Jeffrey Mullins v. United States Bankruptcy Court for the District of Colorado

NOT FOR PUBLICATION 1
UNITED STATES BANKRUPTCY APPELLATE PANEL
OF THE TENTH CIRCUIT
_________________________________
In re JEFFREY THOMAS MULLINS and BAP No. CO-20-046
CHARITY DAWN MULLINS,
Debtors.
___________________________________
Bankr. No. 16-13773
TRANS-WEST, INC., dba Transwest Adv. No. 16-01282
Truck Trailer RV, Chapter 7
Plaintiff - Appellee,
v. OPINION
JEFFREY THOMAS MULLINS and
CHARITY DAWN MULLINS,
Defendants - Appellants.
_________________________________
Appeal from the United States Bankruptcy Court
for the District of Colorado
_________________________________
Before CORNISH, MICHAEL, and HALL, Bankruptcy Judges.
_________________________________
MICHAEL, Bankruptcy Judge.
_________________________________
1
This unpublished opinion may be cited for its persuasive value, but is not
precedential, except under the doctrines of law of the case, claim preclusion, and issue
preclusion. 10th Cir. BAP L.R. 8026-6.
The Debtors, Jeffrey Thomas Mullins (“Mr. Mullins”) and Charity Dawn Mullins
(“Mrs. Mullins”) (collectively, the “Mullins” or “Debtors”), appeal the Bankruptcy Court
judgment in favor of the appellee, Trans-West, Inc., dba Transwest Truck Trailer RV
(“Trans-West”), on Trans-West’s complaint that its debt be excepted from discharge
under 11 U.S.C. § 523(a)(2)(A), (a)(4), and (a)(6). After a trial on the merits, the
Bankruptcy Court determined that Mr. Mullins, while an employee of Trans-West,
engaged in an extensive fraudulent kickback scheme netting himself over $1,000,000 to
the detriment of Trans-West. The Bankruptcy Court found Mr. Mullins’s actions created
a debt to Trans-West that was excepted from discharge under § 523(a)(2)(A) for actual
fraud and false representation, and § 523(a)(6) for willful and malicious injury. Under a
theory of civil conspiracy, the Bankruptcy Court also found Mrs. Mullins was jointly and
severally liable for the entire debt with her husband, and that the debt was excepted from
discharge under the same statutory provisions. Lastly, the Bankruptcy Court found that
the Mullins’ debt was subject to treble damages under Colorado law, and that the entire
amount was excepted from discharge for both Debtors. The Debtors appeal the findings
of the Bankruptcy Court only as they apply to Mrs. Mullins. Because the Bankruptcy
Court did not commit clear error in finding facts in support of its decision, we AFFIRM
the judgment.
Factual and Procedural History
Because the appellants do not challenge the Bankruptcy Court’s judgment with
respect to Mr. Mullins, we limit our statement of facts to those necessary to review the
judgment against Mrs. Mullins. Prior to October 2011, the Mullins lived in Texas, where
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Mr. Mullins owned and operated an RV sales business under the name Pinnacle Coach,
LLC (“Pinnacle”). Although Mrs. Mullins was not actively involved in the purchase and
sale of RVs through Pinnacle, the Bankruptcy Court found that she was an employee of
Pinnacle with check-signing authority on the company’s bank account, and involved in
the winding down of Pinnacle in late 2011. In September 2011, Mr. Mullins relocated
the family to Colorado, where he took a job as sales manager with Trans-West. From the
end of 2011 until its discovery in mid-2015, Mr. Mullins orchestrated and conducted an
elaborate fraudulent kickback scheme, wherein he used his position as sales manager to
cause Trans-West to “buy high” from and “sell low” RV inventory to a network of
business partners, who subsequently remitted checks or cash directly to Mr. Mullins that
represented a portion of the profit from each transaction (the “Kickback Scheme”).
Proceeds from the Kickback Scheme were deposited into a joint personal checking
account held by the Mullins, a bank account of Pinnacle, and a bank account of
Mullbuch, LLC (“Mullbuch”), a life-coaching company operated by Mrs. Mullins.
Upon discovery of the fraud, Trans-West brought claims against both of the
Mullins in a state court civil action and referred the matter to the Weld County District
Attorney for possible criminal charges. Criminal charges were later filed against Mr.
Mullins in Weld County, Colorado. The civil matter was stayed when the Mullins filed a
petition under chapter 7 of the Bankruptcy Code on April 20, 2016. Trans-West then
initiated the present adversary proceeding, which was itself stayed until the conclusion of
the criminal proceedings against Mr. Mullins. The litigation resumed before the
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Bankruptcy Court with the filing of a second amended complaint (the “Complaint”), 2
which sought to establish a nondischargeable debt by Mr. Mullins to Trans-West under
11 U.S.C. § 523(a)(2)(A) 3 for actual fraud and false representation, § 523(a)(4) for fraud
or defalcation while acting in a fiduciary capacity, and § 523(a)(6) for willful and
malicious injury. In addition, Trans-West asked the Bankruptcy Court to find Mr.
