Opinion
Bankruptcy Case No. 19-12054 EEB Adversary Proceeding No. 19-1162 EEB
2020-12-07
IN RE: Kenneth Andrew MCGILL, Debtor. JK Transports, Inc., Plaintiff, v. Kenneth Andrew McGill, Defendant.
Douglas J. Perko, Arvada, CO, for Plaintiff. Stephen E. Berken, Sean Cloyes, Denver, CO, for Defendant.
Douglas J. Perko, Arvada, CO, for Plaintiff.
Stephen E. Berken, Sean Cloyes, Denver, CO, for Defendant.
ORDER
Elizabeth E. Brown, Bankruptcy Judge 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. 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.
All references to "section" or "§" shall refer to Title 11, United States Code, unless expressly stated otherwise.
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. The Debtor admits that Nomad did not pay the Plaintiff, despite the fact that Nomad received full payment on its contract with Bassett.
At trial, the Plaintiff used the figure $12,574 for the amount of the unpaid invoices but later realized a calculation error and reduced the amount to $12,142. As such, although the pleadings and exhibits refer to the $12,574 figure, the Court assumes in this Order that $12,142 is the correct amount.
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. 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 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).
The CPWA applies rather than Colorado's standard mechanics' lien statute because the latter statute does not apply to public lands. See City of Westminster v. Brannan Sand & Gravel Co., Inc ., 940 P.2d 393, 395 (Colo. 1997) (concluding mechanics' lien statute does not apply to public land).
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 under the theft statute and that this debt is nondischargeable under 11 U.S.C. § 523(a)(4).
The Plaintiff's Complaint also asserted a claim for denial of the Debtor's discharge under 11 U.S.C. § 727(a)(2)(A). However, the Plaintiff withdrew that claim on the day of trial.
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 bond. See 3 Philip L. Bruner & Patrick J. O'Connor, Jr., Bruner and O'Connor on Construction Law § 8:152 (2002). This is the case under the CPWA, which gives an unpaid sub-subcontractor, like the Plaintiff, a right of action against the principal obligor (Bassett) and the bond surety (Western), even though the obligee on the bond was the City of Aurora. See Colo. Rev. Stat. § 38-26-105(1).
Payment of a debt within a suretyship usually invokes subrogation rights. Generally speaking, under subrogation, "a party secondarily liable who has paid the debt of the party who is primarily liable may institute a recovery action in order to be made whole." Mid-Century Ins. Co. v. Travelers Indem. Co. of Ill. , 982 P.2d 310, 315 (Colo. 1999). Subrogation is an equitable doctrine designed to ensure "the ultimate discharge of a debt by the person who in equity and good conscience ought to pay it." Id. (internal citation omitted). Within a suretyship, subrogation "entails the restoration of the amount paid by a surety or other similar person, and restoration of that amount only." Id.
The Supreme Court has recognized that subrogation rights arise when a surety pays a subcontractor or supplier pursuant to a payment bond on a construction project. Pearlman v. Reliance Ins. Co. , 371 U.S. 132, 136-37, 83 S.Ct. 232, 9 L.Ed.2d 190 (1962). The surety who paid the debt is entitled to seek reimbursement and is entitled to "all the rights of the person he paid." Id. ; see also Am. Casualty Co. of Reading, Pa. v. Line Materials Indus. , 332 F.2d 393, 394-95 (10th Cir. 1964) (noting that when surety pays debts to subcontractors under payment bond, surety becomes subrogated to the rights of the person it paid). The Supreme Court describes this type of subrogation as "widely applied in this country." Pearlman , 371 U.S. at 137, 83 S.Ct. 232.
In this case, Bassett obtained a surety bond from Western for payment of sub-subcontractor claims like the one asserted by Plaintiff. It appears that, rather than allow the surety bond to be drawn upon, Bassett elected to pay the Plaintiff's claim directly. Thus, Bassett, rather than Western, acted as the surety when it paid Nomad's debt, entitling it to subrogation rights. See Pearlman , 371 U.S. at 137, 83 S.Ct. 232. As subrogee, Bassett became entitled to reimbursement from Nomad or the Debtor. In other words, Bassett "stands in the shoes" of Plaintiff. State Farm Fire & Cas. Co. v. Weiss , 194 P.3d 1063, 1066 (Colo. App. 2008).
Bassett, however, was only partially subrogated. Subrogation is limited in nature. It differs from the assignment of a claim, in which the entire value of a claim is voluntarily transferred to another person. Subrogation, in contrast, "transfers the claim only to the extent necessary to reimburse the subrogee." Id. at 1067 (detailing differences between a claim assignment and subrogation). A subrogee is not entitled to a windfall above what it paid. Mid-Century Ins. Co. v. Travelers Indem. Co. of Ill. , 982 P.2d 310, 315 (Colo. 1999).
The Plaintiff asserts claims against the Debtor in excess of $12,142. Specifically, the Plaintiff asserts a claim for $36,426 in treble damages, plus attorney fees and costs under the civil theft statute. Neither Bassett nor Western paid these additional amounts to Plaintiff, and they had no obligation to do so because a payment bond does not cover penalties, such as punitive damages. Edmonds v. W. Sur. Co. , 962 P.2d 323, 326 (Colo. App. 1998) ; Restatement (Third) of Suretyship & Guaranty § 73. Thus, Bassett became a partial subrogee as to the $12,142, but not as to Plaintiff's other claims.
The Debtor argues that, once Bassett became the subrogee, Plaintiff no longer had standing to recover the $12,142 nor any other claims against him. The oft cited elements of constitutional standing are (1) injury in fact that is (2) traceable to the defendant and (3) redressable by the court. Jackson v. Volvo Trucks N. Am., Inc. , 462 F.3d 1234, 1241 (10th Cir. 2006). The Debtor argues Plaintiff can no longer show the first element, injury in fact, because the $12,142 payment resolved Nomad's unpaid invoices, thereby mooting all Plaintiff's claims.
The defendant made a similar argument in Frias v. Chris the Crazy Trader, Inc. , 604 Fed. App'x 638 (10th Cir. 2015). In that case, the plaintiffs attempted to purchase a used car from the defendant and made a down payment. However, they could not secure financing for the purchase. They then returned the car, but the defendant refused to return all their down payment. Plaintiffs sued for civil theft, violations of the Truth in Lending Act, and of the Colorado Consumer Protection Act. Only after initiation of the lawsuit did the defendant refund the entire down payment. The defendant then argued its refund mooted the plaintiffs' claims and caused them to lose standing to sue because, after repayment, they had no injury. The Tenth Circuit rejected this argument, emphasizing that the plaintiffs had sued for more than actual damages. They also asserted claims for statutory damages, costs, and attorney fees. "Even if they could no longer prove that they suffered actual damages, because defendant repaid their down payment in full, all of the statutes under which they sued provide for statutory damages as well." Id. at 641. Those additional damages, including treble damages for civil theft, were sufficient to establish an injury in fact for standing purposes.
The same is true in this case. Even if the Plaintiff received $12,142 from Bassett, it still has claims for statutory damages, attorney fees, and costs against the Debtor under the civil theft statute. These additional claims give Plaintiff the "requisite injury in fact" for purposes of standing and this case is not moot. Id.
