Opinion
Rehearing Denied Aug. 17, 1971.
Page 330
Dolan & Dolan, Paul A. Morris, Boulder, for plaintiff in error, Gilbert Leroy Peterson.
Martin & Riggs, E. Gregory Martin, Don P. Stimmel, Boulder, for plaintiff in error, Glenn L. Kunce.
Mark R. Klauber, Boulder, for defendants in error.
PIERCE, Judge.
This case was transferred from the Supreme Court pursuant to statute.
The parties appear here in reverse of their order of appearance below and will be referred to by their trial court designations or by name. Glenn Kunce and Gilbert Peterson seek reversal of the trial court's judgment. Prior to trial, defaults were entered against Gilbert Peterson's brother, Dean Peterson, and Peterson Brothers Construction, Inc. (construction company). Among the named defendants in the action below, only Kunce and Gilbert Peterson took part in the trial. Dean Peterson and the construction company have not sought review.
This is an action for the recovery of damages incurred by plaintiffs as a result of mechanics' lien suits filed against their property in connection with the construction of a duplex residence for them by defendants. The complaint set forth numerous claims for relief, including allegations of breach of contract, conversion, and that the corporation was a sham. Fraud was claimed on the part of Kunce, based upon an alleged false representation by him that the construction company was financially sound and reputable and concealment of the facts as to the actual financial condition of the company. It was further alleged that this fraud was imputable to Gilbert.
Judgment was entered in favor of plaintiffs upon answers to interrogatories submitted to the jury.
The factual background of this action is as follows: In March 1964, the Phillipses decided to construct a duplex residence. Originally, they consulted a realtor who, because he did not deal in duplex construction, referred them to Kunce, a licensed real estate broker working on behalf of Peterson Brothers Construction, Inc. Although the evidence is disputed, there is testimony to the effect that Kunce did not inform the Phillipses of his relationship with the construction company and that they were, in fact, relying upon him as their agent.
Kunce showed plaintiffs several residences which the construction company had built or was building. Plaintiffs thereafter decided to have the construction company purchase a lot and build a duplex for them for a total price of $22,000. On March 18, 1964, plaintiffs signed a contract brought to them by Kunce, which called for full payment in advance.
Prior to signing the contract, Mrs. Phillips inquired as to the solvency of the construction company and the requirement that they make full payment in advance. She maintained that Kunce made statements leading them to believe the construction company was prosperous and that payment in advance was a common practice in duplex construction. Relying upon these representations, the Phillipses executed the constract.
A witness, who did sand, gravel, and concrete work for Peterson Brothers Construction, Inc., testified that the company was experiencing financial difficulties in 1963 and 1964, prior to the Phillipses signing the contract, and that Kunce was aware of these financial problems in late 1963. Other testimony established that full payment in advance was not the standard practice of the industry in that community; to the contrary, it was highly unusual.
After the Phillipses signed the contract in March 1964, they paid the total purchase price to the company and the duplex was constructed. In September 1964, several subcontractors brought actions against plaintiffs to foreclose mechanics' liens in the aggregate amount of $10,636.73, plus interest. These actions were later settled for $7,500. It was stipulated that in the defense of the mechanics' lien suits plaintiffs had incurred reasonable attorney's fees of $3,500.
By fall of 1964, the construction company was insolvent, and Gilbert Peterson filed a voluntary petition in bankruptcy. He was discharged in bankruptcy on November 14, 1966, with plaintiffs listed among his personal creditors.
After receiving instruction, the case was submitted to the jury upon the following special interrogatories:
1. 'Do you find, by clear and convincing evidence, as defined in Instruction No. 1, submitted herewith that the Defendant Peterson Bros. Construction, Inc. was in financial difficulty on or about March 18, 1964?'
2. 'Do you find, by clear and convincing evidence, that the Defendant, Glenn Kunce knew that the Defendant, Peterson Bros. Construction, Inc. was in financial difficulty on or about March 18, 1964, and knew that Peterson Bros. Construction Inc. probably could not fulfill its obligations under the contract (Plaintiffs' Exhibit A)?'
