Dewitt v. Stewart (In re Stewart)

Case Type:
Case Status:
Reversed and Remanded
18-9007 (1st Circuit, Feb 03,2020) Published
The bankruptcy court misapplied the standard for fraudulent intent under § 523(a)(2)(A) -- best articulated by our decision in Palmacci v. Umpierrez, 121 F.3d 781 (1st Cir. 1997) -- which it was required to employ when determining whether Stewart intended to deceive the DeWitts. Also, instead of reviewing for "clear error," as it was supposed to, the BAP exceeded the bounds of appellate review by engaging in fact-finding when it reversed the bankruptcy court.
Procedural context:
Plaintiffs filed an adversary proceeding against Stewart opposing discharge. The DeWitts alleged that through numerous false representations, Stewart induced the DeWitts to hire BN and then proceeded to misuse their advance payments, directing the funds instead to debts unrelated to the project and for Stewart's personal enrichment. The complaint requested the corporate veil be pierced because Stewart had used BN, of which he was the sole shareholder, President, and Treasurer, as his "alter ego" to "wrongfully obtain funds from the DeWitts" and "to perpetuate injustice and fraud." The bankruptcy court disagreed with the DeWitts, and on August 18, 2017, it entered a final judgment concluding that their unsecured claim against Stewart was dischargeable. Unsatisfied, the DeWitts appealed to the BAP, which reversed the bankruptcy court. Stewart filed a timely appeal before our Court on November 29, 2018.
After specifically inquiring over the company's financials and projects, the DeWitts hired Mr. Edward Stewart and his company, Boardwalk North ("BN"), in 2013 to remodel their New Hampshire home. During the course of their dealings, the DeWitts alleged that Stewart misrepresented, among other things, the financial health of his company and that he would use so-called "milestone payments" to both "fund" their renovation project and "leverage" subcontractors. When the DeWitts asked about delays, Lessard explained they were because the subcontractors had failed to show up, never disclosing to the DeWitts that certain products or services had not arrived because BN actually lacked the money to purchase them. As matters devolved, after the DeWitts had already paid ninety percent of the project costs but Stewart and his company had only completed forty-five percent of the renovations, Stewart abandoned the project in the summer of 2014. The DeWitts ultimately hired another company to finish the renovations for a cost of $736,786.30 -- $558,335.38 in excess of their pending balance with Stewart and BN. On September 29, 2014, BN filed for Chapter 7 bankruptcy. With his personal finances similarly underwater, Stewart also filed for relief under Chapter 7 on February 23, 2015. The DeWitts thereafter filed a proof of claim in Stewart's bankruptcy case, indicating that they held an unsecured claim for $558,335.38. On May 26, 2015, the DeWitts commenced an adversary proceeding against Stewart seeking to exempt their unsecured claim from discharge. The Dewitts undertood that their claim against Stewart was ineligible for discharge, per § 523(a)(2)(A), because the debt resulted from Stewart's false statements and misrepresentations.
Howard, Torruella, Seyla

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