S. MARTIN TEEL, JR., Bankruptcy Judge.
The plaintiff, Wyatt, alleges that the defendant, Carpenter, induced her to enter into a contract for him to perform work on her home in the District of Columbia by fraudulently representing that he held a license to perform home improvement work in the District of Columbia. She obtained a $55,540 judgment against Carpenter in the Superior Court for the District of Columbia, and now seeks a determination that the judgment is nondischargeable pursuant to 11 U.S.C. § 523(a)(2)(A) as a debt for property obtained by fraud. (Her attorney, Willcox, who joined as a plaintiff, no longer presses his claims in this proceeding.) Carpenter has moved to dismiss. For purposes of the motion, I assume that the allegations of the second amended complaint are accurate. Although I agree with Carpenter on his principal contention, and can grant partial dismissal in that regard, I will not grant dismissal as to all issues.
Wyatt's judgment was, first, an award to her of all compensation Carpenter had received in the amount of $10,671. That disgorgement of compensation was premised on a District of Columbia rule of law that requires an unlicensed contractor
16 D.C. Mun. Reg. § 800.1. When an unlicensed home improvement contractor takes a payment for work on a home in the District of Columbia before completing all of the work, that voids the contract and entitles the homeowner to a return of all moneys paid to the contractor, regardless of whether the homeowner knew the contractor was unlicensed, regardless of whether the contractor misled her regarding whether he was licensed, and regardless of whether the contractor performed the work in a competent fashion. Nixon v. Hansford, 584 A.2d 597 (D.C.1991); Billes v. Bailey, 555 A.2d 460, 462 (D.C.1989).
The Superior Court found that Carpenter had performed his work in a shoddy fashion, and that a $1,944 insurance payment that Wyatt had received from her home insurance carrier for water damage "was significantly insufficient to pay for all the damage that had been done by defendant." Nevertheless, the judgment did not include an award for the damages caused by Carpenter's shoddy work.
Instead, in addition to awarding disgorgement of the $10,615, the court found the violation of DCMR § 800.1 to be an unlawful trade practice under D.C.Code § 28-3904(dd), and pursuant to D.C.Code § 28-3905(k)(1), the Superior Court trebled $8,671 of the $10,615 disgorgement award. The Superior Court explained that it limited the trebling of damages to only $8,671 of the disgorgement award "because plaintiff did receive payment of $1944 from her home insurance company for some of the water damage caused by defendant's shoddy work." The total disgorgement award, after taking into account the partial trebling of damages, came to $27,957 (the sum of $10,615 + $8,671 + $8,671).
Finally, the Superior Court granted Wyatt her attorney's fees and costs of $27,583. That brought the total judgment to $55,540.
Carpenter has sought dismissal, contending that a construction contractor's license in the District of Columbia does not depend on the contractor's level of skill, and thus that any damage Wyatt suffered from shoddy work by Carpenter was not proximately caused by Wyatt's alleged reliance on Carpenter's stating that he was licensed. The judgment was not an award for damages caused by shoddy work. Instead, the judgment was premised on the violation of a regulation that forbade Carpenter's accepting payment before completion of his work, and the District of Columbia rule of law requiring disgorgement of compensation when that regulation is violated. The real issue is whether such an award necessarily is not a debt for property obtained by fraud.
Under 11 U.S.C. § 523(a)(2)(A), a chapter 7 discharge:
11 U.S.C. § 523(a)(2)(A) (2006).
As held in Cohen v. de la Cruz, 523 U.S. 213, 217, 118 S.Ct. 1212, 140 L.Ed.2d 341 (1998):
Accordingly, if Carpenter's receipt of payments gave rise to a debt for such payments as being obtained by fraud, the judgment, including the trebled damages and attorney's fees, is nondischargeable.
An obligation to disgorge all compensation received by an unlicensed contractor, premised solely on a rule of law, like the District of Columbia's, that requires no showing of a knowing misrepresentation or actual damages, does not give rise to a nondischargeable claim for property obtained by fraud. Ghomeshi v. Sabban (In re Sabban), 600 F.3d 1219 (9th Cir.2010).
