Hernandez v. Dorado

1The Complaint to Determine Dischargeability of Debt asserts causes of action under 11
U.S.C. § 523(a)(2)(A), (a)(4), and (a)(6), but the Amended Pre-Trial Order references only 11
U.S.C. § 523(a)(4) and (a)(6). See Docket Nos. 1 and 14. The pre-trial order controls the
matters for trial. See Rule 16(d), Fed.R.Civ.P., made applicable to adversary proceedings by
Rule 7016, Fed.R.Bankr.P. Because the Amended Pre-Trial Order includes a contested issue of
law that the Defendant obtained monies by false pretenses, false representations, or actual fraud,
the Court will consider Plaintiffs’ claim under 11 U.S.C. § 523(a)(2)(A) even though the
Amended Pre-Trial Order fails to specifically reference that subsection of 11 U.S.C. § 523. See
In re Miner, 369 B.R. 655, 672 (Bankr.D.Kan. 2007)(“‘[T]he Pretrial Order should be ‘liberally
construed to cover any of the legal or factual theories that might be embraced by their
language.’’”)(quoting Lohmann & Rauscher, Inc. v. YKK (U.S.A.) Inc., 477 F.Supp.2d 1147,
1151-52 (D.Kan.2007) (quoting Trujillo v. Uniroyal Corp., 608 F.2d 815, 818 (10th Cir.1979)).
1
UNITED STATES BANKRUPTCY COURT
DISTRICT OF NEW MEXICO
In re: 	ROBERTO G. DORADO, a/k/a 	No. 7-07-13164 MR
ROBERTO DORADO-GUEVARA,
Debtor.
_____________________________________________________________________________
GREGORIO HERNANDEZ and
MARIA HERNANDEZ,
Plaintiffs,
v. 	Adversary No. 08-1009 M
ROBERTO G. DORADO a/k/a
ROBERTO DORADO-GUEVARA,
Defendant.
MEMORANDUM OPINION
THIS MATTER is before the Court following a trial on the merits to determine the
dischargeability of a debt arising from the parties’ oral contract to remodel Plaintiffs’ home.
Plaintiffs assert that the debt is non-dischargeable under 11 U.S.C. § 523(a)(2)(A), (a)(4) and/or
(a)(6).1 A Spanish-English interpreter served at trial because neither Plaintiffs nor Defendant
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are fluent in English (nor is the Court fluent in Spanish). 	Whether the debt at issue in this
proceeding is non-dischargeable largely depends upon whom the Court believes. 	Plaintiffs
allege that Defendant misrepresented to them that he was a licensed contractor, when in fact he
is not. Defendant maintains that he never told Plaintiffs he was a licensed contractor.
After careful consideration of the evidence and testimony, and being otherwise
sufficiently informed, the Court finds that neither 11 U.S.C. § 523(a)(4) nor (a)(6) apply, and,
although Defendant has not satisfactorily accounted for his receipt of $20,000.00, the evidence is
insufficient to establish that Defendant intended to defraud Plaintiffs. Nor does the Court find
that Defendant misrepresented to Plaintiffs that he was a licensed contractor. Consequently, the
debt is dischargeable.
FACTS
Gregorio Hernandez and Maria Hernandez (together, Plaintiffs) and Roberto Dorado
(Defendant) came to the United States from the same town in Mexico. Defendant knew the
Plaintiffs from when he lived in Mexico, and considered Mr. Hernandez a good friend.
Defendant was also friends with Ms. Hernandez’s brother in law. 	In 2006, Plaintiffs decided
that they wanted to remodel their home. 	Ms. Hernandez testified that Defendant offered to do
the work, that he told Plaintiffs that he had done similar work in California, and that he had a
license to do it. Defendant testified that he never represented to Plaintiffs that he had a
contractor’s license.
