Poole v. Batson (In re Batson)

Citation: 568 B.R. 281Docket: CASE NO. 315-03170; ADV. NO. 315-90375

Court: United States Bankruptcy Court, M.D. Tennessee; February 28, 2017; Us Bankruptcy; United States Bankruptcy Court

SummaryOriginalCytator Case TreatmentBackward CitatorAnalysis

EnglishEspañolSimplified EnglishEspañol Fácil

The Pooles filed an adversary complaint against the Batsons to determine the non-dischargeability of their claim under 11 U.S.C. § 523(a)(2)(A) and (a)(4). They also sought treble damages, attorney fees, and costs under the Tennessee Consumer Protection Act (TCPA). The court found the Pooles’ claim to be non-dischargeable and awarded them treble damages and costs related to the Impact Fee.

On May 17, 2014, the Pooles met the Batsons to discuss constructing a new home. Mr. Batson claimed 30 years of construction experience and provided a preliminary budget. Concerned about the safety of their retainer, Ms. Poole communicated with Ms. Batson, who assured her via email that the retainer would be safely held for their project. The Pooles signed a Construction Agreement on February 6, 2015, requiring a $22,553.51 retainer, which they paid on February 27, 2015. The retainer was deposited into the Batsons’ account, which had a negative balance before the deposit and again shortly thereafter. The Batsons misappropriated the retainer for personal and other business expenses.

On March 21, 2015, the Pooles paid the Batsons $6,751.01 for expenses, including a $3,000 Impact Fee, which was not required and had not been paid by the Batsons. Mr. Batson later claimed ignorance of the waiver possibility for the Impact Fee. The Batsons filed for Chapter 7 bankruptcy on May 7, 2015, and on May 12, informed the Pooles of their intention to abandon the project. The only expense the Batsons accounted for related to the Pooles’ project was $618.83 for materials, which was not invoiced.

The Pooles claim a total outstanding balance of $25,234.68 owed to the Batsons for a culvert and silt fence after crediting the Batsons for their purchase. Following the Batsons' bankruptcy filing on August 11, 2015, the Pooles' attorney requested the return of a Retainer within ten days, but it was not returned. The Pooles have incurred or expect to incur attorney's fees of $15,221 and non-filing expenses of $618.96, totaling $15,839.96.

In the discussion of dischargeability, it is noted that exceptions to discharge are interpreted strictly against creditors, with the burden of proof on the creditor to demonstrate a debt is nondischargeable. The Pooles argue that the debt is nondischargeable under 11 U.S.C. § 523(a)(2)(A), alleging that the Batsons obtained the Retainer under false pretenses, intending to use it for their home but actually diverting it for personal expenses. They also contend that the Batsons' second draw request for a $3,000 Impact Fee, plus a 10% Contractor Fee, was made based on false representations, as no Impact Fee had been paid when the invoice was issued.

Furthermore, the Pooles assert that the Batsons breached Tennessee contractor statutes, specifically T.C.A. § 66-11-140, which provides prima facie evidence of intent to defraud if proceeds are used for unauthorized purposes. The Batsons counter that they used a single account for all projects, arguing that the prima facie case from the state statute does not suffice for establishing nondischargeability under federal law, which requires proof of five specific elements. Consequently, the prima facie evidence does not meet the federal standard for nondischargeability under 11 U.S.C. § 523(a)(2)(A).

False representation or false pretense is established through Ms. Batson’s conversation with Ms. Poole regarding the escrow of funds and her assurance that the Retainer would be set up in-house for the Pooles’ project. Ms. Poole was misled into believing the Retainer was separately secured, while the Batsons commingled funds, a fact not disclosed to her. The fraudulent intent, a second element under 11 U.S.C. 523(a)(2)(A), is evaluated subjectively and is supported by the circumstances surrounding the Batsons’ financial difficulties. Prior to the Pooles’ check deposit of $22,553.51, the Batsons had a negative account balance and spent most of the Retainer immediately on other projects, undermining Mr. Batson’s claims of financial stability. Ms. Poole’s reliance on Ms. Batson’s assurances and the misrepresentation of the Retainer being in-house directly caused the Pooles’ loss.

