October 5 , 2019, Northern District of Texas – Debtor Jenkins and his wife Elizabeth Jenkins (collectively, the “Jenkins”) purchased a property titled Bennett Lawson Property in 2001. At the time of purchase, the property had an on-site conventional anaerobic septic tank sewer system installed. In or about 2007, the Jenkins decided to upgrade the septic tank sewer system to an Aerobic Sewer System. According to Jenkins, they hired Peter Gross to undertake the conversion project based upon referral and recommendation obtained from one of his regular subcontractors. The Aerobic Sewer System was installed, and as per Jenkins, they never had any problems with it during the remaining period of their ownership of the Bennett Lawson Property.
In 2015, the Jenkins decided to sell the Bennett Lawson Property and entered into a contract for sale with the Plaintiffs James Dare and Mary Dare (collectively, the “Dares”). The parties entered into an agreement, and the Jenkins provided the “Seller’s Disclosure Notice” required by Section 5.008 of the Texas Property Code. Jenkins disclosed to the Dares that the Bennett Lawson Property had an on-site an “Aerobic Treatment” sewer system that was in working condition and approximately eight years old. The parties closed the deal, and the property was sold to the Dares.
Within a few months, the Dares experienced their first major problem with the on-site sewage facility when the toilets would not flush, and sewage began to back up into the house. At that point, the extent of the deficiency with the system was unknown. The Dares hired a plumber, who stated that the problem was nothing more than a blockage. The plumber temporarily fixed the issue. Approximately three months later, in March 2016, the Dares began to experience the same problem. This time, their hired plumber discovered that the problem was not just blockage, but rather the lack of a properly installed and functioning Aerobic Sewer System. Ultimately, it was found that there was no new Aerobic Sewer System installed in the property. It was the original septic tank sewer system, which was modified to appear as though it were an Aerobic Sewer System (e.g., by adding the controller box and a couple of sprinkler heads).
Finally, the Dares were forced to replace the existing sewer system with an actual Aerobic Sewer System. The total cost of addressing and replacing the deficient sewer system was $17,486.72.21. On August 5, 2016, the Dares initiated an action in the 153rd District Court of Tarrant County, Texas (the “State Court”), under Cause No. 153-286874-16. The Dares argued on the following counts- misrepresentations/non-disclosures; actual fraud by misrepresentation; actual fraud by nondisclosure; statutory fraud; and negligent misrepresentation against Jenkins.
Jenkins did not file an answer or appeared in the case. Consequently, the Dares moved for entry of a default judgment and obtained entry of the Prepetition Judgment. Pursuant to the Prepetition Judgment, the Dares were awarded the following amounts against Jenkins (collectively, the “Judgment Debt”): (a) $17,486.72 in actual damages; (b) prejudgment interest of $324.74; (c) court costs in an unspecified amount; and (d) post-judgment interest on all of the foregoing amounts at the rate of 5.0%, compounded annually, until paid in full.
Now, the Dares have brought a motion to seek a determination that the debt owed to them by Jenkins pursuant to the final default judgment entered by the 153rd District Court of Tarrant County, Texas is non-dischargeable pursuant to Section 523(a)(2)(A) of the United States Bankruptcy Code, 11 U.S.C. § 101, et seq. (the “Bankruptcy Code”).
According to Dares, Jenkins made false disclosures concerning the existence of an on-site aerobic sewage treatment system on the Bennett Lawson Property in connection with the sale of such property to them. The plaintiffs added that the prepetition judgment was obtained against Jenkins on account of such false disclosures. Further, the debt owed under the Prepetition Judgment constituted debt for money received from the Dares by false pretenses, a false representation and/or actual fraud and was therefore non-dischargeable.
Jenkins denied the existence of any such false pretenses, false representation, or actual fraud. Jenkins raised the affirmative defenses of res judicata and collateral estoppel. Jenkins asserted that any alleged fraudulent conduct on his part was fully and finally litigated in the State Court action. According to Jenkins, the State Court neither expressly found that they engaged in any such fraudulent conduct nor explicitly rendered judgment on any of the Dares’ fraud-based claims. Thus, Jenkins argued that the Dares were now barred from further litigating or re-litigating the fraud-based issues in connection with this case.
The Court held that the Debtor’s invocation of the doctrine of res judicata to prevent judgment creditors’ prosecution of their non-dischargeability claim was unavailing because the non-dischargeability claim could not be asserted in the state court.
The Court further found that Jenkins did represent to the Dares that the Bennett Lawson Property had a fully installed, functioning Aerobic Sewer System, which was false. Next, Jenkins knew that the representation was wrong, and they made the representation for deceiving the Dares. The Court stated that Jenkins induced them to part with money in purchasing the property and that the Dares actually and justifiably relied on the representation in buying the property. Thus, as a proximate result, the Dares were duped and ultimately suffered a loss in the amount of the Judgment Debt.
Accordingly, the Court concluded that the Judgment Debt was a debt of Jenkins for money obtained by false pretenses, by false representation, and by actual fraud, in each case which is non-dischargeable under Section 523(a)(2)(A) of the Bankruptcy Code.