The Honorable Pasc o M. Bowman succeeded the Honorable Richard S. 1 Arnold as Chief Judge of the United States Court of Appeals for th e Eighth Circuit at the close of business on April 17, 1998.



## United States Court of Appeals

FOR THE EIGHTH CIRCUIT

___________ No. 97-3819

___________ In re: Eliot M. Alport, * * Debtor. * * Eliot M. Alport, * * Appeal from the United States Appellant, * District Court for the * Eastern District of Missouri v. * * Jerry E. Ritter; * Margaret A. Ritter, * * Appellees. *

___________ Submitted: April 13, 1998 Filed: May 29, 1998

___________ Before BOWMAN, Chief Judge, and McMILLIAN and MURPHY, Circuit Judges. 1

___________ McMILLIAN, Circuit Judge.The Honorable David P. McDonald, United States Bankruptcy Judge for th e 2 Eastern District of Missouri. The Honorable Catherine D. Perry, United States District Judge for the Eastern 3 District of Missouri. -2- Eliot M. Alport (debtor) filed a voluntary Chapter 7 bankruptcy petition in the United States Bankruptcy Court for the Eastern District of Missouri on September 16, 2 1992. Jerry E. Ritter and Ma rgaret A. Ritter (the Ritters) timely brought an adversary proceedi ng asserting the nondischargeability of their claim against debtor under 1 1 U.S.C. § 523(a)(2)(A), (a)(4), (a)(6). Following a three-day hearing, the bankruptcy court ente red judgment for the Ritters in the amount of $184,362.00, upon a determ inationof nondischargeability under § 523(a)(2)(A). In re Alport , No. 92

- 46298-293 (Bankr. E.D. Mo. June 14, 1996) (order); id. (June 19, 1996) (memorandum opini on). In a separate order, the bankruptcy court awarded the Ritters their pre

petition and post-petition attorney’s fees, totaling $93,166.90, as part of th e nondischargeable debt. Id. (Aug. 30, 1996). Debtor appealed both orders of th e bankruptcy court to the district court pursuant to 28 U.S.C. § 158(a). Upon review, 3 th e district court affirmed the orders of the bankruptcy court. Id. , No. 4:96CV200 1 (E.D. Mo. Se pt. 18, 1997). Debtor appealed the district court order to this cour t pursuant to 28 U.S.C. § 158(d). For reversal, debtor argues that the bankruptcy court err ed in: (1) piercing the corporate veil to hold him personally liable for the Ritters ’ claim; (2) interpreting and applying § 523(a)(2)(A); (3) applying the “collateral source rule”; and (4 ) including attorney’s fees in the nondischargeable debt. For the reasons stated below, we affirm. Background The followingis a summary of the underlying facts as found by the bankruptcy court. Debtor has been in the home-building business since the late 1960s. In 1969, he acquired ownership of Thunderbird Construction Company (ThunderbirdTAG, Thunderbird Construction, and three other business entities owned and 4 opera ted by debtor were housed in the same office. The costs and services o f personnel, rent, and other overhead expenses were not segregated or apportione d among the several entities sharing the office. -3- Construction), which specializes in custom home building. Over the years, debtor has establishedor acquired other companies as well. He used Thunderbird Construction as the co nstruction contractor for developments built by his real estate companie s incl uding The Alport Group (TAG). In 1980, debtor moved from St. Louis to Vail , Colorado. He set up an irrevocable living trust called the “Silverstein trust” an d trans ferredmuch of Thunderbird Construction’s assets and other investments an d holdings to the Silverstein trust. TAG was started in 1986 by debtor, Bruce Goldford, and Ernie Niswonger. Goldford is debtor’s nephew, and Niswonger was Goldford’s business associate. After TAG was established, debtor commuted between Vail and St. Louis. On September 1, 1988, TAG and Thunderbird Construction entered into an agr eement

whereby Thunderbird Construction was to serve as the constructio n contract or

for TAG’s first and only real estate development, a subdivision calle d “Sheffield Estates” in St. Louis County, Missouri. 4
The Ritters became intereste d in building a custom home in Sheffield Estates in June of 1987. In August 1987, th e Ritters signed a sales contract to purchase two lots for$ 470,000. Debtor signed the sales contract as president of TAG. The contrac t sp ecifiedthat TAG reserved the exclusive right to build a residence on the property

