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Stewart v. Stewart

United States Bankruptcy Appellate Panel of the First Circuit

November 1, 2018

EDWARD T. STEWART, JR., Defendant-Appellee. SHEILA DEWITT and JOSEPH DEWITT, Plaintiffs-Appellants, Adversary Proceeding No. 15-01032-BAH

          Appeal from the United States Bankruptcy Court for the District of New Hampshire (Hon. J. Michael Deasy, U.S. Bankruptcy Judge) [1]

          Daniel M. Deschenes, Esq., and Seth M. Pasakarnis, Esq., on brief for Plaintiffs-Appellants.

          Nancy H. Michels, Esq., on brief for Defendant-Appellee.

          Before Feeney, Tester, and Finkle, United States Bankruptcy Appellate Panel Judges.

          Per Curiam.

         Homeowners, Sheila DeWitt and Joseph DeWitt (collectively, the "DeWitts"), appeal from the bankruptcy court's Memorandum Opinion and Final Judgment (collectively, the "Judgment") determining that the obligation allegedly owed to them by their builder, Edward T. Stewart, Jr. ("Stewart"), is dischargeable in bankruptcy.[2] The DeWitts contend that the bankruptcy court should have excepted Stewart's alleged obligation from discharge pursuant to § 523(a)(2)(A) and § 523(a)(6).[3] The record establishes that the DeWitts satisfied their burden of proving: (1) all of the necessary elements for a claim of nondischargeability under § 523(a)(2)(A); and (2) that Stewart should be personally liable for the debt owed to them by Boardwalk by piercing Boardwalk's corporate veil under New Hampshire law. Accordingly, we REVERSE the Judgment as to § 523(a)(2)(A) and REMAND to the bankruptcy court for further proceedings consistent with this opinion.[4]


         I. Introduction

         Stewart is the owner of Data Industries, Inc., which did business as Boardwalk North ("Boardwalk"), a company specializing in home remodeling. In June 2013, the DeWitts entered into a contract with Boardwalk, whereby Boardwalk agreed to renovate the DeWitts' New Hampshire home for $1, 649, 936.[5] The contract included a three-page payment schedule based on the "start of certain construction milestones.[6] At the commencement of each of these specified milestones, the contract required the DeWitts to pay to Boardwalk the sum of $41, 931.81. The contract did not explicitly state, however, how the milestone payments were to be disbursed or allocated.

         Pursuant to a change order executed on August 2, 2013 (the "Change Order"), the contract amount was reduced to $1, 300, 000. One year later, when the project was only 45% complete, and after the DeWitts had paid Boardwalk a total of $1, 175, 350, Boardwalk abandoned the project. In September 2014, Boardwalk filed a petition for chapter 7 relief. Stewart's own chapter 7 bankruptcy petition followed several months later. The DeWitts have since paid a new contractor an additional $730, 000 to complete the project, far more than the remaining contract balance of $175, 755. The DeWitts filed a proof of claim in Stewart's case, indicating that they held an unsecured claim in the amount of $558, 335.28.

         II. Bankruptcy Proceedings

         A. The Amended Complaint

         On May 26, 2015, the DeWitts commenced an adversary proceeding against Stewart with a thirteen-count complaint which they subsequently amended (the "Amended Complaint").[7] In the Amended Complaint, the DeWitts alleged that Stewart, the sole shareholder, president, and treasurer of Boardwalk, operated that company as his "alter ego . . . to perpetrate injustice and fraud upon" them. The DeWitts further alleged that Stewart "made numerous false representations to induce [them] into a contract with" Boardwalk, "misappropriated [their] advance payments and deposits . . ., paid his personal expenses with those funds, and utilized Boardwalk['s] bank account as his own personal checking account." Accordingly, they claimed the "fiction" that Boardwalk was independent of Stewart "should be disregarded" and Stewart "should be held personally liable for Boardwalk['s] breaches of contract, breaches of the covenant of good faith and fair dealing, negligence, conversion, fraudulent misrepresentations, and violations of [N.H. Rev. Stat. Ann. §] 358-A" (New Hampshire's Consumer Protection Act). They also sought a determination that Stewart was not entitled to a discharge in bankruptcy pursuant to § 727 or, alternatively, that Stewart's debt to them was not dischargeable pursuant to § 523.

