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In re Cleary

United States District Court, Fourth Circuit

December 18, 2013

MICHAEL T. CLEARY Bankruptcy No. RAG-08-10319 Adversary Case No. 08-00264


WILLIAM M. NICKERSON, Senior District Judge.

This matter is before this Court on Appellant Michael T. Cleary's appeal from a February 28, 2013, Order of the United States Bankruptcy Court for the District of Maryland concluding that a portion of his debt to Appellees Timothy and Lisa Limberger was non-dischargeable under 11 U.S.C. § 523(a)(2)(A). For the reasons that follow, the decision of the Bankruptcy Court will be affirmed.


Debtor Michael T. Cleary partially owned, but fully operated and controlled, a residential construction company, Trinity Home Builders, L.L.C. (Trinity). The underlying adversary action from which this appeal arises relates to a contract between Trinity and the Limbergers for the construction of the Limbergers' custom home. The parties entered into the contract in May of 2006, for a total contract price of $1, 252, 278. The contract required a deposit of $62, 613.90, leaving a balance of $1, 189, 664.10 to be financed.

To fund the acquisition of the building lot and the construction of their home, the Limbergers entered into a loan agreement with SunTrust Mortgage (SunTrust) to borrow $1, 421, 900.00. Under the terms of the loan documents, the transfer of funds from SunTrust to Trinity was to be made for completed work only, and a draw schedule was incorporated into the loan documents to guide the disbursal of funds. Under that draw schedule, each category of work to be done on the home was assigned a percentage of the total loan. For example, the roof framing and sheathing was assigned a total of 5% of the loan. The established procedure for disbursal of the loan funds involved Cleary contacting SunTrust to request a draw; SunTrust sending an inspector to verify the work in place; and, after verification, SunTrust wiring the appropriate percentage of the loan to Trinity.

There came a point in time that the Limbergers were dissatisfied with Trinity's progress on their home and ordered Trinity off the job as of June 19, 2007. By that date, 71% of the draws, or a total of $844, 661.51, had been disbursed by SunTrust to Trinity. In addition to the deposit and the draws, the Limbergers had also paid $88, 858.10 in change orders to Trinity. After ordering Trinity off the job, the Limbergers hired a new contractor, Gast Construction, to complete the work on the home. As discussed below, there is a dispute as to what percentage of the work Trinity had performed on its contract and, thus, how much work remained to be completed on the home by the new builder. The Limbergers also obtained a new construction loan from a different bank, Branch Banking and Trust Company (BB&T).

After removing Trinity from the job, the Limbergers filed suit against Cleary in the Circuit Court for Baltimore County in August of 2007. In response, Cleary filed for personal bankruptcy in January 2008, at least in part to stay the Limbergers' state court action against him. The Limbergers filed a Proof of Claim in the main bankruptcy case for $1, 000, 000 which was never objected to and, thus, is deemed allowed. See 11 U.S.C. § 502(a). They also filed the adversary action giving rise to this appeal, in which they prayed that claims related to certain draws from SunTrust to Trinity be excluded from Cleary's bankruptcy discharge. Prior to trial, the Limbergers limited their claims of non-dischargeability to claims relating to three draws: (1) a $23, 793.28 draw for the completion of the water well, (2) a $47, 586.57 draw which Cleary represented he was requesting to cover a deposit for windows and trusses, and (3) a $47, 586.57 draw which Cleary represented he was requesting to cover a deposit for cabinetry. The Limbergers argued that their claims arising from these draws were exempt from discharge in bankruptcy pursuant to 11 U.S.C. §§ 523(a)(2)(A), 523(a)(4), and 523(a)(6).

The adversary action proceeded to trial. After receiving three days of evidence on October 26, October 27, and November 12, 2010, the court reconvened on January 24, 2011, to hear closing arguments. During closing arguments, the Bankruptcy Judge questioned the Limbergers' attorney as to whether there was any evidence in the record that the Limbergers were obligated to repay SunTrust for the funds disbursed to Trinity in these three particular draws or whether they ultimately did repay those funds. ECF No. 1-34 at 7. Counsel responded that he believed there was such evidence in the record and the judge instructed counsel to file a memorandum pointing out what that evidence might be. Id. at 8.

Reviewing the record, it appears that the reason for the Bankruptcy Judge raising the issue of repayment of the SunTrust loan was his awareness of a dispute between the Limbergers and SunTrust. In addition to their dissatisfaction with Trinity, the Limbergers also took issue with the manner in which SunTrust disbursed loan funds to Trinity and, to resolve that dispute, the Limbergers filed suit against SunTrust in the Circuit Court for Harford County. That case was settled during the pendency of the adversary action before the Bankruptcy Court. While the Bankruptcy Court was aware of this action and the settlement, the parties entered into the settlement pursuant to a confidentiality agreement and the terms of the settlement were not revealed to Cleary or to the Bankruptcy Court. See ECF No. 1-40 at 3 n.6.