Mullins liable to Trans-West for violating Colorado Revised Statutes § 18-4-405 (“§ 18-
4-405”), Colorado’s civil theft statute. 4 Trans-West also asked the Bankruptcy Court to
find each of the Mullins liable to Trans-West for conspiracy to commit false
representation and actual fraud under § 523(a)(2)(A), and conspiracy to commit willful
and malicious injury under § 523(a)(6). It sought a nondischargeable judgment against
Mrs. Mullins alone for aiding and abetting fraud or defalcation while acting in a fiduciary
capacity under § 523(a)(4). Lastly, Trans-West requested the Bankruptcy Court award it
any damages proven at trial, including an award of treble damages, attorney’s fees, and
costs pursuant to § 18-4-405, for damages resulting from theft.
After a four-day trial on the merits, which included live testimony from eight
witnesses, three of whom were experts, and the deposition testimony of five additional
witnesses, the Bankruptcy Court concluded that Mr. Mullins had orchestrated the
fraudulent Kickback Scheme, which resulted in actual damages to Trans-West in excess
2
Second Amended Complaint for Nondischargeability of Debt under Section
523(a), in Appellant’s App. at 9.
3
Unless otherwise noted, all future references to “Code” “Section,” and “§” are to
the Bankruptcy Code, Title 11 of the United States Code.
4
Colo. Rev. Stat. § 18-4-405 (2020).
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of $1,000,000. Although Mr. Mullins tried to explain away the various deposits into his
personal and business accounts, the Bankruptcy Court did not believe his explanations,
and found the debt nondischargeable under § 523(a)(2)(A) for actual fraud and false
representation 5 and § 523(a)(6) for willful and malicious injury. 6 The Bankruptcy Court
then found Mrs. Mullins liable for civil conspiracy under Colorado law based on her
“extensive[] and overt[]” 7 participation in the Kickback Scheme. The Bankruptcy Court
concluded that Mrs. Mullins conspired with her husband to commit actual fraud, false
representation, and willful and malicious injury. 8 Upon finding that Trans-West suffered
at least $1,000,000 in actual damages, the Bankruptcy Court applied § 18-4-405 to assess
treble damages for civil theft in the amount of $3 million in addition to attorney’s fees
and costs, and entered a nondischargeable judgment in that amount against both of the
5
Although the Bankruptcy Court titled the section discussing this claim “False
Pretenses,” the court set forth the elements of the tort of false representation and
proceeded to apply the facts to those elements. This Court has recognized false pretenses
and false representation as separate and distinct torts, Bank of Cordell v. Sturgeon (In re
Sturgeon), 496 B.R. 215, 223 (10th Cir. BAP 2013) (“Unlike false representations, which
are express misrepresentations, false pretenses include conduct and material omissions.”),
but the Bankruptcy Court appears to use the terms interchangeably. The conduct of Mr.
Mullins would easily support a finding of nondischargeability under § 523(a)(2)(A) based
on either tort. The Bankruptcy Court ultimately entered judgment against Mr. Mullins
based on the tort of false representation, which is the tort we will use as the basis for the
claim of civil conspiracy against Mrs. Mullins.
6
The Bankruptcy Court dismissed all counts related to breach of fiduciary duty
under § 523(a)(4) for both Debtors, finding no express trust in favor of Trans-West based
on Mr. Mullins’s status as an employee. The Bankruptcy Court declined to amend the
claim to include embezzlement, which was not pled in the Complaint, nor contained in
any pre-trial statements.
7
Findings of Fact, Conclusions of Law, and Order at 37, in Appellant’s App. at
619.
8
Id. at 37-38, in Appellant’s App. at 619-20.
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Mullins, jointly and severally. The Debtors do not challenge the findings of the
Bankruptcy Court with respect to Mr. Mullins, but they assign five separate points of
error to the Bankruptcy Court’s conclusion that Mrs. Mullins was properly found liable
for the debt to Trans-West.
Jurisdiction and Standard of Review
This Court has jurisdiction over this appeal. The Bankruptcy Court’s judgment,
which fully resolved the adversary proceeding, was entered on September 20, 2020. The
Debtors filed a timely notice of appeal on October 12, 2020, and neither side elected to
have this appeal heard by the United States District Court for Colorado.
The “issue of whether the [trial] court relied on the correct legal standard . . . is a
matter of law which we review de novo.” 9 A bankruptcy court’s factual findings,
including whether a co-conspirator is liable under the theory of conspiracy, are reviewed
on appeal for clear error; legal conclusions are reviewed de novo. 10 To the extent review
involves the sufficiency of the evidence, we review for clear error. 11 “A finding of fact is
‘clearly erroneous’ if it is without factual support in the record, or if the appellate court,
after reviewing all the evidence, is left with a definite and firm conviction that a mistake
has been made.” 12 “If the [trial] court’s account of the evidence is plausible in light of
9
Hadden v. Bowen, 851 F.2d 1266, 1268 (10th Cir. 1988).
10
In re Paige, 685 F.3d 1160, 1178 (10th Cir. 2012); Blankenship v. Herzfeld, 721
F.2d 306, 308 (10th Cir. 1983) (reviewing findings related to conspiracy for clear error).
