Goguen and Sharfarz entered into a construction contract, whereby Goguen agreed to build a residence for Sharfarz. The contract required Goguen to secure the necessary permits and complete the renovation by March 15, 2007; it also required Sharfarz to make seven progress payments totaling $171,286.00. As the construction stalled through October and November 2006, Goguen continued to blame the lack of progress on the town’s delay in issuing the permit. Relying on Goguen’s representations regarding the purported difficulties with the permit process, Sharfarz elected not to cancel the
contract.
Goguen finally submitted the permit application on November 29, 2006, and received the permit on December 11, 2006. During the following year, construction plodded along until November 26, 2007 when Goguen finally informed Sharfarz that the project was underfunded and he had run out of money. By then, Sharfarz had already paid the entire contract price, although the house was far from complete. Goguen asked Sharfarz to fund the completion of the project and when Sharfarz refused, Goguen abandoned the job, as he had threatened.
Sharfarz sued Goguen in state court and obtained a default against him for failure to appear. Thereafter, Goguen filed a chapter 7 petition, and Sharfarz commenced an adversary proceeding, seeking to have the entire state court judgment excepted from discharge pursuant to Bankruptcy Code Sections 523(a)(2)(A) and (a)(6). At trial, Sharfarz testified that if he had known the truth about the permit application, he “would have stopped the project on a dime.” The bankruptcy court ruled in Sharfarz’s favor.
Section 523(a)(2)(A) specifically excepts from discharge debts obtained by “false pretense, a false representation, or actual fraud, other than a statement respecting the debtor’s or an insider’s financial condition.” The dispositive issue in this appeal is whether Goguen’s misrepresentation about the status of the permit application caused Sharfarz’s damages. Section 523(a)(2)(A) “requires a ‘direct link’ between the alleged fraud and the creation of the debt to be excepted from discharge.”
The Bankruptcy Appellate Panel found that there was nothing in the record to support a conclusion that Goguen’s misrepresentation about the permit is either the “direct link” to Sharfarz’s damages or “the essence of the agreement” between the parties. Goguen’s misrepresentation regarding the permit application post-dated the signing of the construction contract, so it could not possibly have induced Sharfarz to enter into the contract in the first instance.
The second element of proximate cause, legal causation, required Sharfarz to establish that his damages could reasonably have been expected to result from his reliance on Goguen’s misrepresentation. The Panel found that it is not reasonable to suggest that Goguen could have foreseen that Sharfarz would spend $88,000.00 beyond the contract price because he misrepresented the status of the permit application for a ten-week period after they signed the contract.
The Panel found that the bankruptcy court did not apply the standard of causation and, therefore, it erroneously found that Goguen’s misrepresentation regarding the permit caused Sharfarz’s pecuniary loss.
Reversed.