667 B.R. 581
Bankr. D. Colo.2025Background
- Homeowners Dawn and Jacob McNulty contracted with Christopher Construction, Inc. (CCI), owned by debtor Christopher Palecki, to renovate a historic carriage house; they paid a $59,375 deposit (25% of the contract price).
- Palecki represented he was a licensed, bonded, insured general contractor and could obtain permits; he was not licensed by the City and County of Denver.
- CCI (at Palecki’s direction) spent the entire deposit within about one month on other projects, operating costs, and personal expenses; no deposit funds were used on the McNultys’ project and no refund was made.
- The McNultys sued in state court; a default judgment against CCI was entered for approximately $65,419.52. Palecki filed Chapter 13 and listed the McNultys’ claim; they then brought this adversary proceeding to except the debt from discharge under 11 U.S.C. §§ 523(a)(2)(A), (a)(4), and (a)(6).
- At trial the court found liability established and calculated a base nondischargeable debt of $59,129.52 (after agreed deductions) and held the debt nondischargeable under §§ 523(a)(2)(A), (a)(4) (embezzlement), and (a)(6) (willful and malicious), trebled under Colorado civil-theft statute to a single judgment of $177,388.56; post-judgment interest allowed, pre-judgment interest denied.
Issues
| Issue | Plaintiff's Argument | Defendant's Argument | Held |
|---|---|---|---|
| Existence/Amount of debt | McNultys: deposit misappropriated; state default judgment establishes debt | Palecki admitted liability previously; contested amount but made no effective objection | Court treated debt as established; base debt $59,129.52 after agreed deductions |
| § 523(a)(2)(A) — false representation/pretenses/actual fraud | Misrepresentations that Palecki was a licensed GC and could pull permits induced the contract and deposit; he concealed hiring a licensed GC and misused the deposit | Palecki disputes some factual points and asserts intent to repay/use funds to keep company afloat | Court found Palecki knowingly misrepresented licensure and concealed material facts; McNultys’ reliance was justifiable; judgment nondischargeable for $59,129.52 under § 523(a)(2)(A) |
| § 523(a)(4) — embezzlement | Deposit was entrusted for sole use on project and was misappropriated with fraudulent intent to permanently deprive | Palecki contended he intended to return funds once company stabilized; argued lack of fiduciary status | Court held elements of embezzlement proven (entrustment, misappropriation, fraudulent intent); debt nondischargeable under § 523(a)(4) |
| § 523(a)(6) — willful and malicious injury | Misuse and concealment of the deposit were intentional and substantially certain to injure the McNultys; no just cause or excuse | Palecki claimed he used funds to keep CCI operating and hoped to reimburse later | Court found subjective substantial-certainty (willful) and wrongful conduct without just cause (malicious); debt nondischargeable under § 523(a)(6) |
| Civil theft (C.R.S. § 18-4-401 / § 18-4-405) — treble damages, fees | McNultys sought treble damages and fees under civil-theft theory | Palecki offered no successful defense to statutory elements | Court concluded civil-theft proven and trebled the base award to $177,388.56; allowed attorneys’ fees application procedure post-judgment |
| Interest | McNultys sought pre- and post-judgment interest | Palecki opposed extra pre-judgment interest | Court denied pre-judgment interest (partly because state judgment included some pre-judgment interest); awarded post-judgment interest under 28 U.S.C. § 1961 |
Key Cases Cited
- Grogan v. Garner, 498 U.S. 279 (1991) (creditor bears preponderance burden for nondischargeability)
- Field v. Mans, 516 U.S. 59 (1995) (justifiable reliance standard in fraud claims)
- Kawaauhau v. Geiger, 523 U.S. 57 (1998) (§ 523(a)(6) requires deliberate or intentional injury)
- Husky Int’l Elecs., Inc. v. Ritz, 578 U.S. 355 (2016) (definition and scope of "actual fraud" under § 523(a)(2)(A))
- Bullock v. BankChampaign, N.A., 569 U.S. 267 (2013) (mens rea required for defalcation and analogy to embezzlement)
- Johnson v. Riebesell (In re Riebesell), 586 F.3d 782 (10th Cir. 2009) (justifiable-reliance analysis)
- Fowler Bros. v. Young (In re Young), 91 F.3d 1367 (10th Cir. 1996) (elements for § 523(a)(2)(A) misrepresentation)
- Panalis v. Moore (In re Moore), 357 F.3d 1125 (10th Cir. 2004) (willful and malicious elements for § 523(a)(6))
- Itin v. Ungar, 17 P.3d 129 (Colo. 2000) (elements and mental-state requirements for Colorado civil theft)
- Franklin Drilling & Blasting Inc. v. Lawrence Constr. Co., 463 P.3d 883 (Colo. App. 2018) (interpretation of civil-theft culpable mental states)