JK Transports, Inc. v. McGill (In re McGill), Bankruptcy Case No. 19-12054 EEB

• Court: United States Bankruptcy Courts. Tenth Circuit. U.S. Bankruptcy Court — District of Colorado
• Writing for the Court: Elizabeth E. Brown, Bankruptcy Judge
• Citation: 623 B.R. 876
• Docket Number: Adversary Proceeding No. 19-1162 EEB,Bankruptcy Case No. 19-12054 EEB
• Decision Date: 07 December 2020
• Parties: IN RE: Kenneth Andrew MCGILL, Debtor. JK Transports, Inc., Plaintiff, v. Kenneth Andrew McGill, Defendant.

623 B.R. 876

IN RE: Kenneth Andrew MCGILL, Debtor.

JK Transports, Inc., Plaintiff,
v.
Kenneth Andrew McGill, Defendant.

Bankruptcy Case No. 19-12054 EEB
Adversary Proceeding No. 19-1162 EEB

United States Bankruptcy Court, D. Colorado.

Signed December 7, 2020

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Douglas J. Perko, Arvada, CO, for Plaintiff.

Stephen E. Berken, Sean Cloyes, Denver, CO, for Defendant.

ORDER

Elizabeth E. Brown, Bankruptcy Judge

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THIS MATTER is before the Court following a trial on Plaintiff's Complaint, alleging a nondischargeability claim under 11 U.S.C. § 523(a)(4) and a claim for civil theft.¹ At issue is whether a subcontractor's misapplication of construction trust funds amounts to a defalcation for purposes of § 523(a)(4), including a sub-issue as to whether the Plaintiff's receipt of a partial payment of its claim from a third party caused it to lose standing and its real-party-in-interest status. For the reasons set forth below, the Court concludes that the Plaintiff has standing, is the real party in interest, and has established a claim for nondischargeability.

I. BACKGROUND

This dispute centers on a 2017 public works construction project described as the "District 2/Traffic Building and Site Renovation" (the "Project") for the City of Aurora. The City hired Bassett and Associates, Inc. ("Bassett") as its general contractor. Bassett hired Nomad Excavating, Inc. ("Nomad") as its excavation subcontractor. Debtor Kenneth McGill is the sole owner and President of Nomad. To assist in completion of its excavation work, Nomad hired the Plaintiff to haul away dirt and debris. To summarize, Bassett was the general contractor on the Project, Nomad was a subcontractor, and Plaintiff was a sub-subcontractor.

This was not the first hauling job Plaintiff performed for Nomad. Plaintiff's president testified that her company has performed hauling services for Nomad on about twenty-five jobs. On this Project, the Plaintiff provided hauling services on several different days in October 2017 and sent Nomad invoices totaling $12,142.² The Debtor admits that Nomad did not pay the Plaintiff, despite the fact that Nomad received full payment on its contract with Bassett.

Due to Nomad's failure to pay, Plaintiff filed a claim with Bassett pursuant Colo. Rev. Stat. § 38-26-107, which is part of the Colorado Public Works Act ("CPWA" or the "Act"). That Act provides various remedies for persons who furnish labor, materials, or supplies used by a contractor or subcontractor on a public works construction site.³ See Colo. Rev. Stat. §§ 38-26-101 to - 110. Under the CPWA, all funds disbursed to any contractor or subcontractor under a public works contract must be "held in trust" for the payment of any person who furnished labor or materials on the project. Colo. Rev. Stat. § 38-26-109(a)(1). A contractor or subcontractor must "maintain separate

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records of account of each project" and refrain from disbursing trust funds in a manner that conflicts with the Act. Id. § 38-26-109(3). If a contractor or subcontractor fails to hold such funds in trust, it is deemed to have committed theft within the meaning of Colorado's civil theft statute. Id. § 38-26-109(4).

When a person who furnished labor or materials on a public works project is not paid, the CPWA provides at least three possible remedies. First, the Act allows an unpaid supplier to file a verified statement of claim with the general contractor. Colo. Rev. Stat. § 38-26-107(1). The government entity that awarded the contract is then required to withhold from its payment to the general contractor sufficient funds to insure payment of the statement of claim. Id. § 38-26-107(2). The claimholder must then file an action in court, and if the claim is established, the government entity will pay the claim from the retained funds. Another possible remedy is the right to collect against a payment bond. The CPWA requires general contractors entering into a public works contract above a certain dollar amount to obtain a payment bond that ensures payment of claims filed by laborers and suppliers. Id. § 38-26-105(1). The Act specifically gives unpaid laborers and suppliers a right of action against the principal and surety of the payment bond. Id. A third remedy is to sue the contractor or subcontractor who failed to pay the invoice for violation of the trust fund provision and for civil theft. Id. § 38-26-109(4).

