In re Regan

• Decision Date: 06 July 2004
• Docket Number: Bankruptcy No. 03-16625 HRT.,Adversary No. 03-1783 MER.
• Citation: 311 B.R. 271
• Court: U.S. Bankruptcy Court — District of Colorado
• Parties: In re Jeffrey Shawn REGAN and Kerrie Marie Regan, Debtors. Fowler & Peth, Inc., a Wyoming corporation, Plaintiff, v. Jeffrey Shawn Regan and, Kerrie Marie Regan, Defendants.

311 B.R. 271

In re Jeffrey Shawn REGAN and Kerrie Marie Regan, Debtors Fowler & Peth, Inc., a Wyoming corporation, Plaintiff, v. Jeffrey Shawn Regan and, Kerrie Marie Regan, Defendants.

Bankruptcy No. 03-16625 HRT.

Adversary No. 03-1783 MER.

United States Bankruptcy Court, D. Colorado.

July 6, 2004.

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Rene P. Koller, Arvada, CO, for Debtors.

Brian J. Berardini, Harvey L. Kramer, Denver, CO, for Plaintiff.

Stephen E. Berken, Denver, CO, for Defendants and Counter-Claimants.

ORDER AND MEMORANDUM OPINION DETERMINING DEBT TO BE NONDISCHARGEABLE

MICHAEL A. ROMERO, Bankruptcy Judge.

The Defendants, Jeffrey and Kerrie Regan (collectively the "Regans") filed for Chapter 7 relief on April 14, 2003. Subsequent to the Regans' bankruptcy filing, Fowler & Peth, Inc. ("Fowler") filed an Adversary proceeding to determine the dischargeability of its debt pursuant to 11 U.S.C. § 523(a)(4).

Fowler asserts the Regans should be held personally liable for the outstanding debt owed to that entity pursuant to what is commonly known as the Colorado Mechanic's Lien Trust Fund Statute. Colo. Rev.Stat. § 38-22-127 (the "TFS"). Fowler then argues that the obligation is non-dischargeable as the actions of the Regans constituted defalcation while acting in a fiduciary capacity. A trial on Fowler's Complaint was held on May 14, 2004. For the reasons discussed below, this Court finds the debt owed by the Regans to Fowler is nondischargeable.

BACKGROUND FACTS

The Regans are the sole shareholders, officers and directors of Eagle Roofing, Inc. ("Eagle"), an entity specializing in the repair and installation of roofs on buildings in Colorado. At all times relevant to this dispute, Kerrie Regan was the company's Secretary and Treasurer, while Jeffrey Regan served as President.¹ As the sole owners and operators of Eagle, the Regans controlled the cash flow and made all the necessary financial decisions for the entity.

Ms. Regan acted as Eagle's day-to-day bookkeeper from the inception of the corporation in 1997 (an accountant was hired to prepare the corporation's yearly tax returns). Ms. Regan has no formal accounting experience, and her accounting skills are largely self-taught. On any given construction project for which Eagle provided services, Ms. Regan would typically prepare invoices and submit them by facsimile to the various builders or owners. These invoices would include amounts charged to Eagle by suppliers who provided material for each such project.² The builder or owner would then pay Eagle in full based upon the invoice amount. Separate files were not kept for each project. Instead, Eagle maintained a general file for each builder/owner.

During the operation of its business, Eagle opened a credit account with Fowler to acquire roofing material and supplies for use in construction projects. In calendar year 2000, Eagle's finances became increasingly overtaxed. To improve cash flow, the Regans decided to make payments to Eagle's suppliers, including Fowler, based on the dates of the invoices (i.e., the ninety day invoices were paid prior to the sixty day invoices, regardless of the project for which the monies were allocated). In addition, a portion of project receipts was used to pay for the Regans' personal living expenses and other general business expenses owed by Eagle. As a result, although Eagle had been fully compensated for the construction projects into which the materials purchased from Fowler were incorporated, Fowler was not fully paid. As of April 14, 2003, the Regans' bankruptcy petition date, Eagle owed Fowler $48,185.03.

DISCUSSION

Section 523(a)(4) provides that an individual debtor is not discharged from any debt for defalcation while acting in a fiduciary capacity. In evaluating whether the debt owed to Fowler by Eagle is a dischargeable debt pursuant to Section 523(a)(4) in the Regans' personal bankruptcy case, the following issues are relevant:

1. Whether the debt owed to Fowler arose while Eagle was acting in a fiduciary capacity;

2. Whether the debt owed by Eagle resulted from a defalcation;

3. Whether the Regans, acting as the sole officers and directors of Eagle, are personally liable for any breach of fiduciary duty owed by Eagle to Fowler; and

4. Whether the resulting obligation is of the type that should be nondischargeable in the Regans' personal bankruptcy case.

See In re Currin, 55 B.R. 928, 932 (Bankr.D.Colo.1985).