Plaintiffs and Defendant entered into an oral agreement for Defendant to remodel
Plaintiffs’ home, including adding a fifty-foot by twelve-foot room to the existing home. There
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is no written contract for the project. Defendant believes Plaintiffs agreed to pay $35,000 for the
completed project. Plaintiffs believe they agreed to pay a total of $25,000. Plaintiffs advanced
Defendant $15,000 on or about August 8, 2006 so that Defendant could purchase materials for
the project. See Exhibit 24 - Check dated 8/8/06 for $15,000. 	About one week later, Plaintiffs
advanced Defendant an additional $5,000. See Exhibit 25 - Check dated 8/12/06 for $5,000.
Defendant, along with his father and two others, began the work on the inside of the
home in August of 2006. 	Defendant testified that he paid his workers between $500 and $600
per week. He paid them in cash, and does not have time sheets or other records for these labor
expenses. Defendant documented expenses for materials in the total amount of $4,586.76. See
Exhibit B - Receipts from McCoy’s; Exhibit C - Receipts from Home Depot; Exhibit D -
Receipts from Higginbotham-Bartlett. Defendant testified that he did not keep all receipts for
the materials he purchased for the remodeling project.
Work on the addition to the home could not begin until a construction permit was
obtained. 	Mr. Hernandez signed the application for a Homeowner Construction Permit. See
Exhibit 2. 	Plaintiffs did not have the skills or ability to do the work themselves and had no
experience in construction. Defendant testified that he and Mr. Hernandez agreed that if a
building inspector came to inquire about the project, Defendants were to tell the inspector that
they were doing the work themselves, and that Defendant was only helping them. 	The permit
was not issued until November of 2006. See Exhibit 2 - State Building Permit reflecting
November 4, 2006 as the date issued; But see Exhibit 3 - Notice of Building Permit No.
2006050096, reflecting permit issue date of 10/3/2006.
Defendant did not complete the remodeling project. By the time the permit for the
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2Bellco First Fed. Credit Union v. Kaspar (In re Kaspar), 125 F.3d 1358, 1361 (10 th Cir.
1991).
3Id. (citing In re Hunter, 780 F.2d 1577, 1579 (11 th Cir. 1986)).
4Grogan v. Gardner, 498 U.S. 279, 111 S.Ct. 654, 112 L.Ed.2d 755 (1991)(holding that
preponderance of the evidence standard applies to all exceptions from dischargeability of
particular debts under 11 U.S.C. § 523).
4
addition was issued, Defendant had already left the job. 	Plaintiffs testified that Defendant left
the inside of their home torn apart. In support of this testimony, Plaintiffs offered photographs
of the incomplete work. Defendant denied that he left the home in the condition depicted in the
photographs, but does not dispute that he did not complete the job nor that he did not start any
work on the addition. 	Defendant did not return to the Plaintiffs any of the $20,000 he received
from the Plaintiffs. Plaintiffs ultimately paid different contractors to complete the remodeling
project, including the addition.
DISCUSSION
Plaintiffs claim that the $20,000 they gave to Defendant for the remodel of their home
should be declared non-dischargeable under 11 U.S.C. § 523(a)(2)(A), (a)(4), and/or (a)(6).
Exceptions to discharge under 11 U.S.C. § 523(a) must be construed narrowly. 2 Furthermore,
“because of the fresh start objectives of bankruptcy, doubt is to be resolved in the debtor’s
favor.” 3 Plaintiffs bear the burden of proving that the debt at issue is non-dischargeable by a
preponderance of the evidence.4 As explained below, the Court will resolve this matter in favor
of the Defendant and find that the debt at issue is dischargeable.
A. Fiduciary capacity, embezzlement, larceny - 11 U.S.C. § 523(a)(4)
Section 523(a)(4) provides, in relevant part:
A discharge under section 727 . . . of this title does not discharge an individual debtor
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5An express trust requires an intent to create a trust, a clearly defined trust res, and
specific trust duties. See, Tulsa Spine Hospital, LLC v. Tucker (In re Tucker), 346 B.R. 844, 850
(Bankr.E.D.Okla. 2006)(“‘The elements of an express trust are the intent to create a trust, a
clearly defined trust res, and specific trust duties.’”)(quoting In re Stefanoff, 97 B.R. 607
(Bankr.N.D.Okla. 1989)).
