Ott v. Somogye (In re Somogye)

In Re: Brian R. Somogye, Debtor.

Jim Ott and Linda L. Ott, Plaintiffs, v. Brian R. Somogye, Defendant.

Case No.: 18-30927

Adv. Pro. No. 18-03037

UNITED STATES BANKRUPTCY COURT NORTHERN DISTRICT OF OHIO WESTERN DIVISION

March 30, 2020

The court incorporates by reference in this paragraph and adopts as the findings and analysis of this court the document set forth below. This document has been entered electronically in the record of the United States Bankruptcy Court for the Northern District of Ohio.

Chapter 7

Hon. Mary Ann Whipple

MEMORANDUM OF DECISION

This adversary proceeding is before the court for decision after trial on Plaintiffs Jim and Linda Otts' ("Plaintiffs" or "Otts") complaint to determine the dischargeability of a state court judgment debt owed to them by Defendant Brian R. Somogye ("Defendant" or "Somogye"). Defendant is the debtor in the underlying Chapter 7 case, in which he has received his discharge. The Otts contend Somogye owes them a debt allegedly resulting from fraudulent representations about his qualifications to perform a new garage construction and home remodeling contract for them and that the debt should be excepted from his Chapter 7 discharge under 11 U.S.C. § 523(a)(2)(A).

The district court has jurisdiction over this adversary proceeding pursuant to 28 U.S.C. § 1334(b) as a civil proceeding arising under Title 11. This proceeding has been referred to this court by the district court under its general order of reference. 28 U.S.C. § 157(a); General Order 2012-7 of the United States District Court for the Northern District of Ohio. Proceedings to determine dischargeability of debts are core proceedings that this court may hear and decide. 28 U.S.C. § 157(b)(1) and (b)(2)(I).

This memorandum of decision constitutes the court's findings of fact and conclusions of law pursuant to Rule 52(a) of the Federal Rules of Civil Procedure, applicable to this adversary proceeding under Rule 7052 of the Federal Rules of Bankruptcy Procedure. Regardless of whether specifically referred to in this Memorandum of Decision, the court has examined the submitted materials, weighed the credibility of the six witnesses, considered all the evidence, and reviewed the entire record of the case. Based upon that review, and for the reasons discussed below, the court finds the Defendant is entitled to judgment in his favor.

BACKGROUND FACTS

For several years prior to 2016, Linda and Jim Ott had discussed building a garage on their property. The Otts ultimately chose Somogye to undertake the project, which also involved remodeling their home. According to the parties' contract, the scope of the project "included but [is] not limited to the following...":

• Construct 24 x 40 garage per drawings including a 2 piece bathroom with toilet under the stairs and small septic system

• Remove small shed and preserve for future donation to historical society. Dig out base of shed and break up concrete or block base. All items from shed and garage will be stored in a storage trailer until it can be put in the new garage.

• Remove chimney and repair roof remove chimney all the way to basement and repair walls, shingle to match existing roof. Examine complete roof and make sure it's in good repair. Repair as needed.

• Paint exterior siding or replace with vinyl to match color choice of customer and repair any spots necessary in exterior walls.

• Remove cistern in basement and reroute downspouts, Finish off floor to match existing floor.

• Replace boiler with forced air heat and air conditioning, remove any piping and radiators. Remove fuel oil tanks.

• Install new plumbing and electrical in the house including switches and add light fixtures where requires or desired

• All repair and replacing of interior walls will be finished by the same crew so design of texture matches through the house.

• Remodel kitchen with new cabinets, plumbing, fixtures, and flooring. Add dishwasher, new stone countertop and backsplash• Insulate complete house including walls, attic and basement edges. Insulate floor in enclosed area on the front of the house

• Remodel existing garage to man cave including a bathroom with shower, heated wood floors

• Finish master bedroom closet where chimney was removed, remodel attic closet as a heated/cooled dressing room and storage area

• Remodel mud room area by adding closet and washer and dryer

• New carpeting in some areas and hardwood in others, per customer, entire house

• New basement windows, new entry doors in all entry's

• Add exhibit shelf in dining room with accent lighting

• Use vintage lumber and trim to match period of house

• Add hidden gun safe location and design to be determined

[Plt. Exs. 1 and 27]. Somogye broke down the cost estimate in the contract as follows:

¦ Construct garage

$ 12,500.00

¦ Kitchen

15,000.00

¦ HVAC

10,000.00

¦ Bath

5,000.00

¦ Insulation

2,500.00

¦ Electrical

4,500.00

¦ Plumbing

3,500.00

¦ Cistern/concrete

3,000.00

¦ Demo/moving

10,000.00

¦ Construction

15,000.00

¦ Total

$ 81,000.00

[Id.; (emphasis added)]. The contract estimated completion of the project in 9 to 12 weeks. Terms of payment were "$20,000.00 deposit. $20,000.00 upon completion of garage and beginning house. $20,000.00 when ½ way thru house project, balance due upon completion." [Id.]. On February 8, 2016, the Otts and Somogye signed the contract and the Otts wrote Somogye a check for the initial $20,000.00 deposit, [Plt. Ex. 27], which he cashed.

