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In Re Salvatore

2011 WL 2115816 (Bkrtcy. D. N.J. 2011) (Unpublished)

CONSUMER FRAUD ACT; BANKRUPTCY; CONTRACTORS — Although debts incurred through fraud are generally nondischargeable under federal law, regulatory violations under New Jersey’s Consumer Fraud Act don’t constitute the kind of fraud that result in such a nondischargeable claim in a contractor’s bankruptcy.

A homeowner wanted to remodel her kitchen and two bathrooms. Around the same time, she received an unsolicited, four-page promotional advertisement in the mail from a contractor. In the advertisement, the contractor provided thirteen examples of how it differed from others, including that its employees were highly skilled, conscientious technicians; their work was guaranteed; and that there would be no maintenance headaches. The advertisement claimed that if later services were needed, it would return for free. The advertising materials also provided that it would handle all phases of the job, from getting the permits to cleaning up the site and hauling away all debris; customers would receive a written proposal, and everything would be included without any “hidden surprises.”

The homeowner contacted the contractor, a sole proprietorship, and arranged to meet to discuss the renovations that she envisioned for her home. The initial meeting took place at her home, during which time they discussed the general terms of the desired work. The woman recalled that she was satisfied with the discussion and that she felt reassured that if there were any problems, the contractor’s principal would take care of them. The principal returned with three separate written proposals he had prepared for the consumer’s review and approval, one for each of the three rooms to be renovated. The proposals stated that the contractor would furnish all materials and labor necessary for the completion of the specific work outlined with respect to each space. The list of work to be performed included the contractor removing, installing, adding or relocating various items. All of the construction materials were guaranteed to be as specified in the proposal, and the work was to be performed in accordance with drawings and specifications submitted and completed in a workerlike manner.

Based on everything she had seen, the homeowner believed the contractor to be “full-service.” Although a firm start date for the project was never set forth in writing, she recalled that the principal orally indicated that he would start work on a certain date. Work did not commence on the project until later. In her testimony within a suit she brought, she explained that she considered the written representations included in the advertisement to be a part of her agreement with the contractor. She assumed that, based on the guarantees in the promotional material, whatever was needed would be taken care of. The homeowner acknowledged that the issue of building permits for the proposed project did not initially come up prior to the commencement of work on the project, and that she did not become concerned about permits until later, when the lack of permits was brought to her attention. She recalled that she had separately retained a plumber to replace her hot water heater. She claimed that the plumber, or one of his workers, mentioned to her that the plumber had inquired about permits and stated that since the contractor had not acquired any, the plumber wasn’t going to bother to get one either. She testified that this was the first she knew that there were no permits.

The contractor’s principal testified that he told the homeowner that permits could be an issue, and that he offered to inquire as to whether they would be needed in this case. He explained that if permits were needed, it would involve an additional cost. He claimed that his customer did not wish to pursue getting the necessary permits, and so he dropped the issue. In his opinion, the decision as to whether or not to acquire a permit was the homeowner’s responsibility. He explained that whenever he accepted the responsibility for obtaining permits, he specifically included that task in the contract because of the additional cost involved. He acknowledged that, in the normal course, a permit would have been obtained prior to actually commencing any home improvement work. He testified that in only one to two percent of his earlier projects had he actually started work without first applying for, and obtaining, all necessary approvals and permits. He claimed that, in this case, the homeowner was acting as her own general contractor and agreed that his role as to these home improvements was strictly as set forth in the proposal.

The Court found the contractor’s credibility was undermined when he proffered a Certificate of Completion allegedly signed by his customer and the signature on that certificate was clearly different from all the other homeowner’s signatures available in the record. Also, it was uncontested that the necessary building permits were never applied for or obtained by anyone. As required by the written agreement, the woman had paid on an installment basis as various stages of completion were reached. When the contractor informed the homeowner that the kitchen portion of the renovations project had been completed, she performed a perfunctory inspection and paid the contractor. Approximately two weeks later, the contractor finished the whole project. The woman tendered a final check for the balance, but for a smaller sum.

