In re Carlson

• Decision Date: 30 August 2011
• Docket Number: Adversary No. 10–2702.,Bankruptcy No. 10–38400.
• Citation: 456 B.R. 391
• Parties: In re Jeff L. CARLSON, Debtor.Baytherm Insulation, Inc., Plaintiff,v.Jeff L. Carlson, Defendant.
• Court: U.S. Bankruptcy Court — Eastern District of Wisconsin

456 B.R. 391

In re Jeff L. CARLSON, Debtor.Baytherm Insulation, Inc., Plaintiff,
v.
Jeff L. Carlson, Defendant.

Bankruptcy No. 10–38400.

Adversary No. 10–2702.

United States Bankruptcy Court, E.D. Wisconsin.

Aug. 30, 2011.

[456 B.R. 393]

Thomas J. Wroblewski, Menasha, WI, for Plaintiff.Timothy J. Helbing, Helbing Law Office LLC, Appleton, WI, for Defendant.MEMORANDUM DECISION ON PLAINTIFF'S MOTION FOR SUMMARY JUDGMENT MARGARET DEE McGARITY, Bankruptcy Judge.

The plaintiff, Baytherm Insulation, Inc., brought this adversary proceeding objecting to the dischargeability of certain obligations incurred by the defendant, Jeff Carlson. After the defendant filed his answer, the plaintiff moved for summary judgment asserting it was entitled to a nondischargeable judgment pursuant to 11 U.S.C. § 523(a)(4).

This Court has jurisdiction under 28 U.S.C. § 1334 and this is a core proceeding under 28 U.S.C. § 157(b)(2)(I). This decision constitutes the Court's findings of fact and conclusions of law under Fed. R. Bankr.P. 7052. For the reasons stated herein, the plaintiff's motion for summary judgment is granted.

BACKGROUND

The debtor owned and operated a sole proprietorship business known as Carlson Homes and, at all times relevant to this proceeding, acted as a prime contractor on

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two construction projects. In the spring and fall of 2008, the debtor requested that Baytherm Insulation, Inc., as subcontractor, supply labor and insulation materials for improvement of properties in Collins and Kaukauna, Wisconsin. The debtor received payment in full from the owners of both properties but never paid Baytherm.

On or about April 15, 2009, Baytherm filed an Amended Summons and Amended Complaint in the Calumet County Circuit Court, alleging, among other things, theft by contractor in violation of section 779.02(5), Wis. Stats. The parties later entered into a Stipulation for Dismissal of the suit which read as follows:

IT IS STIPULATED and agreed by the Plaintiff, by its attorney, and the Defendant that the Complaint filed in this action should be dismissed not on the merits, without prejudice, without fees or costs, and subject to Plaintiff's right to reopen and take judgment on the following terms and conditions:

1. Defendant shall pay the aggregate sum of $6,019.94 to Plaintiff as follows:

a. Six (6) monthly installments in the amount of $150.00, due on the first day of each month, commencing July 1, 2009, ending December 1, 2009;

b. Sixteen (16) monthly installments in the amount of $300.00 due on the first day of each month, commencing January 1, 2010, ending April 1, 2011;

c. A balloon payment in the amount of $319.94 due on May 1, 2011;

d. All payments shall be made by check payable to Baytherm Insulation, Inc. and delivered to Thomas S. Wroblewski, S.C., 180 Main Street, Menasha, Wisconsin 54952 on or before the due date.

2. If Defendant fails to make any payment required by Paragraph 1 above, Plaintiff shall have the right to reopen this matter, without further notice to Defendant of any kind, Defendant specifically waiving the same, and to take judgment by affidavit against the Defendant for treble the amount of damages caused by Defendant's theft by contractor, to wit: $14,268.00, plus all reasonable actual attorney fees and costs incurred by Plaintiff, less any amounts paid pursuant to Paragraph 1.

3. If Plaintiff reopens this matter and moves for judgment according to Paragraph 2 above, Defendant specifically waives any right to object to or contest Plaintiff's right to recover the amounts demanded in the Complaint, including but not limited to any such objection in the form of an answer or affirmative defense to the allegations of the Complaint, except Defendant may object to the sole issue of whether Plaintiff gave due credit to Defendant for amounts paid pursuant to paragraph 1, above.

(Stipulation and Order for Dismissal, Calumet County Circuit Court Case No. 09 CV 135, signed June 25 & 29, 2009). The stipulation was approved by the judge and the Order for Dismissal was entered on July 6, 2009.

After making one payment of $150.00 on July 1, 2009, the debtor failed to comply with the remaining terms of the stipulation and order, and a money judgment was entered upon the submission of an affidavit from plaintiff's counsel. The state court judge found Baytherm was entitled to judgment against the debtor according to the demands of the complaint and entered judgment “in the sum of $16,221.98, plus any future disbursements, costs, and attorneys' fees which may be incurred during collection of its Judgment.” (Money Judgment,

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Calumet County Circuit Court Case No. 09 CV 135, entered September 3, 2009).

