SG Homes Associates, LP v. Marinucci, No. 12-1621

Decided: June 4, 2013

The Fourth Circuit affirmed the District Court for the District of Maryland, which affirmed the bankruptcy court’s finding of fraud and entry of a non-dischargeable judgment in favor of the Appellee, SG Homes Associates, LP (“SG Homes”).

Marinucci was the president and, along with Munnikhuysen, a fifty percent shareholder of Chesapeake Site Contracting, Inc. (“Chesapeake”). On January 28, 2008, SG Homes accepted Chesapeake’s bid for site work on a building project at Crabbs Branch Way in Montgomery County Maryland (“The Project”) and requested, among other things, a performance and payment bond (the “P&P Bond”). Almost immediately after SG Homes accepted the bid, before any formal written contract was signed, Chesapeake hired subcontractors and suppliers and began work on The Project.  Soon thereafter Marinucci completed a bond request form and informed Randall, SG Homes’ procurement vice president, that Chesapeake was pursing the P&P Bond. However, by mid-March, Marinucci had decided not to obtain the P&B Bond because his wife refused to sign a personal guaranty as required by the bonding company. Nonetheless, on March 26, 2008, Munnikhuysen copied Marinucci on an email sent to SG Homes’ procurement manager, DeVerger, indicating that his office had advised him that SG Homes should see the P&P Bond by the end of the next week. Meanwhile, work continued on The Project and Chesapeake submitted monthly payment application to SG Homes containing a certification that the work covered by the application had been completed in accordance with the contract documents and all amounts previously paid to Chesapeake under the contract had been used to pay Chesapeake’s costs for labor, materials, and other obligations. Marinucci reviewed each application and directed an employee to sign each certification. Chesapeake deposited each payment into a common fund from which it paid some of its subcontractors and suppliers on The Project as well as other creditors who did not provide services or supplies for The Project. A written contract (“the Contract”) governing The Project was executed on May 12, 2008. The Contract was ambiguous as to whether SG Homes required the P&B Bond. Consequently, Munnikhuysen sent an email on May 14, 2008 informing DeVerger that the P&B Bond had been canceled because Chesapeake assumed SG Homes no longer wanted it. However, DeVerger insisted that there must have been a communication breakdown because SG Homes still wanted the P&B Bond. Subsequently, Marinucci was copied on several email exchanges between Munnikhuysen and DeVerger regarding the status of the P&B Bond, including one that indicated Marinucci was handling the issue. Thereafter, beginning in September 2008, multiple subcontractors and suppliers informed SG Homes that they were not receiving payment from Chesapeake. On October 29, 2008 Randall informed Marinucci that other subcontractors and suppliers had reported nonpayment and indicated that SG Homes would pay them directly with funds due to Chesapeake. After the subcontractors and suppliers were paid, SG Homes’ calculations indicated that no money was due to Chesapeake. The Contract was subsequently terminated. Thereafter, in February of 2009, SG Homes sued Chesapeake and Marinucci. While the case was pending, Marinucci filed chapter 7 bankruptcy and the suit was stayed against Marinucci, but preceded against Chesapeake. A default judgment was entered against Chesapeake and a final judgment was entered in favor of SG Homes in the amount of $208,806.89. Four days later, SG Homes filed an adversary proceeding against Marinucci in bankruptcy court, seeking a declaration that Marinucci’s debt was non-dischargeable under 11 U.S.C. §523(a)(2)(A). SG Homes asserted that the debt was non-dischargeable because Marinucci committed fraud when he falsely represented that Chesapeake would obtain a payment bond and when he falsely certified that Chesapeake was paying its subcontractors and suppliers in the monthly payment applications. The case went to trial in the bankruptcy court, and the court found that SG Homes had proven fraud by Marinucci on both theories, finding each ground as an independent basis for judgment against Marinucci for fraud, the amount of damages, and the non-dischargeability of the debt. On appeal, the district court affirmed that bankruptcy court’s findings and subsequently Marinucci appealed to the Fourth Circuit.

Reviewing the bankruptcy court’s decision independently, the Fourth Circuit first addressed Marinucci’s contention that the bankruptcy court erred in entering a non-dischargeable judgment against him because SG Homes failed to prove two of the elements of fraud: reliance and damages. Rejecting this argument, the Fourth Circuit found that the bankruptcy court relied on solid evidence, which indicated that SG Homes justifiably relied on Marinucci’s false certifications in the monthly payment applications and was therefore damaged because SG Homes would not have otherwise continued to pay Chesapeake had it known Chesapeake was making false certifications. Next, the court addressed the bankruptcy court’s finding that SG Homes incurred $208,806.89 in damages—the amount SG Homes double paid for work completed and material furnished by Chesapeake’s subcontractors and suppliers—as a result of Marinucci’s fraud. Rejecting this argument, the court found that Marinucci’s unsupported testimony was not sufficient to rebut SG Homes’ prima facie case of damages. Lastly, because SG Homes obtained a judgment based on the fraud after having shown (1) fraud; (2) reliance on the fraud; and (3) damages attributable to the fraud, the court concluded that the bankruptcy court did not err in determining that the judgment debt was non-dischargeable pursuant to 11 U.S.C. § 523(a)(2)(A).

Full Opinion

-W. Ryan Nichols

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