In this case, the Plaintiff took advantage of all these remedies. As required by the Act, Bassett had obtained a payment bond for the Project from Western Surety Company ("Western") in the amount of $4.2 million. After filing a verified statement of claim with Bassett, the Plaintiff filed a lawsuit in state court against the City of Aurora, Bassett, Western, Nomad, and the Debtor seeking to collect its unpaid invoices, as well as treble damages and attorney's fees under the civil theft statute. The Plaintiff later resolved its claims against the City, Bassett, and Western when it received a $12,142 payment from Bassett. In exchange for this payment, the Plaintiff signed a "Lien Waiver, Release & Estoppel," in which the Plaintiff acknowledged full payment of its outstanding invoices on the Project and released its claims against Bassett, Western, and the City. The agreement further states that, if Plaintiff "[is] successful in its endeavor to collect these funds from Nomad ... [Plaintiff] agrees to refund Bassett and Associates, Inc. in the appropriate amount." Ex. 33.

The Plaintiff then continued its lawsuit against Nomad and the Debtor. Initially, Nomad and the Debtor were represented by counsel and participated in the state court action. However, their counsel later withdrew and the Debtor filed for bankruptcy on March 29, 2019. This stayed the state court action against the Debtor but the Plaintiff obtained an "Order of Judgment," dated July 22, 2019, against Nomad. The Order of Judgment contains findings that Nomad breached its contract with Plaintiff, violated the CPWA trust fund provision, and committed civil theft. It awarded Plaintiff actual damages for the unpaid invoices, plus treble damages, attorney fees, costs, and interest.

After the Debtor filed for bankruptcy, the Plaintiff initiated this adversary proceeding. Plaintiff has previously filed a motion for summary judgment in this action, arguing that the state court's Order of Judgment should have preclusive effect in this proceeding, but the Court denied that motion. At trial, the Plaintiff argued that the Debtor is liable for $12,142, plus treble damages, attorney fees, and costs

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under the theft statute and that this debt is nondischargeable under 11 U.S.C. § 523(a)(4).⁴

The Debtor argued at trial that Plaintiff's receipt of $12,142 from Bassett caused Plaintiff to lose its standing and its status as the real party in interest to assert a claim against the Debtor. Instead, the Debtor argues that Bassett was subrogated on that claim and is the only party with standing to assert it against the Debtor. To allow the Plaintiff to also recover damages from him, the Debtor argues, would amount to a double recovery. In addition, to the extent the Court allows Plaintiff to assert its claim, the Debtor argues that Plaintiff failed to establish the intent required for either a § 523(a)(4) or civil theft claim, that Plaintiff has improperly calculated treble damages, and that Plaintiff is not entitled to attorney fees or prejudgment interest.

II. DISCUSSION

A. Standing/Real Party in Interest

The Debtor's first argument is that the Plaintiff lacks standing and is not the real party in interest to assert a claim against him because Plaintiff already received a $12,142 payment from Bassett. Debtor contends that, when Bassett made the payment, Bassett became subrogated to Plaintiff's claim against the Debtor, making Bassett the party with standing to assert that claim and the real party in interest.

To decide this question, it is helpful to further identify the roles of the various parties in this transaction. A payment bond like the one required by the CPWA is a form of suretyship. See generally Restatement (Third) of Suretyship & Guaranty § 1. A suretyship is typically a tripartite relationship between a primary obligor, a secondary obligor, and an obligee. In the case of a payment bond, the general contractor is usually the primary obligor who obtains the bond and promises the obligee, usually the project owner, that it will pay all subcontractors, laborers, and suppliers on the project. The secondary obligor is the issuer of the bond, who agrees via a contract (the bond) that, if the primary obligor fails to perform its obligation to pay all laborers and suppliers, then the bond company will pay those debts. See Restatement (Third) of Suretyship & Guaranty § 1, cmt. d & illus. 1. Although a payment bond is furnished to the project owner who is listed as the obligee, the bond's intended beneficiaries are the subcontractors, laborers, and suppliers who, although not a party to the bond, are typically given a direct right of action against the...