Zakco Commercial Consultants, Inc. v. Hagen

FILED
Joyce W. Harris
Clerk of Court
2:47 pm, 11/3/05
[N THE UNITED STATES BANKRUPTCY COURT
FOR THE DISTRICT OF WYOMING
~re 	)
)
KYLE ALLEN HAGEN, 	)
)
Debtor. 	)
)
ZAKCO COMMERCIAL CONSULTANTS, 	)
[NC., 	)
Plaintiff, 	)
)
v. 	)
)
KYLE ALLEN HAGEN, 	)
)
Defendant. 	)
Case No. 04-20802
CHAPTER 7
Adv. No . 04-2063
OPINION ON COMPLAINT
On August 10 , 2005 the court held a trial on Zakeo Commercial Consultants, Inc. 's
(Zakco) "Co mplaint for Determination of Non-Dischargeability of Debtor for Certain Debt,"
followed by closing arguments on October 13,2005. The court has considered the testimony
and th e argu ments of the parties and is prepared to rule .
JURISDICTION
The court has jurisdiction over this case under 28 U.S.C. §§ 15 7 and 1334. This is a
co re procecding under § 157(b)(2)(1).
Pa ge I
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FINDINGS OF FACT
The Debtor, Kyle Hagen, was previously the president of Teton Heating Company
(Teton), a Wyom in g corporation established to conduct a plumbing business. 	The Debtor
and his spouse, Leidy E. Hagen, were the principal s and owners of Teton and controlled its
acrivities. Teton purchased its plumbing supplies from Fa ll s Plumbing Supply, In c. (Falls
Plumbing) , among other businesses.
The plaintiff, ZakeD, is a Colorado corporation and the general con tractor on the
construction of a Holiday Inn Express in Casper, Wyoming (Holiday Inn Job). On January
24, 2003, ZakeD entered into a "ZAKCO Commercial Consulta nt s, Inc. 	Subcontract
Agreement" (Subcontract) with Teton to provide plumbing services at the Holiday Inn Job.
The Subcontract was signed in Wyoming by the Debtor, Kyle Hagen as President of Teton.
Teton was designated as a corporation, and its federal tax identification number was
provided.
The Subcontract ha s no choice oflaw or choice of forum provisions. The Subcontract
identifies Falls Plumbing as one of two suppliers to Teton.
At Teton, M s. Hagen did the office work, managed the finances and paid the bills.
The Debtor was in charge of the field work, managing the employees and performing the
plumbing job s. Te ton had several employees at the tim e it contracted with Zakco, located
in Casper at the Holiday Inn Job and at another job site in Gillette, Wyoming.
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In the late s ummer or fall of2003, Teton was unable to co ll ect funds it was owed for
th e Gillette work. That lo ss of revenue ca used Teton financial probl ems and the inability to
pay its ongoing expenses timely. At some time in September 2003, Teton left the Gillette
lo ca tion and did not finish the work there. However, Teton continued to perfonn work at the
Holiday Inn Job in Casper.
At about the s ame time, Teton submitted four Payment Reque sts to Zakco for th e
purpo se of obtaining progress payments. The Payment Reque sts were on Zakco's standard
form . The Payment Requests contained the following statement:
We, the undersigned, having been employed by ZAKCO Commercial
Consultants, In c. or any of its age nt s to furni sh labor andlor mate rial in
connection with construction or improvem e nt s to above-named pro perty , and
in consideration of receipt of the s um of 	(fill in amount of thi s
draw ), waive and release any and all lien, claim or right to lien on sai d above
premises, building or property, or any portion thereof under th e s tatut es of the
state of WYOMING relating to Mechanics Lien for labor or material or both
furnished 	by the 	undersigned 	in 	connection 	wi th 	sa id 	constmction 	or
impro veme nt. 	The 	undersigned 	repre se nt s 	to 	th e 	Own er 	and 	Za keo
Co mm ercial Cons ultant s. In c. that is ha s paid or will pa y upon rece ipt hereof.
all of its s uppliers. subcontractors. laborers. etc. who have furnished mate ri als.
services or labor who ha ve or may ha ve a lien against sa id property . 	Th e
und ers ign ed wi ll hold Owner and ZA KCO Commercial Co nsultant s, In c.
harmle ss from any and all cl aim s and li ab iliti es to in clude necessary attorne y
fee s. (Emphasis provided).
The June and July 2003 Payment Requests were for materials associated with the
Holiday Inn Job, and were signed by Ms. Hagen. The August 2003 Payment Request was
for labo r ex pen ses and was also s ign ed by Le id y Hage n.
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The September 2003 Payment Request was dated September 25, 2003 and was signed
by th e Debtor on October 1, 2003 . The Payment Request detailed amounts sought under the
Subcontract for Labor totaling $32,250 and for Materials totaling $12,900, less a 10%
reta ina ge. However, the Payment Reque sts did not identify to whom the fund s for Materi als
we re owed. 	Based on the statements on the Payme nt Requests, ZakeD advanced funds to
Teton. Teton did not pay Falls Plumbing for the plumbing materials used at th e Holiday Inn
Job from July through September 2003.
