Court Opinion

ID: 3020662
Source: CourtListenerOpinion
Date Created: 2015-10-13 22:23:17.68986+00
Date Added: 2024-06-11T12:46:33.341364
License: Public Domain

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

McMILLIAN, Circuit Judge.

      1
      The Honorable Pasco M. Bowman succeeded the Honorable Richard S.
      Arnold as Chief Judge of the United States Court of Appeals for the
      Eighth Circuit at the close of business on April 17, 1998.
       Eliot M. Alport (debtor) filed a voluntary Chapter 7 bankruptcy petition in the
United States Bankruptcy Court2 for the Eastern District of Missouri on September 16,
1992. Jerry E. Ritter and Margaret A. Ritter (the Ritters) timely brought an adversary
proceeding asserting the nondischargeability of their claim against debtor under 11
U.S.C. § 523(a)(2)(A), (a)(4), (a)(6). Following a three-day hearing, the bankruptcy
court entered judgment for the Ritters in the amount of $184,362.00, upon a
determination of 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
opinion). 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 the
nondischargeable debt. Id. (Aug. 30, 1996). Debtor appealed both orders of the
bankruptcy court to the district court3 pursuant to 28 U.S.C. § 158(a). Upon review,
the district court affirmed the orders of the bankruptcy court. Id., No. 4:96CV2001
(E.D. Mo. Sept. 18, 1997). Debtor appealed the district court order to this court
pursuant to 28 U.S.C. § 158(d). For reversal, debtor argues that the bankruptcy court
erred 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 following is 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 (Thunderbird

      2
       The Honorable David P. McDonald, United States Bankruptcy Judge for the
Eastern District of Missouri.
      3
        The Honorable Catherine D. Perry, United States District Judge for the Eastern
District of Missouri.
                                          -2-
Construction), which specializes in custom home building. Over the years, debtor has
established or acquired other companies as well. He used Thunderbird Construction
as the construction contractor for developments built by his real estate companies
including 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” and
transferred much of Thunderbird Construction’s assets and other investments and
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
agreement whereby Thunderbird Construction was to serve as the construction
contractor for TAG’s first and only real estate development, a subdivision called
“Sheffield Estates” in St. Louis County, Missouri.4

       The Ritters became interested in building a custom home in Sheffield Estates in
June of 1987. In August 1987, the Ritters signed a sales contract to purchase two lots
for $470,000. Debtor signed the sales contract as president of TAG. The contract
specified that 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 bankruptcy court, debtor “demonstrated that he was in charge of
the project.” In re Alport, slip op. at 8 (Bankr. E.D. Mo. June 19, 1996). On July 12,
1988, the Ritters and TAG entered into a “base contract” for the construction of the
residence for $882,000. The base contract provided, among other things, that TAG
“shall not permit any mechanic’s or materialmen’s liens to be filed against the [Ritters’
house]” and that, if attorney’s fees and costs are incurred to enforce the contract or

      4
       TAG, Thunderbird Construction, and three other business entities owned and
operated by debtor were housed in the same office. The costs and services of
personnel, rent, and other overhead expenses were not segregated or apportioned
among the several entities sharing the office.
                                           -3-
recover damages for a breach of the contract, the non-prevailing party must pay the
prevailing party’s reasonable costs and attorney’s fees. See id. at 9. The Ritters, TAG,
and Lawyers 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
materialmen for work performed on the Ritters’ house and then would submit lien
releases signed by the subcontractors and materialmen to LTC to obtain
reimbursements from the Ritters’ escrow account. Id.5 After construction on the
house began, the Ritters decided to make some changes to the original specifications.
Debtor suggested, and the Ritters agreed, that they would bypass LTC with respect to
the “change orders” and instead the Ritters would pay TAG directly for any additional
work.

       Debtor deposited funds received from the Ritters and from LTC into Thunderbird
Construction’s bank account. He drew money from that account not only to make
partial payments to the subcontractors and materialmen, but also to pay his own
“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 and June 1989, debtor diverged to his own benefit $568,385 from the
Thunderbird Construction account; by contrast, debtor was able to demonstrate that the
Thunderbird Construction account was repaid only $169,139 by the Silverstein trust
and $35,000 by debtor. Id. at 12. In the spring of 1989, Thunderbird Construction
owed $367,556 to the subcontractors and materialmen for work on the Ritters’ house.
Meanwhile, debtor continued to submit documentation to LTC to receive payments
from the escrow account.

      5
       The evidence showed that LTC agreed to this relatively unusual arrangement
whereby the money would be channeled through TAG, rather than paid directly from
LTC to the subcontractors and materialmen, because LTC was trying to secure debtor’s
business.
                                          -4-
       In June 1989, while debtor was away, Goldford took steps to exclude debtor
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 thousands of dollars even
though the Ritters had fully paid for the work done on the house. Goldford told the
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 the
remaining unfinished work on the house, at an added cost to the Ritters of $260,689.

      Needless 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 and
materialmen for work done on the Ritters’ house. Id. Numerous mechanic’s liens
were filed against the house, and a lawsuit was brought to perfect those liens. The
Ritters hired an attorney who settled the liens. Pursuant to an indemnity agreement
contained in the escrow agreement, LTC partially reimbursed the Ritters for the
settlement of the mechanic’s liens. Id. at 15-16.
                                     Discussion

Standard of review

        We apply the same standards of review to the bankruptcy court’s orders as the
district court. Findings of fact are reviewed for clear error and conclusions of law are
reviewed de novo. Wegner v. Grunewaldt, 821 F.2d 1317, 1320 (8th Cir. 1987).

