624 B.R. 629
Bankr. N.D. Ill.2021Background
- Grant Manny and Katharine Lennox contracted with Catalyst Construction (sole member: Eric Udelhoven) in July 2018 to renovate 1413 West Belle Plaine, Chicago; they paid multiple installment payments and deposits for progress and for ordered finished goods.
- Catalyst performed demolition and some framing but did not complete the project; the finished goods paid for by Manny and Lennox were never delivered and had to be repurchased.
- Catalyst and Udelhoven each filed Chapter 7 on February 15, 2019; Plaintiffs sued Udelhoven seeking to (1) pierce the corporate veil to hold him personally liable for Catalyst’s breach and (2) except their claim from discharge under 11 U.S.C. §§ 523(a)(2), (a)(4), (a)(6) and deny his discharge under §§ 727(a)(3) and (a)(4).
- Plaintiffs relied on alleged inadequate recordkeeping, commingling/personal charges on Catalyst accounts, undercapitalization, and alleged misappropriation of funds as bases for veil piercing and nondischargeability.
- The bankruptcy court found Udelhoven credible, declined to pierce the veil, and ruled for the defendant on all nondischargeability and discharge-denial claims.
Issues
| Issue | Plaintiff's Argument | Defendant's Argument | Held |
|---|---|---|---|
| Piercing corporate veil (personal liability for Catalyst debts) | Catalyst was undercapitalized, lacked records, commingled funds, and Udelhoven treated company assets as his own, so veil should be pierced. | Catalyst maintained books (QuickBooks/Buildertrend), regular business operations, and Udelhoven’s personal use of company funds was limited and explainable; veil piercing is disfavored. | Denied. Court found insufficient unity of interest/fraud to pierce veil. |
| §523(a)(2)(A) (fraud/false representation) | Udelhoven solicited payments while falsely promising project progress and that goods were ordered/delivered. | No evidence he intended to never perform; some work was done and statements reflected contemporaneous beliefs and delegation to managers. | Claim failed. Plaintiffs did not prove debtor’s subjective intent to defraud or justifiable reliance. |
| §523(a)(4) (embezzlement/defalcation) | Payments were misapplied; Plaintiffs entrusted funds and debtor misappropriated them. | Payments were contractually due; funds were not held in trust and were Catalyst’s funds used for business operations. | Claim failed. No evidence of fraudulent intent or that Plaintiffs retained a property interest in the funds. |
| §523(a)(6) (willful and malicious injury) | Removal of temporary heater and abandoning the site caused willful, malicious injury. | Debtor denied knowledge of who removed heater; no proof of intent or causation by debtor. | Claim failed. Plaintiffs produced no evidence debtor acted with requisite intent. |
| §727(a)(3) / (a)(4) (deny discharge for inadequate records/false oaths) | Debtor failed to keep/preserve records and omitted Plaintiffs from schedules, showing fraudulent intent and inadequate records. | Plaintiffs offered no evidence of debtor’s personal recordkeeping deficiencies; amendments were made and omissions related to Catalyst contracts rather than debtor’s schedules. | Denied. Plaintiffs failed to prove by preponderance that debtor concealed records or made knowing, fraudulent oaths in his case. |
Key Cases Cited
- Grogan v. Garner, 498 U.S. 279 (U.S. 1991) (plaintiff must prove nondischargeability by preponderance)
- Kawaauhau v. Geiger, 523 U.S. 57 (U.S. 1998) (§523(a)(6) requires actual intent to cause injury)
- Jendusa-Nicolai v. Larsen, 677 F.3d 320 (7th Cir. 2012) (willful and malicious standard elaborated)
- Ojeda v. Goldberg, 599 F.3d 712 (7th Cir. 2010) (elements for §523(a)(2)(A) claim)
- Judson Atkinson Candies, Inc. v. Latini-Hohberger Dhimantec, 529 F.3d 371 (7th Cir. 2008) (veil piercing is disfavored)
- In re Mathis, 360 B.R. 662 (Bankr. C.D. Ill. 2006) (contractor cases: no embezzlement where funds were contractually due and not held in trust)
- In re Berman, 629 F.3d 761 (7th Cir. 2011) (state-law fiduciary duties to creditors do not create federal fiduciary relationship for §523(a)(4))
- Stamat v. Neary, 635 F.3d 974 (7th Cir. 2011) (elements for false oath under §727(a)(4)(A))
- Fontana v. TLD Builders, Inc., 840 N.E.2d 767 (Ill. App. Ct. 2005) (factors for veil piercing)
- Peetoom v. Swanson, 778 N.E.2d 291 (Ill. App. Ct. 2002) (veil-piercing doctrine and equitable remedy)