JOHN E. HOFFMAN, JR., Bankruptcy Judge.
In the complaint initiating this adversary proceeding ("Complaint") (Doc. 1),
In response, the Plaintiffs assert that the Defendant made false representations to them on which they did in fact rely. These assertions are based on other stipulations of the parties and the accompanying exhibits, as well as on Mr. Milam's affidavit. Because the stipulations and the affidavit show that there is a genuine dispute as to material facts, the Court denies the Motion.
The Court has jurisdiction to hear and determine this adversary proceeding pursuant to 28 U.S.C. §§ 157 and 1334 and the general order of reference entered in this district. This is a core proceeding. See 28 U.S.C. § 157(b)(2)(I).
In 2008, the Plaintiffs owned real property on which they decided to build a new home ("Property"). See Stipulation of Facts of Parties for Purpose of Adversary Proceeding ("Stipulations") (Doc. 29) ¶ 1, 3.
First, the "Defendant or someone else working under her direction at Ashley Homes initiated draw requests by contacting the Bank," and "the Bank would then supply Ashley Homes with two documents:
Claimant Amount Claimed None None
Stipulations ¶ 13; Copies of Payout Authorizations attached to the Stipulations.
"Defendant avers that she never expressly represented to either Plaintiff ... that all bills for labor and materials for Ashley Homes' subcontractors, laborers, and/or materialmen had been fully paid by Ashley Homes[.]" Stipulations ¶ 25. And the "Plaintiffs have no specific recollection of Defendant specifically saying that all such bills had been fully paid." Stipulations ¶ 25. But "Defendant, or someone else acting at her direction for Ashley Homes, represented that Ashley Homes was entitled to each draw and presented Plaintiffs with each respective Payout Authorization." Stipulations ¶ 28. "Based upon this, Plaintiffs represent that they believed that Defendant was causing Ashley Homes to pay for the necessary labor and materials as construction progressed." Stipulations ¶ 28. Similarly, each Lien Waiver had an "X" placed on the form, next to the following statement: "All bills for labor and material from Contractor's subcontractors, laborers, and/or materialmen have been fully paid by Contractor." Stipulations ¶ 13. "The Payout Authorization signed by Plaintiffs and the corresponding Lien Waiver signed by Defendant as president of Ashley Homes [were] presented by Ashley Homes to the Bank. The Bank then disbursed the amounts indicated in the Lien Waivers directly to Ashley Homes." Stipulations ¶ 14.
On or about July 15, 2009, the Defendant advised the Plaintiffs that Ashley Homes could not complete the construction of the Plaintiffs' home. Stipulations ¶ 8. The Plaintiffs were forced to find other contractors to complete the construction. The aggregate amount that the Plaintiffs paid Ashley Homes and other entities to complete the construction of their home exceeded the contract price under the Construction Contract by more than $60,000. Stipulations ¶¶ 4, 7, 9. In addition, the Plaintiffs incurred legal fees and expenses in obtaining the release of mechanics' liens placed on their property as a result of Ashley Homes's failure to pay its subcontractors. Stipulations ¶ 30.
On May 25, 2011, the Defendant commenced a Chapter 7 bankruptcy case, and the Plaintiffs thereafter initiated this adversary proceeding. In the Complaint, the Plaintiffs alleged that "[f]rom time to time as construction of Plaintiffs' residence progressed, [Defendant] represented, under oath, that all bills of subcontractors and materialmen for labor and materials provided for construction of Plaintiffs' residence had been fully paid by Ashley Homes." Compl. ¶ 15 (emphasis added). This allegation clearly referred to the Lien Waivers, because "[t]he Lien Waivers were the only representations, under oath, that were made by Defendant as president of Ashley Homes in connection with the construction of the Property." Stipulations ¶ 15 (emphasis added). "The Lien Waivers were not given by Defendant, or anyone else acting for Ashley Homes, to Plaintiffs at the times they were prepared, signed and submitted to the Bank." Stipulations ¶ 24. And the "Plaintiffs were not aware of the existence of the executed
Under Rule 56 of the Federal Rules of Civil Procedure ("Civil Rule(s)"), made applicable in this adversary proceeding by Rule 7056 of the Federal Rules of Bankruptcy Procedure, a court "shall grant summary judgment if the movant shows that there is no genuine dispute as to any material fact and the movant is entitled to judgment as a matter of law." Fed. R.Civ.P. 56(a). "On a motion for summary judgment, facts must be viewed in the light most favorable to the nonmoving party only if there is a genuine dispute as to those facts." Ricci v. DeStefano, 557 U.S. 557, 586, 129 S.Ct. 2658, 174 L.Ed.2d 490 (2009) (internal quotation marks omitted). A dispute is genuine only if it is "based on evidence upon which a reasonable [finder of fact] could return a [judgment] in favor of the non-moving party." Gallagher v. C.H. Robinson Worldwide, Inc., 567 F.3d 263, 270 (6th Cir.2009). And "[a] factual dispute concerns a `material' fact only if its resolution might affect the outcome of the suit under the governing substantive law." Id.