Piercing the corporate veil

     Debtor first argues that the bankruptcy court erred in piercing the corporate veil
of TAG to hold him personally liable for its debts. Debtor points out that he had only

                                          -5-
a one-third ownership interest in TAG. He also argues that he had far less control over
TAG than Goldford. Debtor argues that Goldford’s actions, not his, caused the Ritters’
losses because Goldford had unilaterally decided to tell the Ritters that the funds did
not exist to pay the subcontractors and materialmen. Debtor also contends that,
contrary to the bankruptcy court’s findings, the Ritters still owed TAG over $300,000,
and therefore, in the end, cash flow would not have been a problem. The bankruptcy
court pierced the corporate veils of TAG and Thunderbird Construction on the basis
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 the
bankruptcy court’s decision to disregard 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)

       Debtor 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 pretenses, a false representation, or actual fraud, other than a statement
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 (8th Cir. 1987) (setting forth elements of fraudulent
misrepresentation). Debtor suggests that the Ritters established, at best, a breach of
contract. He argues that the escrow arrangement did not require TAG to pay the
subcontractors and materialmen first; rather, he contends, TAG agreed to obtain the
funds from LTC and then pay the subcontractors and materialmen. He also maintains
that, to the extent the escrow arrangement caused the Ritters’ losses, Goldford was
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

                                          -6-
responsible was the Thunderbird Construction employee who prepared the invoices for
the change orders.

        The bankruptcy court found that debtor represented to the Ritters that he would
pay the materialmen and subcontractors before seeking payment from the LTC escrow
account or from the Ritters under the change orders, but instead debtor consistently
failed to pay the materialmen and subcontractors first. Moreover, the bankruptcy court
concluded that debtor had presented LTC with false documentation implying that he
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 the bankruptcy court’s findings. Moreover, it was reasonable for the
bankruptcy court to infer from 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 about timely payment of the subcontractors and materialmen, and that
the Ritters’ reliance was justified in light of debtor’s apparent expertise in residential
construction and financing. Finally, proximate cause was sufficiently established
because, absent debtor’s misrepresentations, 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 above, LTC partially reimbursed the Ritters for the amount they paid
to settle the mechanic’s liens. The bankruptcy court held that, under the “collateral
source rule,” as set forth in Overton v. United States, 619 F.2d 1299, 1306 (8th Cir.
1980), the payment from LTC to the Ritters should not be a basis for reducing the
amount of the nondischargeable debt. On appeal, debtor argues that the bankruptcy
court 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 agreement, LTC had the right to sue the contractor (i.e., Thunderbird
Construction) as the subrogee of the Ritters’ rights. Debtor also argues that the

                                            -7-
collateral source rule 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 wholly independent from the alleged wrongdoer (i.e., debtor), and the parties
have not expressly contracted for such a “double recovery.” See id. at 1306-07.

       Upon careful review, we hold that the bankruptcy court’s application of the
collateral source rule is not inconsistent with Overton. We read the language in
Overton, stating that either the collateral source must be independent from the alleged
wrongdoer or the parties must have contracted for double recovery, id. at 1307, in the
context of that case. In Overton, the collateral 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. Moreover, LTC’s right of subrogation does not bar the Ritters’ right of
recovery in the present case. See, e.g., Mason-Rust v. Laborers’ Int’l Union, 435 F.2d
939, 945 (8th Cir. 1970) (indicating that collateral source rule may apply even when
source 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 injured party than that it should accrue to the
tort feasor.’” 619 F.2d at 1306 (quoting Hamilton v. Slover, 440 S.W.2d 947, 958
(Mo. 1969)).

Inclusion of attorney’s fees

        Debtor also argues that the bankruptcy court improperly awarded the Ritters
attorney’s fees under § 523(a)(2)(A). Debtor notes that the bankruptcy court relied on
In re Hunter, 771 F.2d 1126 (8th Cir. 1985), as authority for awarding attorney’s fees
in this case. In In re Hunter, this court noted that:

                                            -8-
      when the parties have included a provision authorizing recovery of
      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 reasonable 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 award of attorney’s fees in the present case. Debtor further argues
that attorney’s fees should not be included within the nondischargeable debt under
§ 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 contract 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 that the base contract clearly states the parties’ right to recover
reasonable attorney’s fees upon prevailing in any matter arising under the contract
documents. The Ritters’ attorney’s fees were properly included in the nondis-
chargeable debt under § 523(a)(2)(A) because attorney’s fees provided by contract, like
accrued interest, can become part of the debt. In re Hunter, 771 F.2d at 1131; cf. In
re Fobian, 951 F.2d 1149, 1153 (9th Cir. 1991) (“[w]here a contract . . . provides for
an award of attorneys’ fees, a creditor may be entitled to such fees in bankruptcy
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 to
pierce TAG’s corporate veil apply to this issue as well.

                                           -9-
                                      Conclusion

      For the reasons stated, the order of the district court, affirming the orders of the
bankruptcy court, is affirmed. See 8th Cir. R. 47B.

      A true copy.

             Attest:

                     CLERK, U.S. COURT OF APPEALS, EIGHTH CIRCUIT.

                                           -10-