Reeves v. Davis

Citations: 638 F.3d 549; 2011 WL 855837Docket: 10-2757

Court: Court of Appeals for the Seventh Circuit; March 14, 2011; Federal Appellate Court

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Linda Reeves obtained a judgment against Gerald Davis in Indiana state court in 2007 for violating the Indiana Home Improvement Contracts Act, which found that Davis committed a deceptive act by not providing a proper contract prior to work. Davis had advertised himself as a licensed contractor but was not licensed in Monroe County, where he undertook renovations for Reeves. After failing to complete the work and leaving it defective, the state court awarded Reeves $77,015.98.

Davis filed for bankruptcy on October 25, 2007, before paying the judgment. In the bankruptcy proceedings, Reeves sought to have the judgment declared non-dischargeable under 11 U.S.C. 523(a)(2)(A), arguing that the Indiana court's finding of a deceptive act constituted fraud. However, the bankruptcy court ruled that the debt was dischargeable, as Davis lacked the intent to deceive. This decision was affirmed by the district court and subsequently by the Seventh Circuit Court of Appeals, which upheld the finding that the necessary elements for non-dischargeability were not satisfied.

The bankruptcy court held a trial where Reeves presented a drawing from Davis that depicted a porch. Davis testified that he did not agree to build a porch and that it was not included in the contract price, characterizing it as part of Reeves’s "wish list." The bankruptcy court rejected Reeves's collateral estoppel argument, stating that establishing non-dischargeability under 11 U.S.C. § 523(a)(2)(A) necessitates proof of fraudulent intent, which is not required under the Indiana Home Improvement Contracts Act. The court noted that the state court did not determine Davis's intent and, over Reeves's objection, made its own factual findings, including that the contract likely did not include a porch. The court accepted Davis's testimony that he intended to complete the job but ultimately refused due to Reeves being a difficult customer. On December 9, 2009, the bankruptcy court ruled that Davis’s debt was dischargeable. 

In the appeal to the district court, Reeves argued the bankruptcy court erred by finding Davis lacked the necessary intent under § 523(a)(2)(A) and claimed Davis misrepresented himself as a licensed contractor. The district court did not address the licensing issue, deeming it inadequately pled, and affirmed the bankruptcy court's finding that the state court had not determined Davis's state of mind, concluding the bankruptcy court’s intent finding was not clearly erroneous.

For an exception from discharge under § 523(a)(2)(A), Reeves needed to demonstrate that Davis made a false representation or omission knowingly or with reckless disregard for the truth, intended to deceive, and that she justifiably relied on this representation. The focus of the review centers on the second element—Davis's intent—originating from the bankruptcy court. The findings of fact are reviewed for clear error, while legal conclusions are reviewed de novo. Reeves claimed Davis's failure to construct the porch, his misrepresentation as a licensed contractor, defective work, failure to complete the job, and taking payment for unperformed work as evidence of false representation.

Reeves's fraud claim hinges on Davis's failure to build a porch, which Reeves asserts was part of their home renovation contract. She argues that the bankruptcy court should have recognized the state court’s finding that Davis agreed to construct the porch due to collateral estoppel principles, which prevent relitigation of factual determinations. The court affirms that the state court's findings on the contract's terms should have been acknowledged, but this does not alter the bankruptcy court's conclusion regarding Davis's intent. 

The court clarifies that a breach of contract occurs when one fails to fulfill a promise, while fraud requires an intention not to keep a promise. Reeves attempts to interpret the state court’s finding that Davis agreed to build the porch as indicative of fraudulent intent. However, the court suggests a more limited interpretation, indicating that the state court did not assess Davis’s intent at the time of the contract's formation. Consequently, the bankruptcy court was free to evaluate Davis's intent without being bound by the state court's findings.

Reeves’s argument relies on Davis's testimony about his lack of intent to build the porch, but this was tied to his belief that the contract did not include it. The bankruptcy court found Davis's testimony credible, and the court notes that it generally defers to trial courts on credibility assessments. Ultimately, the situation reflects a miscommunication regarding the contract's terms rather than fraud, as the court concluded that Davis did not share Reeves’s interpretation of the contract’s requirements.

Reeves's allegations of fraud regarding Davis's status as a licensed contractor are insufficiently pled, as the complaint does not address licensure or misrepresentations related to it, merely referencing a state court decision that lacks relevant details. The district court correctly determined that this claim does not meet the pleading standards of Rule 8(a) or the stricter Rule 9(b). Additionally, Reeves waived the licensure issue by not raising it during the bankruptcy court's summary judgment. 

The final three grounds of Reeves's appeal—concerning the quality of Davis's work, his failure to complete the job, and his acceptance of payment for incomplete work—are also waived, as they were not presented in the bankruptcy or district courts in relation to 11 U.S.C. § 523(a)(2). Furthermore, Reeves fails to demonstrate fraudulent intent regarding these claims, lacking assertions that Davis intended to perform poorly, abandon the job, or misuse funds from the outset. Consequently, no fraudulent intent is established, which is necessary for 11 U.S.C. § 523(a)(2) to apply. The district court's judgment is affirmed.