In October 2003, Zakeo had difficulty communicating with the Debtor, and Teton's
employees at th e Holiday Inn Job were complaining that they had not been paid their wages.
Around November 1,2003, the Debtor informed Zakco that Teton was unable to complete
the Holiday Inn work anticipated by the Subcontract, which was at that time around 75%
complete. Zakco hired another plumbing contractor and paid $65,000, the cost of competing
the plumbing work on the Holiday Inn.
On January 13,200 4, Falls Plumbing filed a Lien Statement agai nst the Holiday Inn
Job for $64,416.37. Zakco settled with Falls Plumbing for $60,000 and paid the debt o ffin
return for a li en release.
On January 27 ,2 004, the Debtor consulted bankruptcy counsel. He fil ed a voluntary
chapter 7 petition on April 30, 2004, and this adversary proceeding follo wed.
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CONCLUSIONS OF LAW
The plaintiffs Complaint states three claims for relief. 	The plaintiff seeks a
determination of non dischargeability ofthe funds paid to Falls Plumbing and to complete the
plumbing on the Holiday Inn Job under II U.S.C. § 523(a)(2)(A), (a)(4), & (a)(6).
Section 523(a)C2J(A)
Zakco contends the Payment Requests signed by the Debtor and Leidy Hagen were
false and the debts should not be discharged under § 523(a)(2)(A). That section provides:
A discharge under section 727 ... does not discharge an individual
debtor from any debt
(2) 	for money, property, [or] services ... to the extent obtained by
(A) 	false pretenses, a false representation, or actual fraud ,
other than a statement respecting the debtor's financial condition.
The plaintiff has the burden to prove the elements of the claims under § 523(a) by a
preponderance of the evidence. Grogan v. Garner, 498 U.S. 279, IllS. Ct. 654, 661 (1991).
Exceptions to discharge arc construed narrowly in order to protect the debtor's fresh start.
In re Mullet, 817 F.2d 666, 680 (10th Cir. 1987). 	Under § 523(a)(2)(A), the terms fal se
pretens es , false representation and actual fraud are interpreted according to their common
law definitions. Field v. Man s, 516 U.S. 59, 116 S. Ct. 437, 442 (1995).
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In the Tenth Circuit, a creditor must prove the debtor made a fa lse representation with
the intent to deceive the creditor, and that the creditor relied on the misrepresentation. In re
Young, 9 1 F.3d 1367, 1373 (10th Cir. 19 96). The section requires proof of fraudulent intent,
id., and the creditor must show that its reliance was justified. Field v. Mans, 116 S. Ct. at
439.
Zakco contends the sworn statements that Teton "has paid or will pay upon receipt
hereof, all of its suppliers, subcontractors, laborers, etc. who have furnished materials," were
false representations intended to obtain funds under fa lse pretenses because the Debtor had
no intention of paying the labor or materials detailed in the Payment Requests. Because the
Debtor did not sign all of the Payment Requests, Zakco contends Teton was the Debtor's
"agent" for purposes of the alleged fraud.
Zakco cited no authority for its argument that Ms. Hagen's signatures on the June, July
and August Payment Requests could be imputed to the Debtor for purposes of fraud, and the
court knows of none. Nor is there evidence that the Debtor directed Ms. Hagen to sign the
Payment Requests. 	In fact, the evidence was to the contrary. 	The Debtor's unrefuted
testimony was that he was not involved in the management of the finances and was not aware
of which creditors were paid and which were not. 	He was simply trying to keep the field
operations going. The court concludes the Debtor made no false statements with regard to
the June, July and August Payment Requests.
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The Debtor signed the September23, 2003 Payment Request and stated that he would
payor had p ai d the materials and labor bills. Zakco has suffered no loss as to the lab or bills.
Therefore, the o nl y issue is whether the Debtor intended to obtain funds fro m Za kco
fraudulently, i.e., with the intention to use the funds for a purpose other than to pay for
materia ls in the sta ted amount of$12,900, less th e retaina ge. The court concludes he did not
have the requisite intent.
The Debtor was aware of th e precarious nature of Teton's fin ances at th e tim e he
signed the Payment Request. Howev er, he testifi ed that he had no intimate knowl edge ofthe
finan ces, to whom funds were owed, or which creditors were being paid and which we re not.
He also testified that he was attempting to do everything possible to co ntinue operating the
company, but that when he clearly could not, he took immediate steps to limit the damages
by notifying ZakeD. This was a case of money in and money Qut, not a case of intentional
fraud to obtain fund s for an unstated purpose.
Za k eD also failed to meet its burden of proof with regard to th e co mpletion costs at
the Holiday Inn Job. The money Zakco paid to compl ete the plumbing at the Holiday Inn Job
was the result of a breach of contract by Teton, not fraud by the Debtor.