The Plaintiffs seek a judgment that any debt the Defendant owes them is excepted from discharge by § 523(a)(2).
11 U.S.C. § 523(a)(2)(A). See also Rembert, 141 F.3d at 280-81 ("In order to except a debt from discharge under § 523(a)(2)(A), a creditor must prove the following elements: (1) the debtor obtained money through a material misrepresentation that, at the time, the debtor knew was false or made with gross recklessness as to its truth; (2) the debtor intended to deceive the creditor; (3) the creditor justifiably relied on the false representation; and (4) [the creditor's] reliance was the proximate cause of loss.") (footnote omitted).
As the sole basis for summary judgment, the Defendant, while conceding that certain of the Lien Waivers contained false representations, see Mot. at 7,
The Plaintiffs filed a memorandum in opposition to the Motion ("Objection") (Doc. 35) in which they contend that "[t]he Motion is premised upon an incomplete and misleading summary of the pertinent events." Objection at 2. In support of this contention, Mr. Milam submitted as an exhibit to the Objection an affidavit made on personal knowledge ("Milam Affidavit"), as permitted by Civil Rule 56(c)(4).
Milam Aff. ¶¶ 4-5.
In her reply to the Objection ("Reply") (Doc. 36), the Defendant argues that these statements are inadmissible because they are based on hearsay statements of a representative of the Bank. See Reply at 4. The statements, however, are admissible for the purpose of establishing Mr. Milam's understanding of what was to happen before Ashley Homes was entitled to obtain a draw. See Alioto v. Comm'r, 699 F.3d 948, 954 (6th Cir.2012) (holding that plaintiff's testimony regarding receipt of e-mail in which he was advised "that no further reimbursement was forthcoming" was admissible to establish the plaintiff's "subjective understanding that he would not be paid back"); Kessler v. Riccardi, 363 Fed.Appx. 350, 357 (6th Cir.2010) ("Kessler obtained much of his understanding about the role of a mentor/sponsor from conversations with an undisclosed member of NARSAD, [and] Riccardi classifies [this] as inadmissible hearsay inappropriate for consideration in a summary judgment ruling. But because Kessler testified about his conversation with a senior member of the NARSAD council to show the basis of his belief that he could not help her, not for the truth of the matter asserted, the conversation is not hearsay and the district court did not err in considering it."). The Sixth Circuit's Alioto and Kessler decisions were based on Rule 801(c) of the Federal Rules of Evidence, under which a statement is hearsay only if it is offered by a party "to prove the truth of the matter asserted." Fed. R.Evid. 801(c)(2). Because Mr. Milam is
The Defendant further contends that the Stipulations are inconsistent with the Milam Affidavit's statements regarding the Lien Waivers. As support, the Defendant points to the stipulations that the "[t]he Lien Waivers were not given by Defendant, or anyone else acting for Ashley Homes, to Plaintiffs at the times they were prepared, signed and submitted to the Bank," Stipulations ¶ 24, that the "Plaintiffs were not aware of the existence of the executed Lien Waivers ... until sometime after July 15, 2009," Stipulations ¶ 26, and that "Plaintiffs were not aware of the executed Lien Waivers submitted by Defendant to the Bank until after they contacted counsel and arranged, with counsel's advice and assistance, to obtain such documents from the Bank." Stipulations ¶ 27. The Defendant contrasts those stipulations with the statement in the Milam Affidavit that Mr. Milam "understood that Defendant would be signing a corresponding Lien Waiver ... and submitting [it] to the Bank in order to obtain the draw...." Milam Aff. ¶ 5. The Defendant describes that statement as "totally inconsistent" with the stipulations in which the Plaintiffs disclaimed awareness of the existence of the executed Lien Waivers until after they contacted counsel. Reply at 5-6. But an understanding that a document was going to be signed is not incompatible with a subsequent lack of awareness that the document was actually signed. The Stipulations and the Milam Affidavit, therefore, are not necessarily inconsistent with one another.