11
Diamond v. Vickery (In re Vickery), 488 B.R. 680, 685 (10th Cir. BAP 2013)
(citing DSC Nat’l Props., LLC v. Johnson (In re Johnson), 477 B.R. 156, 168 (10th Cir.
BAP 2012)).
12
Cowles v. Dow Keith Oil & Gas, Inc., 752 F.2d 508, 511 (10th Cir. 1985)
(citation omitted).
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the record viewed in its entirety, the court of appeals may not reverse it even though
convinced that had it been sitting as the trier of fact, it would have weighed the evidence
differently.” 13 “This admonition applies equally regardless of whether the [trial] court’s
factual findings are based on credibility determinations[,] documentary evidence,” or
inferences from other facts. 14 Whether a court erred in ordering the amendment of
pleadings pursuant to Federal Rule of Civil Procedure 15(b) is reviewed for abuse of
discretion. 15
Discussion
The Debtors make several assignments of error, which we will discuss in turn.
1. The Bankruptcy Court did not improperly sua sponte amend the Complaint pursuant
to Federal Rule of Civil Procedure 15(b)(1).
The Debtors allege that Trans-West did not properly plead a claim for civil
conspiracy under Colorado law, and that the Bankruptcy Court erred by sua sponte
amending the Complaint pursuant to Federal Rule of Civil Procedure 15(b)(1) to include
the claim. We find that, despite the Debtors’ strained and narrow reading, the Complaint
was sufficient to put them on notice that Trans-West was asserting a claim of civil
conspiracy against Mrs. Mullins. Therefore, the Bankruptcy Court had no reason to
resort to amendment of the Complaint.
13
La Resolana Architects, PA v. Reno, Inc., 555 F.3d 1171, 1177 (10th Cir. 2009)
(quoting Anderson v. City of Bessemer City, N.C., 470 U.S. 564, 573–74 (1985)).
14
Id.15
Green Country Food Mkt., Inc. v. Bottling Grp., LLC, 371 F.3d 1275, 1280
(10th Cir. 2004). See also Sinclair Wyo. Ref. Co. v. A & B Builders, Ltd., 989 F.3d 747,
778 (10th Cir. 2021) (“We hold the appropriate standard of review is abuse of discretion
because we apply that standard in the analogous Rule 15 context.”).
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Despite the Debtors’ insistence that a claim for conspiracy could not be
maintained under § 523, multiple courts, including this Court, have found otherwise. 16
When a plaintiff holds a claim against a debtor, but has not yet acquired a judgment, the
process of finding the claim excepted from discharge by the bankruptcy court is a two-
step dance. 17 The first step requires the trial court to determine whether the plaintiff
holds a valid claim against the defendant, which is controlled by state law. 18 The relevant
state law claim is whether Mrs. Mullins is liable to Trans-West on a theory of conspiracy.
The Complaint clearly alleges the Mullins engaged in a conspiracy to unlawfully defraud
or willfully and maliciously injure Trans-West, including allegations of each element
necessary to state claims of civil conspiracy under Colorado law. It is only the second
16
Bank of Cordell v. Sturgeon (In re Sturgeon), 496 B.R. 215, 223 (10th Cir. BAP
2013) (“False representations and implied misrepresentations that are intended to create
and foster a false impression by co-conspirators in furtherance of a fraudulent scheme
may be attributed to a debtor who is an active, willing and knowing participant in the
fraudulent scheme for purposes of Section 523(a)(2)(A).”); Ewers v. Cottingham (In re
Cottingham), 473 B.R. 703, 710 (6th Cir. BAP 2012) (§ 523(a)(6)); Haemonetics Corp. v.
Dupre, 238 B.R. 224, 230 (D. Mass. 1999), aff’d sub nom. In re Dupre, 229 F.3d 1133(1st Cir. 2000) (§ 523(a)(6)); O’Gara v. Hunter (In re Hunter), 610 B.R. 479, 511
(Bankr. M.D.N.C. 2019) (“To determine whether a debtor’s liability for civil conspiracy
is a willful and malicious injury subject to nondischargeability under § 523(a)(6), the
court looks to a debtor’s intent, as a coconspirator, in committing the underlying unlawful
act or tort of the conspiracy.”); Synod of S. Atl. Presbyterian Church v. Magpusao (In re
Magpusao), 265 B.R. 492, 498 (Bankr. M.D. Fla. 2001) (§ 523(a)(6)).
17
Grogan v. Garner, 498 U.S. 279, 283 (1991) (“At the outset, we distinguish
between the standard of proof that a creditor must satisfy in order to establish a valid
claim against a bankrupt estate and the standard that a creditor who has established a
valid claim must still satisfy in order to avoid dischargeability.”).
18
Id. at 283-84 (“The validity of a creditor’s claim is determined by rules of state
law.”); Diamond v. Vickery (In re Vickery), 488 B.R. 680, 692 n.63 (10th Cir. BAP
2013); Lang v. Lang (In re Lang), 293 B.R. 501, 513 (10th Cir. BAP 2003) (“The state
law of fraud controls with respect to whether fraud has occurred, while bankruptcy law
controls with respect to the determination of nondischargeability.”).
