Ash et al v. Hahn

UNITED STATES BANKRUPTCY COURT
NORTHERN DISTRICT OF OHIO
WESTERN DIVISION
In Re:
David L. Hahn and Darlene A. Hahn,
Debtors.
Bonita D. Ash and Wilhelm L. Ash,
Plaintiffs,
v.
David L. Hahn,
Defendant.
) 	Case No. 11-32001
) 	Chapter 7
)
) 	Adv. Pro. No. 11-3146
)
) 	Hon. Mary Ann Whipple
)
)
)
)
)
)
)
)
)
MEMORANDUM OF DECISION AND ORDER
This adversary proceeding is before the court upon Plaintiffs’ “First Amended Complaint to
Determine Dischargeability of Debt” (“Complaint”) [Doc. #12]. 	Defendant is one of the joint 	debtors
in Chapter 7 Case No. 11-32001 	in this court. 	Plaintiffs Bonita D. Ash and Wilhelm L. Ash are
individual creditors of Defendant.
On October 31, 2011, 	the Clerk issued an alias summons and notice of pre-trial conference
[Doc. # 14]. The return on service [Doc. # 15] shows that the alias summons and Complaint were timely
served on Defendant at his address as set forth in his petition in the underlying Chapter 7 case by personal
service. Fed. R. Bankr. P. 7004(b); Fed. R. Civ. P. 4(e)(2)(A). 	The alias summons required an answer
or other response to the Complaint to be filed by November 30, 2011.
On December 6, 2011, the court held a pre-trial scheduling conference. Attorney for Plaintiffs
Dated: February 6 2012
The court incorporates by reference in this paragraph and adopts as the findings and
orders of this court the document set forth below. This document has been entered
electronically in the record of the United States Bankruptcy Court for the Northern
District of Ohio.
11-03146-maw Doc 25 FILED 02/06/12 ENTERED 02/06/12 16:22:47 Page 1 of 6

appeared in person. There was no appearance by or on behalf of Defendant at the pretrial conference and
no answer or other response to the complaint had been filed and served. The Clerk accordingly entered
Defendant’s default on the Complaint [Doc. ## 20, 23]. Plaintiffs filed a motion for default judgment
(“Motion”) [Doc. # 16]. The Motion was served by first class United States mail on Defendant at the
address in his petition. The Clerk scheduled a hearing on the Motion and notice of this hearing was also
properly served on Defendant by first class mail sent to the address in his petition. [Doc. ## 19, 22].
On January 17, 2012, the court held a hearing on the Motion. 	Attorney for Plaintiffs appeared
in person at the hearing. There was no appearance by or on behalf of Defendant. 	A review of the record
shows that no answer or other response to the Complaint or Motion has been filed. Plaintiffs’ counsel
certified in an Affidavit filed with the 	Motion that Defendant is not in the military service to the best
of his knowledge and information, complying with the Servicemembers Civil Relief Act. 	Therefore,
pursuant to Fed. R. Civ. P. 55, made applicable by Fed. R. Bankr. P. 7055, Plaintiffs’ Motion for Default
Judgment will be GRANTED.
The legal basis for the Complaint is 11 U.S.C. § 523(a)(2)(A), which provides that a debt incurred
under certain circumstances involving fraud shall be excepted from a debtor’s bankruptcy discharge. The
debt in issue is $30,737.00 paid by Plaintiffs to Defendant and to an entity directed and controlled by
Defendant for home improvements and kitchen remodeling that were never completed. Plaintiffs allege
that they transmitted the funds to Defendant and the related entity as a result of misrepresentations made
by Defendant upon which they justifiably relied to their detriment.
The district court has jurisdiction over the Debtors’ underlying Chapter 7 bankruptcy case and this
adversary proceeding. 28 U.S.C. § 1334. The Chapter 7 case and all related proceedings, including this
adversary proceeding, have been referred to this court for decision. 28 U.S.C. § 157(a) and General Order
No. 84 entered on July 16, 1984 by the United States District Court for the Northern District of Ohio.
This adversary proceeding is a core proceeding in which this court can make a final determination
because it involves a determination as to the dischargeability of a particular debt. 	28 U.S.C. §
157(b)(2)(I).
The court finds that notice, including the service of the alias summons and Complaint pursuant
to Fed. R. Bankr. P. 7004(b) and Fed. R. Civ. P. 4(e)(2)(A) incorporated therein, has been duly and
properly been served upon Defendant at all stages of this adversary proceeding and in the underlying
Chapter 7 case. No mail to Defendant from the court to the address in the Chapter 7 petition and as
specified in the Complaint has been returned. The court therefore finds that Defendant has failed to
plead or otherwise defend this action as required by the applicable rules of procedure.
2
11-03146-maw Doc 25 FILED 02/06/12 ENTERED 02/06/12 16:22:47 Page 2 of 6

