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Panel Upholds Exception From Discharge and Fixing of Damages in Fraud Case - In re Deitz

May 18, 2012

Vincent Howard and our Norco personal bankruptcy lawyers have written several times before about the nondischargeability of certain debts in bankruptcy. One clear case of nondischargeabiity comes from cases of fraud, or legal judgments for "willful and malicious injury," including financial injury. In In re Deitz, Chapter 7 debtor Shawn Deitz unsuccessfully fought to have a debt to Wayne and Patricia Ford declared dischargeable, where that debt stemmed from payment Deitz took from the Fords for work he never completed. Deitz held himself out as a licensed general contractor when the Fords hired him to build their home in Fresno County, but his license had actually been suspended and he never completed the home. The Bankruptcy Appellate Panel of the Ninth U.S. Circuit Court of Appeals ultimately declined to make this debt dischargeable.

Deitz was a "sometime" general building contractor in Fresno who met with the Fords to discuss building them a handicap-accessible home. Wayne Ford had been disabled while serving in the Army and Patricia Ford was a nurse; Deitz held himself out as a Marine veteran and the son of a nurse. Perhaps more importantly, he said he was a licensed general contractor, which was important to the Fords because they needed a licensed contractor in order to quality for VA funding. On the day they signed the contract, however, Deitz had a suspended license; it was later revoked. The Fords ultimately paid $511,800 to Deitz, who completed only 65 percent and did not respond to requests for an itemized accounting of how the money was spent.

Deitz filed for bankruptcy nearly two years after signing the contract, listing the Fords as unsecured creditors for an unknown amount. The Fords filed an adversary proceeding for nondischargeability, saying Deitz made willful and malicious misrepresentations that were the proximate cause of their losses. In the meantime, he was prosecuted in Fresno County for grand theft from the Fords and three other parties, though he was convicted only of contracting without a license. After that case was resolved, the bankruptcy court tried the adversary proceeding and found the debt nondischargeable because of intentional false representations. It fixed the nondischargeable damages at $386,092.76.

Deitz appealed, arguing both that the decision was wrong and that the bankruptcy court had no authority to make a final judgment, thanks to the Supreme Court's 2011 ruling in Stern v. Marshall. The panel first rejected the challenge to the bankruptcy court's authority. The Stern court held that bankruptcy courts may not make a final judgment on state-law claims that have some bearing on the bankruptcy case. However, that decision was expressly very narrow, the panel said, and does not permit Deitz to attack standard bankruptcy rulings. It went on to also reject arguments by Deitz that the nondischargeability decision itself was erroneous, because he had no intent to deceive. To make that finding, the bankruptcy court relied on witness testimony that Ford had represented any licensing problems as solved; the BAP deferred to the court as fact-finder. Thus, it affirmed the bankruptcy court's decision.

Led by Vincent Howard, our Newport Beach consumer bankruptcy attorneys represent people of all backgrounds and walks of life who are considering bankruptcy as a way to discharge debts they don't think they can realistically pay. One of the ways we counsel our clients, however, is by discussing debts that are not dischargeable - and a debt like that owed by Deitz to the Fords falls squarely into that category. Bankruptcy exists to give honest debtors a fresh start while making sure their creditors are fairly dealt with. If a debtor has been less than honest, it will generally catch up with him or her in the form of nondischargeability; in cases of fraud on the court itself, the bankruptcy can be dismissed or the debtor may even be criminally prosecuted. That's why Vincent Howard and our Pomona individual bankruptcy lawyers start each case by counseling clients on the dangers of inadvertently or intentionally committing fraud.

Howard Law, P.C., represents clients across California who are ready to do the hard work of a bankruptcy in order to clear their debts and start over. If you'd like to talk to us about your case and your legal options, call us today at 1-800-872-5925 or send us an email.

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