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First Circuit BAP Upholds Finding That Debt Is Dischargeable Despite Fraud Allegations - Bellas Pavers v. Stewart

October 26, 2012

Vincent Howard and our Highland consumer bankruptcy lawyers were interested to see a recent ruling about a debt that was alleged non-dischargeable through fraud. One of the categories of debt that cannot be discharged in bankruptcy is any debt created through fraud. However, the fraud must be proven to the bankruptcy court, and in Bellas Pavers v. Stewart, the Bankruptcy Appellate Panel of the First U.S. Circuit Court of Appeals found that it was not proven. Scot Stewart ran a construction company that subcontracted some work to Bellas Pavers, and never paid after the client complained. The Massachusetts bankruptcy court found no fraud in Stewart's promise to pay Bellas within a week of the job being completed, and the BAP agreed, saying it saw no reason to think Stewart didn't intend to pay when he made the promise.

Stewart's company, Premier Building & Window, took a job building a stone patio and retaining wall. Premier hired Bellas as a subcontractor performing masonry services; its request said Premier would pay Bellas one week after the job was finished and the customer signed off. The customer paid Premier but contacted Premier soon after, threatening legal action because the stones in the patio were discolored. The two attempted to work it out over the next few months, and ultimately, Coffin sent a demand letter but did not sue. Meanwhile, Bellas attempted unsuccessfully to get paid for the next four months, and never did get paid. In July of 2009, Stewart and Lisa Perrone filed a joint Chapter 7 petition, and Bellas brought an adversary proceeding arguing that Stewart's debt to it should not be dischargeable because Stewart never intended to pay it, and thus had committed fraud in his offer. After a trial, the bankruptcy court found there was no evidence that Premier never intended to pay, and thus found the debt dischargeable.

Bellas appealed to the BAP for the First Circuit. After disposing of a jurisdictional question, the panel ruled there was no error in the bankruptcy court's choice to grant summary judgment for Stewart. To establish that a debt is not dischargeable due to fraud, the creditor must prove, among other things, that the debtor knowingly made a false representation and intended to deceive. Bellas argues that even though there was no direct proof of Stewart's intent, the bankruptcy court should have inferred it from the circumstances, particularly the short period between the promise and his non-payment. The panel disagreed. Nothing in the record shows Stewart had fraudulent intent, and the short time period between the promise and the non-payment was not itself enough to infer that he did. Thus, it couldn't find that the bankruptcy court erred.

Vincent Howard and our Dana Point personal bankruptcy attorneys occasionally must counsel clients on the risk of having a debt found non-dischargeable. This bankruptcy filer was lucky enough to avoid a finding of non-dischargeability, but if the court does find non-dischargeability, it will require the filer to pay the debt in full. That is, the point of bankruptcy--to erase debts and give the filer a chance to start over--is undermined when debts are not dischargeable. That's why it's rarely used and used only when proven. When clients at Howard Law, P.C., are facing a non-dischargeability trial, our Claremont individual bankruptcy lawyers mount a vigorous defense, so they have the best possible chance for that fresh start.

If you feel like you're drowning in debt and you'd like to talk to an experienced attorney about your rights and your options, call Vincent Howard and the team at Howard Law. For a consultation, send us a message online or call 1-800-872-5925.

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