. Thereafter, Goldford signed most of the documents for TAG in dealing with the Ritters but, according to the ba

nkruptcy court, debtor “demonstrated that he was in charge of the project.” In re Alport , sl ip op. at 8 (Bankr. E.D. Mo. June 19, 1996). On July 12, 1988, t he Ritters and TAG entered into a “base contract” for the construction of th e re sidence for $882,000. The base contract provided, among other things, that TA G “shall not permit any mechanic’s or materialmen’s li ens to be filed against the [Ritters’ house]” and that, if attorney’s fees and costs are incurred to enforce the contract orT he evidence showed that LTC agreed to this relatively unusual arrangemen t 5 whereby the money would be channeled through TAG, rather than paid directly from LTC to the subcontractors and materialmen, because LTC was trying to sec ure debtor’s business. -4- recover damages for a breach of the contract, the non-prevailing party must pay th e prevailing party’s reasonable costs and attorney’s fees. See id. at 9. The Ritters, TAG, and Law yers Title Company (LTC) entered into an escrow agreement, whereby LTC was to serve as the disbursing agent of payments made under the base contract. The bankruptcy court found that the parties agreed that TAG would pay subcontractors and materia lmen

for work performed on the Ritters’ house and then would submit lie n releas es signed by the subcontractors and materialmen to LTC to obtai n reim bursements from the Ritters’ escrow account. Id. After construction on th e 5 house began, th e Ritters decided to make some changes to the original specifications. Debtor suggested, and the Ri tters agreed, that they would bypass LTC with respect to the “change orders” and instead the Rit ters would pay TAG directly for any additional work. Debtor deposited funds received from the Ritters and from LTC into Thunderb ird Const ruction’s bank account. He drew money from that account not only to mak e parti al payments to the subcontractors and materialmen, but also to pay his ow n “salary, ” to make deposits into the Silverstein trust, and to pay for personal expenses unrelated to the Ritters’ house. The bankruptcy court found that, between February 1988 a nd June 1989, debtor diverged to his own benefit $568,385 from th e Thunderbird Construction account; by contrast, debtor was able to demonstrate that the Thund erbirdConstruction account was repaid only $169,139 by the Silverstein trus t and $35 ,000 by debtor. Id. at 12. In the spring of 1989, Thunderbird Constructio n owed $367,556 to the subcon tractors and materialmen for work on the Ritters’ house. Mea nwhile, debtor continued to submit documentation to LTC to receive payment s from the escrow account.-5-

In June 19 89, while debtor was away, Goldford took steps to exclude debto r from TAG’s business operations. Goldford changed the locks on the doors to the office which housed TAG and debtor’s other companies. He told the Ritters that many of the subcontractors and materialmen were still owed hundreds of thousand s of dollars even though the Ritt ers had fully paid for the work done on the house. Goldford told th e Ritters that debtor had improperly diverted funds paid by the Ritters to debtor’s own use. The Ritters thereafter paid the subcontractors and materialmen directly for th e remaining unfinished work on the house, at an added cost to the Ritters of $260,689.
Needl ess to say, debtor and Goldford had a “complete falling out.” Id. at 15

. Goldford wound up the business of TAG. Debtor moved to California. Neither debtor nor Goldford paid any of the outstanding debts owed to the subcontractors an d materialmen f

or work done on the Ritters’ house. Id. Numerous mechanic’s lien s wer e filed against the house, and a lawsuit was brought to perfect those liens. Th e Ritter s hired an attorney who settled the liens. Pursuant to an indemnity agreemen t contain ed in the escrow agreement, LTC partially reimbursed the Ritters for th e settlement of the mechanic’s liens. Id. at 15-16. Discussion Standard of review We apply th e same standards of review to the bankruptcy court’s orders as the district court. Findin gs of fact are reviewed for clear error and conclusions of law are reviewed de novo

