Rosenthal v. Gill (In re Gill)

• Decision Date: 28 July 2011
• Docket Number: Adversary No. 09-1723 MER,Case No. 09-26854 MER
• Parties: In re: MARK G. GILL NANCY J. GILL Debtors. KENNETH J. ROSENTHAL Plaintiff, v. MARK G. GILL NANCY J. GILL Defendants.
• Court: U.S. Bankruptcy Court — District of Colorado

In re: MARK G. GILL NANCY J. GILL Debtors.KENNETH J. ROSENTHAL Plaintiff,

v.MARK G. GILL NANCY J. GILL Defendants.

Case No. 09-26854 MER

Adversary No. 09-1723 MER

UNITED STATES BANKRUPTCY COURT FOR THE DISTRICT OF COLORADO

July 28, 2011

The Honorable Michael E. Romero

Chapter 11

Signed/Docketed

ORDER

THIS MATTER comes before the Court on the Complaint to Determine Dischargeability of Debt (the "Complaint") filed by Kenneth J. Rosenthal ("Rosenthal") and the Answer filed by Mark G. Gill and Nancy J. Gill (collectively, the "Gills").

JURISDICTION

The Court has jurisdiction over this matter under 28 U.S.C. §§ 1334 (a) and (b) and 157(a) and (b). This is a core proceeding under 28 U.S.C. § 157(b)(2)(I) as it concerns a determination as to the dischargeability of a particular debt.

BACKGROUND FACTS

Based on the Complaint, Answer, Pre-Trial Statement,¹ and evidence presented at trial, th Court finds the following facts are uncontested:

• Rosenthal is the homeowner of the residence located at 9385 Riviera Hills Drive, Greenwood Village, Colorado 80111 (the "Property"). Complaint ¶ 6, Answer ¶ 6. Stipulated Facts ¶ 1.

• At all times relevant to this proceeding, Colorado Regional Construction, Inc. ("CRC") was a Colorado corporation doing business as a construction company. Complaint ¶ 7. However, CRC has not been in business since August 2009. Answer ¶ 7.

• Mark and Nancy Gill are the owners, officers, directors and shareholders of CRC. Complaint ¶ 8, Answer ¶ 8, Stipulated Facts ¶ 3.

• Mark and Nancy Gill are persons in control of the finances and financial decisions of CRC. Complaint j 9, Answer ¶ 9.

• In and about December of 2005, Rosenthal entered into an agreement with CRC whereby Rosenthal hired CRC (as general contractor) to provide services, material, and supplies to remodel his home, the Property (the "Project"). Complaint ¶ 10, Answer ¶ 10, Stipulated Facts ¶ 2.

• CRC and Rosenthal initially agreed on a remodeling plan using a conceptual estimate prepared by CRC. Stipulated Facts ¶ 4.

• CRC agreed to work on a time and material basis plus ten percent for overhead and five percent for profit. Stipulated Facts ¶ 5.

• Each month, CRC gave the owner an itemized bill by the general contractor for work performed. Stipulated Facts ¶ 6. For the first five pay applications, Rosenthal paid CRC all charges in full.² Stipulated Facts ¶ 7.

• The amounts received by CRC from Rosenthal for subcontractor charges included in each Pay Application were to be held in trust by CRC for its subcontractors. Stipulated Facts ¶ 8.

• Subcontractors submitted invoices to CRC for payment for labor, services, materials, and supplies provided by the subcontractors for the benefit of the Project. Complaint ¶ 13, Answer ¶ 13.

• Three subcontractors and CRC filed mechanics' liens against the Property for payment. Stipulated Facts ¶ 9.

• In May 2007, Rosenthal and the Gills were involved in a state court law suit filed in the District Court for Arapahoe County, Colorado, Case No. 2007 CV 487, captioned E Light Electric Services, Inc. et al v. Colorado Regional Construction, Inc. et al (the "State Court"). Complaint ¶ 11, Answer ¶ 11. In the State Court, Rosenthal (as a third-party plaintiff) filed a Third-Party Complaint against Mark and Nancy Gill (as defendants). Complaint ¶ 12, Answer ¶ 12. The Gills filed answers in the State Court. Complaint ¶ 12, Answer ¶ 12.

• In the State Court case, Rosenthal sought remedies under the Colorado Construction Trust Fund Statute, COLO. REV. STAT. § 38-22-127 (the "Trust Fund Statute"), arising out of nonpayment for labor, services, materials and supplies with respect to the Property. Complaint ¶ 4, Answer ¶ 4.

• During the course of the State Court proceeding, including trial, Mark and Nancy Gill acted as the representatives of, and made decisions for, CRC. Complaint ¶ 19, Answer ¶ 19.³

• The State Court proceeding was in progress when the Gills filed their bankruptcy petition on August 17, 2009. Complaint ¶ 20, Answer ¶ 20.

• In this Adversary Proceeding, Rosenthal seeks a determination that the debt arising out of the Gills' violations of the Trust Fund Statute is not dischargeable in bankruptcy pursuant to 11 U.S.C. § 523(a)(4).⁴ Complaint ¶ 5.

• The Gills have admitted receiving salaries and income from CRC on a periodic basis from January 2006 until they filed bankruptcy. Complaint ¶ 24, Answer ¶ 24.

