James P. Smith, Chief United States Bankruptcy Judge.
In this adversary proceeding, Oman Family Trust seeks to have a claim arising out of the construction of a house declared nondischargeable under 11 U.S.C. § 523(a)(2)(A). The case was tried on May 25, 2017. At the conclusion of the trial, the Court asked the parties to submit their concluding arguments in writing. The Court, having considered the testimony and exhibits introduced at trial, the arguments of counsel and the law, now publishes its findings of fact and conclusions of law pursuant to Bankruptcy Rule 7052.
Oman Family Trust ("Trust"), the Plaintiff in this case, is a trust formed by Phil Oman ("Oman") and his wife, Mary J. Oman, to hold assets owned by them.
Pilot Builders, Inc. ("Pilot") was a corporation formed in 1998 by Jacob Christopher Hilsman (Debtor and Defendant herein, hereinafter "Hilsman") and Douglas Tomlin for the purpose of constructing houses around Lake Oconee in Central Georgia. In approximately 2010, Tomlin left the company and Hilsman became the sole officer, shareholder and director of the corporation.
Mr. and Mrs. Oman lived in Vermont. Oman was in the retail business. As he was approaching retirement, he planned to sell his business and move with Mrs. Oman to Lake Oconee.
A friend of Hilsman, whose house had been built by Pilot several years earlier, introduced Oman to Hilsman. They had discussions about building a house in the Harbor Club Subdivision at Lake Oconee. As a result of these discussions, the Trust and Pilot entered into a construction contract on March 19, 2014, for a house to be built at an estimated cost of $342,500. Exhibit "A" to the contract lists certain allowed prices for items (such as windows, doors, carpets, fixtures, cabinets, countertops, etc.) to be included in the house, with the Trust being responsible for any amounts actually spent over the allowed prices. Exhibit "B" to the contract provides a draw schedule, with an initial down payment of $34,250, an initial draw of $17,125, eight draws of $34,947.45 and a final draw of $17,473.73.
Both Hilsman and Oman testified that the Trust house was being "piggybacked" with another, more expensive house Pilot was building in the same neighborhood. Hilsman explained that, by using the same subcontractors and scheduling them to work on both houses on the same day, he was able to reduce total construction costs to the Trust.
Paragraph 11 of the contract, which provides a place for a date by which Pilot would use its best efforts to complete the house, was left blank. There was no explanation for this at trial. However, Oman testified that Hilsman promised the house would be completed by February 2015.
Construction started in July 2014. Oman made the initial down payment and seven requested draws between March and December 2014. In addition, he made a payment of $26,452 on December 8, 2014, for amounts exceeding the allowances for the items listed in Exhibit "A" to the contract. He testified that when he made this payment in December, Hilsman again promised that the house would be completed by February 2015.
In January 2015, Hilsman called Oman and advised that, due to delays at the other house Pilot was building (and on which the Trust house was to be "piggybacked"),
At the end of April 2015, Oman came to Georgia and had a meeting with Hilsman and Pilot's employees. They developed a list of everything that needed to be done to complete the house. Oman testified that Hilsman agreed that the house would be completed by June 15, 2015.
Oman testified that in mid-May 2015, Hilsman called him and, for the first time, revealed that Pilot was having financial problems. He testified that Hilsman asked for, and received, the final draw and again promised the house would be completed by June 15, 2015.
Oman testified that in late May 2015, Hilsman called him and told him he was not going to be able to complete the house. The Trust completed the house through another contractor. Hilsman filed his Chapter 7 petition on September 21, 2015. Pilot was thereafter dissolved on October 27, 2015.
The parties stipulated that the Trust paid Pilot a total of $420,327 over a period of fourteen months and that approximately $256,000 was applied to labor and materials for the house. The parties stipulated that $164,000 represented the amount paid, but not applied to the cost of the house. Accordingly, this is the amount the Trust sought to have declared nondischargeable under section 523(a)(2)(A).
11 U.S.C. § 523 provides, in pertinent part:
The plaintiff has the burden of proving by a preponderance of the evidence that the claim is nondischargeable.