The Debtor further asserts that Bassett's payment caused the Plaintiff to lose its status as the real party in interest under Fed. R. Civ. P. 17(a), made applicable to this proceeding by Fed. R. Bankr. P. 7017. That Rule provides that "[a]n action must be prosecuted in the name of the real party in interest." Fed. R. Civ. P. 17(a). Rule 17 is codification of the prudential standing doctrine that includes a "general prohibition on a litigant's raising another person's legal rights." Wilderness Soc'y v. Kane Cty. , 632 F.3d 1162, 1168 (10th Cir. 2011) ; Boscoe Chung v. Lamb , 2018 WL 6429922, at *4 (D. Colo. Nov. 14, 2018). "[T]he ‘real party in interest’ is the one who, under applicable substantive law, has the right to bring the suit.’ " FDIC v. Geldermann Inc. , 975 F.2d 695, 698 (10th Cir. 1992) (internal citation omitted).
The Plaintiff asserts that the Debtor waived this defense when he failed to plead it in his Answer. The Debtor seeks leave to amend his answer to add it as a defense. While it is true that a real-party-in-interest challenge may be waived because it is not jurisdictional in nature, see First Am. Title Ins. Co. v. NW Title Ins. Agency, 906 F.3d 884, 890 (10th Cir. 2018), the Court need not decide the issue because even if the Debtor did not waive the defense, his challenge to the Plaintiff's status is unsuccessful for the reasons discussed below.
Subrogation can affect a party's status as the real party in interest. Cases addressing this issue most often arise in the insurance context. Where an insured has been injured by a third-party tortfeasor and the insured's claim has been paid in full by his or her insurance company, the fully subrogated insurance company is deemed the only real party in interest. Am. Fidelity & Cas. Co. v. All Am. Bus. Lines , 179 F.2d 7, 10 (10th Cir. 1950). The insured party (whose claim has been fully paid by insurance) is not entitled to bring an action against the third-party tortfeasor. Id. The rule is different in the case of partial subrogation, such as where an insured's claim has only been partially covered by the insurance company. In that instance, the insurer as subrogee "has the substantive right to recover from the wrongdoer up to the amount it has been obliged to pay under its policy, and the insured has the substantive right to recover for any excess in loss for which he has not been reimbursed." Gas Serv. Co. v. Hunt , 183 F.2d 417, 419 (10th Cir. 1950). In other words, with partial subrogation, "both the insurer and the insured are real parties in interest." Garcia v. Hall , 624 F.2d 150, 151 (10th Cir. 1980) ; see also 6A Charles Alan Wright, Federal Practice & Procedure § 1546 (3d ed. 2020 update) (noting that in the case of partial subrogation, "[e]ither the insured or the insurer may sue."). Applying these principles, the Plaintiff is a real party in interest, at least as to those damages it incurred in excess of $12,142.
The Debtor argues that the Plaintiff should have mitigated its damages by electing not to incur further attorney's fees after it received the $12,142 from Bassett. However, because Plaintiff remained a real party in interest with standing to assert claims against the Debtor even after receiving the $12,142, the Court finds Plaintiff had no duty to stop its collection efforts or to cease incurring attorney's fees.
Whether the Plaintiff is also entitled to bring a claim for the $12,142 is a thornier issue. The Debtor argues the Plaintiff is not entitled to recover that amount because it already received that amount from Bassett and, allowing Plaintiff to bring the claim, would expose the Debtor to the risk of duplicative damages (i.e. paying both the Plaintiff and Bassett). In other words, the Debtor asserts that Bassett is the only real party in interest as to the $12,142.
Once again, the Court finds subrogation cases in the insurance context instructive. As previously stated, in the case of partial subrogation, both the insurance company and the insured are considered real parties in interest. As such, both the insured and the insurer may bring suit against the tortfeasor. See Public Serv. Co. of Okla. v. Black & Veatch , 467 F.2d 1143, 1144 (10th Cir. 1972). If the insured sues the tortfeasor, the partially subrogated insurance company may intervene to protect its pro rata share of the potential recovery. Id. at 1145 (quoting Wright & Miller, Federal Practice and Procedure: Civil § 1546 ). If either the insurance company or the insured sues and the other does not voluntarily join or intervene, the defendant tortfeasor "may protect himself from multiple lawsuits by having the absent party joined." Id.
However, a partially subrogated insurer is not generally considered an indispensable party to an insured's lawsuit against the tortfeasor. See Fed R. Civ. P. 19. Rather, the insured is allowed to bring suit for the entire loss , even if that loss has been partially paid by the insurance company. Va. Elec. & Power. Co. v. Westinghouse Elec. Corp. , 485 F.2d 78, 83-84 (4th Cir. 1973). "Although both the insurer and insured are real parties in interest, ... where the insured brings suit for the entire loss, the partially subrogated insurance company need not be named a party to the suit under Fed. R. Civ. P. 17(a). Garcia v. Hall , 624 F.2d 150, 152 (10th Cir. 1980). In such instances, the tortfeasor is protected from the risk of multiple litigation because a judgment will be entered regarding the entire loss caused by the tortfeasor, and the subrogated insurer will, in most instances, be bound by that judgment. Garcia , 624 F.2d at 152 ; Va. Elec. & Power. Co., 485 F.2d at 84 ("Even without joinder, the partial subrogee is generally precluded from bringing a subsequent action against the defendants where a judgment has been rendered in a suit by the subrogor for the entire loss."). Further protection against multiple litigation is provided by the fact that any recovery by the insured is impressed with a trust for the benefit of the insurer to the extent the insurer is entitled to subrogation. Braniff Airways, Inc. v. Falkingham , 20 F.R.D. 141, 145 (D. Minn. 1957). In this case, Bassett could have intervened in this case to protect its right to recover the $12,142. The Debtor could have sought to have Bassett joined as a party. Neither of those events occurred. However, Bassett's absence is not detrimental to the Plaintiff's claims. The Plaintiff retained its status as the real party in interest to bring a cause of action for the entire amount of damages it incurred, including the $12,142. See Va. Elec. & Power. Co. , 485 F.2d at 83-84. Any recovery is subject to a trust for the benefit of Bassett in the amount of $12,142. Bassett also protected its rights when it required Plaintiff to sign the "Lien Waiver, Release & Estoppel" agreement, in which Plaintiff agreed that, "if it collected any part of the $12,142 from Nomad ... [Plaintiff] agrees to refund Bassett and Associates, Inc. in the appropriate amount." Ex. 33. This sufficiently protects the Debtor from the threat of multiple recoveries. If the Plaintiff recovers the $12,142 from the Debtor, the Plaintiff must pay that amount to Bassett. The Plaintiff conceded this point, stating that "Bassett only made a conditional payment under the Lien Release, to where if [Plaintiff] actually collects on its TFS/civil theft claims, it has to ‘refund Bassett ... in the appropriate amount.’ " Plaintiff's Post-Trial Brief , ¶ 23. Thus, the Court concludes that the Plaintiff is the real party in interest to assert claims against the Debtor for recovery of $12,142 in unpaid invoices, treble damages, attorney fees, and costs, on the condition that any recovery by the Plaintiff of the $12,142 from the Debtor will be subject to a trust in favor of Bassett.
The Debtor also argues that perhaps the Plaintiff's truck drivers, rather than the Plaintiff, were the real party in interest because those drivers were independent contractors rather than employees of the Plaintiff. If the Plaintiff acted only a broker for the drivers, the Debtor argues, then it was the drivers who were harmed by non-payment. This argument is a red herring. The Debtor admits that Nomad hired the Plaintiff, not the Plaintiff's drivers. The Debtor admits that it was the Plaintiff that provided hauling services on the Project and that the Plaintiff sent invoices to Nomad that Nomad did not pay. Thus, Nomad had a contractual relationship with the Plaintiff (not the Plaintiff's drivers) and it was the Plaintiff that was harmed by breach of that contract. Plaintiff's relationship with its drivers, whatever it may be, does not alter these facts, or the Plaintiff's status as real party in interest.
