Sanchez v. Lovato et al

UNITED STATES BANKRUPTCY COURT
FOR THE DISTRICT OF NEW MEXICO
In re:
RODOLFO LOVATO and
LISA LOVATO,
Debtors. No. 7-07-10287 SA
ALBERT SANCHEZ,
Plaintiff,
v. Adv. No. 07-1072 S
RODOLFO LOVATO and
LISA LOVATO,
Defendants.
MEMORANDUM OPINION IN SUPPORT OF JUDGMENT
OF LIABILITY AGAINST RODOLFO LOVATO AND
ORDER FOR SUPPLEMENTAL HEARING ON DAMAGES
The complaint of Plaintiff Albert Sanchez (“Sanchez”)
against Defendants Rodolfo Lovato (“Lovato”) and his spouse Lisa
Lovato, alleging that they had defrauded him, came before the
Court for trial on March 25, 2009. Having considered the
evidence, including the testimony of the witnesses, the Court
finds that Lovato is liable to Sanchez and the liability is non-	1
dischargeable. The Court further finds that an additional non-
evidentiary hearing on damages is appropriate.2
The Court finds that none of the evidence whatever	1
concerned Lisa Lovato. Since she cannot be held liable for a
non-dischargeable debt based merely upon her status as the spouse
of Rodolfo Lovato, the complaint against Lisa Lovato will be
dismissed with prejudice. E.g., Sandler v. Aguilar (In re
Aguilar), slip op., Adv. Proc. 08-1144, doc 10 (Bankr. D.N.M.
2009).
The Court has jurisdiction of the subject matter and the	2
parties pursuant to 28 U.S.C. §§ 1334 and 157; this is a core
proceeding pursuant to 28 U.S.C. § 157(b)(2)(I); and these are
findings of fact and conclusions of law as may be required by
F.R.B.P. 7052.
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Background
In 2001, Sanchez wanted to substantially renovate his
ancestral home located near Five Points in Albuquerque, New
Mexico. He initially contacted a well known builder, Homes by
Maria, whose unwritten bid was about $250,000. Taken aback by
the large number, Sanchez sought out other builders. A relative
recommended Tomas Torres (“Torres”), who obtained the services of
Robert Puckett, a construction draftsman with a GB98 (general
contractor) license, to prepare a bid for the project. Together
the two of them came up with a bid of $104,000, which Sanchez
found far more palatable. Torres did not have a contractor’s	3
license himself, which was a problem for several reasons, one of
which was that as the contract builder he would not be able to
pull a building permit due to the lack of a license. Neither
Torres nor Puckett disclosed to Sanchez this fact. Torres
nevertheless pulled a building permit by falsely claiming (to the
extent he had to provide any explanation at all) to Bernalillo
County that he was pulling it for Universal Builders, Lovato’s
business. Lovato was the qualifying party for Universal
Builders, with a fistful of licenses including a GB98. Torres
Subsequent change orders increased the price to $142,000,	3
with Sanchez receiving a credit of $10,000 for cabinets that he
was to supply to the project. As it happened, the $142,000 was
only the beginning of the costs. The Court need not go into the
numbers in detail at this stage; those numbers will be the focus
of the supplemental argument.
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had worked with Universal and Lovato before, so much so that he
was able to pull the permit in the name of Universal with few if
any questions asked by County personnel issuing the permit. When
or even whether Torres told Lovato about pulling the permit under
Universal’s name is at the heart of this dispute.
Under Torres, working with Puckett’s plans and change
orders, the project was a disaster. Torres testified that when
they removed the roof, the house fell down. As the months
passed, the construction of the exterior of the house progressed
while the interior remained almost entirely unreconstructed.
What work was done, such as the roof support, was completely
inadequate and risked catastrophic failure. The whole situation
would serve as script material for a low-grade Hollywood comedy
were it not for the grievous consequences to almost everyone
involved.
Sanchez and Torres entered into a short series of change
orders to address the steadily increasing expenses of the
project, until finally Sanchez announced that there would be no
additional funds delivered to Torres for the project. Thereupon
work rapidly slowed and had stopped by late fall of 2002. In
January 2003 Lovato appeared on the site, surveyed the project
and began doing some of the electrical work. In March he sent a
letter to Sanchez offering to complete the project for $77,000.
