In re Cupit

• Decision Date: 29 September 2015
• Docket Number: Civil Action No. 14-cv-03115-PAB
• Parties: In re: Daniel J. Cupit, Debtor
• Court: U.S. District Court — District of Colorado

541 B.R. 739

In re: Daniel J. Cupit, Debtor

Civil Action No. 14-cv-03115-PAB

United States District Court, D. Colorado.

Signed 09/29/2015

Guy Brian Humphries, Denver, CO, for Appellant

Phillip Jeffrey Jones, Williams Turner & Holmes, P.C., Grand Junction, CO, for Appellee

ORDER

PHILIP A. BRIMMER, United States District Judge

This matter is before the Court on defendant-appellant Daniel Cupit's appeal of the judgment entered by the bankruptcy court. The Court exercises jurisdiction pursuant to 28 U.S.C. § 158(a)(1).

I. BACKGROUND¹

A. Professional Roofing, Inc.

In 2001, Mr. Cupit started Professional Roofing, Inc. (“PRI”). R. I at 108.²PRI specializes in installing roofing and exterior construction work on residential and commercial buildings. R. II at 7:4-8. Mr. Cupit successfully operated PRI for several years. R. I at 108. In July 2010, Mr. Cupit sold PRI to Orie Rechtman. R. I at 10:7-11:8. Mr. Cupit testified that PRI was in good financial condition at the time of the sale and was current on its payables. R. II at 11:9-15.

Mr. Cupit testified that Mr. Rechtman failed to make post-sale payments to Mr. Cupit. R. II at 14:3-11. In December 2010, after Mr. Cupit threatened litigation against Mr. Rechtman, Mr. Cupit and Mr. Rechtman reached an agreement whereby Mr. Cupit would reacquire ownership of PRI. Id.at 16:4-17:4. On January 1, 2011, Mr. Cupit regained control of PRI. Id.at 18:22-19:1. Mr. Cupit testified that, over the next six to nine months, he discovered that Mr. Rechtman had taken over $200,000 out of the business for personal use, maxed out PRI's line of credit, and accumulated $600,000 in payables, which PRI's receivables could not cover. Id.at 19:5-21:8. Mr. Cupit injected $200,000 of his personal funds into PRI, but PRI nevertheless struggled to pay its debts. R. I at 109.

In 2011, PRI began purchasing roofing materials from plaintiff-appellee MacArthur Company (“MacArthur”). R. I at 109. The bankruptcy court's order states that Mr. Cupit kept a “Job Cost Detail” record for each job, which reflected how much PRI paid for materials, the balance owed to the supplier, the amount charged to PRI's customer, and the amount received PRI received from its customer. Id. (citing “Ex. B.”). With respect to those roofing projects where PRI purchased supplies from MacArthur, the revenue from such projects was deposited in PRI's general operating account and was used to pay other, unrelated expenses. Id.Mr. Cupit testified that, during the relevant time period, he was attempting to pay off PRI's oldest bills first, regardless of who the creditor was. Id.; see, e.g., R. I at 48:25-49:2. Based upon the Job Cost Detail records, the bankruptcy court found that PRI received full payment for 24 roofing projects for which PRI used materials from MacArthur, but did not pay MacArthur in full for such supplies. R. I at 109. The unpaid balance to MacArthur is $79,625.94. Id.

The bankruptcy court found that several other supplies sued PRI and Mr. Cupit in state court for unpaid invoices and violation of the Colorado Mechanic's Lien Trust Fund Statute (the “Construction Trust Fund Statute”), Colo. Rev. Stat. §–38–22–127(1). R. I at 109 (citing “Ex. 6, at 6-6; Ex. 10”). The first such suit was filed in early August 2011 by American Roofing Supply, Inc. (“ARS”) (the “ARS suit”). ARS's complaint (the “ARS complaint”) alleged violations of the Construction Trust Fund Statute against PRI. Id.at 115. Due in part to these lawsuits, PRI filed a Chapter 11 bankruptcy petition in September 2012. R. II at 25:10-16. PRI's Chapter 11 plan was confirmed and PRI continues to operate. R. II at 25:22-26:6. On February 12, 2013, Mr. Cupit filed his individual petition under Chapter 7. R. I at 109; see also In re Cupit, No. 13-11914-EEB (Bankr. D. Colo. Feb. 12, 2013). Mr. Cupit's personal bankruptcy case was closed on August 1, 2014. In re Cupit(Docket No. 27).

B. Adversary Proceeding

On April 3, 2013, MacArthur filed an adversary proceeding against Mr. Cupit alleging a nondischargeability claim pursuant to 11 U.S.C. §§ 523(a)(2) and (4). R. I at 4, 6. MacArthur alleged that Mr. Cupit received disbursements from PRI's customers and, pursuant to the Construction Trust Fund Statute, was required to hold such funds in trust to ensure that MacArthur was paid. R. I at 5. MacArthur claimed that Mr. Cupit committed a defalcation by failing to hold those funds in trust and failing to pay it the trust funds. Id.MacArthur alleged that Mr. Cupit's violation of the Construction Trust Fund Statute constituted civil theft pursuant to Colo. Rev. Stat. § 38–22–127(5)and § 18–4–401and that, as a result, MacArthur was entitled to treble damages as well as attorney's fees and costs. Id.

