Manny v. Udelhoven (In re Udelhoven)

624 B.R. 629

IN RE: Eric M. UDELHOVEN, Debtor.

Grant Manny and Katharine Lennox, Plaintiffs,

v.Eric M. Udelhoven, Defendant.

Case No. 19 B 4105

Adv. No. 19 A 918

United States Bankruptcy Court, N.D. Illinois, Eastern Division.

Signed January 14, 2021

Timothy M. Hughes, Lavelle Law, Ltd., Schaumburg, IL, Matthew J. Sheahin, Lavelle Law, Ltd., Chicago, IL, for Plaintiffs.

David P. Lloyd, David P. Lloyd, Ltd., LaGrange, IL, for Defendant.

MEMORANDUM OPINION

DAVID D. CLEARY, United States Bankruptcy Judge This matter comes before the court following a two-day trial on the complaint filed by Grant Manny ("Manny") and Katharine Lennox ("Lennox") (collectively, "Plaintiffs") against Eric Udelhoven ("Udelhoven" or "Defendant"). Plaintiffs seek a finding that the debt they claim Defendant owes them is nondischargeable pursuant to 11 U.S.C. §§ 523(a)(2), (a)(4) and (a)(6). They also seek denial of Udelhoven's discharge under 11 U.S.C. §§ 727(a)(3) and (a)(4). Having heard the testimony of witnesses, reviewed the exhibits admitted into evidence, and read the briefs submitted by the parties, the court will enter judgment on all counts in favor of Defendant Eric Udelhoven.

I. JURISDICTION

The court has subject matter jurisdiction under 28 U.S.C. § 1334(b) and the district court's Internal Operating Procedure 15(a). This is a core proceeding under 28 U.S.C. §§ 157(b)(2)(I) and (J). Venue is proper under 28 U.S.C. § 1409(a).

II. FINDINGS OF FACT

In June or July of 2018, Grant Manny and his wife Katharine Lennox put the property located at 1413 West Belle Plaine Avenue, Chicago ("1413 Belle") under contract. (Tr. Vol. I, p. 12). Around the same time, Manny reached out to Eric Udelhoven for a meeting about the construction project that he and Lennox contemplated for their new home. (Id. ).

Eric Udelhoven and Catalyst Construction

Udelhoven has a degree in construction management and formed Catalyst Construction in 2008. He was Catalyst's sole member until it filed for relief under the Bankruptcy Code. (Id. , p. 77; Case No. 19 B 4101, EOD 1).

Nearly all of Catalyst's projects were rehab and renovation work. Udelhoven hired various types of employees including carpenters, apprentices, drivers, superintendents, project managers and general managers. (Tr. Vol. I, pp. 78, 85-86). He directly supervised the general manager and did most of Catalyst's sales and marketing work. (Id. , pp. 78-79).

During the year prior to Catalyst's bankruptcy filing, at least eight managers worked there. This included general manager Mark Elachowicz, whom Udelhoven hired in October 2018. (Id. , pp. 80, 83-84). Udelhoven relied heavily on Elachowicz "to manage the payments that were going out to vendors." (Plaintiff Ex. M, p. 47, lines 9-10).

Udelhoven did not approve all decisions at Catalyst. "I didn't manage that way. I empowered my managers and employees to make decisions for themselves." (Tr. Vol. 1, p. 86, lines 13-15). The project managers "were responsible for managing the profitability and execution for their projects after we got it into the project system.... [I]f there was an issue... I would talk with the people that would be involved and we'd do what we needed to do to push things forward." (Id. , p. 87, lines 8-10, 13-16).

A third party handled Catalyst's payroll. Udelhoven, the general managers and an office manager could sign checks for the company. (Id. , pp. 79-80, 88). Udelhoven used QuickBooks to reconcile Catalyst's financial records. (Id. , pp. 80-82). He also used QuickBooks to produce a spreadsheet, the purpose of which was to see how much money was coming in and going out of Catalyst "so we could make sure that we were getting things paid in a timely manner." (Id. , p. 82, lines 21-23).

When asked at trial if he could track what was spent on the project at 1413 Belle, Udelhoven responded:

It could be done, but it would be – I mean, we could go back through QuickBooks and do a project accounting via QuickBooks if we really needed to.

But, you know, I would probably need to get – it's all recorded in Quickbooks, all of it was or should have. That's – how we file our taxes is, you know, everything goes into QuickBooks so we know what expense is what.

(Id. , p. 112, lines 16-24).

In his deposition, Udelhoven admitted that "[a]s far as like dollar for dollar, there was not really a way to track it dollar for dollar." (Plaintiff Ex. M, p. 70, lines 21-23). But if Catalyst had not been going through a migration from Quickbooks to the cloud-based platform Buildertrend, "it potentially could have been done ... because we did job cost projects after we finished." (Tr. Vol. I, p. 114, lines 21-23).

When challenged as to whether he could tell which checks were for which projects at Catalyst, Udelhoven stated that although it would take "an exorbitant amount of time to do it at this point because it was fragmented... if I needed to go back through and do a project accounting for this, it could be done." (Id. , p. 115, lines 18-19 and 21-22).

