Calloway Cleaning & Restoration, Inc. v. McFarland (In re Mcfarland)

IN RE GABRIELLE IRENE MCFARLAND TERRY A. MCFARLAND DEBTORS

CALLOWAY CLEANING & RESTORATION, INC. PLAINTIFF v. GABRIELLE IRENE MCFARLAND, et al. DEFENDANTS

CASE NO. 16-21587

ADV. NO. 17-2004

UNITED STATES BANKRUPTCY COURT EASTERN DISTRICT OF KENTUCKY COVINGTON DIVISION

February 20, 2018

MEMORANDUM OPINION

Gabrielle and Terry McFarland ("Debtors") and their family suffered a fire at their home on Christmas Eve 2014. That night, they found Calloway Cleaning & Restoration, Inc. ("Creditor") on the internet and called them for help with clean-up, damage mitigation work and property remediation. When Creditor came to Debtors' residence on Christmas morning, the parties signed a "Work Authorization" for services (the "Contract"). As often happens with contracts, the parties later disagreed about each other's performance thereunder. Indeed, were this Court asked to decide at this juncture whether Debtors breached the Contract, genuine disputes of material fact would require a trial to resolve the claim. But the Court need not find liability under the Contract to resolve the pending motion.

This matter is before the Court on Debtors' Motion for Summary Judgment [ECF No. 18] (the "Motion") on both counts of Creditor's non-verified Amended Complaint [ECF No. 4] (the "Complaint"). The Complaint seeks to deny the discharge of a debt under 11 U.S.C. § 523(a)(2)(A) and (a)(4). The Court has reviewed the record, including the Motion, Creditor's Response to the Motion [ECF No. 24], and Debtors' Reply [ECF No. 25], and heard the arguments of counsel. As explained below, Debtors' arguments are well taken, and summary judgment will be granted.

BACKGROUND

The following material facts are undisputed. Creditor contends that Debtors owe Creditor a debt in connection with the Contract for Creditor to clean and restore Debtors' family residence after a fire on December 24-25, 2014. The Complaint attaches a pre-petition state court complaint that Creditor filed against Debtors in Boone County, Kentucky, seeking relief under breach of contract and quantum meruit theories, but not fraud. Debtors filed a counterclaim against Creditor in the state court case, and the parties were conducting discovery when Debtors filed their bankruptcy petition, resulting in a stay of that case. Thus, there has been no adjudication that Debtors owe a debt to Creditor.¹

The Contract that Mr. McFarland and Creditor's representative signed [ECF No. 4 at Exh. A to state court complaint] is a one-page form document with Creditor's name pre-printed on it. The Contract identifies Debtors' residence as the property at which Creditor's serviceswill be rendered. It states that "Customer agrees to pay [Creditor] upon receipt of its invoice." [Id.] And, of particular import here, the Contract also states:

Customer authorizes [Creditor] to make proof of loss to, and act as agent in collection and receive payment from any insurance company liable for the damages or condition of the aforementioned premises comprising the subject of this contract.

Customer also agrees to make prompt payment of any deposit, deductibles or monies owed for the services rendered, which are not paid to [Creditor] by insurance company proceeds.

[Id.] Debtors knew when they contacted Creditor that they would receive insurance proceeds to cover the restoration and related work performed on the residence.

The Contract does not specify the services Creditor was to perform or state how much Creditor would be paid for its work. Creditor's state court complaint, attached to the Complaint herein, demanded a judgment against Debtors in the amount of $52,580.70. The state court complaint attached unsigned and undated descriptions of mitigation and remediation services at Exhibit B; at oral argument on the Motion, Creditor's counsel stated that those documents constituted work estimates.

Sometime after the Contract's execution, Creditor's written estimates were submitted to Debtors' homeowners' insurance carrier. After Creditor performed services, Debtors received approximately $53,000 in insurance proceeds based upon the written estimates. Debtors, however, complained about perceived deficiencies with Creditor's work, including a claim that personal property removed by Creditor for cleaning had not been returned. Mr. McFarland primarily handled the communications related to Debtors' complaints with Creditor's work. Creditor did not complete the work to be performed at the residence. Mr. McFarland testified that he would allow Creditor to "come back and fix these issues" or "come back and finish thework," as Creditor requested, only "when all my property is returned." [ECF No. 24-1 at depo. p. 56.]

When Debtors received the insurance funds, they deposited them into Debtors' joint account. Then, those funds were moved into Mrs. McFarland's personal account. And, thereafter, Debtors used the insurance proceeds to pay other bills, including for automobile-related expenses and college tuition. The record does not reflect that these expenses were either anticipated or outstanding at the time the Contract was executed.