In its closing arguments, the Trust makes several arguments as to why its claim is nondischargeable under § 523(a)(2)(A). First, the Trust contends that Hilsman failed to disclose to Oman the financial difficulties that he and Pilot were experiencing at the time the construction contract was signed. The Trust asserts that it had a right to be informed about their financial problems. In
In this case, there was no evidence that Oman asked about Hilsman's or Pilot's financial condition or that Hilsman voluntarily provided any financial information that was false. Accordingly, the failure of Hilsman to disclose information on his or Pilot's financial condition does not support a claim under section 523(a)(2)(A).
The Trust alleges that Hilsman made a false representation about how payments by the Trust would be applied. The Trust argues that the contract, specifically the "Draw Schedule" attached to the contract as Exhibit B, controlled how payments were to be applied. The Trust further alleges that each time Hilsman made a draw request, he made a false representation that the money would be applied only to the Trust house, when in fact the money was placed in Pilot's general operating account and applied to other bills of Pilot.
Hilsman admitted that all payments received on all of Pilot's jobs, including the payments by the Trust, were deposited into Pilot's general operating account, which was Pilot's sole bank account. He also testified that he and his bookkeeper would routinely review Pilot's bills and that he would decide which bills were to be paid. Generally, this would be the oldest bills, but sometimes it would be to the vendors making the most demands. Therefore, Hilsman admitted that payments from the Trust were not applied solely to the Trust house. However, arguing that this establishes a false representation misconstrues the contract.
Paragraph 8.A.2. of the contract contains the only provision in the contract that provides an option requiring that payments be held in trust and applied to the costs of the Trust house only. The contract provided for selection of this option by "checking" the paragraph. However, this paragraph only applies to the initial "Earnest Money" deposit and it was not "checked" to be included in the contract.
In summary, there was no evidence that Hilsman promised that Trust payments would be used solely for the costs of the Trust house. The contract does not contain any such promise. Accordingly, Pilot's use of Trust payments to pay other bills of Pilot did not constitute a false representation.
Next, the Trust argues that Hilsman made a false representation when he promised the house would be completed by February 2, 2015, if the Trust, in December 2014, would make a $34,250 draw payment and a $26,452 payment for extras ordered by the Trust. The Trust argues that, because Hilsman knew Pilot was using the payments to pay bills unrelated to the costs of the Trust house, he had to know that Pilot would be unable to complete the house by February 2015.
The testimony on the promise to complete the house by February 2, 2015, was in conflict. Oman testified that at a meeting with Hilsman on December 8, 2014, Hilsman promised the house would be finished by February 2, 2015, if the requested payments were made. Hilsman testified that he did tell Oman that he expected the house could be completed by February, but that it was never promised or guaranteed because problems with weather were
Assuming, without deciding, that the February date was a guaranteed date, it was the Trust's burden to prove that at the time this promise was made, Hilsman either knew that he could not perform, or had no intention to perform. However, Hilsman testified that in December 2014, construction on the Trust house was proceeding, that Pilot had several other projects ongoing and that the failure to complete the house by February 2015 was not related to financial problems, but was due to unexpected delays with getting subcontractors. He further testified that he had always intended to complete the Trust house. He testified that it was not until late spring, 2015, when several projects were cancelled unexpectedly, that he realized that Pilot would be unable to complete the house. There was no evidence to challenge this explanation. Accordingly, the Court finds that the Trust has failed to carry its burden.
The Trust also argues that Hilsman made a false representation in May 2015, when he promised that the house would be completed by June 15, 2015 if the final draw for $34,250 was paid.
Finally, the Trust argues that this Court should apply O.C.G.A. § 16-8-15 and find that the Trust has made a prima facie case of intent to defraud. That statute provides, in pertinent part:
Section 16-8-15 is a criminal statute. At trial, counsel for the Trust acknowledged that Hilsman has not been convicted under this statute. A conviction under this statute requires proof beyond a reasonable doubt (O.C.G.A. § 16-1-5), whereas the burden of proof in a dischargeability case is only preponderance of the evidence.
The parties stipulated that the Trust had paid over $420,000 to Pilot and that $256,000 had been applied to labor and materials for the house, thus leaving a claim of $164,000.
In summary, the Court finds that the Trust has failed to prove its claim under 11 U.S.C. § 523(a)(2)(A).