         In support of these claims, the DeWitts further alleged, in pertinent part:

(1)"In or about April 2013, [Stewart] met with the DeWitts concerning the renovation and addition to their home. [Stewart] personally represented that he had the skill, experience, and manpower to deliver a first-class Project by July 2014. [Stewart] personally represented that he had strong relationships with subcontractors and materials suppliers."
(2)"The DeWitts hired Boardwalk . . . . The Contract was modified pursuant to an August 2, 2013 agreed change order . . . reducing the total contract amount to $1, 300, 000."
(3)"At the time of signing the Contract, [Stewart] requested, and the DeWitts paid, a $200, 000 down payment."
(4)"Unbeknownst to the DeWitts, [Stewart] immediately began to misappropriate the DeWitts' deposit."
(5)"On or about August 29, 2013, Boardwalk [ ] began work on the Project. [Stewart] required the DeWitts to make 'up front' installment payments tied to various "milestones." [Stewart] personally represented to the DeWitts that paying in advance for work would allow him to negotiate the best possible prices with subcontractors and would save the DeWitts substantial sums of money. In reliance on [Stewart's] representations, the DeWitts made such installment payments, never refusing to pay for a milestone once work had been started. [Stewart's] representations, however[, ] were false."
(6)"[Stewart] also proposed that the DeWitts could receive up to $20, 000 in pre-paid milestone 'discounts' in exchange for an additional $172, 000 up-front deposit, which the DeWitts made. This deposit was in addition to the $200, 000 deposit the DeWitts initially paid. The Contract required that Boardwalk . . . would pay all subcontractors and material suppliers for labor and materials used on the Project, and would hold the DeWitts' funds in trust for use on their Project. Instead, [Stewart] used the DeWitts' deposits and advance milestone payments to pay debts unrelated to the Project, including the [Stewart's] personal obligations and expenses."
(7)"On July 18, 2014, one of Boardwalk['s] subcontractors, Manning Drywall, sent the DeWitts a notice of intent to file a mechanic's lien against the Project."
(8)"On July 22, 2014, the DeWitts met with [Stewart]. At that meeting, [Stewart] stated that [he] was in the process of 'recapitalizing the company' but gave no indication that the Project would not be completed."
(9)"Manning Drywall filed a lien against the Project . . . ."
(10)"On or about July 24, 2014, [Stewart] notified the DeWitts by email that any financial difficulties had been resolved, and reiterated that Boardwalk intended to return to the Project to complete the work [ ]."
(11)"[T]his representation that financial difficulties had been resolved was false . . . ."
(12)"The last day any person from Boardwalk [ ] was onsite performing substantive construction work was August 11, 2014. [Stewart] refused to return to the Project to complete construction and abandoned the Project."

         Based on the foregoing allegations, the DeWitts asserted seven counts under state law, four § 523(a) counts, and two § 727(a) counts. See note 4, supra. After substantial winnowing of the issues, the bankruptcy court tried only two counts of the Amended Complaint-Count VIII, the § 523(a)(2)(A) claim, and Count XI, the § 523(a)(6) claim.[8]

         B. The Trial

         A summary of each witness's testimony on direct examination follows in the same order it was presented at trial.

         1. Sheila DeWitt

         Sheila DeWitt ("Mrs. DeWitt"), a scientist with a Ph.D. in chemistry, testified regarding a variety of topics, ranging from the seeds of the parties' relationship to the numerous ways in which the DeWitts claim Stewart misrepresented his ability, Boardwalk's financial condition, and the purpose of the DeWitts' payments. She began by explaining that when she and her husband, Joseph DeWitt ("Mr. DeWitt"), moved to New Hampshire in 2000, they purchased a house suitable for their community "outreach," including serving meals to homeless individuals. Because the DeWitts' expanding community work eventually demanded more space, they embarked upon a home renovation project in 2013.

         The DeWitts set a renovation budget of $700, 000 to $1, 000, 000 and searched for a contractor. In March 2013, they met Stewart at a New Hampshire home show, where he had set up a booth for Boardwalk. During their first conversation with Stewart, the DeWitts described their renovation project as "large scale," and Stewart responded that he was "well qualified" for such an undertaking.

         The DeWitts subsequently began a "[due] diligence process," which included sending emails to potential contractors containing a set of questions drafted by Mrs. DeWitt. On March 23, 2013, Stewart received one of Mrs. DeWitt's "vetting" emails, which included the following inquiries: (1) "What were your annual revenues and number of jobs for 2011 and 2012 (separated by year)?"; and (2) "What are your revenue projections for 2013 (without [the] DeWitt project)?"

         On March 24, 2013, Stewart responded that for the year 2011, Boardwalk's revenues were $2, 300, 000. For the same period, however, Stewart's financial records for Boardwalk later disclosed during the course of discovery showed revenue of $1, 948, 000, and Boardwalk's tax return indicated revenue of $1, 946, 000. For the year 2012, Stewart reported to Mrs. DeWitt that Boardwalk had revenues of $1, 700, 000. Yet, Boardwalk's 2012 tax return for that year later revealed income of $1, 500, 000. Stewart further disclosed to Mrs. DeWitt that Boardwalk's income for the first quarter of 2013 was $1, 200, 000, while Stewart's financial records for that period showed income of approximately $335, 000. Moreover, Stewart "indicated that his company was doing extremely well," that "[h]e had a large and experienced team, [and] a long and healthy track record of success in building high-end homes," and that the DeWitts "should have trust and confidence in him and his team." In addition, Stewart represented that he had "excellent relationships" with subcontractors.[9] Mrs. DeWitt testified that, had the DeWitts known Boardwalk's actual revenues, they would have selected a different contractor.