. Wegner v. Grunewaldt , 821 F.2d 1317, 1320 (8 Cir. 1987). th Piercing the corporate veil Debtor first argues that the bankruptcy court erred in piercing the corporate veil of TAG to hold him pe

rsonally liable for its debts. Debtor points out that he had only-6-

a one-third ownership interest in TAG. He also argues t hat he had far less control over TAG than Goldford. Debtor argues that Goldford’s actions, not his, ca used the Ritters’ losses because Goldford had unilaterally decided to tell the Ritters that the funds did not e xist to pay the subcontractors and materialmen. Debtor also contends that , contrary to the bankruptcy court’s findin gs, the Ritters still owed TAG over $300,000, andtherefore, in the end, cash flow would not have been a problem. The bankruptcy co urt pierced the corporate veils of TAG and Thunderbird Construction on the basi s of the non-party testimony of Goldford and others whom the bankruptcy court found to be credible. Upon review of the well-supported findings made by the bankruptcy court, we agree with the district court that the record as a whole amply supports th e bankruptcy court’s decision to disrega rd the corporate forms of TAG and Thunderbird Construction in holding debtor personally liable for the Ritters’ losses. 11 U.S.C. § 523(a)(2)(A)
De btor next challenges the legal and factual bases for the bankruptcy court’ s grant of relief under § 523(a)( 2)(A), which excludes from discharge debts obtained by “false p retenses, a false representation, or actual fraud, other than a statemen t respecting the debtor’s or an insider ’s financial condition.” 11 U.S.C. § 523(a)(2)(A). Debtor maintains that the Ritters failed to prove by the requisite preponderance of the evidence certain elements of fraud or false representation. See, e.g. , In re Ophaug , 827 F.2d 340 , 342 n.2 (8 Cir. 1987) (setting forth elements of fraudulen t th
m i srepresentation). Debtor suggests that the Ritters established, at best, a breach of contract
. He argues that the escrow arrangement did not require TAG to pay th e subcontractors and materialmen first; rather, he contends, TAG agreed to obtain the funds from LTC and t

hen pay the subcontractors and materialmen. He also maintains that, to the extent the escrow arrangement caused the Ritters’ losses, Goldford wa s responsible because he signed the vouchers and endorsed the Ritters’ escrow payments. To the extent the change orders caused the Ritters’ losses, debtor claims, the person-7-

responsible was the Thunderbird Construction employee who prepared the invoices for the change orders. The bankruptcy court found tha t debtor represented to the Ritters that he would pay the materialmen and subcontractors be fore seeking payment from the LTC escrow account or from the Ritters under the change orders, but instead debtor consistentl y failed to pay the materialmen and subcontractors first. Moreover, the bankruptcy court co ncludedthat debtor had presented LTC with false documentation implying that h e had made such prior payments. Jerry Ritter testified at the bankruptcy hearing about the escrow arrangement as it was explained to him by debtor; that testimony directly supports t he bankruptcy court’s findings. Moreover, it was reasonable for th e bankruptcy court to infer f

rom the evidence that debtor knew his representations were false, that he acted with the intent to defraud the Ritters, that the Ritters relied on his representations abou t timely payment of the subcontractors and materialmen, and that the Ritters’ reliance was justified in light of debtor’s apparent expertise in residential const ructionand financing. Finally, proximate cause was sufficiently establishe d because, absent debtor’s misrepre sentations, the Ritters would not have put funds into the LTC escrow account or paid TAG directly for work under the change orders.
Collateral source rule
As stated abov e, LTC partially reimbursed the Ritters for the amount they paid to se ttle the mechanic’s liens. The bankruptcy court held that, under the “collatera l source r ule,” as set forth in Overton v. United States , 619 F.2d 1299, 1306 (8 Cir