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step in the dance, in making a determination whether the claim is excepted from
discharge pursuant to § 523(a), where the bankruptcy court applies federal law governed
by the Bankruptcy Code. 19 We find Trans-West properly pled claims of conspiracy
against Mrs. Mullins, and that the Bankruptcy Court properly applied Colorado law of
civil conspiracy in making its determination regarding the validity of Trans-West’s
claims. Finding no reason for the Bankruptcy Court to conform pleadings to the
evidence, we find no error.
2. The Bankruptcy Court made sufficient factual findings to support a determination of
Mrs. Mullins’s liability to Trans-West under § 523(a)(2)(A) and (a)(6) as a co-
conspirator.
a. Civil conspiracy under Colorado law
In the first step of our dance, we find the Bankruptcy Court properly applied
Colorado law to determine whether Mrs. Mullins was liable to Trans-West under a theory
of conspiracy. In order to establish a claim for civil conspiracy under Colorado law,
there must be: (1) two or more persons, (2) an object to be accomplished; (3) a meeting
of minds on the object or course of action; (4) one or more unlawful overt acts; and (5)
damages as the proximate result thereof. 20 Courts “will not infer the agreement necessary
to form a conspiracy; evidence of such an agreement must be presented by the
plaintiff.” 21 And “silent knowledge of an unlawful act is insufficient to establish the
19
Grogan v. Garner, 498 U.S. at 284.
20
Nelson v. Elway, 908 P.2d 102, 106 (Colo. 1995); Jet Courier Serv., Inc. v.
Mulei, 771 P.2d 486, 502 (Colo. 1989); More v. Johnson, 568 P.2d 437, 440 (Colo.
1977); Lockwood Grader Corp. v. Bockhaus, 270 P.2d 193, 196 (Colo. 1954).
21
Nelson v. Elway, 908 P.2d at 106. See also More v. Johnson, 568 P.2d at 440.
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requisite agreement.” 22 The Bankruptcy Court concluded that Mrs. Mullins conspired
with Mr. Mullins to defraud Trans-West by “extensively and overtly” participating in the
Kickback Scheme, and thus met the requirements for liability under a theory of civil
conspiracy. 23
The Bankruptcy Court found Mrs. Mullins was an employee of Pinnacle with
check signing authority during the time kickbacks flowed through Pinnacle, and she was
involved with its corporate winding down. The Bankruptcy Court also found that Mrs.
Mullins personally received a check from Pinnacle on the same day that one of Mr.
Mullins’s other co-conspirators wrote a check to Pinnacle, despite Mrs. Mullins’s
insistence that she was not involved in any of Mr. Mullins’s business dealings. Mrs.
Mullins deposited approximately $28,000 in unexplained cash into the Debtors’ joint
personal checking account between 2011 and 2014. Mrs. Mullins denied making the
deposits, but was otherwise unable to explain their source or purpose. Mullbuch, Mrs.
Mullins’s life-coaching company, received a check from another of Mr. Mullins’s co-
conspirators and subsequently issued a check to Mrs. Mullins for the same amount. More
than $400,000 over and above Mr. Mullins’s salary flowed through the Debtors’ joint
personal checking account in 2012, when neither of the Mullins had a recognized
secondary source of income. As additional evidence of her participation in the Kickback
Scheme, the Bankruptcy Court noted Mrs. Mullins’s signature on the couple’s tax returns
22
More v. Johnson, 568 P.2d at 440.
23
Findings of Fact, Conclusions of Law, and Order at 37, in Appellant’s App. at
619.
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and recounted several occurrences of “lavish consumer spending sprees,” cash
withdrawals, and numerous expenditures related to the Mullins’ purchase of a new
home. 24 Despite her denials of wrongdoing and alternative explanations for the flow of
funds through their accounts, the Bankruptcy Court found Mrs. Mullins was “evasive,
combative, and never made eye contact with the Court.” 25
We find the Bankruptcy Court’s conclusion of Mrs. Mullins’s liability for civil
conspiracy is supported by the evidence. The court found that Mrs. Mullins conspired
with her husband to defraud and injure Trans-West. Although the evidence of Mrs.
Mullins’s participation in the Kickback Scheme pales in comparison to her husband’s, the
Bankruptcy Court found that she was a knowing and active participant in the fraud,
through the receipt of checks, deposits of cash, consumer purchases made, length of time,
and amount of money transferred. Each of the elements of civil conspiracy is satisfied by
a preponderance of the evidence, and this Court cannot find clear error in the Bankruptcy
Court’s conclusion.
b. Exceptions from discharge under § 523(a)(2)(A) and (a)(6)
The second step of our dance involves asking whether the debt to Trans-West,
having been established in the first step, should be excepted from discharge under any of
the provisions of § 523(a). Because the Bankruptcy Court found the debt to Trans-West
excepted from discharge under both § 523(a)(2)(A) and (a)(6), we must discuss each
provision separately.
24
Id. at 25, in Appellant’s App. at 607.
25
Id.
