In re Baines

Decision Date10 January 2006
Docket NumberBankruptcy No. 7-03-17210 MS.,Adversary No. 04-1123 M.
Citation337 B.R. 392
PartiesIn re Robert P. BAINES and Deann M. Baines, Debtors. Crossingham Trust, Stacy Crossingham and Allan Crossingham, Trustees, Plaintiffs, v. Robert P. Baines and Deann M. Baines, Defendants. Yvette J. Gonzales, Trustee, Third-Party Plaintiff, v. Crossingham Trust, Stacy Crossingham and Allan Crossingham, Trustees, Third-Party Defendants.
CourtU.S. Bankruptcy Court — District of New Mexico

Michael W. Wile, Albuquerque, NM, for Plaintiffs.

Joseph Goldberg, Albuquerque, NM, for Defendants.

MEMORANDUM

MARK B. McFEELEY, Bankruptcy Judge.

THIS MATTER is before the Court on cross motions for summary judgment. Defendants Robert P. Baines and Deann M. Baines, by and through their attorneys of record, Freedman Boyd Daniels Hollander & Goldberg, P.A. (Joseph Goldberg), filed a Motion for Partial Summary Judgment and memorandum in support thereof on March 25, 2005; Plaintiffs Crossingham Trust, Stacy Crossingham and Allan Crossingham, Trustees, by and through their attorneys of record, Bingham, Hurst, Apodaca & Wile, P.C. (Michael W. Wile), filed a Motion for Summary Judgment on March 27, 2005. Plaintiffs filed a response to Defendant's Motion for Summary Judgment, and Defendants Med a reply to Plaintiffs' Motion for Summary Judgment. The Court heard oral argument on the cross motions for summary judgment on July 20, 2005 and took the matter under advisement.

STANDARD

Summary judgment is governed by Rule 56, Fed.R.Civ.P., made applicable to bankruptcy proceedings by Rule 7056, Fed. R.Bankr.P. Summary judgment is appropriate when there is no genuine issue of material fact and the moving party is entitled to judgment as a matter of law. Rule 56(e), Fed.R.Civ.P. Cross motions for summary judgment raise an inference that summary judgment will be appropriate; however, the Court must nevertheless determine whether plaintiff or defendant independently satisfies the requirements for summary judgment and whether there is a genuine issue of material fact that would preclude summary judgment. In re Harris, 209 B.R. 990, 998 (10th Cir. BAP 1997) (citing Renfro v. City of Emporia, 948 F.2d 1529, 1534 (10th Cir.1991) and SEC v. American Commodity Exch., Inc., 546 F.2d 1361, 1365 (10th Cir.1976)). "[A] party opposing a properly supported motion for summary judgment may not rest on mere allegation or denials of his pleading, but must set forth specific facts showing that there is a genuine issue for trial" through affidavits or other supporting evidence. Anderson v. Liberty Lobby, Inc., 477 U.S. 242, 256, 106 S.Ct. 2505, 91 L.Ed.2d 202 (1986). In determining whether genuine issues of material fact preclude summary judgment, the Court will construe the evidence in the light most favorable to the party opposing summary judgment. Jenkins v. Wood, 81 F.3d 988, 990 (10th Cir.1996). In light of these standards the Court will consider the cross motions for summary judgment.

BACKGROUND AND POSITIONS OF THE PARTIES

The Complaint seeks a determination of non-dischargeability of a particular debt pursuant to 11 U.S.C. § 523(a)(2)(A) (debt obtained by false pretenses, a false representation or fraud), or 11 U.S.C. § 523(a)(4) (debt for fraud or defalcation while acting in a fiduciary capacity) arising from a construction contract between the Plaintiffs, as owners, and Defendant Robert Baines, as qualifying party for his business, Building Unlimited by Baines, Inc. ("Building Unlimited"), to develop certain commercial real property located in Santa Fe, New Mexico. Plaintiffs assert that certain funds paid to Robert Baines pursuant to the contract were not used to pay subcontractor invoices, such that Plaintiffs were either forced to pay the outstanding invoices themselves, or are subject to liens filed by the unpaid subcontractors against the property, and that under existing bankruptcy law interpreting the New Mexico statutes governing the licensing of general contractors, Robert Baines was acting in a fiduciary capacity making such debt non-dischargeable under 11 U.S.C. § 523(a)(4). See Allen v. Romero (In re Romero), 535 F.2d 618 (10th Cir.1976). Because Robert Baines admits that certain subcontractor invoices for which he submitted payment applications to Plaintiffs and upon which he received payment nevertheless remained outstanding, Plaintiffs assert that they are entitled to summary judgment on their claim for non-dischargeability based on a defalcation while acting in a fiduciary capacity pursuant to 11 U.S.C. § 523(a)(4).