Defendant’s failure to answer the complaint does not, standing alone, entitle Plaintiffs to a default
judgment as a matter of right. American Express Centurion Bank v. Truong (In re Truong), 271 B.R. 738,
742 (Bankr. D. Conn. 2002); Webster v. Key Bank (In re Webster), 287 B.R. 703, 709(Bankr. N.D. Ohio
2002); Columbiana County Sch. Emples. Credit Union, Inc. v. Cook (In re Cook), 2006 Bankr. LEXIS
446 at *9--*10 (B.A.P. 6 th Cir. Apr. 3, 2006). In determining whether a default judgment is appropriate,
“the court should [accept] as true all of the factual allegations of the complaint, except those relating to
damages” and afford plaintiff “all reasonable inferences from the evidence offered.” Au Bon Pain Corp.
v. Artect, Inc., 653 F.2d 61, 65 (2d Cir. 1981). Yet the court must still decide whether the unchallenged
facts constitute a legitimate cause of action, since a party in default does not admit mere conclusions of
law. Smith v. Household Fin. Realty Corp. Of New York (In re Smith), 262 B.R. 594, 597 (Bankr.
E.D.N.Y. 2001). Where the claim sounds in fraud, the court must evaluate the evidence presented to
assure that the plaintiff has presented a prima facie case. In re Truong, 271 B.R. at 742. In this case, the
detailed and well-pleaded factual allegations of the Complaint, including authenticating exhibits thereto,
substantiate and establish the cause of action against Defendant.
Plaintiffs rely on § 523(a)(2)(A) of the Bankruptcy Code, as follows, in contending that
Defendant incurred a debt to them that should be excepted from his discharge.
A discharge under section 727 . . . of this title does not discharge an individual debtor from
any debt . . . for money, property, services, or an extension, renewal, or refinancing of credit,
to the extent obtained by . . . false pretenses, a false representation, or actual fraud.
11 U.S.C. § 523(a)(2)(A). The specific parts of § 523(a)(2)(A) raised by the Complaint and the
affidavit are conduct involving “false representations” and “actual fraud.”
For purposes of § 523(a)(2)(A), “false representations and false pretenses encompass statements
that falsely purport to depict current or past facts, ” Peoples Sec. Fin. Co., Inc. v. Todd (In re Todd), 34
B.R. 633, 635 (Bankr. W.D. Ky. 1983), with a “‘false representation’ ... [being] 	an express
misrepresentation,” Ozburn v. Moore (In re Moore), 277 B.R. 141, 148 (Bankr. M.D. Ga. 2002)(quoting
Sears Roebuck & Co. v. Faulk (In re Faulk), 69 B.R. 743, 750 (Bankr. N.D. Ind. 1986)). In addition,
§ 523(a)(2)(A) also addresses 	“actual fraud” 	as a concept 	broader than misrepresentation. 	See
McClellan v. Cantrell, 217 F.3d 890 (7 th Cir. 2000); Mellon Bank, N.A. v. Vitanovich (In re Vitanovich),
259 B.R. 873 (B.A.P. 6th Cir. 2001). “Actual fraud has been defined as intentional fraud, consisting in
deception intentionally practiced to induce another to part with property or to surrender some legal right,
and which accomplishes the end designed. It requires intent to deceive or defraud.” Vitanovich, 259 B.R.
3
11-03146-maw Doc 25 FILED 02/06/12 ENTERED 02/06/12 16:22:47 Page 3 of 6

