The bankruptcy court for the Eastern District of Tennessee was asked to determine whether a contractor who misrepresented his licensing status should have the claims of the homeowner who believed him discharged in bankruptcy. In In Re Heinz, 2012 Bankr. LEXIS 218 (January 18, 2012), the plaintiffs claimed that the debtor contractor fraudulently misrepresented that his construction company Masters Touch Custom Homes, Inc. was an insured and licensed general contractor in order to induce them to enter into a construction contract that left them with a fatally defective, partially constructed house.
The bankruptcy court for the Eastern District of Tennessee was asked to determine whether a contractor who misrepresented his licensing status should have the claims of the homeowner who believed him discharged in bankruptcy. In In Re Heinz, 2012 Bankr. LEXIS 218 (January 18, 2012), the plaintiffs claimed that the debtor contractor fraudulently misrepresented that his construction company Masters Touch Custom Homes, Inc. was an insured and licensed general contractor in order to induce them to enter into a construction contract that left them with a fatally defective, partially constructed house.
The plaintiffs' construction loan lender required a copy of the parties' construction loan contract, and received a document identifying the contractor/debtor's name, address, contractors license number, and identifying the contractor/debtor's insurance agency for workers compensation and general liability insurance. The total construction price was for the amount of $342,700.00, and construction was scheduled to last for 12 months. The contractor started work on the plaintiff' planned new log house residence in October 2008. The plaintiffs, who lived at some distance from the construction site, first visited the site in July 2009, then in September 2009, and finally Thanksgiving weekend, and were increasingly dissatisfied with the rate of completion of the work. The plaintiffs finally contacted five other builders to take over construction, all of whom opined the builder should be fired. By this time, plaintiffs had paid their contractor a net sum of $157,420.71. Thereafter, every builder plaintiffs contacted wanted $250,000 or more to finish the house, but plaintiffs only had $160,000 left on their construction loan. In the meantime, plaintiffs made a number of unpleasant discoveries about their terminated contractor. First, its general liability and workers compensation insurance was canceled for nonpayment in September 2008, and was never renewed. Second, it was not licensed when each of the two contracts with the plaintiffs was executed. Third, it did not identify a 2007 state tax lien as well as a number of other income tax liabilities that it was carrying when it signed the contract. Fourth, it was never licensed in a dollar amount sufficient to build the plaintiffs' house. It's monetary limit was $150,000. Plaintiffs filed suit against the contractor, which responded by filing for Chapter 7 bankruptcy on November 17, 2010.
Plaintiffs' suit against its contractor was heard as an adversary proceeding in bankruptcy, in which plaintiffs asserted that the contractors' debts to plaintiffs should not be discharged in bankruptcy under the fraud exception to discharge.
The court found the defendant debtor liable to the plaintiff in the amount paid to the contractor, of $179,420.71, plus attorneys' fees and costs. The court further found that due to the debtor's failure to disclose and misrepresentations regarding its financial, insurance, and licensing condition at the time it signed the contract and made representations it knew would be presented to plaintiffs' construction loan lender, the debt was nondischargeable.
Submitted by Anna Oshiro