Nondischargeability of a Debt - Contractor Fraud

    In the case of Cox v. Morlang, Judge Kiser of the United States District Court at Roanoke, Virginia, affirmed a bankruptcy court nondischargeability order.  As a result, the plaintiff, a woman who had hired the debtor, an unlicensed contractor, to construct an addition to her house, and who relied on the debtor's representation that his county business license was sufficient to allow him to do the work, could collect from the debtor the $7,000 judgment she obtained for her costs in completing the addition after the contractor walked off the job.

    Judge Kiser ruled that the Bankruptcy Court did not err in concluding that the state court judgment was not dischargeable under Bankruptcy Code §523(a)(2)(A).  Judge Kiser found that the evidence clearly supported the Bankruptcy Court's findings that the debtor knowingly made a false representation with the intention of inducing the homeowner to enter into a construction contract.  The evidence also supported the Bankruptcy Court's finding that the homeowner relied upon the debtor's representations when she entered into the contract.  Judge Kiser stated that the only difficult issue for this appeal was whether or not there was a sufficient causal relationship between the fraudulent misrepresentation and the damages incurred by the homeowners.

    The District Court, in making its decision, cited relevant case law.  In Cohen v. de la Cruz, the United States Supreme Court held that nondischargeability should apply to "any debt" related to the fraud, even statutory treble damages and attorney's fees.  The unanimous Court held that Bankruptcy Court §523(a)(2)(A) prevents the discharge of all liability arising from fraud.  The Court went on to state that Bankruptcy Code §523(a)(2)(A) is best read to prohibit the discharge of any liability arising from a debtor's fraudulent acquisition of money, property, etc.  Judge Kiser concluded that Cohen supports a more expansive construction of the statute than have other cases.

    Judge Kiser ruled that in this case the debtor fraudulently coerced the homeowner to enter into a construction contract and to convey to him at least $6,000.  As a result of this fraudulent representation, the homeowner incurred $7,000 in costs to complete and repair the debtor's work.  This liability of the debtor arose as a result of his fraudulent misrepresentation.  Judge Kiser concluded that there was a significant causal relationship between the debtor's fraudulent misrepresentation and the damages suffered by the homeowner, and, therefore, the judgment of nondischargeability was affirmed.