Prior to trial, the parties filed witness and exhibit lists. R. I at 10–12, 14–17. On October 21, 2013, the bankruptcy court held a trial on MacArthur's claims. R. I at 24. The bankruptcy court heard testimony from Mr. Cupit and MacArthur branch manager Duane Ehrhardt. R. I. at 37, 62. The bankruptcy court received into evidence MacArthur's trial Exhibits 1, 3, 4 (excluding page 4–20), 5, and 6 as well as Mr. Cupit's trial Exhibits B, C, and D. R. I at 24.³Based upon the trial transcript, Exhibit 1 is entitled Application for Open Credit and was signed by Mr. Cupit on May 17, 2011, R. I at 39:2-12; Exhibit 3 appears to contain invoices from MacArthur to PRI, id.at 49:7-13; Exhibit 4 was described as a “series of unconditional waivers and releases upon payment,” id.at 52:25-53:5; Exhibit 5 was not described, id.at 55:19-56:4; Exhibit 6 is the Petition in Bankruptcy Schedules that PRI filed in the bankruptcy court, id.at 58:4–9; Exhibit B contains Job Cost Detail records from 24 separate PRI projects, id.at 40:5-13; Exhibit C is a summary of payments PRI made to MacArthur from June 1, 2011 to January 31, 2012, id.at 56:6-12; and Exhibit D is the “invoice amounts that [PRI] showed open” as of September 1, 2012. Id.at 46:9-12. At the close of MacArthur's case, Mr. Cupit moved for a directed verdict, arguing that MacArthur failed to establish that Mr. Cupit acted with the requisite intent under Bullock v. BankChampaign, N.A., ––– U.S. ––––, 133 S.Ct. 1754, 185 L.Ed.2d 922 (2013). R. I at 79. The bankruptcy court stated on the record that it intended to grant Mr. Cupit's motion for a directed verdict, but would do so in a written order. R. I at 86.

The bankruptcy court did not, however, issue a written order granting Mr. Cupit's motion for a directed verdict. Rather, on November 20, 2013, the bankruptcy court issued an order stating that, in light of Bullockand the cases interpreting it, “it is not clear to this Court that it should direct a verdict against the Plaintiff for failing to establish the necessary mental state required for ‘defalcation.’ ” R. at 27. The bankruptcy court concluded that the parties should be given an opportunity to either present further argument on this issue and/or to proceed to the conclusion of the trial. Id.The bankruptcy court heard oral arguments on the issue and determined that it would defer ruling on Mr. Cupit's motion for a directed verdict until after the conclusion of trial. R. at 109-10 (citing Fed. R. Civ. P. 52(c)).

On March 18, 2014, the bankruptcy court reconvened the trial, where Mr. Cupit presented his case. R. I at 88. The bankruptcy court heard testimony from Mr. Cupit and his wife Lori Cupit and received into evidence MacArthur's Exhibit 10 and Mr. Cupit's Exhibits E and F. Id.Based upon the trial transcript, Exhibit 10 appears to be PRI's answer to the ARS complaint, R. II at 48:22-23; Exhibit E appears to contain PRI invoices, id.at 27:9-14; and Exhibit F appears to be a record regarding Mr. Cupit's personal loans to PRI. Id.at 31:20-24. At the conclusion of the evidence, the parties submitted written closing arguments. R. I at 89-107.

On July 18, 2014, the bankruptcy court issued a written order. R. I at 108-22. The order set forth the relevant background facts and discussed the term “defalcation” under Bullock. R. I at 108-14. The bankruptcy court then turned to the question of whether Mr. Cupit had the requisite mental state to commit a defalcation. The bankruptcy court found that Mr. Cupit kept competent records of income and expenses on each project and that, despite PRI's backlog of payables, Mr. Cupit was making efforts to pay PRI's bills. R. I at 114. The bankruptcy court found that, although Mr. Cupit had training and experience in the roofing industry, Mr. Cupit “credibly testified... that none of his professional education had addressed fiduciary duties under the [Construction Trust Fund Statute].” Id. As a result, the bankruptcy court concluded that Mr. Cupit's training and industry experience did not support an inference that Mr. Cupit acted in conscious disregard of his obligations under the Construction Trust Fund Statute. Id.

The bankruptcy court then found that, on August 5, 2011, ARS sued PRI, alleging violations of the Construction Trust Fund Statute. R. I at 115. The bankruptcy court acknowledged Mr. Cupit's testimony that, even after being served with the ARS complaint accusing him of violating the Construction Trust Fund Statute, he remained unaware of the details of the suit and of his duties under the statute, but did not find such testimony credible. Id.Rather, the bankruptcy court noted that Mr. Cupit took action in response to the lawsuit, such as hiring counsel and filing an answer after an attempt to negotiate a settlement. Moreover, the bankruptcy court ruled that the ARS complaint gave Mr. Cupit

an awareness that there was a high probability he owed fiduciary duties to material suppliers under the statute. To the extent Debtor chose not to read the details of the complaint, such conduct amounts to taking a “deliberate action” to avoid learning of his duties under the Construction Trust Fund Statute. Based upon these circumstances, the Court finds that by August 5, 2011, Debtor was either willfully blind to or

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