B. Nondischargeability under § 523(a)(4)
The Plaintiff asserts a claim for nondischargeability under § 523(a)(4). In relevant part, that section 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). To satisfy its requirements, the Plaintiff 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 the Debtor breached the fiduciary duty by defalcation. Fowler Bros. v. Young (In re Young) , 91 F.3d 1367, 1371-72 (10th Cir. 1996).
The parties do not dispute that the first two elements are met in this case. As to the first element, the CPWA 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 public works construction project. Colo. Rev. Stat. § 38-26-109. This statutory trust satisfies the technical trust element of a fiduciary relationship necessary to establish a § 523(a)(4) claim. See Edwards v. Emberton (In re Emberton) , 501 B.R. 392, 399 (Bankr. D. Colo. 2013) ; Bemas Constr. v. Dorland (In re Dorland) , 374 B.R. 765, 781 (Bankr. D. Colo. 2007). As to the second element, the Debtor admits he owned and controlled Nomad, and made all of Nomad's financial decisions. As such, he is personally liable for any breach of the CPWA statutory duties. See Alexander Co. v. Packard , 754 P.2d 780, 782 (Colo. App. 1988).
The parties dispute the third element—defalcation. The definition of defalcation, both in terms of the required mental state (mens rea ) and required action (actus reus ), has been the subject of dispute for decades. See Bullock v. BankChampaign , 569 U.S. 267, 272, 133 S.Ct. 1754, 185 L.Ed.2d 922 (2013). The Supreme Court answered the mens rea question in the Bullock case, when it held that defalcation requires proof of an "intentional wrong." Id. at 273-74, 133 S.Ct. 1754. The Bullock court declined to address the required actus reus for defalcation and that element appears to vary depending on the particular fiduciary duty at issue. See id. at 273, 133 S.Ct. 1754 (assuming without deciding that the trustee's actions fell within the defalcation definition and addressing only the state of mind question). In the context of construction trust funds in Colorado, courts in this district have held that the actus reus for defalcation is a "failure to account" for construction trust funds. MacArthur Co. v. Cupit (In re Cupit) , 514 B.R. 42, 49 (Bankr. D. Colo. 2014).
In this case, the Debtor disputes both the actus reus and mens rea elements of defalcation. He argues that there was no defalcation because he had a bona fide dispute with the Plaintiff's invoices and because he had already spent a majority of the funds he received from Bassett by the time Plaintiff performed its work on the Project. Because the funds were gone, the Debtor argues he was not holding any funds in trust. As to mens rea , the Debtor contends that he did not act with knowing criminal intent when he failed to pay Plaintiff's invoices. Neither the law nor the evidence supports these arguments.
1. The Act of Defalcation - Failure to Account
Any analysis of the actus reus for defalcation starts with an examination of the particular fiduciary duty imposed on the Debtor. The CPWA requires that all funds disbursed to a contractor or subcontractor under a public works contract be "held in trust for the payment of any person that has furnished labor, materials, sustenance, or other supplies used or consumed by the contractor ...." Colo. Rev. Stat. § 38-26-109(1). A contractor or subcontractor who receives trust funds need not put them in a separate bank account, so long as the funds "are not disbursed in a manner that conflicts with [the statute]." Id. § 38-26-109(2). The contractor or subcontractor who receives trust funds, however, must "maintain separate records of account of each project or account." Id. § 38-26-109(3).
This Court has previously addressed the requirements to establish a contractor-fiduciary's defalcation under a nearly identical trust fund provision in the Colorado Construction Trust Fund Statute, which applies to non-public-works projects. ASCI Readi-Mix & Asphalt Specialties, Co. v. Gamboa (In re Gamboa) , 400 B.R. 784 (Bankr. D. Colo. 2008) (construing Colo. Rev. Stat. § 38-22-127 ). In Gamboa , the debtor was a concrete subcontractor who failed to pay its suppliers. This Court recognized that the Construction Trust Fund Statute, like the CPWA, caused funds passed from a general contractor/builder to a subcontractor to be held in trust for payment of the subcontractor's suppliers and laborers, and that the subcontractor had a duty to account for those funds. It applied a burden-shifting analysis to the defalcation claim under which the plaintiff (the unpaid supplier) had the burden of going forward with evidence demonstrating that it had unpaid invoices from projects on which the debtor (the subcontractor) had received disbursements from a builder. Once the plaintiff met this initial burden, the burden of production shifted to the debtor to show that all the builder disbursements he received on a particular property were used to pay his suppliers and laborers on that property. "Unless and until [the debtor's] suppliers and laborers were paid in full, [the debtor] could not use any of the builder funds on a project to pay its overhead, Debtor's compensation, vendors on other projects, or to put them to any other use." Id. at 790.
In this case, the parties stipulated that Bassett hired Nomad for the Project and paid Nomad $79,699 for its work, which Nomad deposited into its bank account. The parties also stipulated that Nomad hired the Plaintiff to provide hauling services on the Project, that Plaintiff provided those services and invoiced Nomad, and that Nomad failed to pay those invoices. This satisfied the Plaintiff's initial burden of production. The burden then shifted to the Debtor to show that Nomad used the $79,699 it received from Bassett to pay only its suppliers and laborers, until they were paid in full. The Debtor did not meet this burden. Instead, Nomad's bank statements from that time period show that, after receiving disbursements from Bassett, Nomad paid numerous other expenses, such as its own overhead (payroll, food, and gas).
Nevertheless, the Debtor argues that he did not violate his duty to account because Nomad had already spent most of the $79,699 it had received from Bassett by the time Plaintiff performed its hauling services. Bassett made a total of seven disbursements to Nomad over a ten-month period. Nomad received five of the disbursements prior to hiring Plaintiff. It only received the last two disbursements totaling $8,597 after the Plaintiff sent its invoices. Thus, the Debtor argues he only needed to account for $8,597, citing this Court's Gamboa decision. Debtor's Post-Trial Brief at 21.
The Debtor misconstrues Gamboa's holding. Indeed, the debtor in Gamboa raised an almost identical argument that this Court wholly rejected: "[n]or is it necessary to demonstrate that the particular supplier had already invoiced the contractor before receiving the disbursement from the builder. The statute does not demand that each builder disbursement be tied to then existing debts for supplies or labor." Gamboa , 400 B.R. at 791. Instead, this Court held that the Construction Trust Fund Statute treats all payments made on a project like a separate pot of funds. Funds can be pulled out of the pot at any time, but only to go toward suppliers and laborers who worked on that project. "The timing of the work does not matter." Id. The one restriction is that the funds in the pot can only be used to pay laborers and suppliers until they are paid in full. The Debtor admits he did not use any of the $79,699 from Bassett to pay the Plaintiff. Nor did he present evidence to show he had used all the $79,699 to pay other laborers and suppliers on the Project.
