IN RE VAN ARSDOL

PETER McNIFF, United States Bankruptcy Judge.

On June 14, 2000, the court held a trial on the plaintiff's complaint for a determination of dischargeability of a debt pursuant to 11 U.S.C. § 523(a)(2) (a)(6). The court has considered the testimony and other evidence, the arguments of the parties and the applicable law and is prepared to rule.

The court has jurisdiction over this adversary case pursuant to 28 U.S.C. § 157(a) 1334. This is a core proceeding within the definition of § 157(b)(I).

The plaintiff contends that certain debts owed to it by a corporation owned by the debtor are nondischargeable because they were incurred as the result of fraud by the debtor. A recitation of the nature of the relationship between the parties is necessary, as well as the facts giving rise to the allegations of fraud.

The defendant/debtor, Kent Van Arsdol, is a master electrician. In 1995, Van Arsdol operated an electrical contracting business with Joel Hershman known as K J Electric LLC. On December 31, 1996, the partners incorporated the business and operated it as K J Electric, Inc. (K J). The change in ownership form was made on the advice of K J's accountant and attorney. Van Arsdol and Hershman were the officers of the corporation.

K J, the limited liability company, subcontracted electrical work on two school building projects in Burns and Pine Bluffs, Wyoming. The general contractor on those jobs was Westates Construction Company (Westates). K J contracted with the plaintiff, Advanced Concepts, Inc. (Advanced Concepts) to provide materials for the electrical work performed on the two job sites. The work continued at the Burns/Pine Bluffs locations after K J became a corporation. The LLC was allowed to become defunct with the Secretary of State.

Westates and K J had a procedure whereby K J would submit a monthly statement to Westates for the work done the previous month. If the work passed an inspection, K J would sign a document entitled Release and Waiver of Lien, and Westates would pay K J sums due under that invoice. Even after K J became a corporation, the waivers identified K J as K J Electrical, LLC. The Release and Waiver of Lien was drafted by Westates. Materialmen such as Advanced Concepts were not parties to the Releases.

Due to masonry defects in the two school construction jobs, the walls at the Burns/Pine Bluffs sites were reconstructed. The reconstruction required that K J have an electrician at the site long after the job should have been completed. Also, K J was required to rewire the electric work in the new walls. The delay at the project caused K J to develop cash flow problems.

During 1998, Westates was aware that K J was having financial problems. By May, Westates was making partial payments to K J in order that K J could keep current on its payroll. The procedure remained the same, but the payments varied from the monthly norm.

In early November 1998, a secured creditor of K J seized K J's assets, including its equipment and accounts receivable. The creditor also froze the K J bank account(s).

K J did not operate after that time. Van Arsdol completed the subcontract with Westates as an employee of Double C, Inc., a newly-formed corporation owned by his wife.

The Release language is critical to resolution of this case. On the document, K J Electric, LLC is inserted as the subcontractor/supplier. Van Arsdol signed the Releases variously on behalf of K J Electric or K J Electric, Inc.

The waiver language states:

[T]he undersigned in consideration of full payment, for labor, materials, equipment use and services of every kind furnished to or used in the performance of Contract No. ___ in structures, or buildings does (do) certify that any and all liens and claims of liens to which undersigned may by law be entitled are hereby waived and the right thereto relinquished and the undersigned does further certify that if any lien or claim of lien has heretofore been filed or recorded, the same is hereby released and discharged and does certify that all materials, labor, equipment rental, and services furnished by the undersigned have been paid in full and undersigned releases WESTATES CONSTRUCTION COMPANY, its Surety and the Owner of the above described premises from all liability and in any event the undersigned herewith indemnifies and holds harmless the WESTATES CONSTRUCTION COMPANY from any liability whatsoever for any unpaid materials, labor, equipment or service charges, debts or claims which have been contracted by the undersigned. (Emphasis in original).

Advanced Concepts instituted a lawsuit against Westates and K J Electric, Inc. for unpaid materials associated with the Burns/Pine Bluffs school jobs. Westates subsequently settled its portion of the case and paid an agreed amount to Advanced Concepts. On April 22, 1999, Van Arsdol executed a confession of judgment as President of K J Electric, Inc. The judgment is in the amount of $9,098.13, plus costs and accruing interest, which is the amount sought to be declared nondischargeable here.

The plaintiff brings its complaint for a determination of the dischargeability of the debt evidenced by the judgment against K J Electric, Inc. pursuant to 11 U.S.C. § 523(a)(2)(A) (B) and (a)(6). The plaintiff contends Van Arsdol should be personally liable for the amount owed by K J.

Van Arsdol contends the judgment obtained by Advanced Concepts against K J merged with any claim against Van Arsdol, and therefore, Advanced Concepts is precluded from bringing its fraud claims except to the extent the judgment was obtained by fraud. The court disagrees with this theory.

