Steves v. Labella (In Re Steves) ( 2012 )

Case: 11-50817 Document: 00511929607 Page: 1 Date Filed: 07/23/2012
IN THE UNITED STATES COURT OF APPEALS
FOR THE FIFTH CIRCUIT United States Court of Appeals
Fifth Circuit
FILED
July 23, 2012
No. 11-50817 Lyle W. Cayce
Clerk
In the matter of: RONALD ORRA STEVES; VIRGINIA MARTINEZ STEVES,
Debtors
-------------------------------
RONALD ORRA STEVES,
Appellant
v.
CARL LABELLA; ALICIA LABELLA,
Appellees
Appeal from the United States District Court
for the Western District of Texas
No. 5:11-CV-280
Before KING, PRADO, and HAYNES, Circuit Judges.
PER CURIAM:*
Ronald Steves (“Mr. Steves”)1 appeals the district court’s affirmance of the
bankruptcy court’s order finding that Mr. Steves’s debt to Carl and Alicia
*
Pursuant to 5TH CIR. R. 47.5, the court has determined that this opinion should not
be published and is not precedent except under the limited circumstances set forth in 5TH CIR.
R. 47.5.4.
1
The bankruptcy court ordered that the debt as to Virginia Steves (“Mrs. Steves”) was
dischargeable; this ruling was not appealed and is not before us.
Case: 11-50817 Document: 00511929607 Page: 2 Date Filed: 07/23/2012
No. 11-50817
Labella (the “Labellas”)2 was non-dischargeable pursuant to 11 U.S.C. §
523(a)(2). Because further factual findings are necessary to the determination
of this appeal, and in light of intervening case law important to the issues before
us, we VACATE the district court and bankruptcy court’s orders on this matter,
without reaching a conclusion as to the ultimate merits of the case, and remand
to the district court to remand to the bankruptcy court.
This case involves an agreement between Mr. Steves and the Labellas to
construct a $60,000 pool in the Labellas’ backyard. Mr. Steves received $54,000
from the Labellas and completed some portion of the pool construction before
ceasing such efforts for reasons disputed by the parties, each blaming the other.
The Labellas hired someone else to finish the pool and obtained a default
judgment against the Steveses. In turn, the Steveses filed for Chapter 7
bankruptcy, and the Labellas sought to declare the debt owed them non-
dischargeable under § 523(a)(2). The Labellas contend that Mr. Steves made
material misrepresentations to induce them to enter into the pool contract that
was not completed. The bankruptcy court agreed. Mr. Steves appealed, and the
district court affirmed. Mr. Steves timely appealed to this court.
Bankruptcy courts in Texas are extremely busy, with heavy case loads and
limited resources. They do a remarkable job balancing the need for efficiency
with the duty to fully and fairly address each case. This case is no exception,
and we have no criticism of the bankruptcy court’s utilization of oral findings of
fact. In most cases, oral findings will serve their purpose of informing the
lawyers and litigants of the court’s reasoning and ultimate ruling.
Unfortunately, from bankruptcy court to district court to our court, some
imperative facts have been lost in translation, leaving a somewhat muddled
situation. It is very difficult to discern what representation Mr. Steves made to
2
Carl Labella individually will be referred to as “Dr. Labella.”
2
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No. 11-50817
Dr. Labella that was untrue and material, with the intent to deceive, and upon
which Dr. Labella relied to his detriment. At varying times, it has been argued
that Mr. Steves misrepresented: (1) his “experience”; (2) whether his company
was a “family-owned” business; (3) whether he and/or “Koala Pools”3 had
previously constructed 50 pools; (4) whether the pictures on the Koala Pools
website were of pools actually constructed by Koala Pools; and (5) whether
representations about Koala Pools’ “financial condition” had been made. The
bankruptcy court stated that “the misrepresentation was as to the financial
ability to perform by Mr. Steves on the part of Koala Pools and Spas . . . . It
turned out to be false, it was relied upon reasonably by Dr. and Mrs. Labella,
and it caused damages to Dr. and Mrs. Labella.”