6A technical trust is a trust imposed by statute. In re Neal, 324 B.R. 365, 370
(Bankr.W.D.Okla. 2005), aff’d, 342 B.R. 384 (10th Cir. 2006). See also Cundy v. Woods (In re
Woods), 284 B.R. 282, 288 (D.Colo. 2001) (“A technical trust may arise as a result of defined
obligations imposed upon the debtor by state or federal statute.”)(citing In re Romero, 535 F.2d
618, 622 (10 th Cir. 1976)).
7Neal, 324 B.R. at 370 (stating that “a finding of nondischargeability under § 523(a)(4)
requires a showing of (1) the existence of a fiduciary relationship between the debtor and the
objecting party, and (2) a defalcation committed by the debtor in the course of that fiduciary
relationship.)(citing Fowler Bros. v. Young (In re Young), 91 F.3d 1367, 1371 (10 th Cir. 1996));
Antlers Roof-Truss & Builders Supply v. Storie (In re Storie), 216 B.R. 283, 285 (10th Cir. BAP
1997)(same).
8See Neal, 324 B.R. at 370 (“‘The existence of a fiduciary relationship is a threshold
issue to be determined under § 523(a)(4)(quoting Klenda v. Hogue (In re Hogue), 221 B.R. 786,
793 (Bankr.N.D.Okla. 1998)).
5
from any debt–
(4) for fraud or defalcation while acting in a fiduciary capacity, embezzlement, or
larceny.
11 U.S.C. § 523(a)(4).
To prevail under this section, Plaintiffs must show that there was a fiduciary relationship
between the parties that gave rise to an express 5 or technical trust 6 and that Defendant committed
fraud or defalcation during the course of that fiduciary relationship. 7 Plaintiffs have neither
alleged nor proven the existence of an express or technical trust. Consequently, Plaintiffs have
not demonstrated that Defendant was acting in a fiduciary capacity. 	Absent a finding of a
fiduciary relationship, Plaintiff’s claim for non-dischargeability based on a defalcation while
acting in a fiduciary capacity fails. 8
Debts may also be declared non-dischargeable under 11 U.S.C. § 523(a)(4) in the
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9Tucker, 346 B.R. at 852 (stating that debts may still fall within the exception to
discharge of § 523(a)(4) in the absence of a fiduciary relationship when they result from
embezzlement or larceny); In re Lynch, 315 B.R. 173, 175 (Bankr.D.Dist.Col. 2004)(“A claim
for nondischargeability under Section 523(a)(4) may rest on proof of larceny or embezzlement,
without requiring proof of a fiduciary relationship.”)(citing In re Wallace, 840 F.2d 762, 765
(10 th Cir. 1988)).
10See Bombardier Capital, Inc. v. Tinkler (In re Tinkler), 311 B.R. 869, 876
(Bankr.D.Colo. 2004)(“‘Larceny is proven for § 523(a)(4) purposes if the debtor has wrongfully
and with fraudulent intent taken property from its owner.’”)(quoting Kaye v. Rose (In re Rose),
934 F.2d 901, 902 (7th Cir. 1991)); In re Tilley, 286 B.R. 782, 789 (Bankr.D.Colo. 2002)(among
the required elements for embezzlement is fraudulent intent); Sullivan v. Clayton (In re
Clayton), 198 B.R. 878, 885 (Bankr.E.D.Pa. 1996)(“Essential to both larceny and embezzlement
is the element of fraudulent intent.”)(citing In re Graham, 194 B.R. 369, 374 (Bankr.E.D.Pa.
1996) and In re Spector, 133 B.R. 733, 741 (Bankr.E.D.Pa. 1991)).
11Tilley, 286 B.R. at 789 (quoting Pool v. Johnson, 2002 WL 598447, *2
(N.D.Tex.2002)(quoting Smith v. Hayden (In re Hayden), 248 B.R. 519, 526 (Bankr.N.D.Tex.
2000)).
12Clayton, 198 B.R. at 884.