From the outset the project dragged on. According to Mrs. Ott, Somogye gave a number of excuses for the slow progress, such as crew members not showing up, one person taking an extended vacation, there was too much rain, etc. It was these numerous false starts, "promises of tomorrow", and slow progress that prompted the Otts to terminate Somogye from the project in August 2016, well before it was complete.

In October 2016, the Otts filed suit against Brian and Mary Somogye in the Court of Common Pleas, Lucas County, Ohio alleging five causes of action arising out of the failed construction project. Ott et al. v. Somogye, et al., Case No. CI 2016 04590 (Lucas County, Ohio Common Pleas Court). TheOtts stated claims for breach of contract, fraudulent misrepresentation, and violation of the Ohio Consumer Sales Practices Act, and a claim of fraudulent transfer of property. Somogye represented himself in the state court litigation and filed an answer. The Otts prevailed on their motion for summary judgment on liability based upon unanswered requests for admission, which were deemed admitted. At a hearing on damages, Somogye appeared and was afforded an opportunity to litigate the Otts' claimed damages. On January 3, 2018, the State Court issued judgment as follows:

A. The Plaintiffs are granted a judgment against defendant, Brian R. Somogye in the sum of $26,892 for compensatory damages.

B. The Plaintiffs are granted a judgment against defendant, Brian R. Somogye, in the sum of $80,676.00 for treble damages for violation of the Consumer Sales Practices Act and fraud.

C. The Plaintiffs are granted a judgment against the defendant, Brian R. Somogye in the sum of $4,700 for attorney fees for violation of the Uniform Fraudulent Transfer Act and fraud.

[See Plt. Ex. 40].

In April 2018, Somogye filed his petition for relief under Chapter 7 of the Bankruptcy Code. The Otts timely filed this adversary action to determine dischargeability of the judgment debt. Plaintiffs initially filed a motion for summary judgment based upon the State Court judgment, arguing its preclusive effect as to their nondischargeability claim in this court. In denying their motion for summary judgment, this court found it could not give preclusive effect to a prior judgment based upon requests for admissions. [Doc. # 18]. As a result, the court conducted a trial on Plaintiffs' adversary complaint.

LAW AND ANALYSIS

A discharge under Chapter 7 of the Bankruptcy Code is subject to the exception of certain types of debts listed in 11 U.S.C. § 523(a). Stamper v. United States (In re Gardner), 360 F.3d 551, 557 (6th Cir. 2004). The Otts' complaint raises one of those exceptions: whether the judgment debt should be excepted from discharge under § 523(a)(2)(A) because of conduct by Somogye involving false representations.

The statutory exceptions are intended to implement the fundamental bankruptcy policy of affording a "fresh start" only to "the honest but unfortunate debtor." Id. (citing Grogan v. Garner, 498 U.S. 279, 286-87 (1991)). In order to implement the fresh start policy, the exceptions to discharge for debts listed in § 523(a) are to be construed narrowly. Rembert v. AT&T Universal Card Svcs., Inc. (In re Rembert), 141 F.3d 277, 281 (6th Cir. 1998).

Section 523(a)(2)(A) excepts from discharge a debt "for money, property, [or] services, . . . to the extent obtained by - (A) false pretenses, a false representation, or actual fraud, other than a statementrespecting the debtor's or an insider's financial condition...." Plaintiffs' complaint is premised upon alleged fraudulent misrepresentations made by Somogye regarding his qualifications to perform the project.

The breach of a construction contract does not itself establish fraud or fraudulent misrepresentations for purposes of § 523(a)(2)(A). In re Antonious, 358 B.R. 172 (Bankr. E.D. Pa. 2006) (quoting In re Maurer, 112 B.R. 710, 712 (Bankr. E.D. Pa. 1990)). Rather, the Sixth Circuit requires that to except a debt from discharge under § 523(a)(2)(A) based on a false representation, a plaintiff must prove the following elements: (1) the debtor obtained money, property, services or credit through a material misrepresentation that, at the time, the debtor knew was false or made with gross recklessness as to its truth; (2) the debtor intended to deceive the creditor; (3) the creditor justifiably relied on the false representation; and (4) the creditor's reliance was the proximate cause of the loss. Rembert, 141 F.3d at 280-81. The Otts, as the...