Consol. Hardwoods, Inc. v. Mayhew (In re Mayhew)
| Decision Date | 31 March 2015 |
| Docket Number | Civil Action No. 14-cv-00899-PAB |
| Parties | In re: KIMBERLY MICHELLE MAYHEW Debtor CONSOLIDATED HARDWOODS, INC. Plaintiff-Appellant, v. KIMBERLY MICHELLE MAYHEW, Defendant-Appellee. |
| Court | U.S. District Court — District of Colorado |
ORDER
This matter is before the Court on the appeal of the Findings of Fact and Conclusions of Law of the Bankruptcy Court filed by plaintiff-appellant Consolidated Hardwoods, Inc. ("Consolidated"). The Court exercises jurisdiction pursuant to 28 U.S.C. § 158(a)(1).
In 1999, Dr. Kimberly Mayhew and her then-husband Doug Mayhew purchased vacant land in Boulder County, Colorado with the intention of building a home (the "home"). R. at 611. The home was to be constructed by Mr. Mayhew's construction company, Mayhew Industries, Inc. ("MII"). Id. Dr. Mayhew functioned as MII'ssecretary and bookkeeper, but continued to work full time as a physician at all times relevant. Id. In 2001, the Mayhews obtained a construction loan for $999,999 (the "construction loan"). R. at 612. In September 2005, the Mayhews obtained a mortgage loan to pay off the outstanding balance of the construction loan. Id. In October 2005, Dr. Mayhew obtained a home equity line of credit, which was secured by a second mortgage. Id. These proceeds were used, in part, to pay MII's expenses. Id. The Mayhews also used personal credit cards to pay MII's expenses. Id.
Consolidated manufactures interior wood trim and other wood products. R. at 613. In 2003, MII opened an account with Consolidated. Id. In December 2004, MII ordered $12,436.81 of wood trim from Consolidated to be used in the home. Id. MII paid $6,669.97 and disputed the remaining charges. Id. Dr. Mayhew testified that Mr. Mayhew told her that the materials Consolidated supplied were defective or did not meet specifications. R. at 123-124. Mr. Mayhew further instructed Dr. Mayhew not to pay Consolidated until the dispute was resolved. Mr. Mayhew and MII employee Tony Mitchell raised concerns regarding defects and specification issues with Consolidated's owner Russ Stewart. Docket No. 22-1 at 46, 65. Dr. Mayhew testified that, if Mr. Mayhew had instructed her to make full payments on the wood trim ordered for the home, she would have done so. R. at 127. In February 2005, MII ordered $4,199.80 worth of trim from Consolidated, which, in May 2005, MII paid for in full. R. at 613. In May 2005, MII paid Consolidated an additional $2000 in past due balances. Id. In July 2005, MII's account with Consolidated had a balance of $9,928.70. Id.
In March 2006, Dr. Mayhew sent Consolidated a settlement offer, whichConsolidated rejected. Id. Consolidated subsequently filed suit in County Court for the City and County of Broomfield, Colorado (the "state court case") against MII and against the Mayhews individually to recover the amount due on the open account. Id.; Docket No. 13 at 10-11. MII and the Mayhews asserted counterclaims against Consolidated for breach of contract, fraudulent misrepresentation, and violation of the Colorado Consumer Protection Act. Docket No. 26-2 at 49-52. The case was then transferred to District Court for the City and County of Broomfield. Docket No. 13 at 10-11. In March 2007, after a two-day trial, the jury awarded Consolidated $9,210, minus a setoff of $703 based upon MII's and the Mayhews' counterclaims. R. at 613. The state court awarded Consolidated approximately $29,000 in attorney's fees and costs. Id.
In January 2008, Dr. Mayhew filed a Chapter 7 bankruptcy petition. Id. On March 27, 2008, Consolidated filed the adversary proceeding that is the subject of this appeal, objecting to the discharge of Dr. Mayhew's debt to Consolidated. R. at 1. On June 29, 2012, Consolidated filed an amended complaint, asserting a claim for relief under 11 U.S.C. § 523(a)(2), (4), and (6), and state law claims for relief for civil theft, civil conspiracy, breach of fiduciary duty, and breach of contract. R. at 17-23.