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i. Section 523(a)(2)(A)
This Court has previously addressed the standards required to find a co-
conspirator liable for a debt resulting from a fraudulent scheme. 26 In In re Sturgeon, we
found that where a debtor was an active and knowing participant in a fraudulent scheme,
liability for the entire scheme would be excepted from discharge, not just the debt tied
directly to the debtor’s actions. 27 In that case, we stated:
Actual fraud occurs “when a debtor intentionally engages in a scheme to
deprive or cheat another of property or a legal right.” [Diamond v. Vickery
(In re Vickery), 488 B.R. 680, 691 (10th Cir. BAP 2013)] at 690 (quoting
Mellon Bank, N.A. v. Vitanovich (In re Vitanovich), 259 B.R. 873, 877 (6th
Cir. BAP 2001)).
False representations and implied misrepresentations that are
intended to create and foster a false impression by co-conspirators in
furtherance of a fraudulent scheme may be attributed to a debtor who is an
active, willing and knowing participant in the fraudulent scheme for
purposes of Section 523(a)(2)(A). See, e.g., Blackmon v. Evans (In re
Evans), 410 B.R. 317, 321 (Bankr. M.D. Fla. 2009) (fraudulent acts and
representations made by co-conspirators are attributed to an active
participant in the fraudulent scheme). Fraudulent intent for purposes of
Section 523(a)(2)(A) can be shown by establishing that the debtor was a
willing participant in a fraudulent scheme and thereby intended to deceive a
creditor. Holmes v. Nat’l City Bank (In re Holmes), 414 B.R. 115, 131–32
(E.D. Mich. 2009). 28
26
Bank of Cordell v. Sturgeon (In re Sturgeon), 496 B.R. 215 (10th Cir. BAP
2013).
27
Id.Id. at 223–24 (footnotes omitted). See also Aetna Cas. and Sur. Co. v.
28
Markarian (In re Markarian), 228 B.R. 34, 39 (1st Cir. BAP 1998) (“[S]ection
523(a)(2)(A) may include debts which arise from the wrongful acts of conspirators and
their co-conspirators.”); MacDonald v. Buck (In re Buck), 75 B.R. 417, 420–21 (Bankr.
N.D. Cal. 1987) (“[A] debtor who has made no false representation may nevertheless be
bound by the fraud of another if a debtor is a knowing and active participant in the
scheme to defraud.”).
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In finding the debt to Trans-West nondischargeable, the Bankruptcy Court found
as a fact that the Mullins orchestrated a fraudulent scheme, and that Mrs. Mullins was an
active participant. The same facts that supported the Bankruptcy Court’s conclusion that
Mrs. Mullins was liable for civil conspiracy under Colorado law also support the
Bankruptcy Court’s determination that the debt should be excepted from discharge
pursuant to § 523(a)(2)(A): her active receipt and deposit of checks and cash were
evidence of her willing participation, and the sheer amount of funds passing through the
couple’s accounts for years was evidence that she “had to know” Mr. Mullins was
coordinating a fraudulent scheme. 29
We acknowledge the weakest element of the Bankruptcy Court’s decision is its
finding that Mrs. Mullins was aware that her husband was orchestrating a fraudulent
scheme against Trans-West. While we believe the Bankruptcy Court could have made
that finding more explicitly, we are aware that this Circuit endorses the principle that
intent to deceive a creditor may be inferred from the totality of the circumstances of a
case. 30 The Bankruptcy Court found sufficient facts from which to infer that Mrs.
Mullins was fully aware of her husband’s fraudulent conduct. We therefore cannot find
that the Bankruptcy Court’s conclusion that Mrs. Mullins was a knowing participant in
the Kickback Scheme was clearly erroneous. Having found Mr. Mullins liable for actual
29
See Findings of Fact, Conclusions of Law, and Order at 38, in Appellant’s App.
at 620 (“In view of the amount of money involved and the time frame, she had to know
that the funds were not just from gambling.”).
30
Fowler Bros. v. Young (In re Young), 91 F.3d 1367, 1375 (10th Cir. 1996); In re
Sturgeon, 496 B.R. at 222; Copper v. Lemke (In re Lemke), 423 B.R. 917, 922 (10th Cir.
BAP 2010).
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fraud and false representation, the Bankruptcy Court concluded that Mrs. Mullins was
liable under § 523(a)(2)(A) as a co-conspirator based on her knowledge of and
participation in the scheme. Because the record provides support for the Bankruptcy
Court’s conclusion, we cannot find error. 31
ii. Section 523(a)(6)
When evaluating a willful and malicious injury under § 523(a)(6), courts
“require[] proof of: (1) an intentional action by the defendant; (2) done with the intent to
harm; (3) which causes damage (economic or physical) to the plaintiff; and (4) the injury
is the proximate result of the action by the defendant.” 32 When evaluating the liability of
a co-conspirator under § 523(a)(6), courts invariably focus on the same two critical
elements as they do under § 523(a)(2)(A): knowledge of the tort and participation.33
Both sections share a requirement that the defendant’s intent to harm be evidenced by
their knowledge of the unlawful conduct at the heart of the conspiracy. Unlike
31
Although individual members of this panel may have reached a different
outcome as triers of fact, the Bankruptcy Court’s account of the evidence is “plausible in
light of the record viewed in its entirety, [and] the court of appeals may not reverse it
even though convinced that had it been sitting as the trier of fact, it would have weighed
the evidence differently.” Anderson v. City of Bessemer City, N.C., 470 U.S. 564, 574
(1985) (“Where there are two permissible views of the evidence, the factfinder’s choice
between them cannot be clearly erroneous.”).
