Jenkins v. Schmank (In re Schmank)

• Decision Date: 27 July 2015
• Docket Number: Adversary Proceeding No. 09–1111,No. 09–12716,09–12716
• Citation: 535 B.R. 243
• Parties: In re: Michael Wolfgang Schmank, Debtor; Dwight Jenkins, individually and J & S Construction, Plaintiff, v. Michael Wolfgang Schmank d/b/a Cumberland Log Homes, Defendant.
• Court: U.S. Bankruptcy Court — Eastern District of Tennessee

535 B.R. 243

In re: Michael Wolfgang Schmank, Debtor;Dwight Jenkins, individually and J & S Construction, Plaintiff

v.Michael Wolfgang Schmank d/b/a Cumberland Log Homes, Defendant.

No. 09–12716

Adversary Proceeding No. 09–1111

United States Bankruptcy Court, E.D. Tennessee, Southern Division.

Signed July 27, 2015

Filed July 28, 2015

Joshua H. Jenne, Jenne, Scott & Jenne, PLLC, Douglas N. Blackwell, II, Blackwell Law Offices, PLLC, Michael E. Jenne, Cleveland, TN, for Plaintiff.

W. Thomas Bible, Jr., Harry W. Miller, III, Chattanooga, TN, for Defendant.

MEMORANDUM

Shelley D. Rucker, UNITED STATES BANKRUPTCY JUDGE

Plaintiffs Dwight Jenkins and J & S Construction (“J & S”) (collectively “Plaintiffs”) have filed this action against the defendant debtor Michael Wolfgang Schmank (“Defendant” or “Debtor”) alleging that the Defendant misused their funds and that such debt should be non-dischargeable pursuant to 11 U.S.C. §§ 523(a)(2)(A), 523(a)(4), 523(a)(6). Although the Plaintiffs cited 11 U.S.C. § 727 in their complaint (Doc. No. 1, “Complaint”), they withdrew their claims under section 727 prior to trial.

The Plaintiffs identify three claims which they contend are nondischargeable. The first is a claim for an advance of $13,500 paid to the Defendant based on future partnership distributions. The Plaintiffs have alleged this advance was made based on false pretenses or fraud. The second claim is for $11,500 which was either the amount taken by the Defendant pursuant to an undisclosed subcontract entered into in violation of his fiduciary obligations as a partner, or in the alternative, was a conversion of funds due to a subcontractor. The third is a claim for the lost profits from a contract which the Plaintiffs contend the Defendant caused to terminate resulting in a loss of profits to the partnership.

The court finds that the Plaintiffs have carried their burden of proof as to only the second claim, and the court will grant the plaintiffs a nondischargeable judgment in the amount of $11,500. The court further finds that the plaintiffs are entitled to attorney fees for their claims of fraud and misrepresentation. The court will set a deadline for the Plaintiffs to file an itemized statement of their fees and expenses. The court will also give the Defendant an opportunity to respond and the court will then set a hearing on the amount of attorney's fees to be awarded. For the reasons stated below the court is denying the request for punitive damages.

These are the court's findings of fact and conclusions of law pursuant to Fed.R.Bankr.P. 7052.

I. Background Facts

In the spring of 2008, the Defendant was experiencing financial difficulties. He was out of work and behind on his mortgage payments and his car payments. He had previously earned his living building log homes. When he was contacted by a log supplier with whom he had previously worked about an opportunity to build homes in a development in Roane County, Tennessee, he realized he would not be able to take advantage of the opportunity because of his financial condition. He approached Mr. Jenkins in the spring of 2008 with the opportunity to work with the developer. He proposed a partnership to construct residential log homes in a subdivision known as the Eagle Ridge Development located in Roane County, Tennessee being developed by Duff Development, LLC. If the first home went well, he was hopeful that there might be an opportunity to build many more in the development.

He had met Mr. Jenkins through a high school football booster program in which both men participated. Both had sons who played football for the school. Mr. Jenkins had been in the construction business for about 30 years and was a licensed contractor. The Defendant had had roughly the same amount of experience in the log home construction business although he was not a licensed contractor. Mr. Jenkins visited the proposed project and decided that he would enter into the deal with the Defendant. The two agreed the Defendant would manage the project for a share in the partnership's profits. Mr. Jenkins would supply the money and contractor's license. They negotiated a contract to build a log home with Duff Development LLC, opened a bank account, and entered into a general partnership agreement as J & S General Contractors (“J & S”) on April 28, 2008. Their partnership agreement was memorialized in a document entitled “Partnership Contract Agreement” (“Agreement”). [Trial Ex. 1.]

The Agreement states in relevant part:

THIS PARTNERSHIP AGREEMENT (“Agreement”) is entered into by and between Michael Schmank ... and Dwight Jenkins....

