United States Bankruptcy Appellate Panel of the First Circuit
EDWARD T. STEWART, JR., Debtor.
EDWARD T. STEWART, JR., Defendant-Appellee. SHEILA DEWITT and JOSEPH DEWITT, Plaintiffs-Appellants, Adversary Proceeding No. 15-01032-BAH
from the United States Bankruptcy Court for the District of
New Hampshire (Hon. J. Michael Deasy, U.S. Bankruptcy Judge)
M. Deschenes, Esq., and Seth M. Pasakarnis, Esq., on brief
H. Michels, Esq., on brief for Defendant-Appellee.
Feeney, Tester, and Finkle, United States Bankruptcy
Appellate Panel Judges.
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. 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). 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
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. The contract included a three-page payment
schedule based on the "start of certain construction
milestones. 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.
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
The Amended Complaint
26, 2015, the DeWitts commenced an adversary proceeding
against Stewart with a thirteen-count complaint which they
subsequently amended (the "Amended
Complaint"). 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.
support of these claims, the DeWitts further alleged, in
(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
(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
(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
(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."
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 §
summary of each witness's testimony on direct examination
follows in the same order it was presented at trial.
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.
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.
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)?"
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. Mrs. DeWitt testified that, had the
DeWitts known Boardwalk's actual revenues, they would
have selected a different contractor.
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,
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
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. 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.
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."
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
A. On our project.
Q. He told you that?
Q. And did you have any reason initially to believe that that
was not true?
A. No, not at all.
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
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.
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?
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
A. We did.
A. Did you rely on that statement in terms of following the
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."
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.
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.
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.
developments prompted the DeWitts to hire a new contractor,
Hutter Construction ("Hutter"), who completed the
project for $598, 450.
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.
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,
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
testified that he regretted Boardwalk's treatment of the
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
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 ...