Macarthur Co. v. Cupit (In re Cupit)

• Citation: 514 B.R. 42
• Decision Date: 18 July 2014
• Docket Number: Bankruptcy Case No. 13-11914 EEB,Adversary Proceeding No. 13-1185 EEB
• Parties: In re: Daniel J. Cupit, Debtor. MacArthur Company, Plaintiff, v. Daniel J. Cupit, Defendant.
• Court: United States Bankruptcy Courts. Tenth Circuit. U.S. Bankruptcy Court — District of Colorado

514 B.R. 42

In re: Daniel J. Cupit, Debtor.

MacArthur Company, Plaintiff,

v.Daniel J. Cupit, Defendant.

Bankruptcy Case No. 13-11914 EEB

Adversary Proceeding No. 13-1185 EEB

United States Bankruptcy Court, D. Colorado.

Signed July 18, 2014

Guy B. Humphries, Denver, CO, for Defendant.

Phillip Jones, Grand Junction, CO, for Plaintiff.

Chapter 7

ORDER

Elizabeth E. Brown, Bankruptcy Judge

THIS MATTER comes before the Court on the Plaintiff's Complaint, alleging a nondischargeability claim under 11 U.S.C. § 523(a)(4). This statute renders a claim nondischargeable if it involves either defalcation while acting in a fiduciary capacity, larceny, or embezzlement. At issue is whether a roofing contractor's misapplication of funds under the Colorado Mechanic's Lien Trust Fund Statute (the “Construction Trust Fund Statute”) amounts to either defalcation, as that term has been recently defined by the Supreme Court in Bullock v. BankChampaign, ––– U.S. ––––, 133 S.Ct. 1754, 185 L.Ed.2d 922 (2013), or as embezzlement. Following trial on this matter, the Court finds and concludes that Debtor's obligation to Plaintiff is partially nondischargeable as a fiduciary's defalcation debt.

I. BACKGROUND

The Debtor is the owner and president of a roofing company, Professional Roofing, Inc. (“PRI”), which he formed in 2001. After running the business successfully for several years, Debtor decided to sell PRI to a third party. At the time of sale, Debtor testified that PRI was in good financial condition, was current on its payables, and had a positive cash flow. After the sale closed in 2010, the new owner took over control of PRI's finances and, according to Debtor, caused PRI to suffer a dramatic financial decline. When the new owner failed to make the required post-closing installment payments for his purchase of PRI, Debtor sued him. Ultimately, the parties reached a settlement agreement pursuant to which Debtor regained ownership and control of PRI as of January 1, 2011.

In the months that followed, Debtor reviewed PRI's finances and discovered that during the prior owner's five-month tenure, PRI had racked up over $600,000 in payables, but had insufficient receivables to cover them. Debtor also testified that the prior owner took significant amounts of cash out of PRI for his personal use and maxed out PRI's existing line of credit. Debtor put over $200,000 of his own personal funds into PRI to keep the business afloat. Nevertheless, PRI struggled to pay off old debts while keeping up with new payables.

Starting in May 2011, PRI started buying roofing materials from Plaintiff MacArthur Company (“MacArthur”), a supplier of roofing products. For each of its roofing jobs, PRI kept a “Job Cost Detail” that reflects the supplies Debtor purchased, how much it paid for those supplies, and if there was a balance owing to any supplier. See Ex. B. The Job Cost Detail also reflects the amount charged to PRI's customer and the payments received from that customer. These Job Cost Details demonstrate that PRI often did not use all the revenue from a particular job to pay the suppliers for that job. Instead, Debtor testified that some of the revenue, which was deposited in PRI's general operating account, went to pay other, unrelated bills. Debtor stated that he was generally attempting to pay PRI's oldest bills first. In total, PRI received full payment on twenty-four roofing jobs that used MacArthur materials, for which MacArthur was not paid in full (collectively, the “Jobs”). Ex. B. The unpaid balance on these invoices is $79,625.94. Id.

MacArthur is not the only supplier that went unpaid. Starting in August 2011, several other suppliers sued PRI and Debtor in state court for unpaid invoices and violation of the Construction Trust Fund Statute. Ex. 6, at 6–6; Ex 10. Because of these lawsuits, PRI eventually filed for chapter 11 bankruptcy protection. Debtor then filed his individual petition under chapter 7.

In this adversary proceeding, MacArthur alleges that the debt owed to it is nondischargeable under § 523(a)(4) because Debtor was acting in a fiduciary capacity pursuant to the Construction Trust Fund Statute and committed a defalcation by failing to pay MacArthur the construction trust funds it was owed. MacArthur further asserts that this alleged defalcation amounts to theft under Colorado law and entitles MacArthur to treble damages under Colo.Rev.Stat. § 18–4–405. In the alternative, MacArthur asserts Debtor's conduct amounts to larceny or embezzlement, which are also grounds for nondischargeability under § 523(a)(4).

