Dancor Construction, Inc. v. Haskell (In re Haskell)

Citation: 475 B.R. 911Docket: Bankruptcy No. 11-80231; Adversary No. 11-8040

Court: United States Bankruptcy Court, C.D. Illinois; July 26, 2012; Us Bankruptcy; United States Bankruptcy Court

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Dancor Construction, Inc. initiated a legal action against Jason R. Haskell, seeking a ruling that certain debts from three construction contracts are nondischargeable under sections 523(a)(2)(A) and (a)(6) of the Bankruptcy Code. Haskell Construction, a closely-held Illinois corporation incorporated on March 19, 2009, and operated by Jason Haskell as Vice President and Secretary, faced financial difficulties and ceased operations on October 22, 2010. The company had two contracts with Dancor for carpentry work on a Beauty Brands Salon and Spa and two AutoZone stores, totaling $140,000. Each contract mandated that Haskell Construction provide all necessary materials, supplies, and equipment. The contracts included provisions for lien waivers and specified that payments would only be made after Dancor received payments from the project owner, allowing deductions for any debts owed by Haskell Construction to Dancor or other parties. Prior to final payment, Haskell Construction was required to prove payment of all taxes and provide lien waivers from all subcontractors and suppliers. Dancor did not have prior employment with Haskell Construction before these projects, and the initial relationship followed the agreed payment terms and standard construction industry practices.

Haskell Construction received initial progress payments and submitted lien waivers to DANCOR, with suppliers providing waivers on subsequent payments. After completing the metal framing, Haskell Construction informed DANCOR of its difficulty in obtaining materials and requested joint checks for itself and its suppliers. Haskell employed union labor under collective bargaining agreements with the Carpenters Union and Painters Union, which required monthly reports and timely fringe benefit contributions. Despite paying employee wages, Haskell occasionally failed to pay union dues and fringe benefits on time.

The AutoZone projects were completed in early 2010, with Haskell fully paid except for retainage on AutoZone #4429. The Beauty Brands project finished later that year after delays due to a workers' strike. On October 25, 2010, DANCOR's president, Daniel J. Policicchio, informed Haskell that over $60,000 was owed under three contracts and provided details of amounts due to Haskell and its suppliers. DANCOR indicated that some suppliers threatened liens and planned to pay them directly. Specifically, Haskell was owed $2,708.49 on AutoZone #4435, while a supplier was owed $6,831; on AutoZone #4429, Haskell was owed $21,200 with suppliers due $14,801.28; and for the Beauty Brands contract, $46,031.59 was due to Haskell with a supplier owed $9,573.55.

To receive remaining payments, DANCOR required Haskell to submit a sworn statement confirming full payment to all suppliers. Haskell complied, signing the letter and providing a list of suppliers, but the correspondence did not mention amounts owed to individual union members or the unions. Haskell's representative, Jason Haskell, consented to the fund distribution and confirmed supplier payments.

On November 22, 2010, Haskell Construction (DEBTOR) and DANCOR, represented by Policicchio, entered into a Mutual Release Agreement resolving all claims between them. DANCOR agreed to pay Haskell Construction $27,500, contingent upon Haskell providing a final lien waiver and confirming that all suppliers and employees had been compensated, which DANCOR relied upon. Haskell Construction agreed to indemnify DANCOR for any claims related to the contract. Of the total payment, $5,000 was allocated for labor on the Beauty Brands project, with DANCOR to reimburse Haskell based on documented hours.

During a meeting on December 1, 2010, the DEBTOR executed a partial lien waiver for $22,500 and a final lien waiver for $2,677.83 related to the Beauty Brands project, both of which affirmed that all labor and materials had been fully paid. A verification call was made to the Laborer’s Union regarding wage payments. Subsequently, various mechanics lien claims were filed by the Painters Union and Carpenters Union against AutoZone and Beauty Brands for unpaid contributions and wages. DANCOR paid these liens in full, securing releases.

