- Case Type:
- Case Status:
- Reversed and Remanded
- 21-1856 (8th Circuit, Apr 22,2022) Published
- The U.S. Court of Appeals for the Eighth Circuit (Circuit) reversed the grant of summary judgment by the bankruptcy court (BC), later affirmed by a bankruptcy appellate panel, in favor of Jay and Lori Buchanan, chapter 7 debtors (DRs) who owned Signature Electric LLC (Signature), in a 523(a)(2)(A) adversary proceeding, launched by Lund-Ross Constructors Inc. (LR), which paid Signature's supplier's construction liens, as it could still advance a valid personal claim against the DRs based on a state tort without veil piercing, its failure to prove the latter being the basis of the BC's decision.
- Procedural context:
- The DRs filed a chapter 7 bankruptcy petition on December 5, 2019, in the BC, i.e. the United States Bankruptcy Court for the District of Nebraska. Because the DRs listed LR's debt as disputed and contingent, LR was required to file a proof of claim. However, because their estate held no assets, LR initially opted to file no proof. Instead, in January 2020, LR filed an adversary proceeding seeking to except its debt, which represented the default judgment entered against Signature in Nebraska state court, for $600,043.64 from discharge under § 523(a)(2)(A). Specifically, LR argued that this debt was exempt because, in the lien waivers that the DRs had filed, they had made false representations that Signature, their company, had paid its suppliers and subcontractors, as it had not (and whose compensation LR was forced to pay once this failure was revealed). Once the trustee filed a notice of intent to claim assets in February 2020, LR now filed its proof of claim (POC). The trustee objected, arguing that the claim alleged a corporate debt of Signature, not the DRs'. When LR filed no objection, and then failed to appear to argue otherwise, the BC disallowed the claim. Subsequently, the DRs moved for summary judgment in the adversary. Concluding that LR did not have a claim for a debt owed by the DRs personally, the BC granted the DRs' motion. The U.S. Bankruptcy Appellate Panel for the Eighth Circuit (BAP) affirmed. LR timely appealed.
- It all began with Signature. Prepetition, the DRs owned and operated this electrical business, which eventually did business as D&J Electric. LR hired Signature as an electrical subcontractor on several building projects for which Signature engaged suppliers. Signature periodically filed pay applications with LR for work completed and supplies purchased. As part of those pay applications, Signature provided signed lien waivers representing that all amounts owed to suppliers and subcontractors had been paid in full. On July 26, 2019, however, Signature notified LR and others that it was discontinuing business operations and would be liquidated by its primary lender, and the DRs would be filing bankruptcy, as they soon thereafter did by docketing a joint chapter 7 petition. Unpaid suppliers on the LR projects then began filing construction liens. Signature and its owners worked out an arrangement to keep suppliers on the job by making bi-weekly payments of $50,000 to cover unpaid invoices, some of which dated back to January 2019. It made some, but not all, of these payments. Some suppliers then initiated lawsuits, which LR was contractually obligated to defend and indemnify, against the projects’ owners to foreclose on their construction liens. In November 2019, LR sued Signature and the DRs in state court for breach of contract. In June 2020, a default judgment was entered against Signature, though the automatic stay protected the DRs, for $600,043.64.
- Lavenski R. Smith; Raymond W. Gruender; and Jonathan A. Kobes
3404 in the system
1 Being Processed