. th 1980), the payment from LTC to the Ritters should not be a basis for reducing th e amount of the nondischargeable debt. On appeal, debtor argues that the bankruptc y cour t erred in applying the collateral source rule to exclude consideration of LTC’ s reimbursement to the Ritters because, under the indemnity agreement contained in the escrow a greement, LTC had the right to sue the contractor (i.e., Thunderbir d Construction) as the subrogee of the Ritters’ rights. Debtor also argues that the-8-

collateral source rul e was erroneously applied in the present case because the Ritters’ claim is based upon a contract rather than tort claim, the collateral source (i.e., LTC) is not whol ly independent from the alleged wrongdoer (i.e., debtor), and the partie s have not expressly contracted for such a “double recovery.” See id. at 1306-07. Upon car eful review, we hold that the bankruptcy court’s application of th e collateral s ource rule is not inconsistent with Overton . We read the language i n Overton , stating that ei ther the collateral source must be independent from the alleged wrongdoer or the partie s must have contracted for double recovery, id. at 1307, in the context of that case. In Overton , the col lateral source and the alleged wrongdoer were one and the same. In the present case, by contrast, LTC and debtor are not the same entity and, moreover, debtor never contributed anything toward LTC’s indemnity payment. M oreover, LTC’s right of subrogation does not bar the Ritters’ right o f recovery in the present case. See, e.g. , Mason-Rust v. Laborers’ Int’l Union , 435 F.2d 939, 945 (8 Cir. 1970) (indicating that collateral source rule may apply even whe n

th
so urce has right of subrogation); see also Overton , 619 F.2d at 1306 n.8 (same)

. Finally, we are compelled by the observation in Overton that “‘it is more just that the windfall should inure to the benefit of the inju red party than that it should accrue to the tort feasor.’” 619 F.2d at 1306 (quoting Hamilton v. Slover , 440 S.W.2d 947, 95 8 (Mo. 1969)). Inclusion of attorney’s fees
Debtor also argues that the bankruptcy court improperly awarded the Ritter s attorney’s fees under § 523(a)(2)(A). Deb tor notes that the bankruptcy court relied on In re Hunter , 771 F.2d 1126 (8 Cir. 1985), as authority for awarding attorney’s fees th in this case. In In re Hunter , this court noted that:-9-

when the parties have included a provision authorizing recovery o f attorneys’ fees in

a contractual agreement, and those fees are incurred in connection with a debt determined to be nondischargeable in bankruptcy, some courts have permitted recovery of reasonab le attorneys’ fees as part of the compensatory relief to which a creditor is entitled under 11 U.S.C. § 523(a)(2)(A).

Id. at 1131 (citing cases). However, debtor argues, the Eighth Circuit merely remanded the case to the district court, which had affirmed the bankruptcy court’s exclusion of post-petition fees. See id. Therefore, debtor argues, In re Hunter

does not require this court to affirm the a

ward of attorney’s fees in the present case. Debtor further argues that attor ney’s fees should not be included within the nondischargeable debt unde r § 523(a)(2)(A) because requiring a bankruptcy debtor to pay the creditor’s attorney’s fees will have a chilling effect on bankruptcy filings and because creditors are generally better able to bear the cost of litigation than bankruptcy debtors. He also contends that he should not be bound under the attorney’s fees provision of the base contr act between the Ritters and TAG because he personally was not a party to that contract and, in fact, it was Goldford who signed the base contract on behalf of TAG.
We note t hat the base contract clearly states the parties’ right to recove r reaso nable attorney’s fees upon prevailing in any matter arising under the contrac t docum ents. The Ritters’ attorney’s fees were properly included in the nondis

chargeable debt under § 523(a)(2)(A) because attorney’s fees provided by co ntract, like accruedinterest, can become part of the debt. In re Hunter , 771 F.2d at 1131; cf. In re Fobian , 951 F.2d 1149, 1153 (9 Cir. 1991) (“[w]here a contract . . . provides for th
an award of attorneys’ fees, a creditor may be entitled to such fees in bankruptc y proceedings”), cert. denied , 505 U.S. 1221 (1992). As to whether a factual basis exists to excuse debtor personally because he was not a party to the base contract or because Goldford signed it on TAG’s behalf, we hold that the bankruptcy court’s reasons t o pierce TAG’s corporate veil apply to this issue as well.-10- Conclusion For the reasons stated, theorder of the district court, affirming the orders of the bankruptcy court, is affirmed. See 8 Cir. R. 47B. th A true copy. Attest: CLERK, U.S. COURT OF APPEALS, EIGHTH CIRCUIT.