The Debtor next asserts he did not have to hold Bassett's disbursements in trust for payment of Plaintiff's invoices because he had a good faith dispute regarding those invoices. The CPWA provides an exception to the trust fund provision where a subcontractor has a "good faith belief" that a verified statement of claim asserted by a supplier or laborer is not valid or is subject to setoff. Colo. Rev. Stat. § 38-26-109(2)(a)-(b). At trial, the Debtor testified that he believed one of Plaintiff's drivers, Juan Fierros, was working in conjunction with one of Nomad's job site supervisors to pad his hours and thereby overcharge Nomad. The Court did not find this testimony to be credible. The Debtor made the same accusation in a July 24, 2018 email to Plaintiff's owner, Kathleen Faatz, after she requested payment of the invoices. Both in her email response at the time and at trial, Ms. Faatz testified that she had no knowledge of any padding and that such padding would be impossible because Plaintiff double checks every truck ticket to ensure the hours are correct and compares it to Plaintiff's internal dispatch books. The Plaintiff offered into evidence Mr. Fierros' "truck tickets" for the two days he worked on the Project and those tickets correspond to Plaintiff's daily dispatch records, showing the same time spent on each job. Both Mr. Fierros and Nomad's former supervisor credibly testified at trial that the work tickets were accurate and that the Debtor had never raised the issue with them before. Indeed, Nomad continued to hire Mr. Fierros to do work on other jobs after the Project ended.
The Debtor had the burden of proof on this defense. Consolidated Hardwoods, Inc. v. Mayhew (In re Mayhew) , 2014 WL 813064, at *5 (Bankr. D. Colo. Feb. 28, 2014), aff'd , 2015 WL 1528971 (D. Colo. Mar. 31, 2015). He presented no evidence, other than his own speculation, that any of the Plaintiff's invoices were inaccurate. During the parties' 2018 email exchange, the Debtor similarly offered no evidence and, after making the initial accusation, did not communicate further with the Plaintiff about the invoices. The Debtor presented no evidence that he communicated with Bassett about problems with Plaintiff's invoices. Even if there were problems with Mr. Fierros' tickets, which the Debtor has not shown, those tickets represent only $1,008 of the $12,142 that Plaintiff billed to Nomad. Ex. 3. The Debtor has presented no challenge to the other $11,134. Instead, the Debtor testified that the primary reason he did not pay the Plaintiff's invoices was that Nomad had not been paid on another, unrelated job and, despite the Debtor's best efforts to keep it afloat, Nomad simply ran out of money. Accordingly, the Court concludes that the Debtor failed to demonstrate he had a good faith dispute with the Plaintiff's invoices. The Plaintiff has therefore established that the Debtor committed the actus reus for defalcation.
2. Intent
The Supreme Court clarified the intent requirement for defalcation in Bullock , 569 U.S. 267, 273-74, 133 S.Ct. 1754 (2013), when it held that there must be proof of an "intentional wrong." An intentional wrong includes not only conduct that the fiduciary knows is improper, but also reckless conduct. Id. at 274, 133 S.Ct. 1754. Thus, liability can be imposed where the fiduciary " ‘consciously disregards’ (or is willfully blind to) ‘a substantial and unjustifiable risk’ that his conduct will turn out to violate a fiduciary duty." Id. (quoting Model Penal Code § 2.02(2)(c) ). The risk "must be of such a nature and degree that, considering the nature and purpose of the actor's conduct and the circumstances known to him, its disregard involves a gross deviation from the standard of conduct that a law-abiding person would observe in the actor's situation." Id. (quoting Model Penal Code § 2.02(2)(c) ).
This Court previously applied the Bullock standard in a case involving the Colorado Construction Trust Fund Statute in MacArthur Co. v. Cupit (In re Cupit) , 514 B.R. 42 (Bankr. D. Colo. 2014). In Cupit , the debtor owned a roofing company that failed to pay the invoices of one of its material suppliers. The debtor admitted that he failed to use all the revenues from a particular job to pay the suppliers for that job, as required by the Construction Trust Fund Statute. Instead, he used job revenues to pay expenses on unrelated bills in an attempt to pay his oldest bills first. The Court found that the debtor credibly testified that he was unaware of his fiduciary duties under the Construction Trust Fund Statute and that his industry experience and training did not support an inference of a conscious disregard of the statute. However, the evidence also showed that a different supplier had sued the debtor previously for violations of the Construction Trust Fund Statute. The debtor's involvement in that prior lawsuit gave him an awareness that there was a high probability he owed fiduciary duties to material suppliers. To the extent the debtor chose not to read the details of that prior complaint, such conduct amounted to taking a "deliberate action" to avoid learning of his duties under the Construction Trust Fund Statute. Cupit , 514 B.R. at 53. Based on this evidence, the Court concluded that the debtor was either willfully blind to or consciously disregarded a risk that his handling of trust funds would violate a fiduciary duty under the Construction Trust Fund Statute. It further concluded that the risk taken by the debtor was "substantial and unjustifiable" because his misuse of funds in no way protected the beneficiary of the trust (the material supplier), and because the debtor's conduct amounted to a gross deviation from the standard of conduct that a law-abiding contractor would follow. Thus, the debtor in Cupit committed a defalcation under the Bullock standard.
As in Cupit , the Debtor in this case testified that he was unaware of his fiduciary duties under the CPWA and denied acting with the requisite intent. This denial, by itself, is not enough to answer the intent question because defendants rarely admit to having the required intent, and a debtor's intent can be inferred from the circumstances. The circumstances in this case lead the Court to conclude that the Debtor acted with at least conscious disregard or willful blindness of his fiduciary duties.
The Debtor has significant experience in the construction business. He testified that he started working for his father's excavation company when he was a teenager. Prior to starting Nomad, he worked as an estimator and project manager for a construction company. He started Nomad in 2016 and, with Nomad, he completed forty-two projects. Despite all his experience, it is unclear when the Debtor first became aware of his construction trust fund duties. But one thing is clear: Nomad's contract with Bassett gave him that exposure. Bassett's contract contained a specific provision setting forth Nomad's fiduciary duties with respect to disbursed funds:
[Nomad] agrees that moneys received for the performance of this contract shall be held in trust and used first for labor and material entering into this work and said moneys shall not be diverted to satisfy other obligations of [Nomad], as provided by Colorado statute.
Ex. 15, at 2. This language, although it does not specifically refer to the CPWA, plainly sets forth Nomad's fiduciary duty to sub-subcontractors like the Plaintiff.
The Debtor admits he signed this contract on behalf of Nomad. The Debtor also admitted in a deposition that he had read the entire contract, including this provision, before signing it. Ex. 48, at 17:3-11 ("I read this entire document."). During trial, the Debtor attempted to undercut this admission by testifying that he was either not sure he read the contract, that he really meant that he read the contract at the deposition, or that he only skimmed the contract. The Court found this testimony to be self-serving, contradictory, and not credible. The Debtor admits it was his practice, as any reasonable businessperson would, to read contracts before he signed them. Indeed, six months before the Debtor signed the subcontract with Bassett, he signed a different subcontract with another general contractor on an unrelated project that contained a similar provision outlining Nomad's fiduciary duties to hold disbursed funds in trust. Ex. 52. Thus, Nomad's contract with Bassett was not the Debtor's first exposure to his trust funds duties.
The Court also finds it relevant that the Debtor submitted inaccurate forms to Bassett, hiding the fact that he had hired and not paid the Plaintiff. In December 2017, after Plaintiff had completed its work and sent Nomad invoices, the Debtor signed a form for Bassett that required him to list all of the sub-subcontractors Nomad hired for the Project, the amount it had paid to each sub-subcontractor, and any amounts still outstanding. The Debtor did not list Plaintiff or its outstanding invoices, and instead put "N/A" on the form and returned it to Bassett. Ex. 23. Bassett also required Nomad to sign a lien waiver form in order to receive its final disbursement of funds. The Debtor signed the lien waiver on January 11, 2018 and falsely certified to Bassett that Nomad had paid all its sub-subcontractors in full for their work on the Project. Ex. 24. The Debtor had no explanation for his misrepresentations on these forms other than he did not remember them. It seems more likely that the Debtor knew the importance of paying his sub-subcontractors and the liability that could flow from non-payment, and intentionally omitted any reference to the Plaintiff so that Nomad could get paid.
