Bankruptcy is often seen as a fresh start for individuals overwhelmed by debt. However, not all debts can be wiped away. Some obligations stick, especially when fraud, embezzlement, or willful misconduct is involved. A recent case in Colorado demonstrates how certain debts can remain nondischargeable—even after a bankruptcy filing.

In re Palecki: A Construction Contract Gone Wrong

Background

The case centers around Christopher, who owned and operated Christopher Construction, Inc. (CCI). Christopher was hired by Dawn and Jacob to renovate a historic carriage house at their Denver property. They paid a deposit of $59,375 to CCI—25% of the total contract price—believing Christopher was a licensed general contractor capable of handling the project.

However, things quickly unraveled. Unbeknownst to Dawn and Jacob, Christopher was not a licensed general contractor. Even worse, he spent the entire deposit within a month on personal and unrelated business expenses before any work had begun on the project.

The Legal Fallout

When the project stalled due to permitting delays and a lack of progress, Dawn and Jacob canceled the contract and demanded a refund. Christopher, however, failed to return the deposit, leading them to sue both him and CCI in state court. Although they obtained a default judgment against CCI for $65,419.52, Christopher filed for Chapter 13 bankruptcy, hoping to discharge his personal liability for the debt.

Not So Fast: The Nondischargeability Complaint

Dawn and Jacob fought back, filing a complaint to prevent the debt from being discharged under several provisions of the Bankruptcy Code:

1. False Pretenses and Misrepresentation (11 U.S.C. § 523(a)(2)(A))
   The court found that Christopher had falsely represented himself as a licensed contractor to secure the contract and deposit. This intentional deception met the requirements for nondischargeability, ensuring the debt would not be wiped away.
2. Embezzlement (11 U.S.C. § 523(a)(4))
   The court determined that Christopher’s use of the deposit for personal expenses constituted embezzlement. Since the funds were entrusted solely for the renovation project, using them otherwise was both unauthorized and fraudulent.
3. Willful and Malicious Injury (11 U.S.C. § 523(a)(6))
   By misappropriating the deposit and concealing the truth from Dawn and Jacob, Christopher was found to have acted with willful and malicious intent. This further solidified the debt as nondischargeable.

Civil Theft and Treble Damages

To add to Christopher’s troubles, the court ruled that his actions also constituted civil theft under Colorado law, making him liable for treble damages—three times the original amount—plus attorneys’ fees and costs. This decision transformed a $59,375 debt into a potential liability of over $177,000.

Key Takeaways for Homeowners

• Verify Licensing Claims: Always confirm that a contractor is licensed, insured, and bonded requesting proof and consider verifying it yourself.
• Track Deposits and Payments: If possible, insist that deposits be placed in escrow or trust accounts, not commingled with general business funds. If not possible, ask who the supplier is and verify the supplier was paid.
• Get a Lawyer if Possible: Depending on how much the job is, consider hiring a construction or property attorney to review and redline the agreement.
• Know Your Rights in Bankruptcy: If you suspect fraud, embezzlement, or other misconduct, bankruptcy does not necessarily erase the debt. If its worth it, you can object to the debt being wiped out in a bankruptcy.

Conclusion: Protecting Your Rights

This case highlights the importance of diligence and legal recourse when a project goes wrong. If you’re a creditor concerned about recovering money in a bankruptcy case, our experienced bankruptcy attorneys can help you navigate the complexities of nondischargeable debts. Contact us today for a consultation.