3. 'Do you find, by clear and convincing evidence that Defendant Glenn L. Kunce represented to the Plaintiffs, Kenneth Phillips and Eleanor C. Phillips that the Defendant, Peterson Bros. Construction, Inc. was financially sound on or about March 18, 1964, with the intent that Kenneth Phillips and Eleanor C. Phillips act upon such representation?'
4. 'Do you find by clear and convincing evidence that Peterson Bros. Construction, Inc. was a sham corporation that is a corporation in name only?'
The jury answered all the interrogatories in the affirmative and the trial court found the issues in favor of plaintiffs and against Gilbert Peterson on the claims of conversion and breach of contract and against Glenn Kunce on the allegation of fraud. Judgment was entered against them, jointly and severally, in the sum of $11,000, plus costs and interest from March 18, 1965. I.
Gilbert Peterson asserts that the trial court erred in failing to grant a directed verdict in his favor at the close of all the evidence on the ground that the debt had been previously discharged by his personal bankruptcy. We are constrained to agree.
The rule, supported by most authorities, is that after a bankrupt has made a prima facie defense to a suit, based upon the fact that he has been discharged in bankruptcy, the burden of proof is upon the plaintiff to establish that the discharge is not operative as to his claim, or that it falls within an exception under s 17 of the Bankruptcy Act as it exists at the time of trial. Kreitlein v. Ferger, 238 U.S. 21, 35 S.Ct. 685, 59 L.Ed. 1184; Valdez v. Sams, 134 Colo. 488, 307 P.2d 189; See 9 Am.Jur.2d Bankruptcy s 815. The Bankruptcy Act, as then in force, excepted from the operation of a discharge debts 'created by his fraud, embezzlement, misappropriation or defalcation while acting as an officer or in any fiduciary capacity.' Bankruptcy Act s 17(a)(4); 11 U.S.C. s 35(a)(4). This exception could not apply to Gilbert due to the lack of the necessary element of fiduciary capacity. The contract between plaintiffs and Peterson Brothers Construction, Inc. established nothing more than a debtor-creditor relationship. The Phillipses delivered money and property to the construction company in exchange for the promise to construct a duplex. No ownership of or interest in the funds remained in plaintiffs once they made payment to the construction company.
It is generally held that the exception to s 17 of the Bankruptcy Act will not come into play unless the facts clearly show a technical or express trust. Noble v. Hammond, 129 S.U. 65, 9 S.Ct. 235, 32 L.Ed. 621. See Annot. 16 A.L.R.2d 1152. There is nothing in the fact situation before us that could be interpreted to create such a trust. The theory of implied trust is also unavailable to plaintiffs as it is necessary that the fiduciary relationship contemplated by the Bankruptcy Act exist prior to, and be independent of, the particular transaction or occurrence from which any liability on the part of the construction company might arise. Davis v. Aetna Acceptance Co., 293 U.S. 328, 55 S.Ct. 151, 79 L.Ed. 393.
The evidence shows that Gilbert Peterson was not involved in the financial end of Peterson Brothers Construction, Inc., since that portion of the business was handled by his brother, Dean. The Phillipses had no contact with him until the construction was commenced and we find no evidence which would indicate that he ever personally, or as an officer of the corporation, entered into any agreement with plaintiffs to become their agent or fiduciary. Where he was not a fiduciary, he could not, as a matter of law, have been guilty of conversion as defined by Byron v. York Investment Company, 133 Colo. 418, 296 P.2d 742, which states:
'Conversion is any distinct, unauthorized act of dominion or ownership exercised by one person over personal property belonging to another. A mere breach of contract will not support any action of trover. An action for damages for the conversion of personal property cannot be maintained unless plaintiff had a general or special property in the personalty converted, coupled with possession or the immediate right thereto. (Citations.)'
As Gilbert Peterson was not in the necessary legal relationship with plaintiffs to have been guilty of conversion, it was error for the trial court to refuse to direct a verdict in his favor on the ground that he had been previously discharged in bankruptcy.