To the extent the Debtor professes ignorance of the details of the contract and the forms he signed for Bassett, the Court finds such conduct amounts to taking a "deliberate action" to avoid learning of his duties under the CPWA. As one court has put it, the Debtor was "playing ostrich—that is, that he suspected that he was violating the law but avoided confirming his suspicion in order to preserve a patina of innocence." Stoughton Lumber Co., Inc. v. Sveum , 787 F.3d 1174, 1177 (7th Cir. 2015) (affirming judgment that home-builder committed defalcation when he violated Wisconsin construction trust fund statute). In this Court's experience, contractors almost always profess ignorance of Colorado's construction trust fund statutes. There is logical appeal to such claims of ignorance because most laypersons do not read state statutes, let alone obscure statutes like the CPWA. But such claims of ignorance ring hollow in this case because the Debtor's fiduciary duty was set forth in simple, clear language in Nomad's contract with Bassett. That contract was not an obscure statute, and the Debtor admits to reading its provisions. The Debtor cannot bury his head in the sand and ignore the explicit terms of a contract he signed when it suits him to do so. The Court therefore concludes that the Debtor was willfully blind to, or consciously disregarded a risk that his handling of trust funds would violate a fiduciary duty under the CPWA.
The Court also finds that the risk was substantial and unjustifiable. The Debtor testified that Nomad was having financial problems at the time and that the company was running out of funds. Nomad's bank records show that after receiving the last disbursement from Bassett, Nomad paid numerous other unrelated bills, including transfers to the Debtor's personal bank account. On several occasions, Nomad's account was overdrawn. These financial practices made in highly likely that the trust funds received from Bassett would be misdirected and not paid to the Plaintiff. The risk was also unjustifiable. As noted in Cupit , a risk could be justified if there were some possible interest or benefit to the trust beneficiary (Plaintiff) that outweighed the risk of misuse of the trust funds. Cupit , 514 B.R. at 53. In this case, the Debtor's purpose in misdirecting funds was to keep Nomad's business running and pay other expenses, not to protect the Plaintiff.
The Court further concludes that the Debtor's conscious disregard involves a "gross deviation from the standard of conduct that a law-abiding person would observe in the actor's situation." Bullock v. BankChampaign , 569 U.S. 267, 274, 133 S.Ct. 1754, 185 L.Ed.2d 922 (2013). The Debtor signed a contract that made him aware of his duties with regard to disbursed funds. He was well aware of Nomad's precarious financial situation and he needed Bassett's disbursements to pay other expenses. The Debtor falsely certified to Bassett that Nomad had no unpaid sub-subcontractors and then he knowingly used funds he received from Bassett to pay other expenses. This amounts to a gross deviation from the standard of conduct that a law-abiding contractor would follow. Cupit , 514 B.R. at 54. The Plaintiff has therefore established defalcation under the Bullock standard as to the $12,142 in unpaid invoices.
C. Treble Damages
1. Entitlement
The Plaintiff also seeks an award of treble damages as part of its nondischargeable debt. Treble damages are indirectly permitted under the CPWA, which provides that "[a]ny person who violates the provisions of subsections (1) and (2) of this section commits theft, as defined in section 18-4-401, C.R.S." Colo. Rev. Stat. § 38-26-109(3). The Colorado Supreme Court has held that evidence of a violation of the Construction Trust Fund Statute by itself does not lead to criminal liability under Colo. Rev. Stat. § 18-4-401. Instead, a plaintiff must prove all the elements of the theft statute, including the requisite element of intent. People v. Mendro , 731 P.2d 704, 706-07 (Colo.1987). If criminal theft is established, Colorado law provides that the owner of stolen property may recover "two hundred dollars or three times the amount of the actual damages sustained by him, whichever is greater." Colo. Rev. Stat. § 18-4-405. If awarded, treble damages may be included in a nondischargeable debt under § 523(a). Cohen v. de la Cruz , 523 U.S. 213, 218-19, 118 S.Ct. 1212, 140 L.Ed.2d 341 (1998).
Since the CPWA is identical to the Construction Trust Fund Statute, these same requirements apply here.
The Debtor does not dispute these basic principles but denies that the Plaintiff established the required elements for civil theft. Those elements are that the Debtor "knowingly obtain[ed], retain[ed], or exercise[d] control over anything of value of another without authorization" and that he had one of the following five alternative culpable mental states:
(a) Intends to deprive the other person permanently of the use or benefit of the thing of value;
(b) Knowingly uses, conceals, or abandons the thing of value in such manner as to deprive the other person permanently of its use or benefit;
(c) Uses, conceals, or abandons the thing of value intending that such use, concealment, or abandonment will deprive the other person permanently of its use or benefit;
(d) Demands any consideration to which he or she is not legally entitled as a condition of restoring the thing of value to the other person; or
(e) Knowingly retains the thing of value more than seventy-two hours after the agreed-upon time of return in any lease or hire agreement.
Colo. Rev. Stat. § 18-4-401(1)(a)-(e).
The Plaintiff argues that it has established the necessary intent under subsection (b) because the Debtor knowingly used trust funds in a manner that deprived the Plaintiff of their use or benefit. The Debtor argues this is not the case because he claims he did not know about the trust fund provision in the CPWA.
The Debtor is confusing the intent requirement for defalcation (a matter of federal law) with the intent requirement for civil theft (a matter of state law). See Grogan v. Garner , 498 U.S. 279, 283, 284 n. 9, 111 S.Ct. 654, 112 L.Ed.2d 755 (1991) ; Cohen v. de la Cruz , 523 U.S. 213, 223, 118 S.Ct. 1212, 140 L.Ed.2d 341 (1998) (applying state law to determine total amount of nondischargeable claim, including punitive damages). Colorado courts have interpreted the phrase "knowing use" in Colo. Rev. Stat. § 18-4-401(1)(b) broadly to cover any situation in which "the offender knowingly obtains control over the property of another without authorization and, even though not intending to deprive the other person permanently of the use or benefit of the property, nonetheless knowingly uses the property in such manner as to deprive the other person permanently of the use or benefit of the property." People v. Anderson , 773 P.2d 542, 545 (Colo.1989). A plaintiff need not prove that the defendant was aware of his or her duties under a construction trust fund statute, People v. Mendro , 731 P.2d 704, 707 (Colo.1987), or that the defendant had "a conscious objective to deprive another person of the use or benefit of the construction trust funds," Anderson , 773 P.2d at 545. Instead, the question is whether the defendant's actions made it practically certain that the plaintiff would be deprived of the use of the trust funds , an identifiable res. Franklin Drilling & Blasting Inc. v. Lawrence Constr. Co. , 463 P.3d 883, 889 (Colo. App. 2018) (citing In re Gamboa , 400 B.R. 784, 794-95 (Bankr. D. Colo. 2008) ). Evidence that the defendant exhausted the trust res prior to payment of a subcontractor is "highly relevant" to whether the defendant had the required intent for civil theft. Id.