         Mrs. DeWitt's testimony then shifted to the documents which memorialized the parties' agreements. The first was a "design fee purchase agree[ment]" (the "Design Agreement") executed by the parties on April 19, 2013, pursuant to which Stewart (on behalf of Boardwalk) agreed to furnish a design proposal to the DeWitts at a cost of $2, 895. The Design Agreement indicated an anticipated price range of $700, 000 to $1, 000, 000 for completion of the project, and called for a "Good Faith Deposit" of "approximately 10-15% of the estimated [s]elling price of project." Appended to the agreement was a document captioned "DeWitt Design Parameters," which similarly indicated a price range of $700, 000 to $1, 000, 000.

         On June 26, 2013, the DeWitts paid Stewart "a good faith deposit" of $200, 000 (the "first deposit"). This deposit significantly exceeded the amount called for in the Design Agreement. The DeWitts voluntarily increased the amount of the required deposit "in a good faith effort to continue a relationship with Boardwalk . . . ." They were eager "to start out on the right foot" and believed that the first deposit would be applied to their project.

         The DeWitts saw the "final contract" for the first time on June 27, 2013-the day after they paid the $200, 000 deposit. On that date, Stewart presented them with a Purchase Agreement which recited a project price of $1, 649, 936.[10] Mrs. DeWitt explained that they were "shock[ed]" by this figure. With respect to payment, the Purchase Agreement provided: "Payments to be made as the work progresses as per the Payment Schedule which is attached and made part of this Contract." The Payment Schedule listed 12 "milestones," each linked to a $41, 932 payment. Mrs. DeWitt testified that, when she and her husband saw the Purchase Agreement, they wanted "to walk away," but "felt trapped." They went forward despite their hesitations.

         During the course of the next six weeks, the DeWitts and Stewart's team met on several occasions in order to "come up with alternative proposals." On August 2, 2013, the parties executed the Change Order, which reduced the price of the project to $1, 300, 000. Like the Purchase Agreement, the Change Order linked the payment schedule with the "start of milestones." Stewart explained to the DeWitts that the purpose of the "milestone payment" approach was to "leverage subcontractors, vendors and other resources that he needed . . . so that he could move [the project] forward in a timely fashion."

         On August 27, 2013, at Stewart's request, the DeWitts made a second "good faith deposit" in the amount of $172, 000 (the "second deposit") and the parties executed another payment schedule. Mrs. DeWitt testified that Stewart said this second deposit would increase "efficiency on [the] project and ensure it was done." With respect to this deposit, her attorney inquired:

Q. [W]here did you understand that money was going to be spent?
A. On our project.
Q. He told you that?
A. Yes.
Q. And did you have any reason initially to believe that that was not true?
A. No, not at all.

         Notations on the August 27, 2013 Payment Schedule indicated that two of the progress payments (both paid on August 27, 2013) had been reduced from $40, 619 to $38, 588, reflecting a discount for prepayment.

         As of August 27, 2013, work on the project had not yet begun, although the DeWitts had already paid Stewart about $450, 000-consisting of the first deposit of $200, 000, the second deposit of $172, 000, and two prepaid milestone payments of $38, 588 each. Work on the project site did not commence until two days later. Mrs. DeWitt testified that, according to Stewart, the prepayment of the milestones would enable him to hire subcontractors at a discount which he would "pass . . . on" to the DeWitts.

         When her attorney again asked, "What were you told was going to happen with your money?" Mrs. DeWitt answered:

A. We were told the money would be used for our project.
Q. To fund your project?
A. To fund our project.
Q. Would you have given this amount of money in advance to any contractor if you knew it was going to pay old bills?
A. Never.
Q. Did you rely on Mr. Stewart's statement that you were, in fact, funding your own project?
A. We did.
Q. Did you rely on that in terms of agreeing to this payment schedule?
A. We did.
A. Did you rely on that statement in terms of following the payment schedule?
A. Yes.

