Memorandum of Decision Re: Construction Fraud

IN THE UNITED STATES BANKRUPTCY COURT FOR THE NORTHERN DISTRICT OF CALIFORNIA
In re HAROLD and LENORE ELLIS,                                       No. 1-86-01339      Debtors. _________________________/ JERRY and TERESA MATTHIAS,      Plaintiffs,    v.                                                                                     A.P. No. 1-87-0008 HAROLD ELLIS,      Defendant. __________________________/
Memorandum of Decision
     In November, 1984, debtor and defendant Harold Ellis contracted with plaintiffs Jerry and Teresa Matthias to construct an addition to the Matthias home. Ellis was not a licensed contractor, nor did he hold himself forth as such. Upon signing the contract, the plaintiffs paid Ellis $15,000.00 which Ellis said was for the materials necessary for the addition.      The contract provided that construction was to begin no later than December 3, 1984, and was to be completed by April 3, 1985. However, Ellis experienced over six months in delays in obtaining a building permit, so that construction did not actually begin until April. Work proceeded slowly and sporadically until December, 1985, when, in the absence of Ellis, plaintiffs completed the work themselves. Ellis had completed no more than about half the contract, but had been paid almost all of the contract price of $30,000.00.      In January, 1985, the plaintiffs asked Ellis for the $15,000.00 back so that they could earn interest on it while the permit delays were being resolved. Ellis told them that he had used all of this money to purchase materials for the job, which the suppliers were holding until needed. This representation was in fact not true; Ellis had purchased only about $4,900.00 in materials for the job, and some of these purchases were made long after January. The plaintiffs believed Ellis and thought that most or all of the materials had been purchased and that completion of the project was merely a matter of getting Ellis out to complete the work. They made advances to Ellis in April, July and August, 1985, in the total of $7,500.00, to get Ellis out to complete the work.      The plaintiffs seek to have the entire amount they paid to Ellis declared nondischargeable. They argue that Ellis never intended to complete the contract, and thus entered into it with the intent to defraud them. They further argue that his failure to use all of the funds they paid to him on the project constituted defalcation in a fiduciary capacity. They therefore seek a nondischargeable judgment pursuant to sections 523(a)(2) and (6) of the Bankruptcy Code      The mere breach of a contract, no matter how egregious, does not render a debt nondischargeable. Matter of Schwaninger (Bkrtcy. W.D. Mo.1986) 57 B.R. 553, 556. Moreover mere promises, though false and intended to deceive, do not afford the basis for actionable fraud under section 523(a). 3 Collier on Bankruptcy (15th ed.), p. 523-51. Regardless of whether as a matter of law plaintiffs can prevail on the theory that they were fraudulently induced to enter into the contract, the evidence clearly demonstrated that at the time Ellis agreed to do the job he fully intended to complete it. There is therefore no basis for plaintiffs' claim in law or in fact.      The Court finds no merit in the plaintiffs' argument that Ellis is liable for defalcation in a fiduciary capacity because he did not use all of the money paid to him to complete the contract. There is no such requirement in the contract. Even if California's contractors license law is applicable, breach of this law does not give rise to a cause of action under section 523(a)(4). In re Pedrazzini (9th Cir.1981) 644 F.2d 756, 759.      While the Court cannot find that all of Ellis' debt to the plaintiffs is nondischargeable, it must find that a portion is. The undisputed testimony was that Ellis falsely told the plaintiffs that all of the $15,000.00 he received upon signing the contract had been used for materials, when in fact less than a third of that was ever used for materials. Plaintiffs, relying on the false belief that the materials had all been paid for, gave Ellis an additional $7,500.00 in the mistaken belief that all that was needed to complete the work was Ellis' labor. Ellis thus obtained the $7,500.00 by misrepresentation, rendering this amount nondischargeable.      For the above reasons, plaintiffs shall have judgment against Harold Ellis in the sum of $7,500.00, together with interest thereon at the legal rate from and after August 14, 1985. Plaintiffs shall also recover their costs of suit.      Counsel for plaintiffs shall submit an appropriate form of judgment. This memorandum constitutes findings and conclusions pursuant to FRCP 52(a) and Bankruptcy Rule 7052.
Dated: April 4, 1988                                                                              _________________________                                                                                                                      Alan Jaroslovsky                                                                                                                      U.S. Bankruptcy