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In re Dailey

United States District Court, D. Nebraska

September 19, 2018


         CHAPTER 7


          Laurie Smith Camp Chief United States District Judge

         This matter is before the Court on appeal of Willmar Electric Services Corp. (Willmar) from the judgment issued by the United States Bankruptcy Court for the District of Nebraska[1] (the “Bankruptcy Court”), in favor of Appellee Joseph K. Dailey. BK ECF No. 96.[2] For the reasons stated below, the judgment of the Bankruptcy Court will be affirmed.


         On March 30, 2016, Dailey filed a petition for discharge under Chapter 7 of the Bankruptcy Code. During the pendency of the Chapter 7 proceedings, Willmar filed an adversary action, asserting that Dailey's debts to Willmar were not dischargeable because they were obtained through fraudulent and malicious representations.

         The Bankruptcy Court made oral findings of fact and conclusions of law, at BK ECF No. 106, Tr.[3] 126:3-136:15, and held that Wilmar failed to meet its burden to prove Dailey's debt was not dischargeable. Willmar elected to have the appeal heard by this Court, and filed its Brief, ECF No. 8, and the record in support of its appeal, ECF Nos. 2, 6, 11. Dailey did not respond to Willman's Brief because Dailey's counsel of record, Kevin J. O'Connell, was not responsive to his client nor to the Court. O'Connell has not moved to withdraw, yet he has failed to respond to the Court's Order to Show Cause, ECF No. 10, and has failed to respond to the Court's efforts to contact him directly. O'Connell's conduct has prolonged the Court's review of this matter and may be the subject of future disciplinary proceedings.

         Notwithstanding Dailey's lack of response, the Court has thoroughly reviewed the arguments and evidence in this case. For the reasons discussed below, the judgment of the Bankruptcy Court will be affirmed.


         I. Subcontract and Lien Waivers

         In 2014, Willmar contracted with Lincoln Public Schools (LPS) to provide labor and materials for LPS Security & Technology Projects in schools in Lincoln, Nebraska (the “LPS Projects”). Tr. 9, 23-24. Willmar subcontracted cabling for the LPS Project to SequrComm, Inc (“SequrComm”). Tr. 20, 24-25; BK ECF No. 36. Dailey was the CEO of SequrComm during the LPS Projects.

         As a condition to getting any payment from Willmar, SequrComm promised to pay its suppliers. BK ECF No. 36, ¶¶ 1.9, 1.10, 3.1(d); Tr. 24. Anixter, Inc. (Anixter) was SequrComm's largest supplier for the LPS Project, supplying over 90 percent of the materials and supplies. Tr. (2) 135, Tr. 33. To confirm SequrComm was paying its suppliers and materialmen, Willmar required SequrComm to sign waivers titled “Unconditional Waiver and Release Upon Progress Payment” (the “Lien Waivers”). BK ECF Nos. 37-39. Dailey admitted he signed four Lien Waivers. Each of the Lien Waivers contained this representation:

The undersigned warrants that he either has already paid or will use the monies he receives from this progress pyment [sic] to promptly pay in full all of his laborers, subcontractors, materialmen and suppliers from [sic] all work, materials, equipment or service provided for or to the above referenced project up to the date of this waiver.

Tr. 45, 132; BK ECF Nos. 37, 38, 39, 86. Dailey understood this language to mean that SequrComm had either “already paid” its suppliers, Tr. 133-134, or would use monies received from progress payments to pay its suppliers promptly. Tr. 133, 63-65.

         SequrComm applied for payment on the LPS Project twice per month. For each request for payment, SequrComm filled out Payment Applications on an American Institute of Architects form, completed its own Invoices, and completed the Lien Waivers. Tr. 23, 24, 28-32; Tr. (2) 16-18. Willmar trained SequrComm personnel to fill out the payment documents, including the Lien Waivers. BK ECF Nos. 53, 54, 57; Tr. 49-50. The documents' purpose was to verify the amount of labor and supplies provided and included in the payment application. Tr. 28-35, 43, 83-84; BK ECF Nos. 51-55, 57, 59. Willmar asserts that the Lien Waivers were crucial because if SequrComm refused to fill out Lien Waivers, Willmar would have known there was a problem with SequrComm's payment of suppliers and Willmar could have stopped making payments to SequrComm, or paid suppliers directly, or taken other action. Tr. 54.

         Dailey and others at SequrComm knew the Lien Waivers were given to Willmar. Tr. 141-144; Tr. (2) 16, 52, Tr. 83. Dailey and others at SequrComm also knew the Lien Waivers had to be signed for SequrComm to get paid. Tr. (2) 16-17, Tr. 141; see also BK ECF No. 59 (“I have a check for you but I am unable to send it to you until the two attached lien waivers have been signed and emailed back to me.”); BK ECF Nos. 53-57, 59, 65.

         II. SequrComm Financial Problems

         In the spring and summer of 2014, SequrComm was in serious financial trouble. Tr. 85, 99. Cash flow had become such a problem that on May 30, 2014, Dailey requested that Chris Armitage, [4] a relatively new employee at SequrComm, make a $25, 000 loan to the company to make payroll. Tr. 76-77, 99. SequrComm also needed additional financing to pay for the large amount of supplies anticipated for the LPS Project. Tr. 85, 86, 159. In May or June 2014, SequrComm sought financing from its bank, Great Western Bank (“GWB”), but was denied due to SequrComm's failure to make payments on existing debts. Tr. 85, 86.

         SequrComm was unable to pay its bills in June 2014. Tr. 76, 85. Creditors called and wrote on a regular basis demanding payment. Tr. 78. Armitage testified that she told Dailey of the vendors' demands for payment, and Dailey made decisions about which would get paid. Tr. 78, 85, 93. SequrComm was also attempting to deal with existing debts to GWB that were guaranteed by SequrComm's owners and directors. Tr. 87; Tr. (2) 15, 29. Emails from May 2014 show that SequrComm was negotiating with GWB to use the money SequrComm received from Willmar on the LPS Project to pay down the loans. BK ECF No. 63; Tr. 85-86, 99. Dailey was included on at least one of the emails. BK ECF No. 63 at 2.

         Throughout this time, SequrComm owed an increasingly large debt to Anixter. There is conflicting evidence about what and when Dailey knew about SequrComm's debt to Anixter. Dailey explained that he was not aware of the magnitude of the debt because he did not handle bookkeeping or finance. Tr. 134-35. According to other SequrComm employees, Dailey oversaw invoicing, and had “decision-making authority over which vendors” and accounts payable were paid. See, e.g. Tr. (2) 19-20, 39- 41, 50- 51. Armitage testified that she spoke to Dailey frequently about Anixter. Stephen Boggs testified that between July 7 and 10, 2014, he called Dailey to tell him Anixter demanded payment. Tr. 119-121, 124-125. In response, Dailey told Stephen Boggs to “knock off questions about Anixter payments.” Tr. 126. Boggs threatened to tell Willmar that SequrComm was ...

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