Memorandum of Decision Re: Fraud

FOR THE NORTHERN DISTRICT OF CALIFORNIA In re MICHAEL and SUZANNE LANSOM,                                                                              No. 1-90-00582        Debtor. ___________________________/ BILL and JANE ROSE,        Plaintiffs,    v.                                                                                                                                        A.P. No. 1-90-0190 MICHAEL LANSOM,        Defendant. ______________________________/
Memorandum of Decision
     In December of 1989, plaintiffs Bill and Jane Rose hired debtor and defendant Michael Lansom, a general contractor, to build their home in Clearlake Oaks, California. The contract provided for an initial payment of $11,400.00, plus an additional payment of $20,000.00 when the foundation was laid and $20,000.00 after the rough frame was completed, plus additional sums thereafter. Lansom filed his bankruptcy petition while the work was in progress and did not finish it. In this adversary proceeding, the Roses seek to establish that at least a portion of their claim against him is nondischargeable.      The court begins its analysis by noting that most of the original allegations in the complaint were either unproved or are not sufficient to establish nondischargeability under section 523(a) of the Bankruptcy Code. Exceptions to discharge are narrowly construed in favor of the debtor. In re Hunter, 780 F.2d 1577 (11th Cir.1986). Even the most inept and damaging performance of a construction contract does not establish grounds for nondischargeability. In re Kaufmann, 57 B.R. 644 (Bkrtcy.E.D.Wis. 1986). Breach of state contracting laws by not applying payments to a specific project likewise does not establish nondischargeability. In re Pedrazzini, 644 F.2d 756 (9th Cir.1981).      However, the circumstances surrounding the third payment to Lansom on March 15, 1990, do establish a nondischargeable debt as to that payment only. On that date the Roses, who lived in Southern California, visited the job and could see that the framing was not completed, as required by the contract before Lansom was entitled to the third payment of $20,000.00. However, Lansom convinced them to make the payment anyway, telling them that he was just about to finish the framing and that he had lien releases for work done to date. The court finds that these statements were not true, in that Lansom was in fact contemplating a bankruptcy and there were no lien releases. Had the Roses known the true facts, they would not have made the payment.      The court acknowledges that the above finding that Lansom was contemplating bankruptcy is subject to dispute, and Lansom himself denied it. However, the fact that he retained bankruptcy counsel just eight days after the payment was made creates a very strong inference that he was contemplating bankruptcy when he obtained the payment, and the court is not convinced that events which took place between March 15 and March 23 created the immediate need for a bankruptcy which the debtor had not previously contemplated. If the old standard of clear and convincing evidence was still applicable, the court has no doubt that it would rule in favor of the debtor; the court is not clearly convinced of anything. However, given the short period of time between the payment by the Roses and the bankruptcy filing, the fact that the payment was not then due and they had to be talked into making it, and the fact that the framing in fact was never completed by Lansom, the court finds it more likely than not that Lansom never intended to complete the work when he talked the Roses into making the payment. Under the present law, such a finding demands judgment in favor of the Roses. Grogan v. Garner, -- U.S. --, 112 L.Ed.2d 755 (1991).      Accordingly, the Roses shall have a nondischargeable judgment against Lansom in the sum of $20,000.00, together with interest at the legal rate from and after March 15, 1990. They shall also recover their cost of suit, less the sum of $300.00 which the court assesses against them for failure to file proper proposed findings and conclusions and to timely exchange exhibits to be used at trial as required by Local Rule 235-8 and specifically ordered by the court.      This memorandum constitutes the court's findings and conclusions pursuant to FRCP 52(a) and Bankruptcy Rule 7052. Counsel for the Roses shall submit an appropriate form of judgment forthwith.
Dated: May 28, 1991                                                                          _______________________                                                                                                                      Alan Jaroslovsky                                                                                                                      U.S. Bankruptcy