Bd. of Trs. v. Quinones (In re Quinones)
| Decision Date | 21 December 2015 |
| Docket Number | No. 12-46834,Adv. Pro. No. 13-04016,Adv. Pro. No. 13-04015,12-46834 |
| Court | U.S. Bankruptcy Court — Northern District of California |
| Parties | In re Jorge Edgard Quinones, Lidia Delvalle Quinones, Debtors. The Board of Trustees, in their capacities as Trustees of the Laborers Health and Welfare Trust Fund for Northern California, et al. Plaintiffs, v. Jorge Edgard Quinones, Lidia Delvalle Quinones, Defendants. The Board of Trustees, in their capacities as Trustees of the Cement Masons Health and Welfare Trust Fund for Northern California, et al. Plaintiffs, v. Jorge Edgard Quinones, Lidia Delvalle Quinones, Defendants. |
Plaintiffs filed the above-captioned adversary proceedings against Defendants to have certain debts declared nondischargeable pursuant to § 523(a)(2)(A), (a)(4), and (a)(6) of the Bankruptcy Code.1 During the pendency of the adversary proceedings, the Court of Appeals for the Ninth Circuit decided the case of Bos v. Board of Trustees, 795 F.3d 1006 (9th Cir. 2015), effectively determining the vast majority of the § 523(a)(4) claims in favor of Defendants.
After the Court granted Defendants' motions requesting summary adjudication (collectively, the "Motions for Summary Adjudication") in both of the adversary proceedings with respect to all but a miniscule amount of the damages sought by Plaintiffs under § 523(a)(4), Plaintiffs decided to forego their fraud claims under § 523(a)(2)(A) and their other tort claims under § 523(a)(6), for which a trial had been scheduled to commence within days. Instead, Plaintiffs filed in each adversary proceeding a Motion to Dismiss Adversary Proceeding (collectively, the "Motions to Dismiss") pursuant to Federal Rule of Bankruptcy Procedure 7041, which incorporates Federal Rule of Civil Procedure 41. Defendants opposed the Motions to Dismiss, arguing that dismissal would prejudice their legal interests because they had prevailed in their Motions for Summary Adjudication, and they were prepared immediately to go to trial on the remaining claims, on which they were confident of prevailing.
Consistent with their opposition to the Motions to Dismiss, and in an attempt to establish a right to attorneys' fees and costs, Defendants filed a Counter Motion for Order Determining Prevailing Party in each of the adversary proceedings (collectively, the "Counter Motions Re Prevailing Party").2 The Counter Motions Re Prevailing Party requested the Court determine that Defendants had prevailed not only on the § 523(a)(4) claims, but also on the § 523(a)(2)(A)and (a)(6) claims asserted by Plaintiffs. Further, Defendants claimed a right to attorneys' fees pursuant to the language of the agreements between the parties, and the provisions of California Code of Civil Procedure ("Cal. CCP") § 1021 and California Civil Code ("Cal. Civ. Code") § 1717. Plaintiffs opposed the Counter Motions Re Prevailing Party on the grounds that Defendants did not prevail on the § 523(a)(2)(A) and (a)(6) claims, that the grounds asserted for recovery of attorneys' fees were inapplicable to these adversary proceedings, and that applicable provisions of the Labor Management Relations Act ("LMRA") preempted any recovery provided under state law.
On October 19, 2015, the Court heard the Motions to Dismiss and the Counter Motions Re Prevailing Party and took the matters under submission at the conclusion of the hearing. For the reasons set forth below, the Court determines that it should: (1) enter judgments in favor of Defendants with respect to the § 523(a)(4) claims, (2) grant the Motions to Dismiss with respect to the § 523(a)(2) and (a)(6) claims, (3) grant the Counter Motions Re Prevailing Party with respect to costs incurred on the § 523(a)(4) claims, and (4) deny the Counter Motions Re Prevailing Party with respect to any claims for attorneys' fees.
On August 16, 2012, Defendants-Debtors Jorge and Lidia Quinones ("Jorge" or "Lidia", collectively the "Quinoneses") commenced the underlying bankruptcy case by filing a voluntary Chapter 11 petition in their individual capacities. Prior to the commencement of the case, andcontinuing during their tenure as debtors-in-possession, the Quinoneses owned and operated a number of construction-related businesses, the most pertinent of which, for these purposes, was Professional Construction Services ("PCS"). PCS was a sole proprietorship of Jorge, although Lidia served as office manager for PCS, with responsibility for, among other things, paying certain expenses and reporting hours worked under the terms of a Collective Bargaining Agreement ("CBA") with the various employee benefit trusts. The Quinoneses' operations in Chapter 11 were unsuccessful, and relatively short-lived. On October 17, 2012, the case was converted to Chapter 7.