In response to the Bankruptcy Judge's questions at oral argument, the Limbergers filed on February 23, 2011, a "Supplemental Post-Trial Memorandum, " ECF No. 1-27, and also a Motion to Reopen to Receive Undisputed Evidence. ECF No. 1-30. The Limbergers stated that the motion to reopen was being submitted "in an abundance of caution" to "clarify [] the injury and damages caused by [Cleary's] improper conduct." Id. at 1. Submitted with the motion were three exhibits: (1) a settlement statement for a $1, 575, 200 loan from BB&T to the Limbergers, (2) the loan agreement for that loan, and (3) an affidavit of Lisa Limberger in which she states that she refinanced the SunTrust loan through the new loan with BB&T. ECF Nos. 1-31, 1-32, 1-33. She states further that "SunTrust never returned nor repaid [her] for any of the money that is the subject of the claims in this adversary case against [Cleary]." ECF No. 1-33. On March 8, 2011, Cleary filed an opposition to the motion to reopen.[1]

On February 28, 2013, the Bankruptcy Court entered a memorandum opinion and order holding that the claims related to the draw for the deposit for window and trusses and the draw for the deposit for cabinetry were non-dischargeable under 11 U.S.C. § 523(a)(2)(A), in that Cleary made fraudulent misrepresentations to SunTrust in order to induce it to disperse those funds. The Court, however, found that the claim related to the draw for the water well was dischargeable. As to that claim, the Court opined that, while Cleary may have been just as dishonest in seeking payment for work related to a well that Trinity did not dig, SunTrust could not have justifiably relied on Cleary's representation in that SunTrust, in the course of financing the purchase of the lot, knew that the well was already presented when the lot was purchased by the Limbergers.

As to the motion to reopen, the Bankruptcy Judge stated in a footnote that it would be granted because "it submits specific, undisputed information that the Court requested during oral argument." ECF No. 1-40 at 15 n.22. Specifically, noted the Bankruptcy Judge, the motion to reopen explained that "[t]he Limbergers had to pay the SunTrust loan in full [through] a refinancing loan from [BB&T]." Id. In that same footnote, the Bankruptcy Judge also opined that Cleary "has had an equal opportunity to rebut the truth of that information but has not done so." Id. An order granting the motion to reopen was entered the next day.

Debtor Cleary raises the following three issues on appeal: (1) whether the Bankruptcy Court erred in granting the motion to reopen the case and admitting the three exhibits submitted with that motion into evidence; (2) whether the Bankruptcy Court erred in finding that the draw requested for the window and truss deposit was non-dischargeable; and (3) whether the Bankruptcy Court erred in finding that the draw requested for the cabinetry deposit was non-dischargeable. The arguments raised as to those last two issues center on whether the Limbergers were actually damaged by these disbursals.


This Court reviews the Bankruptcy Court's findings of facts for clear error and conclusions of law de novo. See Duncan v. Duncan (In re Duncan) , 448 F.3d 725, 728 (4th Cir. 2006). "A finding of fact is clearly erroneous when, although there is evidence to support it, the reviewing court on the entire evidence is left with the definite and firm conviction that a mistake has been committed." Montgomery County v. Barwood, Inc. , 422 B.R. 40, 44 (Bankr. D. Md. 2009) (citing Anderson v. Bessemer City , 470 U.S. 564, 573 (1985)) (internal quotation marks omitted). "A reviewing court will not reverse simply because it is convinced that it would have decided the case differently." Citizens Bank of Md. v. Broyles (In re Broyles) , 55 F.3d 980, 983 (4th Cir. 1995) (citing Anderson , 470 U.S. at 573) (internal quotation marks omitted). As to the decision to reopen the case and admit additional evidence, the parties agree that such a decision is entrusted to the discretion of the trial court and is therefore reviewed under an abuse of discretion standard. See Gathright v. St. Louis Teachers' Credit Union , 97 F.3d 266, 268 (8th Cir. 1996).


Section 523(a) of the Bankruptcy Code provides, in pertinent part, that a discharge under section 727 "does not discharge an individual debtor from any debt... (2) for money... to the extent obtained by - (A) false pretenses, a false representation, or actual fraud...." To establish that a claim is non-dischargeable under § 523(a)(2)(A), a creditor must establish five elements: (1) the debtor made a representation; (2) the debtor knew at the time the representation was made that it was false; (3) the debtor made the representation with the intent and purpose of deceiving the creditor; (4) the creditor justifiably relied upon the false representation; and (5) the creditor suffered harm as the proximate result of the representation. See Dubois v. Lindsley (In re Lindsley) , 388 B.R. 661, 668 (D. Md. 2008). In order to protect the purpose of providing debtors with a fresh start through bankruptcy, exceptions to discharge such as those provided for in § 523 are strictly construed against the creditor, and creditors must prove their allegations by a preponderance of the evidence. In re Rountree , 478 F.3d 215, 219 (4th Cir. 2007).

In this appeal, Cleary raises no serious challenge as to the first four elements, nor could he. The Bankruptcy Court, which had the opportunity to observe Cleary's demeanor in his testimony both at trial and in videotaped deposition, concluded in no uncertain terms that Cleary was "evasive, argumentative, contradictory and calculating." ECF No. 1-40 at 11. In reviewing findings of fact made by a bankruptcy court, this Court must give ...

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