The homeowner withheld some money, and the contractor agreed this was acceptable as a sign of good faith that it would return to address any concerns the homeowner might have following an opportunity to completely inspect the finished work. Over the next several days, the woman began to notice significant deficiencies. Characterizing the renovations as defective and aesthetically distasteful, she complained about large white stains that suddenly appeared on her kitchen panels, a defective pocket door, buckling laminate, missing or poorly aligned trim, faulty wiring and plumbing, and a host of other discrepancies that she later memorialized in a punch list. To no avail, the woman reached out to the contractor in an effort to get it to return to her home and repair the defective conditions.

The homeowner’s attorney mailed the contractor a notification that the work performed was in violation of New Jersey building code standards and requested that it return to her home to repair or replace the defective items. The contractor revisited the home to evaluate the items specified in the letter, but he declined to remedy the discrepancies. It advised her lawyer that there remained an outstanding invoice on the project, and that it would not return until this amount was paid. After the parties were unable to reach an agreement regarding the repairs, the homeowner sued under the New Jersey Consumer Fraud Act (CFA). Approximately two years later, the contractor, a sole proprietor, filed a voluntary petition for relief under Chapter 13 of the Bankruptcy Code. This stayed the state court matter. He listed the homeowner as a non-priority unsecured claimant with a claim valued at zero on his Schedule F. The woman filed a proof of claim, an objection to confirmation of the debtor’s Chapter 13 plan, and an adversary complaint. In the adversary complaint, the consumer sought a judgment for the repair costs to her home alleging that pursuant to the CFA, the damages were nondischargeable.

The homeowner claimed that the contractor had violated the CFA through both affirmative acts and regulatory violations. The Court began by noting that a violation of the CFA requires an unlawful practice, an ascertainable loss, and a causal relationship between the two. It found that the contractor made affirmative misrepresentations in the advertising statement that it would “handle all phases of the job, from getting the permits to cleaning up the site and hauling away all debris.” The statement was material to the transaction. Further, acquisition of a building or construction permit is material to a home renovation contract under New Jersey and local law. The statement was made to induce the woman to enter into the agreement; and the statements were intended to alleviate the prospective client’s concerns regarding the pitfalls of potential home improvement projects. Finally, the statement was made contemporaneously with the agreement; the timing between the receipt of the solicitation materials and the first meeting between the parties was sufficiently close in time. According to the Court, the language in the advertisement had the capacity to mislead an average consumer by its reference to acquiring permits. However, the advertisement’s language indicating that work would be performed in a good and workerlike manner was more akin to puffery and, thus, not actionable. Likewise, absent bad faith or lack of fair dealing, inferior work performance was not an unconscionable commercial practice under the CFA. The Court also, in the alternative, found that the contractor was guilty of regulatory violations under the CFA. But, although the contractor’s failure to ensure that the appropriate permits were in place and see that the work was properly inspected by local officials constituted a violation of the Act, intent was not an element under this portion of the test.

The Court readily found that the woman’s loss was ascertainable and the amount of damages sustained by her was not at issue. Finally, the Court found a causal relationship between the CFA violations and the loss. According to the Court, if the appropriate permits had been obtained prior to the start of the work, the issuance of the permits would have triggered regular inspections by local officials who would not have allowed apparently substandard work to continue unimpeded.

In determining dischargeability, the Court noted that debts incurred through fraud are generally nondischargeable under federal law. However, after reviewing the elements to establish fraud in the dischargability context, the Court found that the consumer was unable to establish a material misrepresentation, knowledge that the representation was false, or the contractor’s intent to deceive. The Court was unable to conclude that the contractor, at the time that he made the representations in the advertising materials, knew that those representations with respect to acquiring the permits were false, or that the representations were made with gross recklessness as to their truth. Further, there was no evidence of an actual intent to deceive or circumstantial evidence to support the same. Consequently, the Court found that the claim was not nondischargeable under the heading of willful and malicious injury. Thus, the Court granted the consumer a judgment, including treble damages and attorneys fees, for her CFA claim, but her request for a ruling of nondischargeability was denied.


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