In In re Sabban, California Business & Professions Code § 7031(b) provided that a party who has utilized the services of an unlicensed contractor may recover all compensation paid to that contractor for performance of a contract, with fraud or actual harm being irrelevant. A separate statute, California Business & Professions Code § 7160, provided a cause of action to individuals induced to contract for home improvements in reliance on fraudulent statements by a contractor or its solicitor, authorizing such an individual to recover a penalty of $500 and damages sustained by reason of such statements.
The debtor, Sabban, had induced the plaintiff, Ghomeshi, to contract for home remodeling by his company, Pacific, in reliance on Sabban's misrepresentation that Pacific was licensed. Ghomeshi sued Sabban in state court to recover $123,000 in compensation paid and to recover a $500 penalty and actual damages. The state court awarded $123,000 Ghomeshi pursuant to § 7031(b), and concluded that Sabban had engaged in a fraudulent representation that his company was licensed but held that Sabban and Pacific had caused no losses to Ghomeshi, and thus awarded pursuant to § 7160 (the statutory cause of action for fraud) only the $500 penalty and attorney's fees authorized by that statute.
Ghomeshi sought a determination of nondischargeability of its claim in the bankruptcy court. The bankruptcy court held that the disgorgement award of $123,000 was dischargeable, reasoning that the $123,000 awarded did not constitute a loss and damage sustained by Ghomeshi as the proximate result of Sabban's false representation that Pacific was a licensed contractor. By the time the case reached the court of appeals, both the $500 and the attorney's fees awarded under § 7160 (the
In the court of appeals, Ghomeshi argued that the $123,000 disgorgement award was nondischargeable. Ghomeshi argued that under Cohen v. de la Cruz, it made no difference that a debtor's proven fraud exposes him to further liability for violation of laws that do not mention fraud. The court of appeals disagreed, and distinguished Cohen v. de la Cruz, in part, on the basis that Sabban had caused no actual harm. Critically, however, the court of appeals in In re Sabban distinguished Cohen v. de la Cruz on the additional basis that unlike the statute at issue in Cohen, § 7031(b) (the analog of the District of Columbia rule of law at issue here) was not premised on there being actual damage or a knowing misrepresentation.
This case is slightly different because Carpenter allegedly performed the work in a shoddy fashion. The debtor in In re Sabban, in contrast, had caused no losses and his fraudulent representation only subjected him to the $500 penalty and attorney's fees.
As in In re Sabban, Carpenter's obligation to disgorge compensation received was pursuant to a rule of law (D.C.M.R. § 800.1 and the decisions adopting a disgorgement remedy for violation of that regulation) that required no showing of harm proximately caused by a knowing misrepresentation. Accordingly, the obligation under that District of Columbia rule of law to disgorge compensation received is dischargeable even if Carpenter, in addition, caused actual harm and misrepresented that he was licensed. The trebling of damages, similarly, was premised on the violation of D.C.M.R. § 800.1, and did not depend on a misrepresentation or actual harm (although the Superior Court took into account the extent to which actual damages had been suffered in deciding upon the extent to which it would treble damages).
The issue boils down to one of the elements necessary to prove that a debt is for property obtained by fraud, namely, the requirement that the creditor show that the misrepresentation was the proximate cause of the creditor's losses.
Numerous decisions have addressed § 523(a)(2)(A) in instances in which the debtor falsely represented that he had a professional license, and have looked to whether the license would have required a level of skill and knowledge in the professional field. In Gem Ravioli, Inc. v. Creta (In re Creta), 271 B.R. 214 (1st Cir. BAP 2002), the debtor falsely represented that he had a license to engage in refrigeration work. The court observed:
[Emphasis added.] See also In re Martinez, 2008 WL 954164 (C.D.Cal. Feb. 26, 2008); Sinha v. Clark (In re Clark), 330 B.R. 702 (Bankr.C.D.Ill.2005) (applying section 523(a)(2)(A) to except from discharge amounts paid by homeowners to correct construction defects caused by contractor who had misrepresented his licensing status, but granting discharge to other portions of state court judgment against debtor-contractor). As In re Creta recognized, however, the misrepresentation must have been the proximate cause of the loss suffered. 271 B.R. at 221.