Sanchez refused. Ultimately Sanchez obtained the services of SLT
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Construction Company to complete the project, paid off a series
of subcontractor liens, and paid other bills, for a total
construction cost substantially exceeding the bid from Homes by
Maria.
Sanchez then commenced legal actions against Lovato, among
others; Lovato did not respond to the complaint and Sanchez
obtained a default judgment against him. Lovato then filed his
chapter 7 case on February 8, 2007, and this adversary proceeding
ensued.4
Liability
Section 523(a)(2)(A) of the Bankruptcy Code provides as
follows:
Federal Courts in New Mexico must give the same	4
preclusive effect to a judgment as would a New Mexico court.
Fowler Brothers v. Young (In re Young), 91 F.3d 1367, 1374 (10th
Cir. 1996). See also Corzin v. Fordu (In re Fordu), 201 F.3d
693, 703 (6 Cir. 1999):	th
When a federal court is asked to give preclusive effect
to a state court judgment, the federal court must apply
the law of the state in which the prior judgment was
rendered in determining whether and to what extent the
prior judgment should be given preclusive effect in a
federal action. (Citations omitted.)
Therefore, this Court should look at the preclusive effect that
the New Mexico state court would give to the default judgment.
Under New Mexico law, to invoke collateral estoppel a party
must establish four elements: 1) same parties or privity, 2)
subject matter of the two suits are different, 3) the ultimate
facts or issues were actually litigated, and 4) the issue was
necessarily determined. Reeves v, Wimberly, 107 N.M. 231, 233,
755 P.2d 75, 77 (Ct. App. 1988). In this case, the matter at
issue was clearly not actually litigated and not necessarily
determined in the state court action. In consequence, the matter
needed to be tried on the merits in this court.
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§ 523. Exceptions to discharge
(a) A discharge under section 727, 1141, 1228(a),
1228(b), or 1328(b) of this title does not discharge an
individual debtor from any debt--
...
(2) for money, property, services, or an
extension, renewal, or refinancing of credit, to
the extent obtained by--
(A) false pretenses, a false representation,
or actual fraud, other than a statement
respecting the debtor's or an insider's
financial condition;....
To recover under this subsection, a plaintiff must show “[t]he
debtor made a false representation; the debtor made the
representation with the intent to deceive the creditor; the
creditor relied on the representation; the creditor's reliance
was reasonable; and the debtor's representation caused the
creditor to sustain a loss.” Fowler Bros. v. Young (In re
Young), 91 F.3d 1367, 1373 (10 Cir. 1996). Actually, the	th
creditor’s reliance need only have been justifiable. Field v.
Mans, 516 U.S. 59, 74-75 (1995).
The central dispute concerning Lovato’s liability in this
adversary proceeding is the memorable Watergate question: what
did he know and when did he know it? The Court easily concludes
that Lovato knew within three to four days that Torres had pulled
the building permit in the name of Universal Builders, but did
not inform Sanchez of that fact. Torres conceded that he did not
tell Lovato about pulling the permit before or when he did it;
the Court finds however that Torres did tell Lovato within about
three days of doing it. The Court believes Torres was truthful
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and accurate on this point. Torres’ statement is not contrary to
the affidavit, Lovato exhibit 14, that he signed in the office of
Lovato’s bankruptcy attorney with the aid of Lovato. Paragraph 5
of the affidavit states only that “Rodolfo Lovato did not have
knowledge that [Torres] had purchased the permit, and did not
authorize [Torres] to do so.” Lovato exhibit 14. This statement
is entirely consistent with Torres’ statements that initially he
did not tell Lovato what he was doing, and with Torres’ repeated
expressions of remorse. And it is not inconsistent with Torres
testifying that he told Lovato a few days later. The Court also
finds that Torres likely does not have the capability to make up
a whole false story about Lovato’s liability, even if he was so
inclined to do so at this stage. And the Court is somewhat
skeptical of Lovato’s professed motive for showing up on the site
and continuing the work; to wit, Torres had been honest with him
(Lovato) and so Lovato was willing to help Torres fix the
problem, and Lovato never left a job unfinished.5
What seals the inquiry, however, is Sanchez exhibit 5, the
March 18, 2003 letter from Lovato to Sanchez. The letter tells
Sanchez that Lovato and Torres are essentially judgment proof,
the problem is that the project was way underbid, and that Lovato
can fix the problem for about $77,000. Nowhere in the letter
Lovato’s statement suggests he may have considered this	5
job to be “his”, an implication that further supports Lovato’s
liability.