The Stipulations, however, are inconsistent with the Plaintiffs' contention in the Complaint that they relied on statements the Defendant made under oath (which could only refer to the Lien Waivers). Indeed, in the briefs they submitted after the filing of the Motion, the Plaintiffs do not argue that they relied on the Lien Waivers themselves; instead, they appear to rely on their understanding that the Lien Waivers would be submitted to the Bank. See Objection at 8; Doc. 38 at 3, 4. That is too fine a distinction. A party to a transaction who understands that a document is to be executed, and who then alleges reliance on the document, would not stipulate to a lack of awareness of the existence of the document merely because he or she had not seen an executed copy. The Plaintiffs argue that the Stipulations with respect to the Lien Waivers meant only that they "did not see the [Lien Waivers] executed by Defendant until after Ashley Homes defaulted." See Pls.' Mem. Contra Def.'s Objection to Inclusion of Aff. of Paul Milam (Doc. 38) at 5 (emphasis added). But that is not what the Stipulations say. If that is what the Plaintiffs meant, they presumably would have said so more clearly — or at the very least would not have disclaimed awareness of the very existence of the Lien Waivers.
If this matter proceeds to trial, therefore, the Court will not ignore the Plaintiffs' stipulation that they were unaware of the existence of the executed Lien Waivers until after they consulted counsel. In light of that stipulation, it would be difficult for the Plaintiffs to establish reliance on the Lien Waivers or on their understanding that they were to be submitted to the Bank. As discussed below, however, the dischargeability analysis does not end with the Lien Waivers.
The Milam Affidavit also alleges reliance on the Payout Authorizations, which were addressed in, and attached as exhibits to, the Stipulations. See Stipulations ¶¶ 13-14, 28. In the Milam Affidavit, Mr. Milam states:
Milam Aff. ¶¶ 5-7. In the Objection, the Plaintiffs point out that the Construction Contract, a copy of which was attached as Exhibit 1 to the Stipulations, contains the following provision:
Construction Contract ¶ 4. The entity or person to whom the affirmation was to be made is not specified.
Based on that provision of the Construction Contract and the Payout Authorizations that were presented to them, the Plaintiffs make the following argument in support of their claim of nondischargeability:
Objection at 8-9, 12.
This argument is consistent with the Stipulations and the documents attached as exhibits to the Stipulations. As the parties stipulated, either the "Defendant, or someone else acting at her direction for Ashley Homes ... presented Plaintiffs with each respective Payout Authorization." Stipulations ¶ 28. And each Payout Authorization stated that "[t]his is to certify that Ashley Homes, Ltd. contractor for Paul F. and Deborah K. Milam is/are entitled to a payment ... for work completed...." See Payout Authorizations attached to the Stipulations.
Further, each Payout Authorization included the following representation: "If borrower [Plaintiffs] has made, or has caused to be made, improvements to the below subject property, borrower certifies that all work and materialm[e]n, and laborers have been paid in full." Stipulations ¶ 13. It is unclear whether the purpose of the representation in the Payout Authorizations that all claims had been paid in full except for those listed — and none were — was to disclose the amount and holder of
Because the Court's denial of the Motion is based in part on the Milam Affidavit, the Defendant's objection to the use of the Milam Affidavit ("Objection to Affidavit") (Doc. 37) must be addressed. According to the Defendant, "statements in the Affidavit that Mr. Milam makes on behalf of his wife, with the various references to `my wife' `we' and `us' are not Mrs. Milam's direct statements, but hearsay about what Mrs. Milam, a party herein, would or would not have done." Objection to Aff. at 5. To the contrary, it is not hearsay for Mr. Milam to state that the Defendant told him and his wife that Ashley Homes was entitled to a draw or that the Defendant presented them with the Payout Authorizations, because those are statements regarding what the Defendant, not Mrs. Milam, allegedly said and did. As statements of the Defendant, they are admissible. See Fed.R.Evid. 801(d)(2) (stating that an opposing party's statement does not constitute hearsay).
The Defendant also objects to Mr. Milam's statement that he "relied upon the Defendant for the accuracy of the representations in the Payout Authorizations" and that he "did not think that Defendant would tell us to sign a document that did not state the truth regarding the status of the project." Doc. 37 at 6. In support of this objection, the Defendant relies on Kaylor v. Holsinger (In re Holsinger), 437 B.R. 260 (Bankr.S.D.Ohio 2010). In Holsinger, the bankruptcy court struck, among others, the following two statements from the plaintiff's affidavit:
Holsinger, 437 B.R. at 276. The bankruptcy court struck these statements because they reflected speculation by the plaintiff about the motive of the defendants and whether the defendants knew or should have known about the plaintiff's
Based on the statements made in the Milam Affidavit and the Stipulations regarding the Payout Authorizations, as well as its review of the Payout Authorizations, the Court concludes that there is a genuine dispute as to material facts.
For the foregoing reasons, the Court
