The debtor, as the sole proprietor of his company, contracted with the creditors to build and install a pool on the creditor’s property. The creditors were initially hesitant to hire the debtor because they had inquired about the company and were made aware of several issues related to the pools the company had completed (including tiling, grout work, and leveling). However, the debtor assured the creditors that those issues were caused by a previous contractor who no longer worked for the company and would not do any work on the creditors’ pool. After the work began, several issues arose. The creditors discovered that the problematic contractor (who they were told no longer worked for the debtor) was doing work on their pool. When the creditors confronted the debtor, he assured them he was keeping a close eye on the contractor and the work “would be finished in excellent fashion.” Additionally, the creditors reached out regarding several other problems with the work on the pool (including stonework, incomplete work, and missing equipment), and each time, an employee (different than the problematic contractor) of the debtor’s business assured the creditors that the problems would be addressed and fixed before they poured any concrete. The employee of the company made statements such as “the pool will ‘absolutely [] not . . . crack” and “‘I guarantee you the pool does not need to be torn out’” in response to the creditors’ continued concerns. The debtor himself never made these statements, nor did he reach out to the creditors to address them. Eventually, the creditors told the debtor not to return and ultimately hired another contractor to tear out the work that had been done and redo the pool. Later, the debtor and the debtor’s business filed for chapter 7 bankruptcy, and the creditors filed an adversary proceeding under 11 U.S.C. §§ 523(a)(2)(A), (a)(4), (a)(6), seeking to have the debt owed to them by the debtor deemed nondischargeable. Additionally, the court argued that the debtor’s conduct was unconscionable and, therefore, violated the Texas Deceptive Trade Practices Act (DTPA) and the Texas Construction Trust Fund Statute. The debtor denied that his actions would make the debt nondischargeable or violated the TDPA, admitting that “health and money troubles” caused him to fail to do the job in a timely manner, but “he always intended to fix the pool and complete the job and never intended to mislead the [creditors].”
In Ketelhut v. Allen (In re Allen), No. 22-20178-rlj7, 2025 WL 319925, 2025 Bankr. LEXIS 154 (Bankr. N.D. Tex. Jan. 27, 2025) (unpublished opinion), the court held that the creditors failed to prove the debt should be deemed nondischargeable and denied the creditors’ request for relief. The court began by noting that the Chapter 7 case was a “no-assets” case. The court then addressed whether the debtor’s conduct, or the conduct of the employee imputed to the debtor, constituted a violation of the DTPA or Texas Construction Trust Fund Statute. The court determined that the employee's conduct was imputed to the debtor because the employee was his agent through implied actual authority and apparent authority, and the debtor ratified the employee's statements. Therefore, the debtor was bound by the employee's statements and conduct. Additionally, the court found no violation of section 17.45(5) of the DTPA by the debtor. To succeed on a DTPA claim, a plaintiff must prove that “(1) the plaintiff [was] a consumer, (2) the defendant engaged in false, misleading, or deceptive acts; and (3) these acts constituted a proximate cause of the consumer’s damages.” In re Frazin, 732 F.3d 313, 323 (5th Cir. 2013). The court further explained the second element. Unconscionable actions are considered a “false, misleading or deceptive” act and “exists where ‘an act or practice…, to a consumer’s detriment takes advantage of the lack of knowledge, ability, experience, or capacity of the consumer to a grossly unfair degree.’” Tex. Bus. & Com. Code Ann. § 17.45(5). Additionally, “’[t]he Fifth Circuit has interpreted Texas law to mean that ‘where ‘allegedly unconscionable statements’ are made but where the breach of the contract causes the harm, a plaintiff cannot maintain a claim for unconscionable conduct under the DTPA.’” Shakeri v. ADT Security Servs., Inc., 816 F.3d 283, 295 (5th Cir. 2016). Here, the court found the consumer met elements (1) and (3), but because the alleged “unconscionable conduct” (being misled about the company’s ability to construct the pool, what workers would be involved, and the timing and manner of repairs that would be made when issues arose in the construction) would not have occurred without the breach of contract, the consumer did not meet the second element. The court emphasized that all the alleged unconscionable conduct would not have occurred if there had been no agreement between the parties. The court next found the creditors’ claim that the proprietor violated § 162.031, Texas Construction Trust Fund Statute, was also not a valid claim. “Under the statute, a trustee who, intentionally or knowingly or with intent to defraud, directly or