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does Lovato does claim that he never knew about the permit being
pulled in Universal’s name. Rather, the second paragraph of the
letter concedes that “I am the qualifying party and company owner
for the licensing and permitting involved....”
Neither Torres nor Lovato (nor, for that matter, Puckett)
ever told Sanchez that Torres was not licensed as a contractor.
Lovato’s silence constituted a form of intentional deception.6
Actionable fraud is found if a party to a transaction
knows of material facts, has a duty to disclose, and
remains silent. A duty to disclose may arise if there
is knowledge that the other party to a contemplated
transaction is acting under a mistaken belief....
Krupiak v. Payton, 90 N.M. 252, 253, 561 P.2d 1345, 1346 (1977),
citing, among other authorities, Everett v. Gilliland, 47 N.M.
269, 141 P.2d 326 (1943). Lovato’s intent to induce Sanchez to
contract with Torres (or keep the contract in place), based on
Torres’ misrepresentation to Sanchez and Lovato not correcting
that, is sufficient to support that part of the fraud claim.
Sanchez testified that had he known Torres was not licensed,
he would never have contracted with Torres. Given Sanchez’
accepting a ridiculously low figure for the construction (about
$40 per square foot), the Court wonders whether Sanchez in fact
would have been put off by the lack of a contractor’s license.
He certainly did not ask to see such a license, nor, as is
None of this is to suggest that Lovato was acting	6
malevolently, but only that it appears he thought Torres was up
to the job and in effect consented to Torres using his license.
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apparent by the fact of this litigation, did he insist that
Torres be bonded for the project. Nevertheless, the Court finds
it more likely than not that Sanchez would have insisted on a
licensed contractor had the issue been brought up. This was
Sanchez’ testimony (rendered of course after consulting with
attorneys), and no one at the trial disputed it. And given
Sanchez’ almost complete naivete about the cost and process of
residential reconstruction on a such a large scale (including, in
this case, literally raising the roof), coupled with the
assurances provided by Puckett to Sanchez, Sanchez’ reliance was
justifiable.
Damages
Sanchez presented several elements to go into an aggregate
damages award starting at over $384,000. Obviously as an
unlicensed contractor Torres is not able to retain any of the
payments made to him, e.g., Gamboa v. Urena, 135 N.M. 515, 90
P.3d 534 (Ct. App.), cert. denied 2004, citing NMSA 1978, §§ 60-
13-1 to -59, the Construction Industries Licensing Act (“CILA”),
even if Sanchez had known about the lack of the license. 135
N.M. at 519, 90 P.3d at 538, citing Mascarenas v. Jaramillo, 111
N.M. 410, 414, 806 P.2d 59, 63 (1991). One question is whether
Lovato, who received nothing from the funds paid to Torres,
should be liable for the amounts paid to Torres. And since
Lovato himself was licensed, should the ban on the application of
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the unjust enrichment doctrine required by CILA, Gamboa v. Urena,
135 N.M. at 518, 90 P.3d at 537, be applicable to him in such a
way that he should also be liable to Sanchez for the amounts paid
to SLT Construction Company. These are two questions that the
Court needs to address with the parties before making a final
decision in this matter. The Court will therefore notice a	7
supplemental non-evidentiary hearing on the additional damages
issues, and render judgment thereafter.
James S. Starzynski
United States Bankruptcy Judge
Date Entered on Docket: October 15, 2009
COPY TO:
Lisa Lovato
06 Calle Granada
Los Lunas, NM 87031
Jason Neal
320 Gold Avenue SW, Suite 900
Post Office Box 8
Albuquerque, NM 87103-0008
Rodolfo Lovato
05 Calle Sandia
Los Lunas, NM 87031
Chris W. Pierce
PO Box 30088
Albuquerque, NM 87190-0088
The Court also finds that it need not determine, at this	7
point, whether Lovato is also liable to Sanchez on the basis of
§§ 523(a)(4) and (6).
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