Bankruptcy court litigation favors contractors over homeowners

If you hire a contractor to remodel your house, and the workers show up on expensive Harley-Davidson motorcycles, that’s a good sign that the company is solvent enough to finish the job, right?

Wrong. And it led to a long bout of ultimately losing litigation when the contractors filed for personal bankruptcy. Massachusetts chief bankruptcy judge Frank Bailey has ruled that the homeowners can’t recover anything on their allegations that the contractors committed “fraud,” except a small payment (in the scheme of things) for cabinets they ordered.

In the Alexander case(07/23/12), homeowners who had hired the now-bankrupt debtors, who were running a remodeling business under the name Season All, alleged that the contractors committed fraud by misleading them into thinking their operation was financially healthy (in fact, Season All was in deep to the IRS).

The home owners actually tried to argue that because the contractors sometimes arrived for work on expensive Harleys, this amounted to a fraudulent representation of the firm’s solvency. Judge Bailey quickly rejected this line of thought, noting that fraud allegations need to be pleaded with exacting particularity in court, and that section 523 (a) (2) (B) of the Bankruptcy Code requires that representations of solvency to be made in writing, and not by ogling motorcycles.

There are a few lessons to be learned in this case for debtors, homeowners, and lawyers. First, the bankruptcy court is still a debtor-friendly forum, and as such it makes a lousy place to sue for a homeowner with a problem contractor.

Second, the special pleading requirements for fraud are well known and often invoked in bankruptcy court. Before you say that “XYZ defrauded me, so he shouldn’t get a bankruptcy discharge,” you really have to have your chickens lined up just right, and your (voluminous) evidence ready to file. Bad feelings and “misunderstandings” won’t get you very far in court.

Third, for people in the building trades (who have been battered more than most in the recession), bankruptcy offers a way to rebuild, but often comes with the extra price tag of having to fend off one or more nuisance suits from disgruntled former customers.
If you think the ride might be bumpy, make sure you get a good bankruptcy lawyer to pilot your case through the system.


By Doug Beaton

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