13Wallace, 840 F.2d at 765 (quoting Great Am. Ins. Co. v. Graziano (In re Graziano), 35
BR 589, 594 (Bankr.E.D.N.Y. 1983)).
6
absence of a fiduciary relationship when the debts result from a debtor’s embezzlement or
larceny.9 Although fiduciary capacity is not a requisite to embezzlement or larceny within the
meaning of 11 U.S.C. § 523(a)(4), both embezzlement and larceny include a fraudulent intent
component.10 “Larceny is defined as the ‘fraudulent and wrongful taking and carrying away of
the property of another with intent to convert it to the taker’s use and with intent to permanently
deprive the owner of such property.’”11 For purposes of 11 U.S.C. § 523(a)(4), “larceny”
“requires that the initial appropriation of the property of another be wrongful.”12 Embezzlement
is defined for purposes of 11 U.S.C. § 523(a)(4) as “‘the fraudulent appropriation of property by
a person to whom such property has been entrusted or into whose hands it has lawfully come.’”13
The main difference between larceny and embezzlement is that with embezzlement, the debtor
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14Tinkler, 311 B.R. at 876 (quoting Webber v. Giarratano (In re Giarratano), 299 B.R.
328, 338 (Bankr.D.Del. 2003)). See also Schreibman v. Zanetti-Gierke (In re Zanetti-Gierke),
212 B.R. 375, 381 (Bankr.D.Kan. 1997)(stating that “[e]mbezzlement differs from larceny in that
the original taking was lawful.”)(citation omitted).
15Glenn v. Hrim (In re Hrim), 196 B.R. 237, 242 (Bankr.N.D.N.Y. 1993)(citing In re
Imbody, 104 B.R. 830, 841 (Bankr.N.D.Ohio 1989), citing In re Koelfgen, 87 B.R. 993, 998
(Bankr.D.Minn.1988), and In re Storms, 28 B.R. 761, 765 (Bankr.E.D.N.C.1983)).
16Hrim 196 B.R. at 243 (emphasis added)(citing In re Prevost, 123 B.R. 692, 694
(Bankr.D.N.H. 1991) and In re Riso, 978 F.2d 1151, 1154 (9th Cir. 1992)).
7
initially acquires the property lawfully, whereas “‘[l]arceny requires that the funds originally
come into the Debtor’s hands unlawfully.’” 14
Plaintiffs’ claim for non-dischargeability to the extent based on larceny or embezzlement
also fails. There is insufficient evidence that Defendant fraudulently took Plaintiffs’ property, or
that Defendant fraudulently deprived Plaintiffs’ of their property after lawfully acquiring it.
Defendant obtained the funds in order to do the remodeling work according to the parties’ oral
agreement. 	He did not finish the work, but spent all of the money. In other words, he breached
their oral contract.
“Generally, when there is no security interest involved, monies received by a debtor
belong to the debtor and their subsequent use by a debtor is not considered embezzlement” 15 so
that, “[i]n the absence of an identifiable fund of cash belonging to the creditor, a court is left
with a simple breach of contract which is dischargeable.” 16 Here, there was no security
agreement, and once Plaintiffs paid the funds to Defendant, the funds no longer belonged to
Plaintiffs. Defendant then breached their contract. Consequently the debt does not fall within
the non-dischargeability exception contained in 11 U.S.C. § 523(a)(4).
B. Willful and Malicious Injury - 11 U.S.C. § 523(a)(6)
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17In re Gagle, 230 B.R. 174, 179 (Bankr.D.Utah 1999); In re Longley, 235 B.R. 651, 655
(10th Cir. BAP 1999)(stating that "the phrase 'willful and malicious injury' has been interpreted
as requiring proof of two distinct elements-- that the injury was both 'willful' and 'malicious.'").
18Gagle, 230 B.R. at 179 (citations omitted).
19See Longley, 235 B.R. at 657 (noting that "conversion can, under certain circumstances,
give rise to a non-dischargeable debt pursuant to § 523(a)(6)."); Bank of Utah v. Auto Outlet, Inc.