II.
Defendant Kunce assigns as error the trial court's failure to direct a verdict in his favor on the ground that the evidence adduced at trial was insufficient to support a verdict of fraud. In Colorado, fraud must be established against the party charged by clear and convincing evidence and must be of such a nature as to impel the minds of reasonable men to a conviction of the truth thereof. Morrison v. McCluer, 27 Colo.App. 264, 148 P. 380. As measured by the above defined standards, a review of the record in this case provides a substantial evidentiary basis supportive of the jury's finding of fraud on the part of Kunce.
III.
Kunce next contends that the trial court erred in awarding plaintiffs $7,500 as damages, which was the full cost of their settlement of the mechanics' lien suits brought against them, on the ground that payment in such a settlement was not the natural, probable, and proximate result of his conduct. Jones v. Nathrop, 7 Colo. 1, 1 P. 435. Kunce relies on the fact that defects appeared on the face of certain mechanics' lien statements offered into evidence. The mechanics' lien statements in evidence totaled claims of $8,649.14.
Contrary to this assertion, we find that evidence presented on behalf of plaintiffs clearly supports the view that the mechanics' lien suits and the subsequent settlement thereof were the natural, probable, and proximate result of defendant's actions. The validity of a compromise is not impaired by the fact that it resolved issues differently than a court might have. Perkins v. Trinka, 30 Minn. 241, 15 N.W. 115; Kronmeyer v. Buck, 258 Ill. 586, 101 N.E. 935; Ohlson v. Steinhauser, 218 Or. 532, 315 P.2d 136, 346 P.2d 87. Thus, a claim need not be valid or well-founded to support a compromise and, as long as there has been good faith, the courts will not inquire into the merits of the claim or the actual rights of the parties in an effort to avoid or defeat a compromise. Kiefer Oil & Gas Co. v. McDougal, 10 Cir., 229 F. 933; Kronmeyer v. Buck, supra; Neubacher v. Perry, 57 Ind.App. 362, 103 N.E. 805; Sanford v. Hucksford, 32 Mich. 313.
Furthermore, although defendant now claims that due to the defects in the mechanics' lien statements the plaintiffs could have further mitigated their damages, this defense was not pled. It is the rule in Colorado that mitigation of damages must be pled as an affirmative defense. R.C.P. Colo. 8(c); Franklin v. Nolan, Colo.App., 472 P.2d 166.
IV.
Defendant Kunce further claims that the trial court erred in awarding attorney's fees as damages when this element of damage was not pled by plaintiffs. The trial court admitted such evidence and, in fact, awarded damages upon the authority of R.C.P.Colo. 15(b), which states:
'When issues not raised by the pleadings are tried by express or implied consent of the parties, they shall be treated in all respects as if they had been raised in the pleadings.'
The instant record indicates that defendants did not object to the fact that attorney's fees had not been pled until competent evidence of these expenditures had been admitted into evidence. Under these circumstances, it was not error for the trial court to permit evidence of attorney's fees to be considered as if it had been pled and to award damages upon such evidence. Hopkins v. Underwood, 126 Colo. 224, 247 P.2d 1000; Carlson v. Bain, 116 Colo. 526, 182 P.2d 909.
V.
Kunce is correct in his assertion that the trial court erred in granting damages including interest from March 18, 1964, the date the contract to build the duplex was signed. It is the settled rule in Colorado that in an action for fraud and deceit interest may only be assessed from the date of judgment. Holland Furnace Co. v. Robson, 157 Colo. 347, 402 P.2d 628; Moreland v. Austin, 138 Colo. 78, 330 P.2d 136. Defendants' further assignments of error are without merit or are harmless error. See C.R.C.P. 61.
Judgment of the trial court against Gilbert Peterson is reversed and cause remanded with directions to dismiss the complaint as against him. Judgment against Glenn Kunce is modified by deleting therefrom the allowance of interest prior to judgment, and as so modified, the judgment against Glenn Kunce is affirmed.
SILVERSTEIN, C.J., and DWYER, J., concur.