at 877 (quoting Gerad v.Cole (In re Cole), 164 B.R. 951, 953 (Bankr. N.D. Ohio 1993)). In order to
except a debt from discharge under § 523(a)(2)(A), a creditor must prove the following elements: (1)
the debtor obtained money or services through a material misrepresentation that, at the time, the
debtor knew was false or made with gross recklessness as to its truth; (2) the debtor intended to
deceive the creditor; (3) the creditor justifiably relied on the false representation; and (4) its reliance
was the proximate cause of loss. Rembert v. AT&T Universal Card Services, Inc. (In re Rembert),
141 F.3d 277, 280-81 (6th Cir. 1998). In order to except a debt from discharge, a creditor must prove
each of these elements by a preponderance of the evidence. Id. at 281.
A debtor’s intent to defraud a creditor under § 523(a)(2)(A) is measured by a subjective standard
and must be ascertained by the totality of the circumstances of the case at hand. Id.; Rembert v. AT&T
Universal Card Services, Inc. (In re Rembert), 141 F.3d 277, 281-82 (6 th Cir. 1998). 	A finding of
fraudulent intent may be inferred on the basis of circumstantial evidence or from the debtor’s “course of
conduct,” as direct proof of intent will rarely be available. Hamo v. Wilson (In re Hamo), 233 B.R. 718,
724 (B.A.P. 6th Cir. 1999).
The court finds that the well-pleaded averments of Plaintiffs’ Complaint, as substantiated by the
documents attached thereto, constitute a valid cause of action under § 523(a)(2)(A) and deems them as
true as a result of Defendant’s default. Misrepresentations made by Defendant in causing Plaintiffs to pay
either the entity he controlled or him three sums totaling $30,737.00 are detailed at paragraphs 9, 11, 12,
14, 16 and 18 of the Complaint. The course of Defendant’s conduct and the overall factual circumstances
shown in the Complaint, including admissions by Defendant in conversation with Plaintiffs as stated in
the Complaint, show, and the court finds, that Defendant acted with the requisite fraudulent intent in
obtaining from Plaintiffs the checks and funds at issue. The Complaint also demonstrates that Plaintiffs
relied upon Defendant’s misrepresentations [Complaint, ¶ 25] and that their reliance was justifiable given
Defendant’s experience in the kitchen remodeling business [Complaint ¶ 8]. While the initiation of the
debtor/creditor relationship between the parties had its genesis in a contract, the averments of the
Complaint reach beyond mere breach of contract and establish fraud in inducement of the contract and
in all three instances upon which funds were requested by Defendant from Plaintiffs and then transmitted
to him.
Plaintiffs have established that Defendant has incurred a debt to them that is non-dischargeable
under § 523(a)(2). They also request that the court enter a money judgment against Defendant on account
of that debt. The Sixth Circuit authorizes bankruptcy courts to enter money judgments in actions seeking
to except debts from discharge. Longo v. McLaren (In re McLaren), 3 F.3d 958, 966 (6 th Cir. 1993).
4
11-03146-maw Doc 25 FILED 02/06/12 ENTERED 02/06/12 16:22:47 Page 4 of 6

Averments in a complaint respecting damages are not necessarily entitled to the same presumption of
truthfulness upon default as other averments. Au Bon Pain Corp., 	653 F.2d at 	65. In this instance,
however, the averments and the damages sought focus on liquidated sums transmitted by Plaintiffs, as
substantiated by authenticated copies of two of the checks and the contract notes and documents attached
as exhibits to the Complaint. The court does not find it necessary in this case to hear additional evidence
under Rule 55(b)(2) to determine damages.
The Complaint raises an additional issue that must be addressed. The underlying contract is
with a corporation, David Hahn, Inc. The first check from Plaintiffs was payable to the corporation.
[Complaint, Ex. 3]. The second check is not attached as an exhibit, but the Complaint avers that
Plaintiffs paid Defendant. [Complaint, ¶ 10; see Ex. 4]. The third check was payable to Defendant.
[Complaint, Ex. 5]. These facts raise the issue whether Defendant can be liable for the check made
payable to the corporation.
The Sixth Circuit Court of Appeals decision in Brady v. McAllister (In re Brady), 101 F.3d
1165, 1172 (6th Cir. 1996), addresses this issue. In Brady, the Sixth Circuit adopted what has been
referred to as the “benefits theory” as to whether a debtor must personally receive money or services
as the result of a false representation in order for the § 523(a)(2)(A) exception to apply. The Sixth
Circuit held that a creditor must prove that the debtor directly or indirectly obtained some tangible
or intangible financial benefit in order to prevail under § 523(a)(2)(A).1 It does not require, however,
that the debtor directly and personally obtain every dollar lost by the creditor. In Brady, the plaintiff
creditor successfully proved that the debtor sufficiently benefitted when a corporation that he
controlled was the recipient of $40,000.00 from the creditor. Here, the averments of the Complaint
establish the applicability of Brady in this case with respect to the check payable to the corporation.
Paragraphs 5 and 21establish that Defendant benefitted from the check payable to the corporation
and that the debt may therefore may be excepted from Defendant’s discharge.
Based on the foregoing reasons and authorities, Plaintiffs’ Motion for Default Judgment
1
Subsequently, in Rembert, the Sixth Circuit stated the first element of a claim under
§ 523(a)(2)(A) as requiring proof that the “debtor” obtained money, credit, etc. This court does
not understand the Sixth Circuit’s statement of the elements of a § 523(a)(2)(A) claim in Rembert
as overruling Brady. In Rembert, the issue was simply the dischargeability of the debtor’s credit
card debt. There was simply no issue, as there was in Brady, that the debtor had received direct
credit from creditor AT&T Universal.
5
11-03146-maw Doc 25 FILED 02/06/12 ENTERED 02/06/12 16:22:47 Page 5 of 6

[Doc. # 16] is hereby GRANTED. 	A separate, final judgment against Defendant in accordance with
this Memorandum of Decision and Order shall be entered by the Clerk.
IT IS SO ORDERED.
6
11-03146-maw Doc 25 FILED 02/06/12 ENTERED 02/06/12 16:22:47 Page 6 of 6