In re Bren

• Decision Date: 22 October 2002
• Docket Number: Adversary No. 02-8016.,Bankruptcy No. 01-45166.
• Parties: In re Bruce Peter BREN and Barbara A. Bren, Debtors. David W. Gadtke and Donna A. Gadtke, Plaintiffs, v. Bruce Peter Bren and Barbara A. Bren, Defendants.
• Court: U.S. Bankruptcy Court — District of Minnesota

284 B.R. 681

In re Bruce Peter BREN and Barbara A. Bren, Debtors David W. Gadtke and Donna A. Gadtke, Plaintiffs, v. Bruce Peter Bren and Barbara A. Bren, Defendants.

Bankruptcy No. 01-45166.

Adversary No. 02-8016.

United States Bankruptcy Court, D. Minnesota.

October 22, 2002.

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Jan Stuurmans, Minneapolis, MN, for defendants

David B. Galle, David E. Runck, James M. Jorissen, Minneapolis, MN, for plaintiff.

MEMORANDUM ORDER DETERMINING DISCHARGEABILITY OF A DEBT

ROBERT J. KRESSEL, Bankruptcy Judge.

This proceeding came on for trial on September 30 and October 1, 2002. David B. Galle, David E. Runck, and James M. Jorissen appeared for the plaintiffs, David and Donna Gadtke. Jan Stuurmans appeared for defendant Bruce Peter Bren.

This court has jurisdiction over this matter pursuant to 28 U.S.C. §§ 1334 and 157(a). This is a core proceeding under 28 U.S.C. § 157(I).

THE PARTIES

Bruce Bren, from 1979 until approximately December 2001, was employed by Bruce Bren Homes, Inc., a closely-held corporation formed under Minnesota law as a licensed residential real estate contractor. Bren was the President of BBHI and a 50% shareholder. Barbara A. Bren¹ owned the remaining 50% of BBHI. The last few years, BBHI was engaged in the business of constructing luxury single-family and multi-family residential homes and townhouses.

On October 23, 2000, the Gadtkes, entered into a Residential Dwelling Building Agreement with BBHI, which Bren executed on behalf of BBHI. Pursuant to this agreement, BBHI agreed to build a single family residential home for the Gadtkes in Edina, Minnesota for $1,273,636.00. With regard to the payment of the contract price, the Building Agreement stated:

The contract price shall be paid in the following installments: $191,046.00 (15%) shall be paid upon signing of the contract; $191,046.00 (15%) shall be paid upon completion of the roof framing (also known as installation of roof trusses);

$191,046.00 (15%) shall be paid upon installation of the windows;

$191,046.00 (15%) shall be paid upon installation of the drywall;

$191,046.00 (15%) shall be paid upon delivery of millwork;

and the balance of $318,406.00 (25%) shall be paid the date of closing.

In exchange, BBHI expressly promised in the Building Agreement to furnish the necessary materials, perform necessary labor through qualified subcontractors, and to construct the new residence in a workmanlike manner according to the approved plans, specifications, and in accord with all applicable governmental laws, rules and regulations.

On October 23, 2000, the Gadtkes made the down payment of $191,046 to BBHI. Construction of the Gadtkes' home began in November of 2000. On February 5, 2001, BBHI sent an invoice to the Gadtkes for $191,046, stating that the roof framing had been completed and under the Building Agreement the first progress payment was due. After receipt of this invoice, David Gadtke also received a pre-lien notice on his home from subcontractor Scott Builders. The notice informed the Gadtkes of their right to pay Scott Builders directly unless they received a mechanic's lien waiver from BBHI. Gadtke called BBHI and requested copies of signed mechanic's lien waivers from subcontractors who performed work on his home, an accounting of the subcontractor costs incurred, and payments made to date on the project. On February 19, 2001, David Schmidtlein, BBHI's office manager, faxed the Gadtkes a "Contract vs. Costs to Date" spreadsheet showing the costs for labor and materials incurred by BBHI to date on the Gadtkes' home. According to the spreadsheet, the costs totaled $239,242.72.²

Noticing that the "Contract vs. Costs to Date" spreadsheet did not contain information detailing the amount that BBHI actually paid to subcontractors for materials and work done, Gadtke requested an expanded spreadsheet that detailed such payments. On February 21, 2001, Schmidtlein faxed a "Contract vs. Costs to Date vs. Paid to Date" spreadsheet to the Gadtkes. This second spreadsheet stated that the costs totaled $239, 221.03³, and the amounts paid by BBHI for labor and materials on the Gadtkes' home as of February 20, 2001 were $171,762.94. Upon receiving this report, David Gadtke requested copies of the subcontractor mechanic's lien waivers. On March 1, 2001, Schmidtlein faxed the Gadtkes copies of the four lien waivers from subcontractors, totaling $115,514.88 and acknowledging receipt of payment from BBHI.⁴ Also included within this faxed information was a lien waiver executed by Bren on behalf of BBHI in the amount of $75,531.12, bringing the total amount paid to date on the Gadtkes' home to $191,046.00, the amount of their initial down payment under the Building Contract. On March 1, 2001, the Gadtkes made the first progress payment, and their second payment overall, to BBHI in the amount of $191,046 pursuant to the terms of the Building Agreement.

