case, the court need not allow or disallow the contract claim
as part of this adversary proceeding. A separate judgment will be entered consistent with this
opinion.
END OF DOCUMENT
10 Similarly, any credits or offsets would be owed to AG Design, not Mr. Tedeschi individually.
Accordingly, the court need not find whether the Baileys would be contractually obligated for any of the
asserted design fees or mileage asserted on the final invoice, and addressed those matters only to explain
why the court does not believe that invoice was created in furtherance of a fraudulent scheme.
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