IN RE HAGEN

PETER McNIFF, Bankruptcy Judge

On August 10, 2005 the court held a trial on Zakco Commercial Consultants, Inc.'s (Zakco) "Complaint 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 the arguments of the parties and is prepared to rule.

JURISDICTION

The court has jurisdiction over this case under 28 U.S.C. §§ 157 and 1334. This is a core proceeding under § 157(b)(2)(I).

FINDINGS OF FACT

The Debtor, Kyle Hagen, was previously the president of Teton Heating Company (Teton), a Wyoming corporation established to conduct a plumbing business. The Debtor and his spouse, Leidy E. Hagen, were the principals and owners of Teton and controlled its activities. Teton purchased its plumbing supplies from Falls Plumbing Supply, Inc. (Falls Plumbing), among other businesses.

The plaintiff, Zakco, is a Colorado corporation and the general contractor on the construction of a Holiday Inn Express in Casper, Wyoming (Holiday Inn Job). On January 24, 2003, Zakco entered into a "ZAKCO Commercial Consultants, 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 has no choice of law or choice of forum provisions. The Subcontract identifies Falls Plumbing as one of two suppliers to Teton.

At Teton, Ms. 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 jobs. Teton had several employees at the time it contracted with Zakco, located in Casper at the Holiday Inn Job and at another job site in Gillette, Wyoming.

In the late summer or fall of 2003, Teton was unable to collect funds it was owed for the Gillette work. That loss of revenue caused Teton financial problems and the inability to pay its ongoing expenses timely. At some time in September 2003, Teton left the Gillette location and did not finish the work there. However, Teton continued to perform work at the Holiday Inn Job in Casper.

At about the same time, Teton submitted four Payment Requests to Zakco for the purpose of obtaining progress payments. The Payment Requests were on Zakco's standard form. The Payment Requests contained the following statement:

We, the undersigned, having been employed by ZAKCO Commercial Consultants, Inc. or any of its agents to furnish labor and/or material in connection with construction or improvements to above-named property, and in consideration of receipt of the sum of ________ (fill in amount of this draw), waive and release any and all lien, claim or right to lien on said above premises, building or property, or any portion thereof under the statutes of the state of WYOMING relating to Mechanics Lien for labor or material or both furnished by the undersigned in connection with said construction or improvement. The undersigned represents to the Owner and Zakco Commercial Consultants, Inc. that is has paid or will pay upon receipt hereof, all of its suppliers, subcontractors, laborers, etc. who have furnished materials, services or labor who have or may have a lien against said property. The undersigned will hold Owner and ZAKCO Commercial Consultants, Inc. harmless from any and all claims and liabilities to include necessary attorney fees. (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 labor expenses and was also signed by Leidy Hagen.

The September 2003 Payment Request was dated September 25, 2003 and was signed by the 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% retainage. However, the Payment Requests did not identify to whom the funds for Materials were owed. Based on the statements on the Payment Requests, Zakco advanced funds to Teton. Teton did not pay Falls Plumbing for the plumbing materials used at the Holiday Inn Job from July through September 2003.

In October 2003, Zakco had difficulty communicating with the Debtor, and Teton's employees at the 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, 2004, Falls Plumbing filed a Lien Statement against the Holiday Inn Job for $64,416.37. Zakco settled with Falls Plumbing for $60,000 and paid the debt off in return for a lien release.

On January 27, 2004, the Debtor consulted bankruptcy counsel. He filed a voluntary chapter 7 petition on April 30, 2004, and this adversary proceeding followed.

CONCLUSIONS OF LAW

The plaintiff's Complaint states three claims for relief. The plaintiff seeks a determination of nondischargeability of the funds paid to Falls Plumbing and to complete the plumbing on the Holiday Inn Job under 11 U.S.C. § 523(a)(2)(A), (a)(4), (a)(6).

Section 523(a)(2)(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, 111 S. Ct. 654, 661 (1991). Exceptions to discharge are 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 false pretenses, false representation and actual fraud are interpreted according to their common law definitions. Field v. Mans, 516 U.S. 59, 116 S. Ct. 437, 442 (1995).

In the Tenth Circuit, a creditor must prove the debtor made a false representation with the intent to deceive the creditor, and that the creditor relied on the misrepresentation. In re Young, 91 F.3d 1367, 1373 (10th Cir. 1996). 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 false 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.