The debtor filed a chapter 13 petition on November 17, 2010, and converted to chapter 7 on July 26, 2011.

ARGUMENTS

The plaintiff urges this Court to follow its previous rulings in In re Dinkins, 327 B.R. 918 (Bankr.E.D.Wis.2005), and In re Ecker, 400 B.R. 669 (Bankr.E.D.Wis.2009), wherein no wrongful intent was deemed necessary for a finding of nondischargeability when the defendant has violated the state theft by contractor statute. Funds received by the debtor from the owners of property which the plaintiff improved constituted trust funds in the hands of the debtor and the latter was responsible for maintaining such funds in trust for the plaintiff pursuant to section 779.02(5), Wis. Stats. The debtor breached his fiduciary obligations, the state court entered a money judgment against him, and the resulting debts are nondischargeable under 11 U.S.C. § 523(a)(4).

The defendant did not file a response to the plaintiff's brief. In his answer, he denied the obligation was nondischargeable.

DISCUSSION

Summary judgment is required “if the movant shows that there is no genuine dispute as to any material fact and the movant is entitled to judgment as a matter of law.” Fed.R.Civ.P. 56(a). To determine if there is a genuine issue of material fact, all facts are construed in the light most favorable to the non-moving party. Heft v. Moore, 351 F.3d 278, 282 (7th Cir.2003). Additionally, all reasonable inferences are drawn in favor of that party. Id. However, the non-movant must set forth “specific facts showing that there is a genuine issue for trial” which requires more than “just speculation or conclusory statements.” Id. at 283 (citations omitted).

Section 523(a)(4) of the Bankruptcy Code excepts from discharge any debt “for fraud or defalcation while acting in a fiduciary capacity, embezzlement, or larceny.” The elements required to establish a nondischargeable debt for defalcation under this section are: (1) the existence of a trust; (2) the debtor is a fiduciary of that trust; and (3) fraud or defalcation by the debtor while acting as a fiduciary of the trust. In re Ecker, 400 B.R. at 671 (citations omitted). The bankruptcy court must look to state law to determine whether the requisite trust relationship exists. Id.

The “theft by contractor” provisions of sections 779.02(5) and 779.16, Wis. Stats., create a trust fund for sums paid by a property owner to a general contractor for the benefit of subcontractors and material suppliers. Kraemer Bros., Inc. v. Pulaski State Bank, 138 Wis.2d 395, 399–400, 406 N.W.2d 379, 381 (1987). Wisconsin's theft by contractor statute establishes the type of express statutory trust contemplated by section 523(a)(4) of the Bankruptcy Code. See Matter of Thomas, 729 F.2d 502 (7th Cir.1984) (applying Wis. Stat. § 779.16, theft by contractor statute for public improvements, which provides the same trust fund requirement for general contractors for private improvements).

Section 779.02(5) provides, in relevant part:

Theft by Contractors. [A]ll moneys paid to any prime contractor or subcontractor by any owner for improvements, constitute a trust fund only in the hands of the prime contractor or subcontractor to the amount of all claims due or to become due or owing from the prime contractor or subcontractor for labor,

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services, materials, plans, and specifications used for the improvements, until all the claims have been paid.... The use of any such moneys by any prime contractor or subcontractor for any other purpose until all claims ... have been paid in full or proportionally in cases of a deficiency, is theft by the prime contractor or subcontractor of moneys so misappropriated and is punishable under s. 943.20.

Wis. Stat. § 779.02(5).

The bankruptcy courts in Wisconsin have developed different treatments for the third element of section 523(a)(4), whether the debtor committed fraud or defalcation while acting as a fiduciary of the trust. This Court has traditionally applied a per se approach to violations of the state theft by contractor statute, without regard to any precise lack of care exercised by the debtor. See In re Dinkins, 327 B.R. at 923 (holding “[n]o wrongful intent is required for a finding of nondischargeability. It is only necessary for the plaintiff to prove that funds received from the owner should have been paid to a beneficiary of the statutory trust, and [that] the debtor failed to do so.”); In re Ecker, 400 B.R. at 673 (same). Likewise, the Seventh Circuit in Matter of Thomas, 729 F.2d 502, 505–06 (7th Cir.1984), interpreting a similar statute relating to public works,¹ held that the general contractor satisfied its burden of establishing nondischargeability by showing the it paid the debtor subcontractors $17,894.54 to complete the work and that “the defalcation by defendants occurred when they used this trust fund for their own purposes.” In that case, the defendants' “own purposes” included their home mortgages and other unrelated business debts. While it is possible that the other business debts were innocently paid, the case was remanded to determine only if any of the payments were applied to the plaintiff's project. Apparently, no...