32
Bryant v. Tilley (In re Tilley), 286 B.R. 782, 790 (Bankr. D. Colo. 2002) (citing
Synod of S. Atl. Presbyterian Church v. Magpusao (In re Magpusao), 265 B.R. 492, 498
(Bankr. M.D. Fla. 2001)).
33
Ewers v. Cottingham (In re Cottingham), 473 B.R. 703, 710 (6th Cir. BAP
2012); Haemonetics Corp. v. Dupre, 238 B.R. 224, 229-30 (D. Mass. 1999), aff’d sub
nom. In re Dupre, 229 F.3d 1133 (1st Cir. 2000); O’Gara v. Hunter (In re Hunter), 610
B.R. 479, 511 (Bankr. M.D.N.C. 2019); In re Tilley, 286 B.R. at 790; In re Magpusao,
265 B.R. at 498 (“[K]nowledge must be concurrent with participation in the use or
enjoyment of the stolen property in order for liability to attach.”).
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§ 523(a)(2)(A), which requires active participation in the fraudulent scheme by the
defendant, courts have found debts nondischargeable under § 523(a)(6) where the
debtor’s “participation” was the active spending of, and benefit from, funds the debtor
knew were unlawfully acquired. This conduct amounts to a conversion of the stolen
funds that is separate and distinct from the tort that brought the funds into the defendant’s
hands. 34
In Haemonetics Corp. v. Dupre, 35 the United States District Court for the District
of Massachusetts faced facts similar to ours. There, the court found that the debtor-wife
could not claim ignorance of her husband’s embezzlement, which brought substantial
excess funds into their joint accounts. While the court found no evidence that she
participated in the embezzlement of funds from her husband’s employer, the court found
the debtor-wife knowingly participated in a subsequent conversion of the funds by
utilizing the embezzled funds to support an extravagant lifestyle. The reflections of the
court are noteworthy:
It is not sufficient, of course, to merely show knowledge on
Theresa’s part. The evidence must also establish that Theresa was a
participant in the scheme to convert the appellants’ funds. Judge Hillman
seemed to be [of] the view that appellants were required in this regard to
show that Theresa assisted Paul in the actual embezzlement to establish
liability on her part. This, I believe, reflects a misunderstanding of the
theory on which the appellants’ case is based. The scheme alleged involved
not one, but two conversions of the pilfered funds. The first conversion was
the embezzlement itself for which appellants concede Paul bears the sole
responsibility. The second conversion, and the one appellants seek to pin on
Theresa, was the use of the money by the couple to support their
34
See, e.g., Haemonetics Corp. v. Dupre, 238 B.R. at 229.
35
Id.-15-
extravagant lifestyle. While embezzlement was the driving logic of the
alleged scheme, it was not its defining or sole object.
Seen in this light the issue becomes one of Theresa’s liability under
section 523(a)(6) (and not section a(2)(A) [sic] which would apply more
appropriately to Paul). To fall within the exception of § 523(a)(6), a debtor
must be shown to have “willfully and maliciously” injured the property of
another. That a conversion is an “injury” to property is not disputed. But
the meaning of the phrase “wilful and malicious,” which obviously speaks
to the debtor’s state of mind, was a fair subject of debate prior to
Kawaauhau v. Geiger, 523 U.S. 57, 118 S. Ct. 974, 140 L.Ed.2d 90 (1998).
The Supreme Court held in Geiger, that as used in section (a)(6), the phrase
means more than an intentional act leading to an injury. As the Court
observed, because “‘wilful’ in (a)(6) modifies the word ‘injury,’ ... a
deliberate or intentional injury, [and] not merely a deliberate or intentional
act that leads to injury” is required. Id. at 61, 118 S. Ct. 974. In making this
distinction, Justice Ginsburg noted that “the (a)(6) formulation triggers in
the lawyer’s mind the category ‘intentional torts,’ as distinguished from
negligent or reckless torts. Intentional torts generally require that the actor
intend ‘the consequences of an act,’ not simply ‘the act itself.’” Id. at 61–
62, 118 S. Ct. 974, citing Restatement (Second) of Torts § 8A, Comment a,
p. 15 (1964).
....
Under Geiger, the debtor must thus be shown not only to have
intended to exercise control over the plaintiffs’ property, but to have done
so intending the consequent injury to the plaintiffs’ interest in the property.
Here the record demonstrates that Theresa knew that the excess funds in the
joint accounts were stolen. She nonetheless wrote checks on these funds.