Defendants assert that changes to the New Mexico statute at issue subsequent to the Tenth Circuit's decision in Allen v. Romero question the continuing vitality of Allen v. Romero to nondischargeability actions under 11 U.S.C. § 523(a)(4) predicated on the New Mexico statute. Defendants assert that summary judgment should be granted in their favor for the following reasons: 1) Plaintiffs have failed to make any allegations of misrepresentation or fraud sufficient to sustain a cause of action for non-dischargeability under 11 U.S.C. § 523(a)(2)(A); 2) Allen v. Romero is no longer good law, such that Defendant Robert Baines was not acting in a fiduciary capacity which would give rise to a claim for non-dischargeability of certain debt under 11 U.S.C. § 523(a)(4); and 3) that Defendant Deann Baines' only connection to Baines Construction and Baines Limited was her position as an officer and shareholder of Defendants' corporation, and that absent any evidence of her participation in the alleged fraud, Plaintiffs cannot sustain a non-dischargeability action against her.

UNDISPUTED FACTS

The following facts are undisputed:

1. Robert Baines and Deann Baines filed a voluntary petition under Chapter 13 of the Bankruptcy Code on September 12, 2003.

2. The case was converted to Chapter 7 on February 18, 2004.

3. Stacy Crossingham and her husband, Allan Crossingham, are trustees of the Crossingham Trust.

4. Building Unlimited is a New Mexico corporation organized for the purpose of doing construction work. Building Unlimited holds a construction license. Robert Baines is the qualifying party for the license issued by the New Mexico Construction Industries Division to Building Unlimited, and served as the qualifying party for Building Unlimited during all times material to this action. (Complaint, ¶ 4; Answer ¶ 4).

5. Robert Baines is the 51% shareholder, and president of Building Unlimited. Deann Baines holds the remaining 49% of the shares of Building Unlimited, and also serves as a corporate officer. (Plaintiffs' Motion for Summary Judgment), Statement of Undisputed facts No. 19; Defendant's Memorandum in Support of Motion for Partial Summary Judgment ("Defendant's Memorandum") Statement of Undisputed Material Facts, No. 2 and 3. Deposition of Robert P. Baines (Defendant's Exhibit 1) (statement of financial affairs).

6. The deposition of Robert P. Baines ("Baines Deposition") includes the following question and answer:

Q. Other than your wife and yourself, were there any other individuals that played a significant role in managing that corporation [Building Unlimited]?

A. No.

Baines Deposition, p. 16, lines 4-7.

7. In July of 2002, Stacy Crossingham and Allan Crossingham, as trustees of the Crossingham Trust entered into a construction contract with Building Unlimited for the construction of office condos in Santa Fe, New Mexico ("Lot 3 Project"). Building Unlimited was the general contractor for the Lot 3 Project. (Plaintiffs' Motion for Summary Judgment, Statement of Undisputed Facts Nos. 33-38; Defendant's Memorandum, Statement of Undisputed Material Facts, No. 8).

8. The construction contract for the Lot 3 Project was a cost-plus contract, meaning that the consideration to be paid to Building Unlimited was "the cost of work as defined in article 5 and a contractors fee of 13% overhead and 7% profit." Contract, Section 4.1 (Exhibit 2 to Baines Deposition; Plaintiffs' Motion for Summary Judgment, Statement of Undisputed Facts No. 39; Defendants' Memorandum, Statement of Undisputed Material Facts, No. 15).

9. Crossingham advanced $45,000.00 to Building Unlimited at the beginning of the Lot 3 Project. (Plaintiffs' Motion for Summary Judgment, Statement of Undisputed Facts No. 42; Defendants' Memorandum, Statement of Undisputed Material Facts, No. 13).

10. Building Unlimited submitted invoices ("Payment Applications") to Crossingham Trust for the charges of subcontractors and/or suppliers in connection with work performed on the Lot 3 Project.

11. The Payment Applications listed work performed by various subcontractors and amounts due to various suppliers, and included amounts attributable to overhead and profit. (Baines Deposition, attachments to Exhibit 2; Defendant's Memorandum, Statement of Undisputed Facts No. 15).

12. After making adjustments to some of the requested amounts, Crossingham Trust paid Building Unlimited for the first seven Payment Applications. (Defendants' Memorandum, Statement of Undisputed Material Facts, ¶ 17).

13. As of August 18, 2003, Building Unlimited had not paid $68,746.191 of the amounts due to subcontractors for work reported and included in Payment Applications # 1-# 7, and for which Building Unlimited received payment from Crossingham Trust. (Defendants' Memorandum, Statement of Undisputed Material Facts, ¶¶ 17, 31, 32, 33, 34, 35, and 37 and Exhibit 14 to Defendants' Memorandum; Plaintiffs' Memorandum, Statement of Undisputed Material Facts ¶ 55, 56, and Exhibit 2, p. 18).

DISCUSSION
A. Fraud under 11 U.S.C. § 523(a)(2)

Debts that arise as a result of fraud are not dischargeable in bankruptcy pursuant to 11 U.S.C. § 523(a)(2). That section provides, in relevant part:

A discharge under section 727, 1141, 1228(a), 1228(b), or 1328(b) of this title does not discharge an individual debtor from any debt —

(2) for money, property,...

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