• CRC received funds from Rosenthal to pay for services, materials and supplies provided to the Project. Complaint ¶ 26, Answer ¶ 26.

• On October 19, 2010, District Court Judge John L. Wheeler entered an Order in the State Court case, ORDER - Re: Findings of Fact, Conclusions of Law and Entry of Judgment -Colorado Lien Trust Fund Claims (the "10/19/10 Order").⁵ The 10/19/10 Order addresses the claims under the Trust Fund Statute, civil theft, and treble damages.

• On October 21, 2010, District Court Judge John L. Wheeler entered an Order in the State Court case, ORDER - Re: Findings of Fact and Conclusions of Law - Partial Entry of Judgment (the "10/21/10 Order").⁶ The 10/21/10 Order addresses broader claims such as breach of contract and unjust enrichment between E Light Electrical Services, Inc., Rosenthal, and CRC.

• On December 22, 2010, District Court Judge John L. Wheeler entered an Order in the State Court case, ORDER - Re: Findings of Fact and Conclusions of Law - Entry of Judgment -Trust Fund Claims (the "12/22/10 Order").⁷ The 12/22/10 Order addresses the unresolved issues from the 10/21/10 Order.

SUMMARY OF THE PLEADINGS

Rosenthal's Complaint includes two claims for relief: (1) a finding of a violation of the Trust Fund Statute, Colo. Rev. Stat. § 38-22-127 and (2) a finding treble damages are appropriate under Colo. Rev. Stat. § 18-4-401.⁸ Rosenthal asserts the State Court entered a judgment against CRC and in favor of Rosenthal and certain subcontractors under Colo. Rev. Stat. 38-22-127 "for a total trust fund claim of $59,297.44, treble damages, attorney fees and costs."⁹ Rosenthal asserts the judgment renders the Gills personally and such liability is nondischargeable under § 523(a)(4).

The Gills argue the State Court held a trial over a period of several months and they were only present the first two or three days. The Gills maintain the State Court entered its findings on the first five pay applications from CRC to Rosenthal, but that CRC worked for Rosenthal for several months after the fifth pay application and incurred actual costs exceeding $99,244. The Debtors believe CRC has a valid lien recorded against the Property in the amount of $99,244, and contend they are entitled to an offset in that amount based on the sixth and final (seventh) pay applications.

DISCUSSION

A. CRC Violated Colorado's Trust Fund Statute and Civil Theft Statute.

COLO. REV. STAT. § 38-22-127(1) provides in relevant part:

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 intrust 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.

The 10/19/10 Order reflects Judge Wheeler considered the presentation of testimonial and documentary evidence and legal argument from the trial held on June 23-24, July 24, September 910, 2009, May 17 and June 28, 2010.¹⁰ Throughout the six-page 10/19/10 Order, Judge Wheeler set forth the relevant facts, an analysis of the Colorado Mechanics' Lien Trust Fund Statute, and directed entry of judgment as follows:

a. On the claim of violation of the Colorado Mechanic's Lien Trust Statute, C.R.S. § 38-22-127(1), against Colorado Regional Construction, Inc., and in favor of Kenneth Rosenthal (on behalf of E Light Electric Services, Inc.; Metro Carpet and Flooring, LLC; The Door Company; and T&G Hardwood), E Light Electric Services, Inc. and Metro Carpet and Flooring, LLC, for all amounts paid by Rosenthal to CRC that were intended to cover the aforementioned subcontractors' invoices included in the first five pay applications, and which were unpaid by CRC to the aforementioned subcontractors as follows:

(1) Kenneth Rosenthal [on behalf of E Light Electric Services, Inc. ($27,500.50; Metro Carpet and Flooring, LLC ($6,384.76); The Door Company ($5,122.18); and T&G Hardwood ($20,290.00)]: $59,297.44

(2) E Light Electric Services, Inc.: $27,500.50

(3) Metro Carpet and Flooring, LLC: $6,384.76

b. Pursuant to C.R.S. § 38-22-127(5), on the claim of civil theft, against Colorado Regional Construction, Inc. and in favor of Kenneth Rosenthal, E Light Electric Services, Inc., and Metro Carpet and Flooring, LLC, for the same reasons and in the same amount as set forth in subparagraph a. above, plus treble damages and reasonable attorneys' fees pursuant to pursuant to [sic] C.R.S. § 18-4-405.

c. All claims for attorneys' fees and costs shall be submitted within thirty (30) days of this Order.

d. But for the automatic stay in the Bankruptcy Court pursuant to 11 U.S.C. § 362(a), the Judgment entered against Colorado Regional Construction, Inc., would also be entered against Mark and Nancy Gill, individually.¹¹

There was much testimony at this Court's trial regarding the pay applications at issue, CRC's bank statements and disputes among the parties. However, the Court believes the primary issue is whether this Court should afford the 10/19/10 Order preclusive effect under the doctrine of collateral estoppel. Collateral estoppel, or issue preclusion, is a doctrine prohibiting the relitigation of issues of ultimate fact between the same parties that have been "determined by a valid and finaljudgment."¹² Collateral estoppel applies in bankruptcy court actions to determine...