Her intent was to convert the embezzled money to her own (and to Paul’s)
use, thereby permanently depriving the true owners (Haemonetics and
Nova) of their money. Her conduct clearly satisfies Geiger, and hence the
appellants’ claims against her are not dischargeable. 36
In In re Tilley, 37 the Bankruptcy Court for the District of Colorado faced a similar
fact pattern, with a twist. There, the court found that mere receipt and expenditure of
embezzled funds was insufficient to meet the requirements of § 523(a)(6), where there
36
Id. at 229–30 (emphasis added) (footnotes omitted).
37
In re Tilley, 286 B.R. at 782.
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was no evidence the debtor participated in the embezzlement or knew of the source of the
funds. That court opined:
If a debtor knows that his spouse or significant other is embezzling funds
and then participates in the use or dissipation of them for a purpose other
than the intent of the original entrustment to the significant other, then the
debtor may be liable for conversion, which is a claim that would satisfy the
requirements of a willful and malicious injury to property claim under
Section 523(a)(6). To satisfy a prima facie case, however, a plaintiff must
establish the defendant’s knowledge of the embezzlement, not simply his
receipt of the embezzled funds, in order to demonstrate the conversion.38
Although the present case involves actual fraud and false representation instead of
embezzlement, the principles are the same. Having concluded that Mrs. Mullins knew of
the fraudulent activity of her husband and that she was, in fact, an active participant in the
Kickback Scheme, the Bankruptcy Court found that her profligate spending of the fruits
of the scheme resulted in a willful and malicious injury to Trans-West. We cannot find
error in the Bankruptcy Court’s conclusion.
3. The Bankruptcy Court did not err in awarding treble damages and attorney’s fees
against Mrs. Mullins under § 18-4-405.
Having found each of the Mullins liable for the damages to Trans-West for civil
theft, the Bankruptcy Court awarded Trans-West treble damages pursuant to § 18-4-405.
The Debtors assert that such an award was not properly pled against Mrs. Mullins. 39 We
disagree.
38
Id. at 790.
39
The Debtors also argue that in the event we find error in the Bankruptcy Court’s
conclusions under § 523(a)(6) with respect to Mrs. Mullins, the award under § 18-4-405
should be reversed. Finding no error, we find no grounds to disturb the award.
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First, the Complaint put the Mullins on sufficient notice of the request for an
award of treble damages and attorney’s fees against both defendants. The Mullins assert
that the Complaint did not specifically plead § 18-4-405 in connection with Mrs. Mullins,
and they were caught off-guard when the enhanced damage award was applied to her.
This may stem from a misunderstanding of the nature of a claim for conspiracy.
Colorado courts have noted that “the essence of a civil conspiracy claim is not the
conspiracy itself, but the actual damages resulting from the acts done in furtherance of
the conspiracy.” 40 In Morrison v. Goodspeed, 41 a commonly cited case by Colorado’s
highest court on the subject of civil conspiracy, the court stated:
In a civil action, conspiracy is not actionable per se. The proof of
conspiracy in such actions is admitted in order that what otherwise might
appear to be unrelated acts of several individuals shall appear as related
parts of a single transaction, in which the acts of each are in fact the acts of
the others in furtherance of a common design, the consummation of which
results in damage. The gist of such an action is damages and no right of
action accrues until damages are sustained. The proof of a conspiracy in
civil cases also determines who shall respond in damages. Action of an
individual which would cause him to be liable for damages, if acquiesced in
by two or more others, and in which they co-operated imposes on all who
participated the obligation to respond in damages resulting from the
consummation of the common design. In Pullen v. Headberg, 53 Colo. 502,
127 P. 954, 955, we said: ‘At common law a ‘conspiracy’ is defined as a
combination between two or more persons to do a criminal or unlawful act
or a lawful act by criminal or unlawful means. In criminal prosecutions, the
gist of the action is the conspiracy. But in civil cases the gist of the action is
not the conspiracy, but the damages resulting from it, and unless a civil
action in damages would lie against one of the conspirators, if the act was
done by him alone, it will not lie against many acting in concert. The object
of the criminal action is punishment against the wrongdoers. The object of
40
Resol. Tr. Corp. v. Heiserman, 898 P.2d 1049, 1055, 1057 (Colo. 1995); Jet
Courier Serv., Inc. v. Mulei, 771 P.2d 486, 502 (Colo. 1989); Double Oak Const., L.L.C.
v. Cornerstone Dev. Int’l, L.L.C., 97 P.3d 140, 146 (Colo. App. 2003).
41
68 P.2d 458 (Colo. 1937).
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the civil action is to recover any damages resulting from carrying out the
conspiracy.’ 42
Under the principles espoused in Morrison, it is clear that Colorado courts would endorse
the extension of damages to all active participants, regardless of their relative
involvement in the scheme.