In this case, the evidence established that the Debtor deposited all the funds he received from Bassett into Nomad's bank account and then used those funds for various expenses, including payroll and expenses incurred on other projects. The Debtor also admits that, after receiving the last disbursement from Bassett, Nomad's bank account had a zero or negative balance on several occasions. The Debtor admits that Nomad never paid the Plaintiff's invoices. This is sufficient evidence to establish that the Debtor "knowingly used" trust funds in a manner that was certain to deprive the Plaintiff of those trust funds. Accordingly, the Plaintiff is entitled to treble damages.
2. Calculation
The civil theft statute provides that a victim of theft may recover "two hundred dollars or three times the amount of the actual damages sustained by him, whichever is greater." Colo. Rev. Stat. § 18-4-405. In this case, the Plaintiff's actual damages equal the amount of invoices the Debtor failed to pay with trust funds--$12,142. Three times that amount is $36,426. Since this amount exceeds $200, the Plaintiff is entitled to recover $36,426. There is little to dispute in this basic arithmetic. The Plaintiff, however, has not limited its damage request to just $36,426. Instead, the Plaintiff asserted in its closing argument that it is entitled to recover $12,142 plus treble damages of $36,426, for a total $48,568. According to the Plaintiff, its claim under the CPWA is totally distinct its claim under the civil theft statute because each relies on different facts. As such, the Plaintiff believes it should be awarded separate damages under each statute—i.e. $12,142 in actual damages for violation of the CPWA and $12,142 in actual damages for civil theft, trebled to $36,426. In effect, this would allow Plaintiff to recover quadruple damages.
The Plaintiff does not cite to, nor could this Court locate, any cases that construe the CPWA/Construction Trust Fund Statute and the civil theft statute in this manner. Rather, most decisions, without addressing the issue directly, calculate damages so that the prevailing party is permitted to recover only one award of actual damages under both statutes, which is then trebled. For example, in Syfrett v. Pullen , 209 P.3d 1167 (Colo. App. 2009), a plaintiff-homeowner sued the owner of the construction company she hired to remodel her home for violation of the Construction Trust Fund Statute and for civil theft. She alleged the defendant failed to use trust funds to pay the subcontractors he had hired for the job. The trial court found in favor of the homeowner and concluded that the defendant had left unpaid claims of subcontractors totaling $17,863.80. The trial court trebled this amount and entered one judgment in favor of the homeowner on both claims in the amount of $53,591.40 (or 3 x $17,863.80). The Colorado Court of Appeal affirmed this calculation. Id. at 1172.
The Court of Appeals modified the trial court's judgment to reflect that the homeowner held these damages in a constructive trust for the benefit of the unpaid subcontractors, laborers, and material suppliers who had claims to the funds.
In prior cases, this Court has also calculated actual damages under the Construction Trust Fund and the civil theft statute in this non-additive fashion. See MacArthur Co. v. Cupit (In re Cupit) , 514 B.R. 42, 60 (Bankr. D. Colo. 2014) (awarding three times actual damages in a § 523(a)(4) Construction Trust Fund and civil theft case). Other federal judges in this district have done the same. See Parker Excavating, Inc. v. Parker , 2010 WL 1258034, at *3 (D. Colo. March 24, 2010) ; Adams v. Hernandez (In re Hernandez) , 2014 WL 2609795, at *9 (Bankr. D. Colo. June 11, 2014) ; Edwards v. Emberton (In re Emberton) , 501 B.R. 392, 403 (Bankr. D. Colo. 2013) ; Lykins v. Thomas (In re Thomas) , 2013 WL 6840527, at *22 (Bankr. D. Colo. Dec. 27, 2013).
The Plaintiff also initially adopted a non-additive calculation. In its previously filed Motion for Summary Judgment, the Plaintiff sought summary judgment in the amount of $37,200 ($12,400 x 3), plus attorney's fees, costs, and prejudgment interest. Plaintiff's Motion for Summary Judgment and Memorandum in Support Thereof , at 18. Plaintiff changed its position at trial, however, and now cites to American Family Mutual Insurance Co. v. Barriga , 418 P.3d 1181 (Colo. 2018) in support of its argument that it should be awarded actual damages under the CPWA, in addition to treble damages the civil theft statute. In Barriga , the Colorado Supreme Court analyzed Colo. Rev. Stat. § 10-3-1116, which defines a statutory claim for unreasonable delay or denial of insurance benefits. It provides that a claimant "whose claim for payment of [insurance] benefits has been unreasonably delayed or denied may bring an action in a district court to recover reasonable attorney fees and court costs and two times the covered benefit." Colo. Rev. Stat. § 10-3-1116(1). One of the questions raised in the Barriga case was whether a plaintiff whose insurance benefits had been denied by an insurance company could bring both an action for breach of contract to recover the unpaid benefit and a claim for double damages under § 10-3-1116(1). If successful on both claims, that plaintiff would, in effect, recover triple damages—the denied benefit plus two times the covered benefit. The Barriga court held that a plaintiff could indeed bring both claims. It noted that nothing in the wording of § 10-3-1116 precluded a breach of contract claim or required that a double damages award be reduced by amounts recovered under a breach of contract claim. Instead, the court focused on language in the statute that states that "[t]he action authorized in [ § 10-3-1116(1) ] is in addition to, and does not limit or affect, other actions available by statute or common law, now or in the future." Colo. Rev. Stat. § 10-3-1116(4). The court concluded that allowing recovery under both claims did not amount to a double recovery because "a claim for breach of contract and a claim for unreasonable delay or denial of insurance benefits rely on two different sets of facts." Id. at 1185-86. Because the acts underlying the two claims were factually separable, the court concluded that the two claims did not return an award for the same wrong. Id. at 1186.
The Plaintiff also cites the case of Bermel v. BlueRadios, Inc ., 440 P.3d 1150 (Colo. 2019), in which the court held that the economic loss rule does not bar a claimant from bringing a civil theft claim when the theft also constitutes a breach of contract. This Court finds Bermel inapplicable to the facts of this proceeding. The Plaintiff has not asserted a breach of contract claim against the Debtor and, as such, the economic loss rule does not apply. See Rhino Fund LLLP v. Hutchins , 215 P.3d 1186, 1194-95 (Colo. App. 2009) (finding economic loss rule inapplicable where defendant owed no contractual duty to the plaintiff). In addition, the Bermel court did not address the appropriate calculation of treble damages under the civil theft statute.
In reaching this conclusion, the Barriga court distinguished its earlier opinion in the case of Lexton-Ancira Real Estate Fund, 1972 v. Heller , 826 P.2d 819 (Colo. 1992). In the Heller case, the plaintiff brought a common law claim for misappropriation and a statutory claim for deceptive trade practices under the Colorado Consumer Protection Act ("CCPA"). The jury found in favor of plaintiff on both claims and awarded compensatory and punitive damages for misappropriation and compensatory and treble damages under the CCPA. The trial court found these awards duplicative and reduced the amount of damages awarded such that the plaintiff recovered only one compensatory award that the court then trebled pursuant to the CCPA. The Colorado Supreme Court agreed with the reduction, noting that "a plaintiff may not receive a double recovery for the same wrong." Id. at 823. It concluded that the acts constituting the CCPA violation were not factually separable from the acts complained of under the misappropriation claim. Because the alleged wrongdoing that formed that basis of both claims was identical, the court held that the two compensatory damage awards were duplicative.
Twenty-five years after Heller , the Colorado Supreme Court decided Barriga . In distinguishing Heller , the court emphasized that the plaintiff's claims in Barriga were more distinct than those at issue in Heller because they had different elements. A claim for breach of contract claim, the court reasoned, requires proof of the existence of an insurance contract and the insurer's breach of that contract. In contrast, a claim under § 10-3-1116 requires proof that an insurer denied payment of benefits without a reasonable basis. Thus, the Barriga court concluded that the two claims "do not return an award for the same wrong," as they did in Heller . Id. at 1186.