On February 1, 2011, Haskell Construction filed for Chapter 7 bankruptcy, listing significant debts to labor unions and a total of $334,950 in unsecured creditors. Concurrently, the DEBTOR also filed an individual Chapter 7 petition. DANCOR initiated an adversary proceeding against the DEBTOR, claiming that the amounts paid to resolve the mechanics liens were nondischargeable under sections 523(a)(2)(A) and (a)(6). The trial for this matter occurred on February 28, 2012.

Robert Albertson, senior project manager at DANCOR, provided testimony regarding the oversight of construction projects, emphasizing that Haskell Construction was required to submit lien waivers throughout and upon completion of projects. These waivers confirmed payment to Haskell as a subcontractor and included details of payments to their suppliers, vendors, employees, and laborers. Albertson acknowledged Haskell's use of union labor and stated that DANCOR mandated the submission of lien waivers and a contractor’s sworn affidavit detailing payments to all involved parties after implementing a joint-check policy.

Albertson detailed specific payments made to Haskell for various projects, totaling $29,150. He noted that DANCOR discovered that not all suppliers had been compensated after paying Haskell the full contract amount for AutoZone #4435. The debtor testified that Haskell was contractually obligated to submit monthly invoices for ongoing projects and described meetings with the Carpenter’s Union to address outstanding fringe benefits. Haskell fell behind on payments, accumulating a debt of approximately $50,000 by September 2010, and despite issuing a check for the first installment of a repayment plan, it did not clear due to insufficient funds.

Haskell's financial struggles continued, leading to a garnishment of their bank account by the Carpenter’s Union and unfulfilled wage payments to employees due to returned checks. Haskell Construction ceased operations on October 22, 2010, after being effectively shut down by the Union. The debtor noted that despite ongoing financial issues, Haskell continued to accept new projects. He expressed disagreement with the amounts stated in the Mutual Release Agreement but accepted DANCOR's proposal for immediate funds needed for other projects, believing Haskell was owed approximately $12,000. At the time of the agreement, he expected Haskell to remain operational with upcoming projects lined up. He did not disclose the workout agreement with the Carpenter’s Union to DANCOR, believing it unnecessary, and was unaware that fringe benefits for workers on DANCOR projects were unpaid when he signed the Mutual Release Agreement. The debtor did not contest the amounts related to the claimed mechanics liens.

Testimony revealed the individual was unaware that unions could file liens for unpaid fringe benefits, despite acknowledging that Haskell Construction would not receive payment without signed lien waivers. The Bankruptcy Code mandates a narrow construction of exceptions to discharge, favoring the debtor. Creditors bear the burden to prove exceptions by a preponderance of evidence. Section 523(a)(2) outlines that an individual debtor’s discharge does not apply to debts obtained through false pretenses, false representations, or fraud. A 'false representation' involves explicit misrepresentations, while 'false pretenses' pertains to implicit misrepresentations aimed at creating a false impression. To establish an exception to discharge for false representation, a creditor must demonstrate that the debtor made a false representation or omission with knowledge of its falsity or with reckless disregard for the truth, with the intent to deceive, and that the creditor justifiably relied on it. False representations regarding subcontractor payments are actionable under this section. DANCOR's claim arises from misrepresentations in the Mutual Release and lien waivers signed by the debtor, asserting that all suppliers and employees were paid. The debtor does not contest the validity of the mechanics liens filed by the Unions. The focus is on a representation in the Mutual Release concerning three projects, which contradicts the lien waivers limited to the Beauty Brands project. The statement made on November 22, 2010, claiming all payments were made, is deemed false if it includes benefit fund contributions. DANCOR cites a precedent indicating that unpaid benefit contributions are part of labor compensation, arguing that a union employee is not fully 'paid' until such contributions are made. This interpretation of the Mutual Release's language is considered reasonable and unchallenged by the debtor.

