IN THE UNITED STATES BANKRUPTCY COURT
FOR THE NORTHERN DISTRICT OF CALIFORNIA
HAROLD and LENORE ELLIS, No. 1-86-01339
JERRY and TERESA MATTHIAS,
v. A.P. No. 1-87-0008
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
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
(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
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
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
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 _________________________