Catalyst had one primary bank account with two debit cards ending in 6154 and 4627. (Id. , pp. 92-93). During the trial, Plaintiffs' counsel reviewed various charges on those cards. (Plaintiff Ex. G-1).

Page	Date	Charge	Amount	Udelhoven's explanation (Tr. Vol. I)
15	June 21	Microsoft Xbox Game	$10.89	"[W]e did have an Xbox at the office. I mean, I wanted to have a fun working environment." (p. 121, lines 1-2).
16	June 25	Main Street Liquor	$28.23$68.66	"[W]e kept a refrigerator stocked with beer." (p. 121, lines 7-8).
17	June 27	Itunes	$0.99	"We had a TV at the office. You know ... I was at one point working 12-hour days ... so sometimes in the middle of the day it would be nice to chill out." (p. 121, lines 13-16).
17	June 28	Netflix	$15.25
25	July 16	Great Wolf Lodge	$530.68$50	"I don't know exactly what that was. I used to travel a lot because we were Kohler's preferred installer in all of Chicago. But I think this was a comp to a client for some reason." (p. 122, lines 1-5).
25	July 16	Citgo (Wisconsin Dells)	$56.32$24.63	"I used to go to Wisconsin all the time for business just because of my relationship with Kohler.... [U]nfortunately by the time we went bankrupt, we were working on a beta program with Kohler to accomplish more in the e-commerce space. So I was up there quite often." (p. 122, lines 14-16, 18-21).
27	July 25	1-800-Flowers	$102.49	"[W]e finished a number of projects every month. And, you know, if the project went really well, people were super happy or something, we would do, you know, for the customers, you know, a bottle of wine, get them a bouquet of flowers, you know, just something nice." (p. 123, lines 2-7)
38	Aug 14	Floyd's 99 Barbershop	$26.00	"I would consider it a business expense because my appearance was the face of the business." (p. 123, lines 17-18).
61-62	Oct 12	Restaurants and hostel in Wrigleyville	"I took a client to a concert" and stayed overnight. (p. 124, line 6).
66	Oct 26	Green Paws Veterinary	$120.40	"I don't remember what it would be for, but, you know, I wouldn't have run it through the business account if it wasn't a verifiable business expense." (p. 124, lines 12-15).
84	Dec 14	Mario Tricoci	$145	"gifts for customers" (p. 124, lines 20-21)
86	Dec 24	Atlas Obscura	$190.66	"[I]t was an event that I went to in January... It was a networking opportunity." (p. 125, lines 3 and 5).
94	Jan 17	Lakeview Smoke & Vape	$12.90	"I don't know. I don't vape. So, I probably bought Gatorade at a convenience store or something for the guys." (p. 125, lines 9-11).

Starting the project at 1413 Belle

Manny is an asset manager for a commercial real estate firm and has worked in the real estate business for the last ten years. (Tr. Vol. 1, p. 9). He and Lennox interviewed seven or eight contractors for the renovation of 1413 Belle and eventually hired Udelhoven. (Id. , pp. 12-13). Udelhoven expected to complete the project according to the contract. "The company had tremendous momentum in the summer of '18, even going into the winter that year. It was actually a pretty good year." (Id. , p. 130, lines 6-9).

At their second meeting, Manny and Udelhoven "discussed the timeline we needed based on having a new baby in November of 2018, and the fact that we were going to be on a short-term lease for that period of time. And so part of the reason for discussion of the short-term lease was for the timeline that Eric had presented." (Id. , p. 14, lines 10-15.) Udelhoven told Manny that he and Lennox would be able to move into 1413 Belle "probably sometime in April of '19." (Id. , lines 19-20).

Manny and Lennox's short-term lease was set to expire in May 2019. (Id. , p. 17). "[I]t was close by so, you know, we would have enough time to both finish the project and get into the new house based on the timeline Eric provided." (Id. , lines 13-16).

Udelhoven created and provided a contract, which Manny marked up and revised. (Id. , pp. 14-15). In his line of work, Manny has reviewed "around a hundred" construction contracts. (Id. , p. 10). He and Udelhoven went back and forth two or three times with adjustments. (Id. at 15). Plaintiffs eventually signed the contract on July 23, 2018. (Plaintiff Ex. B).

The contract did not include a completion date. (Tr. Vol. I, p. 63; Plaintiff Ex. B). Manny believed that Udelhoven committed to finishing by a date certain: "My definition of committal, he shook my hand and told me that he would get it done by April, and that – he told me that several times throughout the project." (Tr. Vol. I, p. 64, lines 8-11). Manny acknowledged, however, that Udelhoven told him "until demo was complete, we wouldn't have a real deadline. So, it was more of a – as long as there were no problems, we think we can get it done by this time." (Def. Ex. 9, p. 8, lines 6-9; Tr. Vol. I, p. 66). Udelhoven concurred that "there was a target date, but nothing was ever included contractually. There was no performance clause." (Tr. Vol. I, p. 98, lines 8-10).

Manny and Lennox made an initial payment of 20% at signing. (Plaintiff Ex. D). Several stages of work were described...