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Fraud debt exempt from discharge

Where the debtor obtained $120,000 from the plaintiff by telling her that he was a licensed home improvement contractor, when he was not, he must disgorge those funds. Because those funds were obtained through fraud, that debt is not dischargeable.

Background

Prior to this bankruptcy proceeding, a dispute arose between the Hanan Khalil and Mohamed A. El Rafaei, the debtor, and Design 2 Build LLC related to the renovation of a property in Washington, D.C. On or about Sept. 28, 2020, Khalil filed a complaint against D2B and the debtor individually in the D.C. Superior Court, seeking the return of the $131,686.00 she had paid the defendants, plus various other unspecified amounts.

On Nov. 23, 2020, the debtor filed a Chapter 11 petition in this court. Khalil filed proof of claim, seeking to recover a total of $2,014,752.42 against the debtor. She then commenced an adversary proceeding.

Negligence

El Rafaei contends that the standard of care was not disclosed in plaintiff’s expert report. The court agrees. Although plaintiff argues the omission was harmless, the court disagrees. As such, the court strikes the expert testimony with respect to the standard of care. As a result, Khalil’s negligence claim fails because she has failed to produce admissible evidence on the appropriate standard of care and any breach thereof.

Negligent misrepresentation

The record is clear that El Rafaei knew that he could not acquire the permits on an expedited basis; nevertheless, he told Khalil he could obtain them within a month. Ultimately, it took eight months to acquire all the necessary permits.

Khalil, in justifiable reliance on the representation, and on the advice of El Rafaei, forced her tenant to vacate earlier than was necessary causing her to needlessly forego rental payments for eight months. The total foregone rent for the eight months is $17,600.

As explained further below, the court will treble these damages for a full award of $52,800. Further, the court will enter judgment on this count against the defendants jointly and severally.

Contract claims

Khalil’s breach of contract claim must fail because any agreement she reached with El Rafaei or D2B is null and void, and unenforceable on a contract or quasi-contract theory. And because the implied warranty of good faith and fair dealing depends on a contract action, that count is also dismissed.

Fraud

El Rafaei’s representation that he could acquire permits on an expedited basis also establishes fraud, because the representation was made with the knowledge that it was false when uttered and made with the intention to induce Khalil into proceeding with the renovation, which she then did. She suffered damages by forcing her tenant to vacate the premises before it was necessary to do so.

Municipal Regulation § 16-800.1

The purported agreement for the actual renovation of the property qualifies as a home improvement contract and is subject to D.C. Municipal Regulation § 16-800.1. El Rafaei’s acceptance of $120,000 in payments from Khalil when he was not a licensed home improvement contractor violated §16-800.1. El Rafaei must disgorge the $120,000 that he received from Khalil.

CPPA

The court has already ruled that El Rafaei violated D.C. Municipal Regulation § 16-809 and that he made fraudulent misrepresentations of material fact when he did so. This means he also violated the District of Columbia’s Consumer Protection Procedures Act, or CPPA.

As previously stated, the court will treble the $17,600 actual damage award for a total actual damage award of $52,800. The award will be against both defendants, jointly and severally. The court also finds that the fraudulent behavior, coupled with violation of the CPPA as well as the District’s home improvement contractor regulations necessitates an award of reasonable attorneys’ fees. However the court finds that punitive damages are not appropriate in this case.

Quasi contract

The court has already ruled that defendants must disgorge the $120,000 paid by Khalil for the home improvement contract, obviating the need for an unjust enrichment award. Therefore, the court will not enforce this contract, even on a quasi-contractual or quantum meruit basis.

Corporate veil

Because the court has already imposed personal liability on El Rafaei, it declines to apply veil piercing in this instance and will therefore dismiss this count.

Section 523 complaint

The court will be awarding Khalil $120,000, representing the amounts paid in violation of the D.C. home improvement regulations, and $52,800, representing Khalil’s actual damages of $17,600, as trebled by the CPPA. The court will also be awarding attorneys’ fees. The court finds that these amounts are excepted from El Rafaei’s discharge as they were obtained by fraud.

Khalil v. Rafaei, Nos. 21-1002, 21-1009, July 22, 2022. EDVA Bankr. at Alexandria (Kindred). VLW No. 022-4-015. 31 pp.

VLW 022-4-015

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