(In re Auto Outlet, Inc.), 71 B.R. 674, 676 (Bankr.D.Utah 1987)("Although this section does not
specifically mention conversion, ‘willful and malicious injury’ was intended to include 'willful
and malicious conversion.'")(citing 124 Cong.Rec.H.11096 (daily ed. Sept. 28, 1978); S. 17412
(daily ed. Oct. 6, 1978) (statement of Rep. Edwards and Sen. DeConcini)).
20See Davis v. Aetna Acceptance Co., 293 U.S. 328, 332, 55 S.Ct. 151, 79 L.Ed. 393
(1934)(holding that "a willful and malicious injury does not follow as of course from every act of
conversion, without reference to the circumstances."); Tinkler, 311 B.R. at 878 (non-
dischargeability under § 523(a)(6) based on debtor's conversion nevertheless requires creditor to
show that the conversion was both willful and malicious).
8
Section 523(a)(6) provides, in relevant part:
A discharge under section 727 . . . of this title does not discharge an individual debtor
from any debt–
(6) for willful and malicious injury by the debtor to another entity or to the
property of another entity.
11 U.S.C. § 523(a)(6).
"Willful" and "malicious" under 11 U.S.C. § 523(a)(6) are two, distinct elements.17 Thus, non-
dischargeability under 11 U.S.C. § 523(a)(6) requires the plaintiff to "establish that the Debtor's
conduct was both willful and malicious." 18 Conversion of property of another can serve as
grounds for non-dischargeability under 11 U.S.C. § 523(a)(6).19 But not every conversion
constitutes a willful and malicious injury within the meaning of 11 U.S.C. § 523(a)(6); intent to
injure the creditor must be present.20
As discussed above, the evidence before the Court indicates that Defendant breached the
parties’ oral contract to complete the remodeling project. 	But, because 11 U.S.C. § 523(a)(6)
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21Tinkler, 311 B.R. at 878 (citing Davis v. Aetna Acceptance, 293 U.S. at 333, 55 S.Ct. At
153 (“The discharge will prevail as against a showing of conversion without aggravated
features.”). See also, Dorr & Associates v. Pasek (In re Pasek), 129 B.R. 247, 252
(Bankr.D.Wyo. 1991), aff’d, 983 F.2d 1524 (10th Cir. 1993)(stating that “an intentional breach of
contract, without more, is not sufficient to establish a willful and malicious injury for the
purposes of § 523(a)(6).”)
22Grogan v. Garner, 498 U.S. 279, 111 S.Ct. 654, 112 L.Ed.2d 755 (1991) (holding that the
standard of proof for dischargeability actions is by a preponderance of the evidence).
23Field v. Mans, 516 U.S. 59, 73-75, 116 S.Ct. 437, 133 L.Ed.2d 351 (1995)(establishing
justifiable reliance standard).
24Young, 91 F.3d at 1373.
9
requires both willful and malicious injury, “[i]t is clear . . . that a ‘knowing breach of contract,’
without more, does not create a debt which is nondischargeable due to willful and malicious
injury under § 523(a)(6).” 21 Plaintiffs' request for non-dischargeability under 11 U.S.C. §
523(a)(6), therefore, must be denied.
C. False Pretenses, False Representation, Actual Fraud - 11 U.S.C. § 523(a)(2)(A)
Section 523(a)(2)(A) provides, in relevant part:
A discharge under section 727 . . . of this title does not discharge an individual
debtor from any debt--
(2) for money . . . to the extent obtained by–
(A) false pretenses, a false representation, or actual fraud, other than a
statement respecting the debtor’s . . . financial condition.
11 U.S.C. § 523(a)(2)(A).
To prevail under this section, Plaintiffs must prove by a preponderance of the evidence22 that
evidence that 1) the Defendant made a misrepresentation to Plaintiffs; 2) with intent to deceive; 3)
upon which Plaintiffs justifiably relied23; and 4) which caused Plaintiffs to sustain a loss.24 Intent
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25Groetkin v. Davis (In re Davis), 246 B.R. 646, 652 (10th Cir. BAP 2000), aff’d, in part,
vacated in part on other grounds by 35 Fed.Appx. 826 (10th Cir. 2002)(citing American Sur. & Cas.