We also find the structure of the Complaint should have put the Mullins on notice
that Trans-West sought an application of § 18-4-405 for treble damages and attorney’s
fees against both defendants. The request appears in the final “wherefore” paragraph of
the Complaint, applicable to all defendants, as opposed to being tied to a claim against a
particular defendant. 43 Colorado courts make it clear that the purpose of a claim for civil
conspiracy is to extend liability for damages to each of the co-conspirators. 44 The same
logic applies to the extension of enhanced damages: to allow the plaintiff to recover all
damages resulting from the conspiracy. 45 Lastly, the text of § 18-4-405 makes clear that
“[t]he owner [of stolen property] may maintain an action not only against the taker
thereof but also against any person in whose possession he finds the property.” 46 As the
42
Id. at 464 (emphasis added). See Resol. Tr. Corp. v. Heiserman, 898 P.2d at
1055; More v. Johnson, 568 P.2d 437, 494 (1977); McGlasson v. Barger, 431 P.2d 778,
780 (1967). See also Double Oak Const., L.L.C. v. Cornerstone Dev. Int’l, L.L.C., 97
P.3d at 146.
43
See Complaint at 7, in Appellant’s App. at 9.
44
See supra notes 40-42 and accompanying text.
45
See Morrison v. Goodspeed, 68 P.2d at 465 (“If such agreement and concert of
action resulted in damages to Morrison, it is such result that constitutes his cause of
action, and it is good as against all who participated in producing it.”).
46
§ 18-4-405 (emphasis added).
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fruits of the Kickback Scheme were found in the Mullins’ joint personal checking
account, both defendants should have been on notice of the statute’s application.
We also find the Bankruptcy Court correctly applied § 18-4-405 to award treble
damages and fees against both Mr. and Mrs. Mullins. Section 18-4-405 provides a
plaintiff “may recover two hundred dollars or three times the amount of actual damages .
. . and may also recover costs of the action and reasonable attorney fees.” 47 Despite
usage of the word “may,” courts have held that an award of treble damages and attorney’s
fees to a prevailing plaintiff is mandatory upon proof of all of the elements of civil
theft. 48 Thus, the Bankruptcy Court had no discretion whether to award treble damages
and fees upon its finding that the Debtors were liable for civil theft. The Bankruptcy
Court found both Mr. and Mrs. Mullins were liable for civil theft for the whole of the
damages to Trans-West as co-conspirators. Upon such a finding, Colorado law required
the Bankruptcy Court to issue an award of treble damages and attorney’s fees. Finding
47
§ 18-4-405 (emphasis added).
48
Arnold v. Arnold (In re Arnold), No. AP 10-01311, 2016 WL 1022350, at *4
(10th Cir. BAP Mar. 15, 2016) (unpublished); JK Transports, Inc., v. McGill (In re
McGill), 623 B.R. 876, 901 (Bankr. D. Colo. 2020); In re Krupka, 317 B.R. 432, 439
(Bankr. D. Colo. 2004) (“Because the language used [in § 18-4-405] speaks in terms of
what the owner may recover as opposed to what the court may award, this Court does not
believe that the statutory language supports the argument that discretion lies with the trial
court to either award treble damages or not as it may deem appropriate.”); Franklin
Drilling & Blasting Inc. v. Lawrence Constr. Co., 463 P.3d 883, 889 n.5 (Colo. App.
2018) (“[N]othing in the civil theft statute confers such discretion on a trial court, if all
the elements of civil theft have been proved by a preponderance of the evidence.”)
(disagreeing with Bemas Constr., Inc. v. Dorland (In re Dorland), 374 B.R. 765 (Bankr.
D. Colo. 2007), which suggested that an award of treble damages under § 18-4-405 was
subject to court discretion); Steward Software Co. v. Kopcho, 275 P.3d 702, 712 (Colo.
App. 2010) (applying logic of In re Krupka to award of attorney’s fees under § 18-4-
405), rev’d on other grounds, 266 P.3d 1085 (Colo. 2011).
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the Bankruptcy Court applied the correct legal standard for applying enhanced damages,
we find no reason to disturb the award.
4. The Bankruptcy Court did not err in awarding Mrs. Mullins’s share of the funds held
in escrow from the sale of the Defendants’ home to Trans-West pursuant to a stipulation
entered in Weld County Case No. 2015cv30505.
Given that we affirm the Bankruptcy Court’s determinations that each of the
Mullins owe a nondischargeable debt to Trans-West, we find no cause to disturb the
decision to disburse the escrowed funds to Trans-West.
Conclusion
After thoroughly reviewing the record and considering the evidence as a whole,
we are not persuaded by the Debtors’ arguments on appeal. The Complaint was
sufficiently pled to put the Debtors on notice that Trans-West sought to hold Mrs.
Mullins jointly liable with Mr. Mullins for the entire debt on the basis of civil conspiracy.
The Bankruptcy Court’s finding that Mrs. Mullins was a willful participant in Mr.
Mullins’s fraudulent scheme to injure Trans-West is supported by the evidence presented
at trial and is not clearly erroneous. We therefore affirm the Bankruptcy Court’s
determination that the debt to Trans-West is nondischargeable under § 523(a)(2)(A) for
actual fraud and false representation and under § 523(a)(6) for willful and malicious
injury. We also find no error in the Bankruptcy Court’s award of treble damages,
attorney’s fees, costs, and expenses against Mr. and Mrs. Mullins jointly and severally,
nor in its disbursement of funds held in escrow to Trans-West pursuant to a stipulation
entered by the parties.
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