On May 31, 2001, BBHI sent a second invoice to the Gadtkes stating the second progress payment of $191,046 was due under the Building Agreement because the installation of the windows, the second construction benchmark, was complete. Upon receipt of this invoice, David Gadtke requested from Schmidtlein copies of the mechanic's lien waivers signed by subcontractors and suppliers. On June 4, 2001, Schmidtlein faxed to the Gadtkes a third spreadsheet entitled "Contract vs. Costs to Date vs. Paid to Date." This spreadsheet stated that the total costs as of May 31, 2001 were $514,451.08, and the amounts paid by BBHI for subcontractor labor and materials on the Gadtkes' home as of May 31, 2001 totaled of $409,979.45.

In addition to this spreadsheet, on June 4, 2001, Schmidtlein faxed the Gadtkes copies of ten mechanic's lien waivers signed by subcontractors in the total amount of $168,969.28, and two unsigned lien waivers in the total of $41,500. On June 6, 2001, Schmidtlein faxed the Gadtkes copies of three additional lien waivers signed by subcontractors totaling $40,561 for work done on the Gadtkes' home.⁵ Following the receipt of this June 6, 2001 fax, the Gadtkes wrote a check to BBHI in the amount of $191,046 for the second progress payment, their third overall payment, due under the Building Agreement.

On July 3, 2001, the Gadtkes received a letter from Peter Allen Co., a subcontractor on their housing project, stating that the company would no longer be a subcontractor of BBHI, and would no longer work on their home project through BBHI. Peter Allen Co., however, expressed in the letter the desire to work with the Gadtkes directly to complete their home building project. David Gadtke contacted Peter Allen Co. to discuss this matter, and learned that BBHI had failed to pay certain subcontractors for work performed on his home and that many subcontractors' invoices were past due. Upon further inquiry, the Gadtkes learned that some subcontractors either filed or were threatening to file mechanic's liens against their home for unpaid invoices. One such subcontractor was Scott Builders.⁶

Upon learning this information, David Gadtke confronted Bren and Bren for the first time told Gadtke that BBHI had been experiencing financial difficulties, and he had been unable to pay subcontractors on a current basis. Bren asked the Gadtkes if they would agree to "work with him" to get through this difficult period. The Gadtkes agreed, and starting in September of 2001, David Gadtke initiated weekly meetings with Bren to discuss the progress of the Gadtke construction project and the status of BBHI's payments to subcontractors. During this time, construction on the Gadtkes' home slowed down, and finally on October 4, 2001, the Gadtkes received a letter stating that BBHI quit their project and would not perform any further work.⁷ To date, the Gadtkes' payments to BBHI total $573, 138, and the payments made by BBHI for labor and materials on their home total $380,711.10.

On December 3, 2001, the Brens filed for Chapter 7 bankruptcy. On January 14, 2002, BBHI's Minnesota residential building contractor's license was revoked by the Minnesota Commissioner of Commerce pursuant to a Consent Order. With a lot of time and effort, the Gadtkes negotiated with subcontractors and have managed to substantially complete their home, albeit at a cost in excess of the original contract price.

THE GADTKE'S CLAIMS

The Gadtkes assert that Bren's debts to them are nondischargeable under 11 U.S.C. §§ 523(a)(2)(A), (a)(4), and (a)(6). For the following reasons, I disagree.

DISCUSSION

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

Section 523(a)(2)(A) provides that a discharge under 11 U.S.C. § 727 does not discharge an individual debtor from any debt —

(2) for money, property, services, or an extension, renewal, or refinancing of credit, to the extent obtained by —

(A) false pretenses, a false representation, or actual fraud, other than a statement respecting the debtor's or an insider's financial condition.

11 U.S.C. § 523(a)(2)(A) (2002). The Gadtkes claim that Bren committed fraud in this case in at least three ways: (1) falsely representing to the Gadtkes that their payments would be applied to fund the construction of their house and not to other uses; (2) causing BBHI to transmit false mechanic's lien waivers to the Gadtkes for the purpose of inducing them to make further payments to BBHI; and (3) failing to disclose to the Gadtkes the material facts of BBHI's insolvency.

Normally, exceptions to discharge are narrowly construed against the creditor and liberally in favor of the debtor thus effectuating the fresh start policy of the Bankruptcy Code. The Merchants of Nat'l Bank of Winona v. Moen (In re Moen), 238 B.R. 785, 791 (8th Cir. BAP 1999). Bankruptcy law, however, has long prohibited debtors from discharging liabilities incurred on account of their fraud. Id. For a debt to be excepted from...