Adair v. Stutsman Constr., LLC

659 B.R. 85

Ross Shaun ADAIR, Appellant v. STUTSMAN CONSTRUCTION, LLC, Appellee

Appeal Civil Action 23-625-SDD-RLB

United States District Court, M.D. Louisiana

Filed March 28, 2024

Signed March 27, 2024

Franklin Andrew Hoffmann, Faircloth Melton Sobel & Bash, LLC, Baton Rouge, LA, Robert Walker Hoke, Hoke Law Firm, Baton Rouge, LA, for Appellant.

Brent Michael Steier, Simien & Simien, LLC, Baton Rouge, LA, for Appellee.

OPINION

CHIEF JUDGE SHELLY D. DICK, UNITED STATES DISTRICT COURT MIDDLE DISTRICT OF LOUISIANA

Appellant Ross Shaun Adair ("Adair") appeals the Bankruptcy Court's judgment in favor of Appellee Stutsman Construction, LLC ("Stutsman") in Adversary Proceeding No. 22-1009 in the Middle District of Louisiana. The Bankruptcy Court held a trial that began on June 15, 2023. The Bankruptcy Court entered its Opinion and Judgment in favor of Stutsman on July 14, 2023. The Court has jurisdiction over this appeal pursuant to 28 U.S.C. § 158. For the reasons set forth below, the ruling and order of the Bankruptcy Court is AFFIRMED.

I. BACKGROUND AND PROCEDURAL POSTURE

In August 2016, Adair's home flooded,¹ and he contracted with Stutsman to repair his home on September 7, 2016.² These repairs were approved by his mortgage company, Freedom Mortgage.³ Freedom Mortgage issued four checks to pay for the repairs, each of which were issued following an inspection and were payable to both Adair and Stutsman as "Ross S. Adair Stutsman Construction"; their names were listed without a conjunction such as "and" or "or" in between.⁴ For the first three checks, Adair endorsed and gave them to Stutsman.⁵ Following an inspection and report marking the work as 100% complete,⁶ Freedom Mortgage issued the fourth and final check for $71,755.48 on June 22, 2017.⁷ The contract between Adair and Stutsman provided that the final payment was "due upon job completion,"⁸ although the parties' course of conduct was that Adair would pay Stutsman "as the checks would come in," and that Stutsman "really didn't perform any work until [it] received payment."⁹

Adair endorsed the final check and deposited it into his own bank account, denying the proceeds from Stutsman.¹⁰ When Stutsman's manager Roy Stutsman ("Roy") asked Adair for the final check, Adair refused, claiming the work was incomplete and defective.¹¹ Adair alleged multiple problems with the repairs,¹² but his primary complaint was water damage in the master bedroom caused by a pipe leak.¹³ Roy was aware of the water damage as well as a chipped drain pan in the master bathroom, but otherwise, he considered the work "99 to a hundred percent" completed with the exception of small touchups or "punch list" items.¹⁴ Roy offered Adair three options for Stutsman to complete the touchups and fix Adair's problems,¹⁵ but Adair refused all options and kept the money.¹⁶ Adair claims that Freedom Mortgage told him to withhold payment due to the construction issues and that his bank advised him he could endorse the check without Stutsman's signature.¹⁷

Stutsman sued Adair in the 23rd Judicial District Court for Ascension Parish on August 17, 2017, and on July 31, 2020, the court rendered judgment against Adair for $71,755.48 in addition to judicial interest, reasonable attorney fees, and all additional costs ("Judgment").¹⁸ On May 24, 2022, Adair filed a voluntary Chapter 13 bankruptcy petition,¹⁹ and on September 15, 2022, pursuant to 11 U.S.C § 523(a)(6), Stutsman filed a Complaint for its Judgment to be excepted from discharge based on the alleged willful and malicious injury it suffered as a result of Adair's conduct.²⁰ On July 14, 2023, the United States Bankruptcy Court for the Middle District of Louisiana excepted the Judgment from general discharge under § 523(a)(6), holding that Adair did impose willful and malicious injury on Stutsman.²¹ The court found Roy's testimony more credible than Adair's and found both "great financial harm" to Stutsman and intent by Adair to do that harm.²² Adair appealed to this Court on July 27, 2023.²³

On appeal, Adair argues that the bankruptcy court's judgment should be reversed²⁴ on three grounds.²⁵ First and most importantly, Adair argues that the bankruptcy court erroneously placed the burden of proving an exception to discharge on Adair rather than on Stutsman. Second, Adair argues the bankruptcy court erred in holding that Adair converted the insurance proceeds by depositing the final check into his own account. Finally, Adair argues the bankruptcy court erred in "failing to consider the application of unclean hands to Stutsman's claims in equity."²⁶

