Now comes another cautionary tale for builders and developers, especially those using single purpose business entities to handle individual construction projects. The United States Bankruptcy Court in Denver, Colorado, through the Honorable Michael Romero, provided an order regarding plaintiffs’ problems with a home they purchased from an entity controlled or represented by defendants. Plaintiffs, Kelvin and Holly Knaub (the “Knaubs”) filed adversary proceedings against debtor Robert Golba in his bankruptcy proceeding and against debtor Greg Rollison in his separate bankruptcy proceeding. The adversary proceedings were partially consolidated to proceed in parallel but not substantively.
The Knaubs purchased a home from Gemm Homes (“Gemm”) in May 2003. Problems stemming from the foundation caused the Knaubs to seek an explanation and ultimately a solution from Gemm and then from Avalon Homes (“Avalon”), which the Knaubs claim is just a continuation of Gemm. Through their complaint, the Knaubs seek relief for 1) damages caused by fraudulent representations and false pretenses under 11 U.S.C. § 523(a)(2)(A), based on Golba’s misrepresentation that Gemm and Rollison were not involved in Avalon; 2) damages caused by actual fraud under § 523(a)(2)(A), based on Golba’s and Rollison’s alleged conspiracy fraudulently to convey the assets of Gemm to the Avalon entities; and 3) damages caused by breach of fiduciary duty under § 523(a)(4), alleging Gemm was an insolvent company which owed a fiduciary duty to its creditors, and alleging Golba participated in transferring Gemm’s assets to Avalon for no consideration. In the Golba action, the third claim for relief was dismissed.
The facts of the case are important and somewhat convoluted. In an effort to make the cases clear, the evidence, allegations, and facts will be laid out in detail below. The Knaubs’ house was purchased from Gemm and soon after both Gemm and Rollison had an engineering company perform an analysis which discovered the foundation was not laid on stable ground. Thereafter, Gemm, Golba, and Rollison agreed with the Knaubs to construct a new home for them. Around this time, Golba formed Avalon and, according to the Knaubs, assumed the responsibility of building a new home for them.
The Knaubs allege that Rollison was a principal of Gemm and when Gemm was in financial trouble, Avalon was formed. They further allege Avalon was just a continuation of Gemm and all employees of Gemm became employees of Avalon, all assets of Gemm became assets of Avalon, and the transfers of Gemm’s assets were for no consideration. Despite Rollison’s and Golba’s protestations that Rollison was not in any way involved with Avalon, the Knaubs allege they met with Rollison at Avalon’s office, Rollison represented to them he was capable of buying a lot and building a home for them, and the Knaubs allege Rollison signed documents as a manager of Avalon, further strengthening his representation of being involved with the company.
According to both Golba and Rollison, Avalon was formed because of Gemm’s problems with creditors and to take over Gemm’s contracts and finish Gemm’s projects. According to Golba, even though he knew Gemm had no money, he believed Rollison had other lines of credit with which they could resolve the Knaubs’ issues. Shortly after Golba found that Rollison was having trouble obtaining financing and after exhausting other avenues of resolution, he instructed the Knaubs that they should retain counsel. Rollison admitted that at the time he failed to obtain financing for the Knaubs’ home, funds for the value of $465,000.00 were transferred from Gemm to Avalon. Ultimately, both Golba and Rollison filed for bankruptcy and the Knaubs’ home was still not repaired, nor were they provided a new home as had been agreed.
Reviewing the testimony of the parties as well as former employees of Gemm and Avalon, the court came to the conclusion that the claims against Golba must fail while the claims against Rollison are valid and the debt will be non-dischargeable. In coming to its conclusion, the court found that Rollison represented Gemm and Avalon were one and the same or that Avalon was at least continuing Gemm’s business and that it was prosperous and able to complete the Knaubs’ replacement home. From Rollison’s testimony, the court concluded he knew or should have known, regardless of his optimistic outlook, the serious financial issues in which he and his businesses were. Because Rollison held himself out as a controlling person of Gemm, Avalon, and perhaps other entities with the capabilities of funding the project, and he represented he possessed the ability, through other projects, to build the Knaubs a new home, the court found Rollison made false representations.
Accordingly, the court found Rollison made false representations under § 523(a)(2)(A) to the Knaubs, knowing such representations to be false, with the intent to deceive the Knaubs into believing their replacement house would be built. The court also found that, Mrs. Knaub’s testimony indicated the Knaubs justifiably relied on Rollison’s representations because their previous experience had shown willingness by Gemm or Avalon, to fix their home’s problems, and offer them a replacement home. The Knaubs suffered damages, in an amount the court decided would be determined later, arising from problems with a defective home. Thus, as to Rollison, the Knaubs’ debt was found nondischargeable under § 523(a)(2)(A).
As stated above, all claims against Golba failed and the Knaubs’ claim against Rollison under § 523(a)(4) also failed. In the end, Golba was spared any ruling of non-dischargeable debt while Rollison took a pretty hefty hit. Whether Rollison was using single purpose entities or was just a bit careless with his business ventures, does not bear on the lesson: keep each entity separate and apart, making sure there is nothing that even hints at spillover from one entity to another. Otherwise, Rollison’s nondischargeable fate could be repeated.
For additional information regarding Colorado construction litigation, please contact David M. McLain at (303) 987-9813 or by e-mail at mclain@hhmrlaw.com.