Before turning to the District of Columbia licensing regulations, it is useful to examine in general the requirement of
If the damages giving rise to the judgment proximately arose from some other cause than the misrepresentation, the debt can not be deemed to be one for property obtained by fraud. As this court explained in Davis v. Melcher (In re Melcher), 319 B.R. 761, 773-74 (Bankr.D.D.C. 2004):
As the court of appeals observed in Spicer, 57 F.3d at 1157:
See also Archer v. Warner, 538 U.S. 314, 325-26, 123 S.Ct. 1462, 155 L.Ed.2d 454 (2003) (Thomas, J., joined by Stevens, J., dissenting) (for § 523(a)(2)(A) to apply, the creditor's loss must be proximately traceable to the fraudulent act, and superseding independent causes can sever any causal nexus even if there was some remote connection between the injury and the loss). As Spicer and subsequent decisions, including Field v. Mans, 516 U.S. 59, 116 S.Ct. 437, 133 L.Ed.2d 351 (1995), make clear, it is appropriate to look to the Restatement (Second) of Torts (1976) (cited hereinafter as "Restatement") in determining what proximate cause entails. Proximate cause requires both causation in fact (but-for causation) and legal causation. See, e.g., Shaw v. Santos (In re Santos), 304 B.R. 639, 669-70 (Bankr.D.N.J.2004):
As stated in District of Columbia v. Harris, 770 A.2d 82, 92 (D.C.2001):
As this court further explained in Stello v. Aikin (In re Aikin), No. 07-10017, 2007 WL 3305364, at *4 (Bankr.D.D.C. Nov. 5, 2007):
[Emphasis added; footnote omitted.]
In the footnote to that text, the court added:
Stello v. Aikin, No. 07-10017, 2007 WL
To the foregoing observations, it is useful to note that in Spicer, the debtor argued that no proximate causation existed because the borrowers' defaults arose from "a variety of factors, such as job loss or other personal financial reversals, all beyond Spicer's control." 57 F.3d at 1157. In rejecting that argument, the court of appeals observed:
Id. at 1159. Although other factors also caused the defaults, the court of appeals reasoned that:
Id. The court of appeals distinguished In re Hibbs, in which the false certifications made to HUD concerned the property's heat, plumbing, and electrical systems. In Hibbs, the mortgagors monetary defaults and an unforeseen decrease in property values arising from a lead paint injunction could not be said to have proximately flowed from the misrepresentations regarding the heat, plumbing, and electrical systems. See In re Hibbs, 568 F.2d at 351.
As stated in Restatement 2d Torts § 548A (Legal Causation of Pecuniary Loss), "[a] fraudulent misrepresentation is a legal cause of a pecuniary loss resulting from action or inaction in reliance upon it if, but only if, the loss might reasonably be expected to result from the reliance." As explained in Comment a. to that provision, "[i]n general, the misrepresentation is a legal cause only of those pecuniary losses that are within the foreseeable risk of harm that it creates."
The critical question is thus whether Wyatt's claims represent losses that could reasonably have been expected to result from the allegedly false representation that Carpenter was licensed.
I approach the proximate causation question by addressing whether the applicable regulations were designed to assure that Carpenter was competent to perform the work at issue (or had some other qualification that would have minimized the likelihood of her suffering losses through
The decisions imposing the disgorgement requirement for violations of § 800.1 make clear that the provision and other related regulations were designed to protect homeowners. The legislative history to the statute authorizing the adoption of regulations regarding home improvement contractors notes the victimization of home owners that motivated the statute:
S.Rep. No. 86-1829, 86th Cong., 2d Sess. 2 (1960) (emphasis added). It is thus clear that the regulations next discussed were not merely revenue raising measures. At the same time, however, Wyatt has not shown that the regulations finally adopted were designed to protect her from suffering the losses that she suffered or to provide a source of recovery for those losses.
Carpenter characterizes the D.C. regulations as merely revenue raising measures. If they were such, then Wyatt would not be able to say that her damages were proximately caused by her reliance on Carpenter's misrepresentation that he was licensed. Although the regulations are more than just a revenue raising measure, and are intended to protect consumers from victimization, they are nevertheless not designed to assure that licensed contractors are competent to perform work: no showing is required that a contractor is competent in the field of home improvement work in order to obtain a license. In
There being no competence requirement to qualify for a home improvement license, the only possible license requirement imposing a qualification designed to guard against homeowners suffering losses is contained in 16 D.C. Mun. Reg. § 801.2, which provides:
Wyatt, however, would be entitled to a determination of nondischargeability if she can show that she relied on Carpenter's representation that he was licensed because she had reason to believe that she would be better off, with respect to the harm she suffered, if Carpenter had been licensed. Carpenter has not attempted to address the requirements for obtaining a license, and whether they would not be of a character that would permit Wyatt to assume that if Carpenter were licensed, she would be better off with respect to the losses she suffered. Although Wyatt will bear the burden of proving that Carpenter's being licensed would have left her better off with respect to the damages she suffered, it was Carpenter's burden in moving to dismiss to show that Wyatt cannot come up with any such proof. In any event, the parties have not briefed the issue, and it is appropriate therefore to decide this part of the nondischargeability claim only after the issues in this regard are fully addressed by the parties.