1. Both Michael Schmank and Dwight Jenkins are residence [sic] of Bradley County, Tennessee. The said partners are hereby known in this agreement as the (“Parties”). Parties are also know[n] in this agreement as Dwight Jenkins (“Owner one”) and Michael Schmank as (“Owner two”) for clarification of duties in the agreement.

2. The Parties have agreed to contract in a joint Partnership company doing business as J & S General Contractors using the mailing address as PO Box 113, McDonald, TN. 37352.

3. Owner one will act in the capacity of Owner/General contractor licensed in the state of Tennessee. Owner two will act in the capacity of Owner/Project field Manager. Owner two will become incensed [sic] in the future as requirements are deemed.

4. Parties agree to work in combined capacities. Parties will consult with each other regarding all business matters, decisions, costs, and all subjects regarding to each other and the partnership. Owner two will consult with Owner one regarding to and or [sic] all matters pertaining to each project. Owner two will consult with but not limited to all final decisions with Owner one regarding project matters [sic].

5. Proceeds/profits will be paid as follows; the fifteen percent termed in each contract is split as 5% /10%. Owner one will receive five percent of the net profits for each contracted project. Owner two will receive ten percent of the net profits for each contracted project. Parties agree to equal share (“50/50”) of the net profits when fixed price contracts are made. Payments from profits will be paid to parties after all invoices, bills, reimbursements, and debts have been paid by the company.

6. J & S General Contractors will conduct and obtain a DBA account with First Tennessee Bank, located in Cleveland, TN. Parties agree that such account will require the signatures of both parties thus defined as (“Dual Signature account”). Upon termination of this partnership, the account and its worth will be divided as per the terms of the agreement (“5/10”). Only after current and outstanding projects are finished and or debts owed by the company are paid will such actions proceed. In cases of contracts terms as Fixed Price agreements, monies received from these projects will be divided as (“50/50”) and paid to the parties as termed above.

7. Parties agree to contract with said public as J & S General Contractors. Contracts will be termed as Cost plus Construction Agreements but not limited to Fixed cost agreements.

8. Cost Plus is defined as: cost of materials, labor, or any other cost to construct and complete homes under contract Plus Fifteen percent commission payable to J & S General Contractors. Each partner will receive said funds after all invoices, bills, debts, and any funds owed by the company are paid in full. Owners proceeds [sic] will be paid from the company account, each owner will be liable for there [sic] taxes and other state and federal requirements.

9. Any changes to this agreement can acure [sic] only if agreed on by both parties and a written addendum is created in writing.

TERMINATION OF AGREEMENT:

In the event that the parties decide to terminate [sic] this partnership, the parties agree to the following.

Parties agree to complete any outstanding contracts or projects. Parties will divide all assets obtained by the partnership and will retain all assets individually owned by each owner. Cash assets will be divided as explained above in paragraph six of this agreement.

[Agreement.]

A couple of days before signing the Agreement, J & S had executed a contract with a James David Duff d/b/a Duff Development, LLC (“Duff”) on April 25, 2008. In the contract, J & S agreed to construct residential improvements to Lot 16, Unit 1 in the Eagle Ridge subdivision in Rockwood in Roane County, Tennessee. The project was a fixed price contract for $415,525. [Trial Ex. 14, p. 2.] J & S expected to receive $50,000 in profits upon its completion. [Trial Ex. 15, p. 1.] The profits were to be split 50/50 according to the Agreement. The contract called for a $15,000 advance and monthly progress payments going forward. [Trial Ex. 14, par. 4.]

In the beginning of the partnership and as the Eagle Ridge project was commencing, the Defendant asked the Plaintiff for an “advance payment” from the $15,000 advance to help him pay his bills. The Defendant agreed that the advance would be offset against his share of the profits to be made on the Duff project. Mr. Jenkins, knowing the Defendant's financial condition and after conducting his own due diligence on the project, provided the Defendant with an advance in the form of a check drawn on the J & S account in the amount of $13,500 dated April 25, 2008. [Trial Ex. 5.]

That same day, the Defendant opened two accounts at First Tennessee Bank—one in the name of Mike Schmank d/b/a Integrity Log Homes (the “Integrity Account”) and a second account in the names of Mike and Lori Schmank (the “Personal Account”). [Trial Ex. 11 and 12.] When questioned about the operations of Integrity Log Homes at his deposition in 2008, the Defendant had stated that Integrity had ceased its operations in 2007 and did not operate after he entered into the Agreement with Mr. Jenkins. [Trial Ex. 19, Deposition of Michael Schmank, pp. 13–15, lines 9–23.] At trial, Defendant contended that Integrity was a subcontractor on the Duff project to do...