On January 17, 2013, Plaintiffs, the Boards of Trustees of various employee benefit trust funds4 (collectively, the "Boards") filed the above-captioned adversary proceedings (collectively, the "APs").
Plaintiffs' initial Complaint to Determine Certain Debt to be Nondischargeable filed in each of the APs (collectively, the "Initial Complaints") contained the following allegations:
The Plaintiff in each AP is the Board of Trustees for the respective trust funds administered by the Laborers Trust (the "Laborers Trust Funds") and the Cement Masons Trust (the "Cement Masons Trust Funds" and, collectively with the Laborers Trust Funds, the "Trust Funds"). The Trust Funds are multi-employer employee benefit plans established under a written Trust Agreement (each a "Trust Agreement", and collectively, the "Trust Agreements") subject to and pursuant to § 302 of the LMRA, 29 U.S.C. § 185, and §§ 3, 4 and 502 of the Employee Retirement Income Security Act ("ERISA"), as amended, 29 U.S.C. §§ 1002, 1003 and 1132. The Boards are each empowered to bring an action in the name of their respective Trust Funds pursuant toexpress provisions contained in the Trust Agreements. Complaint to Determine Certain Debt to be Nondischargeable ¶ 3, 13-04015 and 13-04016, Jan. 17, 2013, ECF No. 1.
Each of the Trust Funds is a third party beneficiary of a collective bargaining agreement5 that requires contributions to be paid for the purpose of providing pension, health, and other benefits on account of work performed or paid for thereunder. Id. at ¶ 4. A copy of the relevant Master Agreement was attached to each of the Initial Complaints.
The Initial Complaints further alleged that Jorge was the owner, sole proprietor and operator of PCS, and stated that Lidia was named in the proceeding because each of the Boards was informed and believed that she was a co-owner of PCS. Id. at ¶6.
Jorge has done business as a contractor in California, has been an employer within the meaning of ERISA, and qualifies as an employer in an industry affecting commerce within the meaning of the LMRA. Initial Complaints ¶ 7.
The respective Master Agreements, and Trust Agreements that are incorporated by reference into the Master Agreements, provide for prompt payment of employer contributions to the Trust Funds. The Master Agreements also require prompt payment of all delinquent contributions, plus interest, attorneys' fees and other collection costs, and for employer audits as needed by the Trust Funds. Id. at ¶ 9.
The Initial Complaints also asserted that the Quinoneses failed, neglected, or refused to make timely contributions to the Trust Funds as required by the respective Master Agreements and the Trust Agreements, in unknown amounts to be proven, but amounting to at least $183,875.63 with respect to the Laborers Trust Fund and at least $116,090.80 with respect to the Cement Masons Trust Fund. Id. at ¶ 11.
The Trust Agreements also provide, at Article IV, § 3, for attorneys' fees and costs in the event of default:
If any Individual Employer defaults in the making of such Contributions or payments and if the Board consults or causes to be consulted legal counsel with respect thereto, there shall be added to the obligation of the Individual Employerwho is in default, reasonable attorneys fees, court costs and all other reasonable expenses incurred in connection with such suit or claim, including any and all appellate proceedings therein.
Trust Agreement, Art. IV, § 3, 13-04015 and 13-04016, Jan. 17, 2014, ECF No. 1, Ex. C. Accordingly, the Boards each sought damages attributable to auditors' fees, attorneys' fees and costs as permitted by the applicable Trust Agreements.
As part of the Initial Complaints, the Boards made the following allegations with respect to § 523(a)(2)(A), (a)(4), and (a)(6):
(a) Section 523(a)(2)(A): Fraud and False Pretenses
The Boards alleged that the Quinoneses did not intend to perform or knew that they would not be able to perform their obligations under the respective Master Agreements and the Trust Agreements when they entered into them. Despite their intentions and/or knowledge, the Quinoneses benefitted from the labor necessary to perform work under PCS's contracts with third parties. The Boards further alleged that the Quinoneses knowingly and repeatedly failed to report all hours worked under the respective Master Agreements (or otherwise under-reported their obligations under the Master Agreements). The Boards alleged that because the Quinoneses failed to report honestly all hours worked by their employees, it follows that they knowingly failed to pay the amounts due under the Master Agreements. Complaint to Determine Certain Debt to be Nondischargeable ¶¶ 17-23, 13-04015 and 13-04016, Jan. 17, 2013, ECF No. 1.
(b) Section 523(a)(4): Fraud or Defalcation by Fiduciaries, Embezzlement and Larceny
The Boards asserted that pursuant to the provisions of the...
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