Nevertheless, I address below two requirements under the applicable regulations
However, under 16 D.C. Mun. Reg. § 802.3:
If Carpenter had been licensed, his bond could not have been called upon for a claim unless it arose out of a violation of a statute or regulation for which he could be criminally prosecuted. Accordingly, such a bond could not be called upon based on shoddy work without anything more. If Wyatt would not have been able to call upon the bond, it follows that Wyatt cannot assert that she proximately suffered loss because she would have been able to look to a bond if Carpenter had been licensed. Illustratively, in Gilliam v. Travelers Indem. Co., 281 A.2d 429 (D.C.1971), the court of appeals held that a bond could be called upon when the contractor collected prepayment on a contract and its president absconded without the contractor completing the work. The contractor's conduct subjected it to criminal prosecution, and thus the bond could be called upon. The parties have not briefed the issue of whether Carpenter engaged in conduct that caused Wyatt's losses and that would have subjected him to criminal prosecution if he were licensed and had a bond.
Second, 16 D.C. Mun. Reg. § 803 imposes an insurance requirement on licensed home improvement contractors. The licensee may be self-insured under certain criteria, and, alternatively, the licensee is required, upon applying for a license, to:
16 D.C. Mun. Reg. § 803.1. [Emphasis added.] In turn:
16 D.C. Mun. Reg. § 803.2. [Emphasis added.] These provisions do not appear to
Wyatt could take Carpenter's representation that he was licensed as a representation that he was insured and bonded, and, she might argue, could take that as a representation that he was financially responsible, and that such misrepresentation caused her damage because Carpenter proved to be insolvent. The difficulty with such an argument is that having insurance and a bond in place does not demonstrate an ability to pay for any losses suffered if the bond and insurance are not designed to cover such losses. Moreover, a misrepresentation as to financial condition must be in writing in order to form a basis for nondischargeability. 11 U.S.C. § 523(a)(2)(B). Wyatt has not pled a written representation as to financial condition, and has not invoked § 523(a)(2)(B).
If the claim for shoddy work were held to be nondischargeable, that would open up a separate question: does that make the disgorgement award and the partial tripling of that award nondischargeable? It does not make the disgorgement award nondischargeable, as no showing of fraud is required for a disgorgement order, and the disgorgement remedy is not for a loss proximately caused by Carpenter's misrepresentation. All that Wyatt would be entitled to recover would be the losses caused by shoddy workmanship. As to the trebling of damages and the award of attorney's fees, that was applied to the disgorgement award based on Carpenter accepting payment as an unlicensed contractor prior to completing the work, and the incidental award of treble damages and attorney's fees with respect to the disgorgement award is not nondischargeable. As to the losses caused by poor workmanship, however, Wyatt may be able to point to a provision in the D.C. consumer protection statute that permits trebling of the award for such losses. The parties have not addressed that issue. Nor have they addressed whether Wyatt is limited to pursuit of the claim for disgorgement and the award of treble damages and attorney's fees, and cannot now show a claim for losses and an alternative ground for trebling damages and awarding attorney's fees. The disgorgement award apparently was more than adequate to cover Wyatt's losses, and she might argue that she is entitled to treat the judgment as covering her claim for losses. See Spicer, 57 F.3d at 1155-57 (failure to have obtained judgment for fraud did not preclude creditor from demonstrating that the debt was procured by fraud).
In accordance with the foregoing, it is
ORDERED that partial judgment is granted decreeing that any debt based on disgorgement of fees for having accepted payment prior to completing work is dischargeable. It is further
ORDERED that judgment is not granted with respect to whether the losses Wyatt suffered, and any amounts recoverable based on her having suffered such losses, are nondischargeable.