Despite the Barriga court's attempt to distinguish Heller , this Court sees more similarities than differences between the two cases. The Barriga court focused on the explicit statement in Colo. Rev. Stat. § 10-3-1116(4) that its remedies were not meant to limit common law causes of action. However, a similar statutory provision also applied in the Heller case. There, the court noted that the CCPA contains a provision that the "deceptive trade practices listed in this section are in addition to and do not limit the types of unfair trade practices actionable at common law or under other statutes of this state," but held that this language did not allow the plaintiff to recover on two separate theories based on the same facts. Id. at 824-25 (citing Colo. Rev. Stat. § 6-1-105(3) ). The Barriga court also emphasized that the plaintiff's two claims required proof of different elements, but a close review of Heller reveals that the plaintiff's claims in that case also had different elements. A claim for misappropriation requires proof that the defendant wrongfully profited from another's expenditure of labor, skill, or money, or capitalized wrongfully on commercial values earned over a period of time. Heller v. Lexton-Ancira Real Estate Fund, 1972 , 809 P.2d 1016, 1021 (Colo. App. 1990), rev'd , 826 P.2d 819 (Colo. 1992). A claim for deceptive trade practices under the CCPA, on the other hand, requires proof that the defendant knowingly passed off goods or services as those of another or knowingly made a false representation as to the source of goods or services. Id. at 1023. The Heller court looked past these differing elements and nevertheless concluded that the claims focused on the same wrongdoing by the defendant.
Thus, between these two cases, it is difficult to discern a clear test that will determine when two state law claims provide duplicative relief. Perhaps it is more useful to frame the analysis as a multi-factor test where no one factor is determinative. The relevant factors include, but are not limited to, the elements of the claims asserted, the wrongful conduct underlying those claims and the statutory framework (if any) of the claims.
Another factor courts sometimes consider is the manner in which damages are calculated under the potentially duplicative claims. For example, in LaBarre v. Shepard , 84 F.3d 496 (1st Cir. 1996), the plaintiffs sued their mortgage lender for improper foreclosure, breach of contract, misrepresentation, fraud, and deceptive trade practices under the New Hampshire Consumer Protection Act. The jury found for the plaintiff on all five counts and awarded $82,500 in actual damages. The trial court entered judgment for that amount on the common law claims and then added an award of treble damages in the amount of $247,500 under the Consumer Protection Act. This resulted in a total award of a total of $330,000 ($82,500 x 4). The First Circuit reversed, concluding that this award was duplicative because it allowed the plaintiffs "to enjoy quadruple recovery." Id. at 501. In so doing, the court considered several factors. All five of the plaintiffs' claims relied on the same underlying facts—the lender reneging on a promise to accept a deed in lieu of foreclosure. In addition, the actual damage calculation for all the claims was based on the same facts, i.e. the difference between the fair value of the home and the foreclosure bid price. There were no "factually separate items of damage." Id. at 502. The court further reviewed the consumer protection act and found nothing to support the plaintiffs' contention that treble damages were meant to be an independent recovery. The Court therefore reduced the plaintiffs' damages so that they received only treble damages in the amount of $247,500 ($82,500 x 3).
In this case, consideration of these factors demonstrates that a quadruple award would overcompensate the Plaintiff. Both the Plaintiff's CPWA trust fund claim and civil theft claim rely on the same factual allegations, namely the Debtor's failure to use trust funds received from Bassett to pay the Plaintiff's invoices. The Plaintiff's calculation of actual damages for both claims also relies on the same facts—the amount of the unpaid invoices. The Plaintiff has only one set of unpaid invoices totaling $12,042, not two.
The Court is cognizant of the fact that these two statutory claims have different elements, a factor cited in Barriga . In particular, a claim of civil theft has an intent requirement, whereas the CPWA does not. However, the Court finds this factor less important in this case given the statutory framework. Claims for construction trust fund violations and civil theft are usually brought in tandem because of specific language contained in the CPWA. That language provides that anyone who violates the trust fund provision also commits civil theft. Colo. Rev. Stat. § 38-26-109(4) ("Any person who violates the [trust fund provisions] commits theft within the meaning of section 18-4-401, C.R.S."). In other words, the statute defines one type of conduct (misuse of construction trust funds) as violative of two statutes. As discussed above, liability for civil theft is not automatic upon establishment of a construction trust violation. Colorado courts still require proof of all the elements of civil theft, including intent. The heightened intent requirement reflects the punitive function of the civil theft statute, namely to deprive thieves of "the immediate fruits of their criminal activities and by making such persons pay damages that by definition are three times greater than the amount necessary to compensate their victims." In re Marriage of Allen , 724 P.2d 651, 656 (Colo. 1986). However, the intent element required for civil theft does not change the fact that there is one type of conduct underlying both claims—misuse of construction trust funds. Actual damages under both claims compensate that wrong by restoring the misspent trust funds to the claimant. The claimant may recover those trust funds only once. If the claimant establishes the elements of civil theft, the amount of those actual damages may be trebled, thereby serving the theft statute's punitive function.
In this case, this means that the Plaintiff may recover its actual damages and those actual damages may be trebled. Accordingly, judgment shall enter in the amount of $36,426 ($12,042 x3), plus interest, attorney fees, and costs.
D. Prejudgment Interest
The Plaintiff also seeks an award of prejudgment interest. Under federal law, prejudgment interest may generally be awarded if "1) the award of prejudgment interest would serve to compensate the injured party, and 2) the award of prejudgment interest is otherwise equitable." Diamond v. Bakay (In re Bakay) , 454 Fed. App'x 652, 654 (10th Cir.2011) (unpublished) (citing In re Inv. Bankers, Inc ., 4 F.3d 1556, 1566 (10th Cir. 1993) ). "Thus under federal law, prejudgment interest is ordinarily awarded, absent some justification for withholding it." Id. (citing U.S. Indus., Inc. v. Touche Ross & Co. , 854 F.2d 1223, 1256 (10th Cir.1988) ). Such an award serves to compensate the trust fund beneficiary for the fiduciary's misuse of trust funds. See Lapin v. Glatstian (In re Glatstain) , 215 B.R. 495, 497 (Bankr.D.N.J.1997) (awarding prejudgment interest in § 523(a)(4) breach of fiduciary duty case). Prejudgment interest may be included in a nondischargeable debt. See Cohen v. de la Cruz , 523 U.S. 213, 218-19, 118 S.Ct. 1212, 140 L.Ed.2d 341 (1998).
The Debtor's only argument against prejudgment interest is that the Plaintiff is not entitled to interest at a rate of twelve percent as provided in Colorado's mechanic's lien statute. The Plaintiff, however, is not seeking interest at that rate or pursuant to that statute. Instead, the Plaintiff has sought interest at the federal rate of interest found at 28 U.S.C. § 1961(a). The Court concludes this is the appropriate rate of interest.
The Plaintiff calculates prejudgment interest from January 18, 2018 (the date of Plaintiff's last invoice to Nomad) through the date of this Order. This would overcompensate the Plaintiff. Prejudgment interest recognizes the time value of money by compensating the injured party "for being deprived of the monetary value of his loss from the time of the loss to the payment of judgment." U.S. Indus., Inc. v. Touche Ross & Co. , 854 F.2d 1223, 1256 (10th Cir.1988). In this case, however, Plaintiff received payment of its invoices from Bassett prior to entry of this Order. When the Plaintiff received $12,142 from Bassett, it was no longer deprived of the use of those funds. Thus, the Court concludes that interest should only be calculated from January 18, 2018 (the last invoice date) through August 31, 2018 (the date of payment from Bassett), which equates to 225 days. The applicable federal interest rate of 2.44%. Compounded annually, this results in an award of $182.63 in prejudgment interest. See Calculation Tool, http://postjudgmentinterest.com.