Of course, Stutsman argues that the bankruptcy court's judgment should be affirmed.²⁷ Specifically, Stutsman claims that the bankruptcy court was correct in holding that (1) Stutsman met its burden of proof for an exception to discharge the debt, and (2) the clean hands doctrine was subject to collateral estoppel.²⁸ Stutsman did not address Adair's claim about conversion of the insurance proceeds.²⁹

II. LAW AND ANALYSIS

A. Standard of Review

United States District Courts have jurisdiction to hear appeals of judgments from bankruptcy courts.³⁰ For conclusions of law, "the bankruptcy court's decisions are reviewed de novo."³¹ "The interpretation of Section 523(a)(6) is a question of law and is reviewed de novo."³² Matters of contract interpretation are also reviewed de novo.³³

The bankruptcy court's findings of fact are reviewed for clear error; in doing so, the Court reviews "the record as a whole and not just the evidence supporting the finding."³⁴ "The bankruptcy court's findings of fact may be reversed only if the reviewing court has 'the definite and firm conviction that a mistake has been made.' "³⁵ Mixed questions of fact and law are also reviewed de novo.³⁶

1. Discharge Exception for Willful and Malicious Injury under 11 U.S.C. § 523(a)(6)/Conversion of Insurance Proceeds

Adair argues the bankruptcy court erroneously placed the trial burden to prove an exception to discharge on Adair instead of Stutsman.³⁷ As a result, Adair claims the bankruptcy court erred in holding that Stutsman proved that "Adair knowingly breached his contact with Stutsman and intended to cause injury to Stutsman."³⁸ More specifically, the court purportedly erred in (a) finding the repairs complete, (b) finding that Adair subjectively knew the repairs were complete, (c) "placing the burden on Adair to disprove Stutsman's uncorroborated allegations by applying numerous negative inferences in an attempt to establish Adair's subjective intent at the time he withheld payment from Stutsman," and (d) rejecting or ignoring Adair's uncontested evidence and testimony.³⁹ Stutsman counters that the bankruptcy court made proper credibility determinations; thus, it met its burden of proof for an exception to discharge the debt.⁴⁰

The Court finds that the bankruptcy court applied the burden of proof appropriately. The bankruptcy court noted that, with facts in dispute, this case "largely turns on the relative credibility of the witnesses."⁴¹ This Court must give "due regard . . . to the opportunity of the [bankruptcy] court to judge the credibility of the witnesses."⁴² The bankruptcy court found Roy's testimony to be more credible than Adair's.⁴³ Specifically, the court found the construction work to be nearly complete, in line with Roy's testimony. This finding was supported by the inspection documentation indicating 100% completeness and the inspection being done by Freedom Mortgage, a non-party to this suit.⁴⁴ Adair's testimony was supported by text messages between himself and Roy and photographs of Stutsman's allegedly defective work, which were explained by his girlfriend, Megan Meyers.⁴⁵ Notably, one text message from Roy indicated that he could not finish the job and would decrease the amount of the final payment proportionately.⁴⁶ However, because both sides offered support beyond their testimony, and because Roy's support is from a non-party, this Court does not have the firm conviction that a mistake has been made regarding the bankruptcy court's factual findings, including that of the near completeness of the work. Thus, this Court does not find that the bankruptcy court inappropriately shifted the trial burden, nor are its factual determinations clearly erroneous.

Section 523(a)(6) provides that bankruptcy proceedings will not discharge a debt arising from "willful and malicious injury by the debtor to another entity or to the property of another entity."⁴⁷ The Fifth Circuit has stated that "willful" and "malicious" are synonymous and thus a unitary concept.⁴⁸ Section 523(a)(6) applies to "acts done with the actual intent to cause injury," not "acts, done intentionally, that cause injury."⁴⁹ The debtor must "intend 'the consequences of an act,' not simply 'the act itself.' "⁵⁰ The debtor must have acted with either an objective substantial certainty of injury or a subjective motive to cause injury.⁵¹ An intent to injure "may be established by a showing that the debtor intentionally took action that necessarily caused, or was substantially certain to cause, the injury."⁵² The creditor is "required to bear the burden of proof to establish by a preponderance of the evidence that his claim is nondischargeable."⁵³ Exceptions to discharge such as § 523(a)(6) "are construed strictly against the creditor and liberally in favor of the debtor."⁵⁴

a. Conversion of Insurance Proceeds

"Conversion of another's property may constitute a willful and malicious injury for purposes of prohibiting a debtor's discharge under § 523(a)(6)."⁵⁵ Adair argues the bankruptcy court erred in holding that Adair converted the insurance proceeds by depositing the final check.⁵⁶ While Adair raises this as a separate argument, its resolution is necessary to determine whether a willful and malicious injury occurred. Further, if Adair converted the insurance proceeds, this conduct could cause willful and malicious injury that would render the Judgment debt...