However, no one contends that Mr. Steves made any direct representations
about his or Koala Pools’ “financial ability to perform.” Instead, much of the
testimony and argument reflects concern with Mr. Steves’s representations
about Koala Pools’ experience and that it was “more than able to handle the job.”
In effect, Dr. Labella’s counsel indicated at oral argument that Mr. Steves held
Koala Pools out as a “going concern.”
Against the backdrop of the trial testimony, the bankruptcy court’s oral
findings, and the district court’s opinion, we cannot be sure what Mr. Steves said
that misrepresented Koala Pools’ financial ability to perform or any other
material fact. Without having clarity as to the particular facts underpinning the
misrepresentation found by the bankruptcy court, and affirmed by the district
court, it is difficult for us to pair the false statement(s) with intent to deceive (as
to which the bankruptcy court made no finding at all), reliance, and harm—all
necessary elements to except a debt from discharge under § 523(a)(2)(A). See
3
“Koala Pools” was a name the Steveses used to do business under the auspices of their
prior corporation and which they then used to open a bank account for a sole proprietorship
as a “d/b/a” for Mrs. Steves.
3
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No. 11-50817
Gen. Elec. Capital Corp. v. Acosta (In re Acosta), 406 F.3d 367, 372 (5th Cir.
2005).
In addition to the factual confusion, there is a lack of clarity over which
subsection of 523(a)(2) the bankruptcy court intended to apply, making it
uniquely difficult for us to review the issues on appeal. Under § 523(a)(2)(A),
oral misrepresentations can except a debtor from discharge only if they are not
about the “financial condition” of the debtor. “Financial condition”
misrepresentations are then made non-dischargeable under 523(a)(2)(B), but
only if they are in writing. The bankruptcy court made a finding about Mr.
Steves’s “financial ability to perform,” but said nothing of a “writing.” This is
peculiar given the foregoing statutory framework; the bankruptcy court either
omitted the necessary “writing” discussion, or meant that “financial ability to
perform” did not encompass “financial condition,” thereby concluding that the
debt was nondischargeable under subsection (A).
The district court apparently thought the former, concluding that Koala
Pools’ website can be construed as the “writing” necessary to except a debt from
discharge under subsection (B). This inference is not supported by our
precedent, and the Labellas notably abandoned this reasoning at oral argument,
conceding that there is no “writing” at issue and that subsection (B) does not
apply on these facts.
That still leaves us to consider whether Mr. Steves’s alleged
misrepresentation respected Koala Pools’ “financial condition,” thereby excluding
Mr. Steves from § 523(a)(2)(A)’s purview. This very question is at the heart of
a circuit split among the Courts of Appeals, and we only recently decided the
issue in Bandi v. Becnel (In re Bandi), No. 11-30654, 2012 WL 2106348 (5th Cir.
June 12, 2012). There, we concluded that the term “financial condition” must be
given a narrow interpretation. The dischargeability of Mr. Steves’s debt turns
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on whether his alleged misrepresentation respected “financial condition” as
defined in Bandi.
Unfortunately, neither the bankruptcy court nor the district court had the
benefit of Bandi when applying § 523(a)(2). As discussed, the record is unclear
as to what falsehood Mr. Steves represented that can be tied to an intent to
deceive, reliance, and harm. Without clarity on the misrepresentation found by
the bankruptcy court, we cannot properly decide whether it is underpinned by
“a statement respecting [Koala Pools’] financial condition,” a dispositive
question.
We conclude that, under these circumstances, we need further explanation
of the factual findings from the bankruptcy court in order to undertake proper
appellate review. We also conclude that the bankruptcy court and, if further
appeals are filed, the district court, should have the benefit of the Bandi opinion
in assessing the issues raised by counsel. Accordingly, we VACATE the orders
below and remand to the district court to remand to the bankruptcy court for
findings and a new order. We leave to the bankruptcy court the means for
arriving at its new order. We express no opinion on the ultimate resolution of
this case. Should the bankruptcy court’s new order be appealed to the district
court and thereafter to this court, the appeal should be returned to this panel.
VACATED and REMANDED.
5