Relying on the Supreme Court's recent decision in Bullock v. BankChampaign, ––– U.S. ––––, 133 S.Ct. 1754, 185 L.Ed.2d 922 (2013), Debtor argues his conduct does not rise to the level of “defalcation” because he allegedly had no knowledge of his fiduciary duties under the Construction Trust Fund Statute at the time. Debtor further contends that MacArthur failed to establish the necessary elements of either larceny or embezzlement and that the debt owed to MacArthur is dischargeable.

The Court first held a trial on this matter in October 2013. At the conclusion of MacArthur's case-in-chief, the Debtor moved for a judgment on partial findings under Fed.R.Civ.P. 52(c), made applicable to these proceedings by Fed. R. Bankr.P. 7052. The Court orally granted that motion, but indicated it would issue a later written order. Prior to entry of a final order and judgment, the Court reconsidered its decision, based in part on the lack of clarity surrounding the Supreme Court's decision in Bullock. The Court laid out its concerns in an order dated November 20, 2013 and held a non-evidentiary hearing on the matter. At the hearing, the parties made oral arguments, and the Court determined that it would defer ruling on the Debtor's motion for judgment on partial findings until the conclusion of trial and set a further trial date. SeeFed.R.Civ.P. 52(c) (giving a court discretion to “decline to render any judgment until the close of the evidence”). The Court then conducted a continued trial in March 2014. At the conclusion of trial, the parties submitted written closing arguments. The Court now concludes that the best course of action is to render a judgment based on all the evidence, testimony, and applicable law.¹ Accordingly, the Debtor's Rule 52(c) motion is DENIED.

II. DISCUSSIONA. Defalcation While Acting in a Fiduciary Capacity

1. The Bullock Definition of Defalcation

In relevant part, § 523(a)(4) provides that there is no discharge of a debt for “fraud or defalcation while acting in a fiduciary capacity.” 11 U.S.C. § 523(a)(4). The Tenth Circuit has construed § 523(a)(4)'s reference to a “fiduciary” relationship narrowly. To satisfy its requirements, MacArthur must prove: (1) the existence of an express or technical trust; (2) that Debtor owed a fiduciary duty arising from the trust; and (3) that Debtor breached the fiduciary duty by defalcation. Fowler Bros. v. Young (In re Young), 91 F.3d 1367, 1371–72 (10th Cir.1996).

MacArthur relies on the Construction Trust Fund Statute to establish the existence of a trust and Debtor's fiduciary duty. It provides that:

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.

Colo.Rev.Stat. § 38–22–127(1). This section imposes a statutory trust on all funds disbursed to a contractor or subcontractor for the benefit of laborers and suppliers who have furnished services or supplies on a particular construction project. This statutory trust satisfies the technical trust element of a fiduciary relationship necessary to establish a § 523(a)(4) claim. Fowler & Peth v. Regan (In re Regan), 477 F.3d 1209, 1211 n. 1 (10th Cir.2007). Thus, MacArthur has established the first two elements of its § 523(a)(4) claim: a technical trust was created from the funds paid to PRI by customers on the Jobs, and Debtor owed fiduciary duties under that trust. As PRI's president and as the officer in charge of PRI's funds, Debtor is personally liable for any breach of these duties. See Alexander Co. v. Packard, 754 P.2d 780, 782 (Colo.App.1988).

The third element—defalcation—is more problematic. Prior to the Supreme Court's Bullock decision, the standard for defalcation in the Tenth Circuit was relatively low, requiring only “some portion of misconduct.” Okla. Grocers Ass'n, Inc. v. Millikan (In re Millikan), 188 Fed.Appx. 699, 702 (10th Cir.2006) (unpublished). In the context of a claim involving construction trust funds, courts in this circuit previously defined defalcation as “a fiduciary-debtor's failure to account for funds that have been entrusted to it due to any breach of a fiduciary duty, whether intentional, willful, reckless, or negligent. Furthermore, the fiduciary-debtor was charged with knowledge of the law and its duties.” Antlers Roof–Truss & Builders Supply v. Storie (In re Storie), 216 B.R. 283, 288 (10th Cir. BAP 1997). Under this definition, the creditor needed to only establish a failure to account for trust funds (the actus reus ), without establishing any certain mental state (the mens rea ). A creditor could meet its burden on a § 523(a)(4) claim in this district by showing it had unpaid invoices on construction projects on which the debtor had received trust fund disbursements meant for subcontractors, material suppliers, or laborers. See ASCI Readi–Mix & Asphalt Specialties, Co., Inc. v. Gamboa (In re Gamboa), 400 B.R. 784, 790 (Bankr.D.Colo.2008). The burden then shifted to the debtor to render an accounting to show that all contract...