Section 523(a)14)
Zakco contends th e progress payments fro m Za kco to Teton were he ld in tru st for
Zakco, and therefore, the Debtor was a fiduciary under § 523(a)( 4) . A debt is not di scharged
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under § 523(a)(4) " for fraud or defalcation while [the debtor is] acting in a fi du ciary
capacity[.]" 	To establish th e cla im , th e creditor mu st pr ove th e ex istence o f a fi du ci ary
rela ti onship between it se lf and the de bt or and fraud or de falca ti on by the debtor in the course
of that fi du ciary relationship. In re YOll ng, 91 F.3d at 137 1. The court must find an express
o rt echnical tru st in ex istence prior to the crea ti on of the debt. ld. at 137 1-1 372.
Za keD co nt end s a tru st exists du e to an un specified Co lorado statut e, app are ntl y th e
Colorado Mechanics' Li en Trust Fund Statute found at Co lo. Rev. Sta t. § 38-22- 127 (2000).
However, th e Sub c ont rac t between these parti es is gove rn ed by Wyo min g, not Co lorado , law.
Furth e nn ore, und er the Co lorado statute, the tru st is create d in favo r of the mate ri al s uppli er.
not th e ge nera l contract or.
Th e Restateme nt (Second) ofC onflicls of Law § 188(2) (197 1), provides that in the
absence of an effective choice o fl aw in the contract, th e local law of the state w hi ch has th e
most significa nt rela ti onship to th e transaction a nd th e pa rti es co ntrols. 	The factors to be
eva lu ated are (a) the place of contracting, (b) the pl ace of nego ti a ti on of the co ntract, (c) the
place of performance, (d) the location of the subject matter of the contract, and (e) the
domi c il e, res id ence , nati onali ty , pl ace of incorporation and pl ace of bus in ess of the pa rti es.
!d.
Clea rl y un der thc Restatement anal ys is, Wyoming law controls. The Subcontract does
not spec ify a c ho ice oflaw. Th e Sub c ontract wa s signed in Wyomin g. relat es to a Wyo min g
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constru ction project , an d involves a Wyoming corporation. Ne ith er th e Debtor nor Teton had
any relation ship wi th Colorado . Th e court is un awa re of any Wyoming la w that creates a
statutory or other tru st over th e fund s paid by Zakco to Teton.
Zakeo also argues, without authority, that the payme nt of the funds to Teton was
intended to be he ld for the benefit of a third party, Fa ll s Plumbing, th ereby creating the
requi s ite fidu c iary duty . While the co urt is hard pr essed to und ersta nd how Zakco would be
th e beneficiary und er such a scena rio, th ere is no express trust created by the language of the
Payme nt Request. Th e § 523(a)(4) claim fail s as a matter of law.
Section 523 (a)(6)
Finally, Zakco asserts the debts should not be discharged under § 523(a)(6). Under
that sec tion , Zakco must prove a "w illful and malicious injury by th e debtor to another entity
or the prope rt y of another cntity[.]"
The United States Supreme Court addressed a § 523(a)(6) claim in Kawaauhau v.
Geiger, 523 U.S. 57, 11 8 S. Ct. 974,977 (1988). 	The Court ruled that the willfulness
element requires proof of a deliberate or int e nti o nal injury, not mer ely a deliberate or
int e nti onal ac t whi ch res ul ts in injury , 	As w ith int e ntion al torts, th e debto r mu st ha ve
int ended the consequences of hi s act. Jd .
The Court also required that th e injury be "desired or in fac t anticipated by the
de bto r. " ld. However, the Co urt did not defin e malicious co ndu ct. Therefore, the eleme nt
of mali ce requir es application of Tenth Circuit law.
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Prior to the ruling in Geiger, the Tenth Circuit Court of Appeals described malice as
actions taken "without justification or excuse." Dorr, Bentley & Pecha, P.e. v. Pasek (in re
Pasek), 983 P.2d 1524, 1527 (10" Cir. 1993). 	Since the Geiger ruling, other courts have
ruled that legal justification or excuse negates a finding of willful and malicious conduct.
In re Hixson, 252 B.R. 195, 198 (Bankr. E.D. Ok la. 2000).
The evidence does not establish a deliberate injury or that any of the Debtor's actions
were intended to hann Zakco, either when the Debtor signed the Payment Request or when
he terminated work on the Holiday Inn Job. The Debtor's actions were intended to keep the
company functioning in a time of financial distress, and without intimate knowledge of the
company's finances. 	The mere fai lure to perform in accordance with a contract is not
nondischargeable conduct. There is no evidence to support a claim for willful and malicious
condu ct in this case.
The court will issue ajudgment in favor of the DefendantlDebtor discharging any debt
owed to Zakco Commercial Consultant's Inc.
DATED this ,3 	day of November, 2005.
Service to:
Phillip Willoughby
Ken McCartney
By the Court
Pa ge 10
. MCNIFF
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