Additionally, the Batsons improperly invoiced the Pooles for a $3,000 Impact Fee and a 10% Contractor Fee despite not having paid any related expenses, contrary to the contract which required invoicing post-payment. The Batsons did not return the $3,300 and misused it for other purposes, demonstrating a pattern of deceit. Overall, the totality of the circumstances confirms the Batsons acted with fraudulent intent, justifying the findings under 11 U.S.C. 523(a)(2)(A).

Under 11 U.S.C. § 523(a)(4), the Pooles argue that their debt is nondischargeable due to embezzlement by the Batsons, who misappropriated funds entrusted to them for the construction of the Pooles’ home. This section allows for the denial of discharge for debts involving fraud or defalcation while acting in a fiduciary capacity, embezzlement, or larceny. Embezzlement is characterized as the fraudulent appropriation of property by someone to whom it has been entrusted. To establish embezzlement, three elements must be proven: (1) the creditor's property was entrusted to the debtor, (2) the debtor appropriated the property for a different use, and (3) the circumstances indicate fraud. 

The Pooles entrusted the Batsons with a Retainer for construction, relying on assurances that the funds would be used appropriately. Instead, the Batsons used the funds for unrelated expenses, including billing the Pooles for an Impact Fee that had not been paid or required. Evidence suggests that the Batsons were aware of their financial difficulties when they accepted the Pooles' money, and they misrepresented the intended use of the funds. Circumstantial evidence can demonstrate fraudulent intent, indicating that the Batsons acted with deceit. Consequently, the debt owed to the Pooles is determined to be non-dischargeable under 11 U.S.C. § 523(a)(4).

Under 11 U.S.C. § 523(a)(6), a debt is nondischargeable if it arises from "willful and malicious injury" by the debtor to another entity or their property. For an injury to be deemed "willful and malicious," the debtor must either intend to cause harm or believe that harm is substantially certain to result from their actions. Mere negligence or a reasonable debtor's awareness of potential injury is insufficient. The conduct must demonstrate a higher degree of culpability than mere recklessness regarding creditors’ interests. Evidence shows the Batsons misled the Pooles and misappropriated their funds, but there is no proof of malicious intent toward them.

Additionally, the Pooles claim violations of the Tennessee Consumer Protection Act (TCPA), seeking reimbursement for attorney fees, expenses, and treble damages. They allege the Batsons failed to refund payments for home improvement services within the mandated timeframe and improperly charged for a nonexistent Impact Fee. To succeed under the TCPA, the Pooles must demonstrate that the Batsons engaged in unfair or deceptive practices causing identifiable loss. If a violation is confirmed, the court may award attorney fees, and if the conduct was willful or knowing, treble damages may be imposed as a punitive measure intended to deter similar future actions. Factors influencing the decision on treble damages include the consumer's competence, the nature of the deception, the resulting damage, and the violator's good faith. Such damages are also exempt from discharge under 11 U.S.C. § 523(a)(2)(A).

The Batsons failed to refund a Retainer, violating T.C.A. 39-14-154(b)(1)(A)(i), which prohibits home improvement service providers from failing to refund amounts within ten days of a written request if certain conditions are met. These conditions include: no substantial work performed at the request time, more than 90 days since the contract start, and a written request sent to the attorney general's consumer protection division. The Batsons filed for Chapter 7 bankruptcy, which barred them from refunding estate funds to one creditor based on a TCPA demand letter. Their non-compliance with the letter did not violate the TCPA due to bankruptcy protections.

Regarding the Impact Fee, T.C.A. 47-18-104(b) identifies deceptive practices, including misrepresenting the necessity of fees. The Batsons, with their extensive experience, should have known that the Impact Fee was unnecessary and misrepresented its necessity, as evidenced by an invoice claiming payment which was never made. This misrepresentation entitled the Pooles to reasonable attorney fees and treble damages due to the Batsons’ deceptive actions, resulting in $3,300 in damages. The total owed to the Pooles amounts to $32,453.51, including the Retainer and the Impact Fee with treble damages, all deemed non-dischargeable under 11 U.S.C. 523(a)(2)(A) and (a)(4). The Batsons’ lack of good faith and their actions resulted in financial harm to the Pooles, for which they are entitled to additional fees and costs to be substantiated by the Batsons’ attorney. The court also clarified that the Batsons’ claim of ignorance regarding the Impact Fee's necessity is irrelevant, as they invoiced for it without having made any payment. The Tennessee Tort Reform Act of 2011 restricts private actions for deceptive acts to those explicitly listed in T.C.A. 47-18-104(b).