Written by attorney Michael T Millar

Bankruptcy Court Rules that New Jersey Consumer Fraud Act Judgment is Dischargeable

Bankrutpcy Court Rules That A Judgment Under The New Jersey Consumer Fraud Act May Be Discharged In Bankruptcy.

In re Alteiri, 2012 Bank. LEXIS 3843

20 August 2012

The New Jersey Consumer Fraud Act (CFA) makes sellers of goods and services strictly liable for certain violations. A CFA violation is not necessarily "fraud" in the traditional sense because it does not require a showing of an intentional bad act. A CFA violation can occur by a negligent misrepresentation or a negligent violation of certain statutes or administrative code provisions.

In the In Re Alteiri matter, the Bankruptcy Court ruled that absent a showing of an intentional bad act, a judgment obtained under the CFA may be discharged in a bankruptcy.


The Plaintiffs entered into a contract with the Debtor to renovate their home in early 2007. Between March 2007 and January 2008, the Plaintiffs allegedly paid the Debtor over $250,000 for work performed in a substandard manner that ultimately had to be torn down. The Plaintiffs sued the Debtor alleging violations of the NJCFA. In October 2008, the Superior Court of New Jersey entered a judgment against the Debtor in the amount of $1,228,603.70.

On January 31, 2011, the Debtor filed a petition for relief under chapter 7 of the Bankruptcy Code. On February 14, 2011, the Plaintiffs filed a one-count adversary complaint seeking a judgment of nondischargeability pursuant to 11 U.S.C. Section 523(a)(2)(A). The complaint asserts that the Debtor received payments from the Plaintiffs for construction services and related supplies by way of "false pretenses, a false representation, or actual fraud," and sought to prevent those debts from being discharged.

The defendant/debtor moved to dismiss the adversary complaint.

It appears that the plaintiffs were not represented by an attorney and that their pleadings were poorly drafted - which contributed to the dismissal of their case. Plaintiffs appear to have relied solely on their state court CFA judgment as proof of fraud.

The court dismissed the adversary complaint finding that the plaintiffs had failed to plead or prove an intentional bad act which they relied upon to their detriment.

Excerpt from the Decision

  1. Fraudulent Intent

As noted above, intent is an essential element of a fraud claim under section 523(a)(2)(A). See Palmacci v. Umpierrez, 121 F.3d 781, 789 (1st Cir. 1997) (noting that section 523(a)(2)(A) requires "an actual finding of intent to deceive"). For instance, a common way of proving intent to deceive is to show that a debtor entered a contract without intending to fulfill its terms. In re Wiszniewski, 2010 WL 3488960, at *5 (Bankr. N.D. Ill. Aug. 31, 2010); see In re Balzano, 127 B.R. 524, 531 (Bankr. E.D.N.Y. 1991) ("A fraudulent promise under Section 523(a)(2)(A) requires proof that at the time the debtor made it, he or she did not intend to perform as required."). Instead of alleging facts indicating that the Debtor intended to deceive the Plaintiffs, the Plaintiffs argue that the [*9] state court's NJCFA judgment is sufficient to show that the money received by the Debtor was obtained through false pretenses, false representations, or fraud. (Pls.' Am. Compl., Paragraphs 32-34) This argument ignores the fact that intent is not an essential element of NJCFA violations. Allen v. V and A Bros., Inc., 208 N.J. 114, 133 (2011). That the Plaintiffs obtained a state-court judgment against the Debtor under the NJCFA is irrelevant to the issue of the dischargeability of the debt in question because the NJCFA applies a strict liability standard to unlawful conduct by contractors while section 523(a)(2)(A) requires actual intent to defraud. See Purington, 2012 WL 1945510, at *13 (holding that a debtor's violation of the NJCFA did not render a debt nondischargeable because the NJCFA does not require the element of intent to deceive).