The Trust has a claim against Pilot for $164,000 arising from Pilot's failure to fully perform under the construction contract between the Trust and Pilot. Hilsman was not a party to the contract, did not personally guarantee Pilot's performance, and had no direct personal liability to the Trust. Thus, even if the Trust had successfully proven a false representation by Hilsman, the Trust would then have to show that Hilsman was personally liable for the debt of Pilot to the Trust. To do this, the Trust argues that Pilot was the alter ego of Hilsman and that Pilot's corporate veil should be pierced so that Hilsman is personally liable for Pilot's debt to the Trust.
In this case, there is no evidence that Hilsman abused the corporate form. Pilot had its own bank account. Its funds were not commingled with Hilsman's. All corporate income was deposited into Pilot's bank account and all corporate expenses were paid from this account. While Hilsman had personally guaranteed some of this debt, Hilsman never used corporate funds to pay his separate personal expenses. The corporation had a separate office, filed separate tax returns, maintained licenses and insurance in its own name and, until it was dissolved, maintained its registration with the Secretary of State of Georgia.
The Trust argues that Hilsman failed to hold annual corporate meetings. While this was not disputed, the Trust has not cited, and this Court has been unable to find, any case where the failure of the sole officer, shareholder and director of a corporation to hold annual meetings was the sole or primary basis for piercing the corporate veil.
The Trust argues that Hilsman does not know where the corporate records are located. However, Pilot was dissolved in October 2015. Hilsman testified that he had the records and he thought the records were in storage somewhere. The Court fails to see why Hilsman's failure to remember the exact location of records of a corporation dissolved over one and one-half years ago would constitute an abuse of the corporate form and justify piercing the corporate veil.
The Trust focuses on the fact that Hilsman could not remember why he had written, on the corporate bank account, a check to himself for $29,000 in 2014 and a check to his stepmother for $10,000 in May 2015. However, given the number of checks reflected on the corporate bank statements
The Trust points to the fact that Hilsman is personally liable for almost all of the debt of Pilot. However, it is not unusual for vendors and lenders to require the owner of a small corporation to personally guarantee the corporation's debts.
The Trust also focuses on the fact that Hilsman, in his bankruptcy schedules of assets and liabilities, listed the deposits in Pilot's checking account and Pilot's office furniture as his personal property. Hilsman testified that his attorney prepared the schedules and that he, Hilsman, did not understand the legal significance of listing those assets as his personal property. The failure to distinguish in the bankruptcy schedules between Hilsman's property and the corporation's property does not provide a basis for piercing the corporate veil.
The Trust asserts that Hilsman used money from his personal bank account to pay certain bills owed by Pilot. Hilsman testified that he was trying to keep the corporation going. It is not unusual for the owner of a small corporation to use his personal funds to help his company during difficult times.
The Trust points out that Hilsman listed in his bankruptcy schedules some $669,000 in unsecured debt, most of which was Pilot's business debt. Hilsman testified that some of Pilot's creditors were "coming after him." Hilsman personally guaranteed much of this debt. Regardless of whether he was personally liable for the debts, listing these creditors so that they would receive notice of his bankruptcy filing and the automatic stay was not an abuse of the corporate form, but rather an effective strategy for dealing with those creditors.
Finally, the Trust argues that Hilsman had complete control over which debts of Pilot were paid and which construction projects were completed. Since he was the sole shareholder, officer and director, it is not surprising that he made the final decisions with respect to corporate actions. The fact that he made these decisions to "promote his ends" is not a basis for piercing the corporate veil.
In summary, the Court has considered each of the Trust's arguments, both individually and collectively. The Trust has failed to establish that Hilsman abused the corporate form of Pilot. Accordingly, it has
Based on the findings and conclusions set forth above, the Court finds that the Trust has failed to carry its burden under 11 U.S.C. § 523(a)(2)(A). Accordingly, the relief requested by the Trust in its complaint is denied and the same is hereby dismissed, with prejudice. A separate order consistent with this opinion will be entered.
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For the same reason, the Trust has waived any argument that the contract was a direct contract between the Trust and Hilsman. At trial, the Trust solicited testimony that the signature line in the contract for the "Builder" is signed by Hilsman, without any indication of his corporate position. However, the Trust did not pursue this argument in its closing arguments. In any event, "It is a well settled rule that where the language in an instrument is ambiguous, parol evidence is admissible to explain the capacity in which one signed the agreement."