The DEBTOR contests the claim of knowingly false misrepresentation regarding unpaid fringe benefits owed to union workers. He testified he was unaware that a union could file a mechanics lien for these benefits. However, the key issue is whether he knew that the benefits and wages for union workers on DANCOR projects had not been paid. The Court found that the DEBTOR’s statement in the Mutual Release Agreement, asserting all employees and independent laborers had been paid, was made with at least reckless disregard for the truth, despite his claims of uncertainty regarding payments to unions. Evidence showed he was responsible for Haskell Construction's financial obligations and was aware of significant unpaid amounts to union trust funds, including having previously reached a repayment agreement with the Carpenter’s Union. While he may not have known the exact unpaid amounts, he acknowledged that the benefit contributions for the DANCOR projects were unpaid.

The DEBTOR denied intent to deceive, but the Court noted that intent can be inferred from circumstantial evidence. It concluded that the DEBTOR had the intent to deceive based on his overall knowledge of the company’s dire financial situation, including substantial debts and the Carpenter’s Union effectively shutting down the business. His optimism about the company's recovery and lack of disclosure regarding the unpaid benefits to unions at a meeting with DANCOR further indicated intent to deceive. The DEBTOR's belief that he did not intend to harm DANCOR was deemed insufficient, given the circumstances.

The defense under section 523(a)(6) is more appropriate for claims of willful and malicious injury, as the mens rea requirement under section 523(a)(2) focuses on intent to deceive rather than intent to harm. The DEBTOR’s state of mind meets the intent to deceive standard. DANCOR's claim hinges on whether its reliance on the DEBTOR's representations was justifiable. Justifiable reliance requires more than mere actual reliance; it is a standard based on the plaintiff's characteristics and case circumstances. The creditor should not blindly accept representations when their falsity is apparent with minimal inquiry. DANCOR relied on the DEBTOR's claim that all employees had been paid and only disbursed funds after receiving signed lien waivers, with no evidence of knowledge regarding the falsity of the DEBTOR’s claim. Despite awareness of Haskell Construction’s financial issues, DANCOR had no indication of its insolvency level and thus had a right to trust the DEBTOR’s representations. Denying this right would undermine lien waivers' value. 

DANCOR seeks $12,838.81 in compensatory damages, along with non-dischargeability of attorney fees and punitive damages. Punitive damages in Illinois require proof of intentional and outrageous misconduct, which DANCOR did not demonstrate. Under the American Rule, attorney fees are not recoverable unless stipulated by statute or contract, a principle upheld in bankruptcy litigation. Although the Supreme Court in Cohen v. de la Cruz recognized attorney fees as part of nondischargeable debt due to specific statutory provisions, it did not establish a general entitlement to such fees in section 523 actions.

The cause of action involves a false representation in the Mutual Release Agreement, where Haskell Construction agreed to indemnify DANCOR against claims related to its work, but the Agreement does not allow for attorney fees in disputes between the two parties regarding the Agreement's enforcement. The court determines that the nondischargeability claim arises from the contractual representation made in the Mutual Release Agreement after the work was completed, rather than from the work itself, thus not covered by the contract’s attorney fee provision. DANCOR lacks a statutory or contractual basis for recovering fees related to the dischargeability claim. The court finds DANCOR's debt nondischargeable under section 523(a)(2)(A), rendering unnecessary the examination of the claim under section 523(a)(6). The debt, tied to a false representation, should not be classified as resulting from willful and malicious injury. Findings of fact and conclusions of law are presented in accordance with Federal Rule of Bankruptcy Procedure 7052. Relevant contracts for Beauty Brands and AutoZone #4429 were entered into evidence; the AutoZone #4435 contract is not part of the record. Haskell Construction had collective bargaining agreements with the Carpenters Union and Painters Union. A motion for relief from stay in Haskell’s chapter 7 case noted other projects Haskell was involved in, with union workers last present on various dates in October 2010. The amount owed to Haskell Construction was limited to a 10% retainage. Haskell returned to the Beauty Brands project on November 1, 2010. DANCOR is also pursuing a similar suit against Jared in a different district. The evidence indicates mutual understanding between DANCOR and Haskell regarding the necessity of trust fund contributions for hiring union workers, with Haskell being a party to collective bargaining agreements outlining its obligations. The court notes no precedent imposing a duty on a contractor to verify a subcontractor's claims of full payment to suppliers, even if aware of financial difficulties.