indirectly retains, uses, disburses, or otherwise diverts trust funds without first fully paying all current or past due obligations incurred by the trustee to the beneficiaries of the trust funds, has misapplied the trust funds,” and the statute “imposes criminal penalties on trustees who misapply construction trust funds.” Tex. Prop. Code Ann. § 162.031; In re Nicholas, 956 F.2d 110, 111-12 (5th Cir. 1992). Although the court found the debtor was a trustee under the statute, the debtor asserted the affirmative defense under the statute that the funds were used to pay actual expenses of the project. Thus, the debtor was not liable’. Next, the court turned to the creditors’ section 523(a)(2)(A) nondischargeability claim. This section “precludes the discharge of debts "for money, property, services, or an extension, renewal, or refinancing of credit, to the extent obtained by. . .false pretenses, a false representation, or actual fraud, other than a statement respecting the debtor's or an insider's financial condition." In analyzing whether the debt was nondischargeable for false pretenses and false representations, the court employed a five part test: “(1) the debtor made a representation; (2) the debtor knew the representation was false at the time it was made; (3) the debtor made the representation with the intent to deceive; (4) this representation was justifiably relied on; and (5) the plaintiff sustained a loss as a proximate result of the representation.” The court found that there was insufficient evidence to meet elements (2) and (3) because the debtor reasonably believed he would finish the project at the time, and he testified he intended to complete the work and never intended to deceive the creditors. The court then analyzed whether the debt was nondischargeable due to actual fraud. “[A]ctual fraud is ‘any deceit, artifice, trick or design involving direct and active operation of the mind, used to circumvent and cheat another...something said, done or omitted with the design of perpetrating what is known to be a cheat or deception.’" Actual fraud requires a showing that “the underlying conduct must involve a ‘moral turpitude or intentional wrong.’” In re Hunt, 605 B.R. 758, 777-78 (Bankr. N.D. Tex. 2019). Here, the court found the fraud claim failed for the same reasons as the previous claim–there was no evidence of an intentional wrong when the statements were made. The court then turned to the § 523(a)(4) nondischargeability claim. Section 523(a)(4) “prevents the discharge of any debt for fraud or defalcation while acting in a fiduciary capacity, embezzlement, or larceny.” The court first addressed the fraud or defalcation aspect, which requires a creditor to show that “(1) the debt was caused by fraud or defalcation, and (2) there was a fiduciary relationship between the parties at the time the debt was created.” Although the court found a fiduciary relationship existed between the parties, the evidence was again insufficient to prove bad faith or an intent to deceive. The court next turned to the larceny and embezzlement aspects of the statute. The court found that larceny was inapplicable to the case here, so it only analyzed the embezzlement aspect. Embezzlement under § 523(a)(4) is defined as the “fraudulent appropriation of property by a person to whom such property has been entrusted, or into whose hands it has lawfully come.” Three elements must be met: “(1) debtor appropriated funds, (2) the appropriation was for the debtor's use or benefit, and (3) the debtor did the appropriation with fraudulent intent.” The court found that the creditors failed to prove the debtor had a fraudulent intent in taking their money, because the debtor had intended to finish the project had the creditors allowed him to do so. Therefore, the court denied the consumer’s claim for nondischargeability under § 523(a)(4). Finally, the court addressed nondischargeability under § 523(a)(6), which precludes discharge of a debt “arising from willful and malicious injury by the debtor to another entity or to the property of another entity.” The test of whether there was a willful and malicious injury is “either an objective substantial certainty of harm or a subjective motive to cause harm" on the part of the debtor. A mere breach of contract is not enough to meet this standard. Here, the evidence was insufficient to prove the debtor had a subjective motive to cause harm to the creditors. To determine if the injury was objectively certain, the court relied on expert witness testimony and concluded that the injuries suffered during the project were not abnormal and could have been fixed in the next stage of the project. Therefore, the evidence did not meet the standard for willful and malicious conduct, and the debt was not nondischargeable under this claim either. Because the creditors could not meet the elements for precluding discharge of the debt owed by the proprietor under sections 523(a)(2)(A), (a)(4), and (a)(6), the debt owed was held not to be nondischargeable.
By Jace Brown, [email protected]
Edited By Kristin Meurer, [email protected]
Edited By Hayden Mariott, [email protected]