Co. v. Hutchinson (In re Hutchinson), 193 B.R. 61, 64 (Bankr.M.D.Fla. 1996)).
26See Chevy Chase Bank FSB v. Kukuk, (In re Kukuk), 225 B.R. 778, 786 (10th Cir. BAP
1998)("A finding regarding fraudulent intent . . . will be determined on a case-by-case basis,
with the particular circumstances of the case and the demeanor and credibility of the witness
playing a very large role.").
10
to defraud may be inferred based on the totality of the surrounding facts and circumstances.25
Plaintiffs allege that Defendant misrepresented to them that he was a licensed contractor and
that he would obtain a permit for the remodeling project as a licensed contractor for the project. In
fact, Defendant is not a licensed contractor, and the permit for the project was obtained in the names
of the Plaintiffs’ individually. Defendant steadfastly maintained that he never represented to
Plaintiffs that he was a licensed contractor.
The Court is not convinced, based on the evidence presented at trial, that Defendant made a
false representation to Plaintiffs. 	Plaintiffs and Defendant entered into an oral agreement to
remodel Plaintiffs’ home. 	Plaintiffs advanced Defendant the funds to begin work on the project,
and Defendant, in fact, started to work on the project. 	The alleged misrepresentation is that
Defendant represented to Plaintiffs that he was a licensed contractor, when, in fact, he was not.
Defendant testified that he has never been a licensed contractor in California or any other state and
that he never represented to Plaintiffs that he held a contractor's license. 	Ms. Hernandez testified
that Defendant assured her he could do the work and that he was a licensed contractor.
A debtor's credibility and demeanor play a large role in determining fraudulent intent under
11 U.S.C. § 523(a)(2). 26 After weighing the testimony presented at trial, the Court finds that
Defendant did not misrepresent to Plaintiffs that he was a licensed contractor. Defendant's
testimony was credible. The fact that the construction permit was signed by Mr. Hernandez signed
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27See Bank One Columbus, N.A. v. Schad (In re Kountry Korner Store), 221 B.R. 265,
272 (Bankr.N.D.Okla. 1998)(stating that "fraud must be clearly distinguished from the mere
failure to perform a promise, which is not fraud but breach of contract.")(citation omitted).
11
as homeowner, and not submitted as a contractor's permit is consistent with, and further supports
this finding.
It is troubling that Defendant has not offered any evidence, other than his testimony, to
explain how he spent the majority of the $20,000 he received from Plaintiffs. He was only able to
document approximately $4,500 from receipts he testified were for materials he purchased for the
project. 	He did not keep time records or other documentation to support labor expenses incurred
on the project. Neither Plaintiffs nor Defendant could recall exactly how long Defendant worked on
the project, though it is undisputed that Defendant did not perform any work on the addition to the
house. 	All of these factors lead the Court to conclude that there is insufficient circumstantial
evidence from which the Court can infer that Defendant intended to defraud Plaintiffs when they
entered into the oral agreement to remodel Plaintiffs’ home. The agreement to remodel Plaintiffs'
home was breached, but Plaintiffs have not shown that the agreement was obtained through
Defendant's fraud.27 Based on the foregoing, the Court concludes that the $20,000 at issue was
not obtained by false pretenses, a false representation, or actual fraud and is, therefore,
dischargeable under 11 U.S.C. § 523(a)(2)(A).
These findings of fact and conclusions of law are entered in accordance with Rule 7052,
Fed.R.Bankr.P. 	The Court will enter a judgment consistent with this Memorandum Opinion.
______________________________________________
MARK B. McFEELEY
United States Bankruptcy Judge
Date entered on docket: 	December 16, 2008
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COPY TO:
Ramon I. Garcia
Attorney for Plaintiffs
106 N. Washington Ave
Roswell, NM 88203-3062
Glen L Houston
Attorney for Defendant
1304 W Broadway Pl
Hobbs, NM 88240-5508
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