While the Plaintiffs rely primarily on the state court's findings, they do provide some factual allegations to support their fraud claims. Furthermore, because direct proof of intent to defraud is rarely available, courts may infer the element of intent based on circumstantial evidence. See Balzano, 127 B.R. at 531. However, while intent may be inferred, "it cannot be presumed." Id. Here, the complaint alleges that after accepting money for construction services, the Debtor misrepresented the quantity and quality of supplies ordered for the project, failed to follow architectural plans or pay sub-contractors, did work of substandard quality, and used money for personal purposes before abandoning the project prior to completion. (Pls.' Am. Compl., Paragraphs 26-31) While these allegations might suggest that some fraud occurred, nothing in the complaint indicates that the Debtor's failures were the product of a deliberate scheme to defraud as opposed to negligence or poor project management. Similarly, alleging that the Debtor repeatedly represented that the work would be of high quality and performed on time does not lead to an inference of fraudulent intent without additional facts demonstrating that the promises were never meant to be kept. See Balzano, 127 B.R. at 531 ("A bare promise to be fulfilled in the future, which is not carried out, does not render a consequent debt nondischargeable under Section 523(a)(2)(A)."). Because the complaint does not allege facts suggesting that the Debtor intentionally acted to defraud the Plaintiffs, it fails to state a claim under section 523(a)(2)(A).

  1. Timing of the Alleged Misrepresentations

Furthermore, the amended complaint fails to state a claim because the alleged misrepresentations were made after the last payment to the Debtor was completed and therefore could not possibly have been relied upon by the Plaintiffs. As previously noted, section 523(a)(2)(A) provides that individuals may not be discharged from debts arising out of "money, property, services, or an extension, renewal, or refinancing of credit, to the extent obtained by . . . fraud." The amended complaint alleges that the Debtor assured the Plaintiffs that he would complete the renovations in "early February 2008," and then walked off the job later that month. (Pls.' Am. Compl., Paragraphs 13-14) This allegation might constitute a false representation had it induced the Plaintiffs to provide additional payments, but the complaint clearly states that January 2008 was the last month in which the Plaintiffs paid the Debtor. (Id. at Paragraph 8) Because the allegedly misleading statement was made after the Debtor received his last payment, the Plaintiffs could not have relied upon the Debtor's assurances to their detriment. Additionally, the complaint asserts that the Debtor misrepresented that certain supplies were in storage after the Plaintiffs had already "paid Defendant for them." (Pls.' Am. Compl., Paragraphs 26-27) This allegation is insufficient for the same reason: it reveals that the Debtor obtained payment for the supplies before the alleged misrepresentation was made. Thus, the amended complaint fails to state a claim for relief because it lacks the element of section 523(a)(2)(A) requiring a false representation that induces a plaintiff's reliance.

  1. Rule 9(b) Particularity Requirement

Finally, despite being afforded multiple opportunities to do so, the Plaintiffs have failed to plead facts that meet the heightened particularity requirement of Rule 9(b). The crux of the amended complaint is that the Debtor engaged in "false pretenses, false representations, and/or fraud in connection with the Debtor's inducing Plaintiffs regularly to advance funds for an ongoing project that were not being used on the project." (Pls.' Am. Compl., Paragraph 32) These allegations are conclusory because the complaint does not identify specific actions by the Debtor that meet the elements of actual fraud, false pretenses, or false representation. For instance the complaint alleges that the Debtor engaged in fraud by, "repeatedly represent[ing] . . . that he always finished jobs on time, on budget and with the highest quality" and by "repeatedly represent[ing] . . . that supplies were in storage." (Id. at Paragraphs 10-12) These claims do not meet the requirements of Rule 9(b) because they do not include details evidencing how these representations induced the Plaintiffs' reliance or describing the time, place, and manner in which they were made. See Neale, 440 B.R. 510 at 518 (stating that "Rule 9(b) particularity is 'the who, what, when, where, and how: the first paragraph of any newspaper story'") (quoting DiLeo v. Ernst & Young, 901 F.2d 624, 627 (7th Cir. 1990)). Merely alleging that the Debtor repeatedly made various misrepresentations regarding the quality of his work, the location of supplies, and the time in which the project would be finished without providing more detail does not give the Debtor adequate notice of the claims against him. Therefore, the Plaintiffs have failed to adequately state a claim under Rule 9(b).

Thus, even when read in a light most favorable to the Plaintiffs, the amended complaint fails to state a claim upon which relief can be granted. After their initial complaint was dismissed for failing to meet the heightened pleading requirement of Rule 9(b), the Plaintiffs were provided an opportunity to cure its defects. Nonetheless, the Plaintiffs have failed yet again to provide a sufficient factual basis for their allegations of fraud. Accordingly, the Court will dismiss the amended complaint with prejudice. See Neale, 440 B.R. 510 at 523 (dismissing a complaint under Rule 12(b)(6) with prejudice after plaintiff failed to plead Section 523(a)(2)(A) claim with particularity despite having multiple opportunities to do so).


For the foregoing reasons, the Debtor's motion to dismiss is granted. The complaint is hereby dismissed with prejudice.

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