In the case of In re Morrison, ___F.3d___, 2009 WL 103693 (5th Cir. Jan. 16, 2008), the Fifth Circuit Court of Appeals upheld the bankruptcy court’s ruling that the debt resulting from a subcontractor’s abandonment of the construction project was nondischargeable.

      David Wilson Morrison was the president and principal shareholder of Morrison Excavation, Inc. ("Morrison Excavation"). On February 6, 2002, Morrison was informed that his company was in serious financial trouble. On February 14, 2002, Morrison Excavation submitted a bid for a subcontract with Western Builders of Amarillo, Inc. ("Western Builders"). On February 15, 2002, Morrison learned that there was an accounting error within his company and Morrison Excavation was no longer solvent. On February 22, 2002, Western Builder’s requested a copy of Morrison Excavation’s financial statements and Morrison sent Western Builders a financial statement that still reflected the inflated accounts receivable error. On March 6, 2002, Morrison Excavation and Western Builders entered into a construction contract. Then, starting on March 28, 2002, Western Builders started making advanced payments in Morrison Excavation. However, Morrison Excavation used some of this money to payoff materialman lienholders, despite previously certifying to Western Builders that the lien holders had been paid. During this time, Morrison also gave himself a substantial raise and paid off his personal home loan from the company account. By mid-August, Morrison Excavation had abandoned the job. Western Builders was then forced to pay of the materialman lien holders and hire a replacement subcontractor to complete Morrison Excavation’s scope of work.

      On March 13, 2004, Morrison filed for individual bankruptcy under Chapter 7. Western Builders then commenced an adversary proceeding to determine the nondischargeability of the debt owed to it pursuant to 11 U.S.C. § 523(a)(2)(B), which states that a debt for an individual debtor is not dischargeable from any debt for money, property, services, or an extension, renewal or refinancing of credit to the extent it was obtained by use of a statement in writing that is materially false, respecting the debtor’s financial condition, on which the creditor relied, and that the debtor caused to be made or published with the intent to deceive. The bankruptcy court held that the subcontract for services created a debt that could be found nondischargeable under the statute because Morrison could be held liable for the misrepresentation that benefited Morrison Excavation. Therefore, the court held that Morrison was personally liable for the debt under Texas law.

      The Fifth Circuit of Appeals confirmed the bankruptcy court’s determination. In making this determination the court noted that Texas law does allow for a corporate officer to be found liable for the wrongdoing of the company when the officer has direct, personal participation in the wrongdoing and that Texas courts have held that a corporate agent may be held individually liable for the fraudulent or tortious acts committed while in the service of his corporation. Therefore, the Court of Appeals upheld the bankruptcy court’s determination that Morrison committed fraud when he sent the financial statement on February 22nd and Morrison is, therefore, liable for the resulting damages. The court also upheld the determination that the debt was not dischargeable in the bankruptcy proceedings because the actual condition of Morrison Excavation would have been fully revealed in an accurate pre-contract financial statement and the failure to provide the correct financial statement was directly connected to the ultimate default.