         Mrs. DeWitt further testified that she later learned Stewart had actually spent a portion of the $450, 000 they paid-namely, $196, 000-on jobs other than theirs. She repeated that she "never" would have paid the $450, 000 if she had known Stewart was not using this sum to fund their own project. However, the DeWitts continued to make the prepayments upon request, believing that Stewart was applying the money exclusively to their project. For example, after the commencement of the project, on September 26, 2013, the DeWitts made two additional milestone payments totaling $77, 176. Mrs. DeWitt stated that they continued "to funnel money into Boardwalk" because they "felt trapped and wanted to . . . get the project done." They subsequently learned, however, that Stewart used $51, 000 out of the $77, 176 paid "on other expenses of Boardwalk." Throughout her direct examination, Mrs. DeWitt consistently testified that she and her husband had been told their payments were "going to [their] project" and that they would not have continued to pay money to Boardwalk if they had known that the payments "were actually being used to pay old bills."

         Although the DeWitts prepaid every milestone days or even weeks in advance, there were still project delays. Mrs. DeWitt testified that when they inquired about the cause for the delays, they were told Boardwalk "couldn't get the . . . subcontractors for the job." After Stewart had remained out of sight for eight months, he and Brian Lessard, a Boardwalk employee, finally met with the DeWitts and informed them that Boardwalk needed up to $360, 000 to finish the project, even though the remaining balance due on their account at that time should have been $175, 000.

         Mrs. DeWitt then testified to a number of events which reflected Boardwalk's deteriorating financial condition. For example, on July 18, 2014, one of Boardwalk's subcontractors, Manning Drywall, sent the DeWitts a notice of intent to file a mechanics lien against the project. By then, the DeWitts had paid over $1, 000, 000 and their home was in shambles. On or about July 23, 2014, Manning Drywall filed a mechanics lien and two other subcontractors, Concord Lumber and Wetherbee Plumbing and Heating, soon followed suit.

         On July 24, 2014, Stewart notified the DeWitts that Boardwalk had "resolved" its financial difficulties and work on the project would resume. On July 30, 2014, the parties had a final meeting, during which Stewart asked the DeWitts if they would "consider a mutual termination" of their agreement. The DeWitts declined. On August 15, 2014, Boardwalk abandoned the project and, shortly thereafter, Stewart sent the DeWitts an "As Built Policy Invoice," indicating that the DeWitts owed an additional $183, 629, even though they had "already paid in advance" for work that had not been performed.

         These developments prompted the DeWitts to hire a new contractor, Hutter Construction ("Hutter"), who completed the project for $598, 450.

         2. Brian Lessard

         Brian Lessard testified that he was employed by Boardwalk from 2006 through 2014-first, as its lead carpenter, then as its field site supervisor, and as its production manager. He ultimately became its vice president of operations. In 2013, when work on the DeWitts' project began, Lessard served as Boardwalk's vice president of operations, in charge of quality control. When questioned about Boardwalk's financial health as of April 2013, Lessard answered that the company was "struggling" and that it "had a deficit." He described some of Boardwalk's relationships with subcontractors as "strained" or even "bad." According to Lessard, Boardwalk had been charging some of its expenses to the personal credit card of Stewart's wife, Linda ("Mrs. Stewart"). Consistent with Mrs. DeWitt's testimony, Lessard testified that he informed Boardwalk's clients that milestone payments enabled them to "finance" or "fund" their own projects. Lessard conceded that, in fact, milestone payments were collected to fund Boardwalk's business and improve its cash flow.

         In addition, Lessard testified regarding an email he sent to the DeWitts in which he used the word, "leverage." Specifically, on March 4, 2014, Lessard wrote:

As far as the pre-payment goes, as you [can] imagine in order for us to offer this discount the idea is that we are leveraging your money to save money. So we would need to leverage your money for more th[a]n a couple days to [offset] the ($20, 000.00 [overall]) discount being applied. This program was designed with the intention that there would be multiple payments made at a time and that would allow us plenty of time to leverage and save money, with time being the catch. Having the benefit of your funds for a mere few days in return for such a large amount of money would be ill advised by even the most liberal accounts . . . which is what he [Ed] believes the spirit of that agreement was all about, he said.[11]

         Lessard admitted that even though he told the DeWitts their payments were being "leveraged" with subcontractors to save money, this actually never occurred. According to Lessard, Stewart instructed him to "find ways to start the milestones," even if not in the DeWitts' "best interests," in order to "keep the business moving forward" and "keep the company alive." In fact, even though the DeWitts had consistently prepaid the milestone payments, Boardwalk still had difficulty obtaining timely delivery of materials to the DeWitts' site. Lessard admitted that when the DeWitts inquired about the resulting project delays, he never informed them that Boardwalk's financial condition was "the root of the problem."

         Lessard testified that he regretted Boardwalk's treatment of the DeWitts, stating:

A. "I'm not proud of the conduct of myself or the guys -- things were asked of the guys in the field to do or say."
Q. . . . "Give me an example." . . .
A. "Being elusive or deceitful."
Q. . . . "In what sense were you or your guys or other Boardwalk . . . employees elusive and ...

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