The Debtor signed the September 23, 2003 Payment Request and stated that he would pay or had paid the materials and labor bills. Zakco has suffered no loss as to the labor bills. Therefore, the only issue is whether the Debtor intended to obtain funds from Zakco fraudulently, i.e., with the intention to use the funds for a purpose other than to pay for materials in the stated amount of $12,900, less the retainage. The court concludes he did not have the requisite intent.

The Debtor was aware of the precarious nature of Teton's finances at the time he signed the Payment Request. However, he testified that he had no intimate knowledge of the finances, to whom funds were owed, or which creditors were being paid and which were not. He also testified that he was attempting to do everything possible to continue operating the company, but that when he clearly could not, he took immediate steps to limit the damages by notifying Zakco. This was a case of money in and money out, not a case of intentional fraud to obtain funds for an unstated purpose.

Zakco also failed to meet its burden of proof with regard to the completion costs at the Holiday Inn Job. The money Zakco paid to complete 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)(4)

Zakco contends the progress payments from Zakco to Teton were held in trust for Zakco, and therefore, the Debtor was a fiduciary under § 523(a)(4). A debt is not discharged under § 523(a)(4) "for fraud or defalcation while [the debtor is] acting in a fiduciary capacity[.]" To establish the claim, the creditor must prove the existence of a fiduciary relationship between itself and the debtor and fraud or defalcation by the debtor in the course of that fiduciary relationship. In re Young, 91 F.3d at 1371. The court must find an express or technical trust in existence prior to the creation of the debt. Id. at 1371-1372.

Zakco contends a trust exists due to an unspecified Colorado statute, apparently the Colorado Mechanics' Lien Trust Fund Statute found at Colo. Rev. Stat. § 38-22-127 (2000). However, the Subcontract between these parties is governed by Wyoming, not Colorado, law. Furthermore, under the Colorado statute, the trust is created in favor of the material supplier, not the general contractor.

The Restatement (Second) of Conflicts of Law § 188(2) (1971), provides that in the absence of an effective choice of law in the contract, the local law of the state which has the most significant relationship to the transaction and the parties controls. The factors to be evaluated are (a) the place of contracting, (b) the place of negotiation of the contract, (c) the place of performance, (d) the location of the subject matter of the contract, and (e) the domicile, residence, nationality, place of incorporation and place of business of the parties. Id.

Clearly under the Restatement analysis, Wyoming law controls. The Subcontract does not specify a choice of law. The Subcontract was signed in Wyoming, relates to a Wyoming construction project, and involves a Wyoming corporation. Neither the Debtor nor Teton had any relationship with Colorado. The court is unaware of any Wyoming law that creates a statutory or other trust over the funds paid by Zakco to Teton.

Zakco also argues, without authority, that the payment of the funds to Teton was intended to be held for the benefit of a third party, Falls Plumbing, thereby creating the requisite fiduciary duty. While the court is hard pressed to understand how Zakco would be the beneficiary under such a scenario, there is no express trust created by the language of the Payment Request. The § 523(a)(4) claim fails as a matter of law.

Section 523(a)(6)

Finally, Zakco asserts the debts should not be discharged under § 523(a)(6). Under that section, Zakco must prove a "willful and malicious injury by the debtor to another entity or the property of another entity[.]"

The United States Supreme Court addressed a § 523(a)(6) claim in Kawaauhau v. Geiger, 523 U.S. 57, 118 S. Ct. 974, 977 (1988). The Court ruled that the willfulness element requires proof of a deliberate or intentional injury, not merely a deliberate or intentional act which results in injury. As with intentional torts, the debtor must have intended the consequences of his act. Id.

The Court also required that the injury be "desired or in fact anticipated by the debtor." Id. However, the Court did not define malicious conduct. Therefore, the element of malice requires application of Tenth Circuit law.

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.C. v. Pasek (In re Pasek), 983 P.2d 1524, 1527 (10^th 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. Okla. 2000).

The evidence does not establish a deliberate injury or that any of the Debtor's actions were intended to harm 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 failure to perform in accordance with a contract is not nondischargeable conduct. There is no evidence to support a claim for willful and malicious conduct in this case.

The court will issue a judgment in favor of the Defendant/Debtor discharging any debt owed to Zakco Commercial Consultant's Inc.