A. Did the TFS Create a Fiduciary Relationship between Eagle and Fowler.

The traditional definition of a "fiduciary" (a relationship involving confidence, trust and good faith) has been observed as being far too broad for application in a bankruptcy dischargeability context. In re Cairone, 12 B.R. 60, 62 (Bankr.D.R.I.1981). Federal law limits its application to express and technical trusts, and debts alleged to be non-dischargeable must arise from breach of trust obligations imposed by law, separate and distinct from any breach of contract. In re Currin, 55 B.R. 928, 932 (Bankr.D.Colo.1985); In re Johnson, 691 F.2d 249, 251 (6th Cir.1982).

In Romero v. Romero, 535 F.2d 618 (10th Cir.1976), the Tenth Circuit Court of Appeals found that a New Mexico construction licensing statute created a fiduciary duty under § 523(a)(4) on a contractor who had been advanced funds pursuant to construction contracts. Relying upon this finding, Colorado courts have held that the TFS is unambiguous in its creation of a similar statutory fiduciary relationship. See, e.g., In re Specialized Installers, Inc., 12 B.R. 546, 551 (Bankr.D.Colo.1981). Thus, it must be determined whether the TFS applies in the present situation.

The TFS reads in relevant part:

38-22-127. Moneys for lien claims made trust funds — disbursements — penalty. (1) All funds disbursed to any contractor or subcontractor under any building, construction, or remodeling contract or on any construction project shall be held in trust for the payment of the subcontractors, laborer or material suppliers, or laborers who have furnished laborers, materials, services, or labor, who have a lien, or may have a lien, against the property, or who claim, or may claim, against a principal and surety under the provisions of this article and for which such disbursement was made.³

Initially, the Regans argue that because Fowler failed to exercise its mechanic's lien rights when it was not paid, it could not "have a lien" necessary to trigger application of the TFS. In reviewing the case law examining the TFS, the interpretation of the phrase, who have a lien, or may have a lien, against the property, appears to be a matter of first impression before this Court.

The purpose of the TFS is to "protect homeowners, laborers, and providers of construction materials from dishonest or profligate contractors." Flooring Design v. Novick, 923 P.2d 216, 219 (Colo.App.1996) (citing People v. Collie, 682 P.2d 1208 (Colo.App.1983)). The Court notes that even though the TFS falls within Article 22 of the Colorado Revised Statutes (entitled "General Mechanic's Lien"), the language of the TFS appears to provide wronged laborers and materialmen with a second source of protection and relief, separate and apart from the traditional mechanic's lien practice. See First Commercial Corp. v. First Nat'l Bancorporation, Inc., 572 F.Supp. 1430, 1434 (D.Colo.1983) (citing National Bank of Detroit v. Eames & Brown, 396 Mich. 611, 242 N.W.2d 412, 417 (1976)). For example, if a party fails to comply with the time limits of the general lien statutes or alternatively chooses not to file a lien,⁴ the TFS, by its use of the words, may have a lien, creates an alternate remedy for the wronged party.

The statutory interpretation urged by the Regans, namely, that Fowler must have perfected its interests by filing a mechanic's lien(s) to fall within the TFS, vitiates the "may have a lien" portion of the TFS' language. The Court cannot simply dismiss or ignore this portion of the statute as if it did not exist. Rather, the Court must give credence to the entire statute. See Echo Acceptance Corp. v. Household Retail Services, Inc., 267 F.3d 1068, 1077-1078 (10th Cir.2001) ("Colorado courts interpret statutory language to `reach a reasonable result consistent with the General Assembly's intent, and ... [to] give harmonious effect to all of the statute's parts'.") (quoting Sky Fun 1 v. Schuttloffel, 27 P.3d 361, 370 (Colo.2001)); See also Colo. Dept. of Revenue v. Cray Computer Corp., 18 P.3d 1277, 1281 (Colo.2001). For that reason, this Court rejects the Regans' argument and holds that if Fowler can establish it had the "potential" for a lien, this portion of the TFS is satisfied.

Alternatively, the Regans argue that the TFS cannot apply because Fowler failed to sufficiently identify the "property" against which a lien (actual or potential) could attach. This argument also fails as Fowler was able to elicit testimony at trial sufficient to establish that Fowler had the potential right to file mechanic's liens for its unpaid invoices, and specifically identified the property addresses upon which any potential lien could have been filed.⁵

Based on this testimony and on the parties' stipulated facts, the Court finds that even though Fowler did not file any mechanic's liens as a result of unpaid deliveries, it presented sufficient evidence to satisfy the "may have a lien" against "property" language of the TFS. As a result, Eagle owed to Fowler a fiduciary duty when it received payments on those projects to which Fowler supplied materials.

B. Did Eagle Commit a Defalcation.

Because the Court has determined a fiduciary relationship existed between Eagle and Fowler, the Court must next answer whether the fiduciary, in this case Eagle, committed a defalcation. Courts have long struggled to provide a precise definition of the term "defalcation." Generally, under 11 U.S.C. § 523(a)(4) defalcation can be defined as, "a...