Under 28 U.S.C. § 1961(a), interest is calculated at a rate equal to the weekly average 1-year constant maturity Treasury yield, as published by the Board of Governors of the Federal Reserve System, for the calendar week preceding the date of the judgment. Historical interest rates for 2018 can be viewed at http://www.txnd.uscourts.gov/post-judgment-rates?Year%5Bvalue%5D%5Byear%5D=2018.
E. Attorney Fees and Costs
Finally, the Plaintiff requests an award of its attorney fees and costs. Normally, the "American Rule" applies in nondischargeability actions. This means that a prevailing party is not ordinarily entitled to collect attorney fees from his or her opponent. See Busch v. Hancock (In re Busch) , 369 B.R. 614, 625 (10th Cir. BAP 2007). There are exceptions to this rule. Fees may be shifted to the other side by either statute or a contract between the parties. Id. at 625-26. In this case, Debtor concedes that victims of civil theft of construction trust funds under the CPWA are entitled to recover attorney fees and costs under Colo. Rev. Stat. § 18-4-405. See Response to Plaintiff's Motion for Attorney's Fees , ¶ 15. Under Colorado law, an award of attorney fees to a prevailing plaintiff on a civil theft claim is mandatory. Steward Software Co. v. Kopcho , 275 P.3d 702, 712 (Colo. App. 2010), rev'd on other grounds , 266 P.3d 1085 (Colo. 2011). Thus, this Court has no discretion whether to award fees and is limited to determining the reasonableness of the requested fees. Arnold v. Arnold (In re Arnold) , 2016 WL 1022350, at *4 (10th Cir. BAP Mar. 15, 2016). Pursuant to Cohen v. de la Cruz , 523 U.S. 213, 118 S.Ct. 1212, 140 L.Ed.2d 341 (1998), once awarded, the attorney fees and costs may be included in a nondischargeable judgment. See Roshan Hospitality, LLC v. Patel (In re Patel) , 536 B.R. 1 (Bankr. D. N.M. 2015) ("[I]f a party has an independent right to recover attorney's fees or costs under applicable law in connection with a particular nondischargeable debt, the party is entitled to an award of such attorney's fees or costs as part of the non-dischargeable judgment under § 523(a).").
Plaintiff's attorney, Mr. Perko, submitted an affidavit for his fees in the amount of $45,810 and a bill of costs totaling $1,098. Mr. Perko states that he conducted a detailed review of his billing statements to make sure that he had included only those fees related to the § 523(a)(4) and civil theft claims against the Debtor. Mr. Perko has eliminated any work relating to Plaintiff's earlier state court case or to the § 727 claim that the Plaintiff dismissed just prior to trial. Nevertheless, the Debtor contends that the requested award includes work performed on the state court matter or that is otherwise unrelated to the Debtor's bankruptcy case. The Debtor also complains that Mr. Perko has "lumped" his time entries, provided insufficient detail, has included repetitive or unnecessary services, and spent an excessive number of hours on this case.
Colorado law determines whether the attorney fees requested are reasonable within the meaning of Colo. Rev. Stat. § 18-4-405. Arnold v. Arnold (In re Arnold) , 2016 WL 1022350, at *4 (10th Cir. BAP Mar. 15, 2016). Colorado courts look to the criteria set forth in the Colorado Rules of Professional Conduct. Those criteria include the time and labor required, the difficulty of the questions involved, the skill required to perform the legal services, the fees customarily charged in the locality, the amount involved, and the results obtained. Id. at *6.
Colorado courts also apply a lodestar analysis to fees, which calculates reasonable fees by multiplying the number of hours reasonably expended on a case by a reasonable hourly rate. Id. (citing Payan v. Nash Finch Co. , 310 P.3d 212, 218 (Colo. App. 2012) ). In calculating the lodestar amount, it is appropriate to make percentage reductions to the total hours billed if a court finds those hours to be excessive, redundant, unnecessary, lacking in complexity, or if the attorney has engaged in block billing in a manner that precludes effective review. Payan v. Nash Finch Co. , 310 P.3d 212, 218-21 (Colo. App. 2012). In making such adjustments, courts "need not, and indeed should not, become green-eyeshade accountants. The essential goal in shifting fees ... is to do rough justice, not to achieve auditing perfection. So trial courts may take into account their overall sense of a suit, and may use estimates in calculating and allocating an attorney's time." Id. at 219 (citing Fox v. Vice , 563 U.S. 826, 838, 131 S.Ct. 2205, 180 L.Ed.2d 45 (2011) ).
Here, Mr. Perko has completed a careful review of his fees and eliminated those fees that are unrelated to the Plaintiff's § 523(a)(4) /civil theft claim. While the Debtor asserts that Mr. Perko has included fees for work that is unrelated to the Debtor's bankruptcy case, the Debtor provides no specific examples and the Court has found none. Similarly, the Debtor complains about repetitive or unnecessary tasks by Mr. Perko and his assistant, but provides no specific examples.
The Debtor also points to various days on which Mr. Perko allegedly "lumped" his time entries. Many of the days identified by the Debtor were not actually included in Mr. Perko's requested fees, but nonetheless the Court agrees that many of Mr. Perko's billing entries lump tasks together without specifying the time spent on each particular task. This lumping or block billing makes it impossible to determine whether the amount of time spent on any specific task was reasonable or justifies a reduction. See Payan , 310 P.3d at 218-19 (noting that "across-the-board percentage cuts are routinely employed by courts to remedy such block billing."). Furthermore, the total amounts billed by Mr. Perko and his assistant are somewhat excessive given the nature of this dispute. Mr. Perko and his assistant seek reimbursement of 226.8 combined hours, resulting in fees of $45,810. Of this total, Mr. Perko and his assistant spent approximately 108.5 hours or $19,130 in the month of July 2020 preparing for a one-day trial. Although the dispute was contentious, the Plaintiff's § 523(a)(4) and civil theft claims were not particularly novel or complex. Many of the hours consist of Mr. Perko's assistant performing non-compensable secretarial work, such as printing pleadings and preparing exhibit notebooks.
The Court concludes that a 20% reduction of the billed hours is warranted. Reducing both Mr. Perko's 154.2 hours and his assistant's 72.6 hours by 20% results in 123.4 hours and 58.1 hours, respectively. The Court finds Mr. Perko's rate of $250 per hour and his assistant's rate of $100 per hour to be reasonable. Using the same rates but reduced hours results in an award of $30,850 (123.4 x $250) for Mr. Perko's hours and $5,810 (58.1 x $100) for his assistant, for a total fee award of $36,660. The Debtor does not object to the Plaintiff's requested costs of $1,098. Thus, the total award for fees and costs is $37,758.
III. CONCLUSION
For these reasons, the Court concludes that the Plaintiff has demonstrated all the necessary elements of its § 523(a)(4) and civil theft claims. Accordingly, a nondischargeable judgment shall enter in the amount of $74,366.63, calculated as follows:
| Trebled actual damages | $36,426.00 |
| Prejudgment Interest | $182.63 |
| Attorney Fees and Costs | $37,758.00 |
| Total | $74,366.63 |
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