First Circuit: Fraud Judgment Means Debt is Nondischargeable - Bankruptcy Law - U.S. First Circuit
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First Circuit: Fraud Judgment Means Debt is Nondischargeable

Murphy's Law was working overtime when David Sharfarz started talking to contractors about building an addition to his new home. Sharfarz ended up hiring Peter Goguen. The contract for the job required Goguen to pour the foundation by October 15, 2006, to obtain the necessary town permits, and to complete the project by March 15, 2007.

Goguen lied to Sharfarz on multiple occasions throughout the project, (e.g. saying he applied for permits when he hadn't, demanding — and receiving — money for a worker he never hired). Sharfarz's primary concern through the process was pouring the foundation before the weather turned cold to avoid cracks. The project was delayed (due to the missing permits), the foundation was poured after the weather turned cold, and the foundation — you guessed it — cracked.

Sharfarz paid Goguen the entire contract price before the job was completed, and Goguen later abandoned the job when Sharfarz refused to give him even more money.

Sharfarz had to pay other contractors $88,000 to finish the job, so he sued Goguen in Massachusetts state court under the state's consumer protection laws. The judgment, including treble damages and attorneys fees, came to $272,745.50. But Sharfarz never saw a dime because Goguen filed for Chapter 7 bankruptcy.

Sharfarz petitioned to have his judgment against Goguen declared nondischargeable, relying on a Bankruptcy Code provision that bars discharge of "any debt ... for money ... to the extent obtained by ... false pretenses, a false representation, or actual fraud." The bankruptcy judge sided with Sharfarz, but the Bankruptcy Appellate Panel reversed that decision.

This week, the First Circuit ruled that the judgment was nondischargeable. The appellate dispute centered on causation, which is reviewed for clear error.

The Bankruptcy Code is designed to give the deserving debtor a "fresh start," so courts interpret exceptions to dischargeability "narrowly." That means that a person in Sharfarz's shoes must show that his claim fits "squarely" within a specific exception set out in the Bankruptcy Code. As the party seeking an exception to discharge, Sharfarz had the burden of proving nondischargeability by a preponderance of the evidence.

Sharfarz succeeded.

The bankruptcy judge reasoned that if Goguen had not lied to Sharfarz about the building-permit status, Sharfarz "would have canceled the construction contract" and gotten back "all or most" of the initial $25,693 payment. The First Circuit found that the evidence supported the bankruptcy judge's cause-in-fact finding that Goguen's deliberately deceitful conduct was a "substantial factor" in Sharfarz's "loss."

Next, the First Circuit turned to legal cause, which it described as a "trickier matter" because it's largely a question of foreseeability. Here, the court noted that it had to determine whether Sharfarz showed that Goguen's lies led to a "loss" that "might reasonably" have been "expected to result from the reliance." Once again, the appellate court concluded that Sharfarz met his burden of proof.

Sharfarz won because he adequately proved causation, and Goguen did not meet his burden of showing an intervening or superseding cause.

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