Thus, Debtors did not retain all of the insurance proceeds pending a final resolution of their dispute with Creditor. Debtors did not pay Creditor for any portion of the work Creditor performed. Creditor further notes that Debtors did not return the funds to their carrier notwithstanding Debtors' position that they did not feel that Creditor's work was complete or performed adequately.

In deposition testimony and in affidavits submitted with the Motion, Debtors testified that, when they decided to use the insurance funds to pay other bills, their intent was to take a loan from a 401(k) account to pay Creditor upon the project's completion. [ECF No. 18 at 18 (G. McFarland aff. ¶¶ 12-15, 19), 21 (T. McFarland aff. ¶¶ 11-14, 19.] Creditor's Response does not attempt to rebut this testimony.

Creditor alleges in Count One of the Complaint that Debtors owe a debt to Creditor that is non-dischargeable under § 523(a)(2)(A) because Debtors obtained services from Creditor by means of false pretenses, a false representation, or actual fraud. Specifically, Creditor contends that, when Debtors entered into the Contract, they "never intended to fully pay [Creditor] for its restoration services. Instead, [Debtors] intended to receive the insurance funds intended to be paid to [Creditor] and to spend said funds on other debts, including debts for college and forautomobile expenses." [ECF No. 4 ¶ 23.] For support, Creditor cites Debtors' testimony with regard to their financial situation at the time of the fire. According to Mr. McFarland, prior to the fire, Debtors "didn't go and have, you know a stockpile of extra cash at the end of each month that we were wondering what to do with .... [W]e did not have excess money at the end of each month." [ECF No. 24-2 at depo. p. 12.] Similarly, Mrs. McFarland explained, when asked whether Debtors were receiving calls from debt collectors before the fire, that "[t]here was always something left unattended to but nothing large." [ECF No. 24-3 at depo. p. 51.] Mrs. McFarland also testified, however, that Debtors never consulted with a bankruptcy attorney and "never considered it" before the fire occurred. [Id. at depo. p. 52.] Mr. McFarland testified similarly, stating that, while Debtors considered filing bankruptcy a decade before their fire, they were not considering filing for bankruptcy around the time of the fire. [ECF No. 24-2 at depo. pp. 9-11.]

Creditor alleges in Count Two that Debtors owe a debt that is non-dischargeable under § 523(a)(4) because the Contract's terms created a trust for Creditor's benefit, pursuant to which Debtors owed Creditor fiduciary duties. [ECF No. 4 ¶¶ 33-38.] Creditor alleges that Debtors breached their fiduciary duties by misappropriating the funds. [Id. ¶ 39.]

JURISDICTION AND VENUE

This Court has jurisdiction over this adversary proceeding and venue is proper. 28 U.S.C. §§ 1334(b), 1409. Plaintiff's non-dischargeability claims are core proceedings. 28 U.S.C. § 157(b)(2)(I). The parties' pleadings confirm their consent to the Court's entry of final orders on these claims.

ANALYSIS

A summary judgment is appropriate if the pleadings, discovery and disclosure materials on file, and any affidavits, show that there is no genuine issue as to any material fact and that the movant is entitled to a judgment as a matter of law. FED. R. BANKR. P. 7056(c)(2). A summary judgment may be entered "against a party who fails to make a showing sufficient to establish the existence of an element essential to that party's case, and on which that party will bear the burden of proof at trial." Novak v. MetroHealth Med. Ctr., 503 F.3d 572, 577 (6th Cir. 2007).

The moving party has the initial burden of proving that no genuine issue of material fact exists and that the moving party is entitled to judgment as a matter of law. Street v. J.C. Bradford & Co., 886 F.2d 1472, 1477 (6th Cir. 1989). To meet this burden, the moving party may rely on any of the evidentiary sources listed in Rule 56(c) or may merely rely upon the failure of the nonmoving party to produce any evidence which would create a genuine dispute for the jury. Id. at 1478. Essentially, a motion for summary judgment is a means by which to "challenge the opposing party to 'put up or shut up' on a critical issue." Id.

Cox v. Ky. DOT, 53 F.3d 146, 149 (6th Cir. 1995).

As noted above, there has been no adjudication to this point that Debtor owes any debt to Creditor. "The first step in any analysis under § 523(a) ... is not whether a debt is non-dischargeable, it is whether a debt even exists—a 'threshold condition' to whether § 523(a) applies." Feldman v. Pearl (In re Pearl), 577 B.R. 513, 523 (Bankr. E.D. Ky. 2017) (citing Cohen v. de la Cruz, 523 U.S. 213, 218 (1998)). To be clear, the Court is not making any determination herein regarding whether any party is liable to another under the Contract; a trial...