On September 16 and 17, 2013, the Bankruptcy Court held a trial in the adversary proceeding. R. at 58. The parties submitted written closing arguments. In its closing argument, Consolidated chiefly argued that Dr. Mayhew's debts to it were non-dischargeable under 11 U.S.C. § 523(a)(4) because Dr. Mayhew committed "defalcation while acting in a fiduciary capacity" to Consolidated. R. at 67. On February 27, 2014, the Bankruptcy Court issued its decision, dismissing Consolidated's claims. R. at 611. Because Consolidated relied on the Colorado Mechanics' Lien Trust FundStatute, Colo. Rev. Stat. § 38-22-127, to create the requisite trust sufficient to establish a fiduciary duty under 11 U.S.C. § 523(a)(4), the Bankruptcy Court concluded that Consolidated had established a trust res within the scope of Colo. Rev. Stat. § 38-22-127 in the amount of the construction loan. R. at 615-16. The Bankruptcy Court also concluded that Dr. Mayhew had sufficient control over the construction loan proceeds to support the imposition of personal financial liability under Colo. Rev. Stat. § 38-22-127. R. at 618. However, the Bankruptcy Court found that Dr. Mayhew was protected by the safe harbor provision, § 38-22-127(2), because she had a good faith belief that Consolidated's claim was invalid. R. at 619. Although the Bankruptcy Court found that the safe harbor provision was, by itself, sufficient to preclude Consolidated's 11 U.S.C. § 523(a)(4) claim, the Bankruptcy Court concluded that, in the alternative, Dr. Mayhew lacked the requisite mental state to have committed a defalcation. R. at 620-21. As a result, the Bankruptcy Court ordered Consolidated's claims against Dr. Mayhew dismissed. R. at 622.
On March 27, 2014, Consolidated filed this appeal. Docket No. 1. The parties have filed appendices to the record. See Docket Nos. 13-1, 13-2, 13-3, 13-4, 22-1, 26-1, 26-2. This appeal is fully briefed.
The Court reviews the Bankruptcy Court's legal determinations de novo. See In re Baldwin, 593 F.3d 1155, 1159 (10th Cir. 2010). The Court also reviews de novo mixed questions of law and fact that primarily involve legal issues. See In re Wes Dor Inc., 996 F.2d 237 (10th Cir. 1993). The Bankruptcy Court's factual findings arereviewed for clear error. See In re Baldwin, 593 F.3d at 1159.
Consolidated's first argument is that the Bankruptcy Court erred in concluding that Dr. Mayhew was protected by the safe harbor provision of Colo. Rev. Stat. § 38-22-127(2). Docket No. 13 at 12.2
The Bankruptcy Court concluded that a "good faith" belief under § 38-22-127(2) had both a subjective and objective component, a conclusion which Consolidated does not dispute. As to the subjective component, the Bankruptcy Court found that Dr. Mayhew's testimony was credible regarding her understanding of the debt owed to Consolidated and the role she played in disputing such debt. R. at 619. The Bankruptcy Court found that Mr. Mayhew decided whether particular construction invoices would be paid, that Mr. Mayhew told Dr. Mayhew that there were problems with the wood Consolidated provided, and that, at all times relevant, MII had sufficient funds to pay the invoices. Id. As a result, the Bankruptcy Court found that Dr. Mayhew had a "subjectively honest, good faith belief that the balance of Consolidated's claim was not valid or that MII was entitled to a complete setoff." Id.
On the issue of whether Dr. Mayhew's belief was objectively reasonable, the Bankruptcy Court considered two sources of information. First, it considered Dr. Mayhew's testimony, which it found to be credible. R. at 619. Second, it reviewed the state court trial transcript, particularly the testimony of Mr. Mayhew and Mr. Mitchell. The Bankruptcy Court noted that Mr. Mitchell was not employed by MII at the time ofthe trial and therefore had no reason to be "anything other than truthful." Id. The Bankruptcy Court stated that, although the jury did not fully accept MII's counterclaim, "the existence of a reasonable belief is not determined by ultimate success in litigation." Id. (citing People v. Anderson, 773 P.2d 542, 546 (Colo. 1989)). The Bankruptcy Court concluded that Dr. Mayhew's "belief that Consolidated's claim was not valid or that MII was entitled to a complete setoff was supported by other evidence and was objectively reasonable." Id. at 619-20.
Consolidated's arguments do not make clear whether it challenges the Bankruptcy Court's findings regarding Dr. Mayhew's subjective belief, objective belief, or both. To the extent Consolidated challenges the Bankruptcy Court's finding regarding Dr. Mayhew's subjective belief, Consolidated fails to identify any reversible error. Consolidated argues that the fact that the Mayhews did not raise issues related to the quality of the materials Consolidated provided and the fact that none of the invoices refer to any ongoing dispute regarding the quality of such materials calls into the question the objective reasonableness of Dr. Mayhew's belief. However, even assuming that the Court were to draw such an inference, it is not a sufficient basis upon which to conclude that the Bankruptcy Court's conclusion on this point was erroneous. The Bankruptcy Court stated that Dr. Mayhew relied on Mr. Mayhew to determine whether invoices should be paid. Consolidated does not identify any evidence to suggest that Dr. Mayhew did not subjectively believe in the truth of Mr. Mayhew's representations to her regarding the quality of Consolidated's products.
As to Dr. Mayhew's objective belief, Consolidated's primary argument is that the result of the state court case forecloses any conclusion that Dr. Mayhew had anobjectively reasonable belief that Consolidated's claim was invalid. Docket No. 13 at 13-15. However, Consolidated's position on this issue is inconsistent. Consolidated argues that, by virtue of its verdict, the jury must have determined that Mr. Mitchell's testimony was not credible and, as a result, that ...
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