The Tenth Circuit Court of Appeals has ruled that the cause of action created under state law to enforce state created rights is distinct from the claim for relief to determine the dischargeability of a debt under § 523. In re McKendry, 40 F.3d 331, 336 (10th Cir. 1994), reh'g denied (1994). The § 523 claim is a separate claim created by the Bankruptcy Code. Van Arsdol was not a party to the lawsuit in which Advanced Concepts obtained judgment. However, even if he had been, the judgment on the contract would not preclude this action based on alleged fraudulent misconduct.

Second, the plaintiff presumed and attempted to prove that in order for Van Arsdol to be individually liable to Advanced Concepts, his liability must be established under an alter ego theory. The court disagrees. If the plaintiff can show the elements of a § 523 claim, i.e., that misconduct by Van Arsdol caused the plaintiff to suffer damage, the § 523(a) claim is proved. The judgment is only relevant to establish the amount of Advanced Concept's claim if collateral estoppel can be applied here. The evidence of the various entities under which Van Arsdol conducted business is not determinative to this claim. The court will address the plaintiff's claims for relief in the traditional fashion.

Section 523(a)(2)(A) (B) Under § 523

(a)(2), a discharge under § 727 does not discharge an individual debtor from a debt 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;

or

(B) use of a statement in writing

(i) that is materially false;

(ii) respecting the debtor's financial condition;

(iii) on which the creditor to whom the debtor is liable for such money, property, services or credit reasonably relied; and

(iv) that the debtor caused to be made or published with intent to deceive.

A creditor has the burden to prove the elements of its claim under § 523(a) by a preponderance of the evidence. Grogan v. Garner, 498 U.S. 279, 111 S.Ct. 654, 659 (1991). In a § 523(a)(2)(A) claim, the creditor must show that its reliance was justified. Field v. Mans, 516 U.S. 59, 116 S.Ct. 437, 439 (1993).

The plaintiff asserts that Van Arsdol's statements in the Release were materially false and caused damage to Advanced Concepts. Under § 523(a)(2)(A), a written or oral statement that is materially false may give rise to a claim, so long as it is not related to the debtor's financial condition. Subsection 523(a)(2)(B) requires proof of a written statement respecting the debtor's financial condition. Whether the Release provisions are statements concerning the debtor's financial condition is not addressed by the parties. Regardless, the analysis in this case is the same.

Under subsection (a)(2)(A), the terms "false pretenses, false representation," and "actual fraud" are interpreted according to their common law definitions. Field v. Mans, 116 S.Ct. at 442. 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 elements of a claim under subsection (a)(2)(B) are straightforward, also requiring proof of fraudulent intent.

First, the court agrees with Van Arsdol's interpretation of the Releases. To paraphrase, they provide that any lien to which K J may be entitled against Westates is waived, and that Westates paid in full for any materials and labor furnished by K J. The Releases contain no statement that K J had previously paid for any materials it obtained from a third party such as Advanced Concepts. While the indemnification provision may be somewhat ambiguous in the context of the other statements, it only appears to protect Westates for whose benefit the release was prepared.

Nor is there any evidence that Advanced Concepts relied on these statements, or that it is somehow entitled to the benefit of the Releases. Thus, the plaintiff's § 523(a)(2) claims must be overruled.

Section 523(a)(6)

Advanced Concepts also claims that Van Arsdol should not be discharged for the debt K J owes it under § 523(a)(6) which excepts from discharge a debtor "for willful and malicious injury by the debtor to another entity." The United States Supreme Court has addressed the elements of a § 523(a)(6) claim in Kawaauhau v. Geiger, 523 U.S. 57, 118 S.Ct. 974, 977 (1998). The Court ruled that the word "willful" requires proof of a deliberate or intentional injury, not merely a deliberate or intentional act which results in injury.

In this case, there is not a shred of evidence that Van Arsdol engaged in conduct which was deliberately intended to harm Advanced Concepts. There is no evidence that the statements contained in the lien waivers were false. There is no evidence that Van Arsdol was attempting to do anything other than keep a struggling business alive during a financial crisis. Thus, this claim too must be denied.

Section 523(d)

Van Arsdol seeks an award of his attorney fees incurred in this action under 11 U.S.C. § 523(d). That section mandates the court award attorney fees to a debtor if a creditor brings an unjustified determination of dischargeability of a consumer debt. The debt incurred by K J which is owed to Advanced Concepts is not a consumer debt, and the section is inapplicable.

The plaintiff has failed to establish the elements of a claim for nondischargeability under any provision of § 523(a). Judgment will be entered for the defendant/debtor, Kent Van Arsdol, in accordance with this Decision.