Reshetar Systems, Inc. v. Scott Alfred Thompson ( 2011 )

United States Bankruptcy Appellate Panel
FOR THE EIGHTH CIRCUIT
No. 11-6008
In re: *
*
Scott Alfred Thompson; *
Kirsten Marie Thompson, *
*
Debtors. *
*
Reshetar Systems, Inc. * Appeal from the United States
* Bankruptcy Court for the
Plaintiff-Appellant, * District of Minnesota
*
v. *
*
Scott Alfred Thompson, *
*
Defendant-Appellee. *
Submitted: July 27, 2011
Filed: October 4, 2011
Before SCHERMER, VENTERS, and NAIL, Bankruptcy Judges.
NAIL, Bankruptcy Judge.
Reshetar Systems, Inc. appeals the January 20, 2011 judgment of the
bankruptcy court1 determining the debt owed to Reshetar Systems, Inc. by Debtor
Scott A. Thompson was not excepted from discharge. We affirm.
BACKGROUND
Debtor Scott A. Thompson ("Debtor") was the sole owner and president of
Construction 70, Inc. ("Construction 70"). In September 2003, Construction 70
entered into a contract with Applebee's International, Inc. ("Applebee's") to build a
restaurant in Cambridge, Minnesota. Reshetar Systems, Inc. ("Reshetar") agreed to
provide Construction 70 the labor, materials, skills, and equipment necessary to
perform carpentry and drywall work for the project.
Reshetar kept its end of the bargain, completing its work in January 2004.
However, despite being paid at least most of what it claimed it was owed by
Applebee's,2 Construction 70 failed to pay Reshetar $48,293.81 of the total amount
it was owed. As a result, Reshetar commenced a lawsuit against Construction 70 and
Debtor in Minnesota state court. The parties settled that lawsuit in June 2009, with
Debtor executing a confession of judgment for $78,000.00.3
1
The Honorable Gregory F. Kishel, Chief Judge, United States Bankruptcy
Court for the District of Minnesota.
2
Various disputes between Applebee's and Construction 70 led to litigation
between those parties in Kansas state court. That litigation was resolved when
Applebee's and Construction 70 entered into a settlement agreement in March 2007.
3
The difference between the $48,293.81 Construction 70 owed Reshetar and
the $78,000.00 for which Debtor confessed judgment is attributable to attorney fees
and interest.
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On December 30, 2009, Debtor filed a petition for relief under chapter 7 of the
bankruptcy code. Reshetar timely filed a complaint under 11 U.S.C. § 523(a)(2)(A),
(4), and (6) to determine the dischargeability of the $78,000.00 owed to it by Debtor.
The matter was tried, and on January 20, 2011, the bankruptcy court entered a
judgment in favor of Debtor. Reshetar timely filed a notice of appeal.4
STANDARD OF REVIEW
We review the bankruptcy court's findings of fact for clear error and its legal
conclusions de novo. See R & R Ready Mix v. Freier (In re Freier), 604 F.3d 583,
587 (8th Cir. 2010) (citing First Nat'l Bank of Olathe, Kansas v. Pontow, 111 F.3d
604, 609 (8th Cir. 1997)). More specifically, we review de novo the bankruptcy
court's interpretation of a contract. See Bremer Bank v. John Hancock Life Ins. Co.,
601 F.3d 824, 829 (8th Cir. 2010). We also review de novo the bankruptcy court's
interpretation of a statute. See Ferrell v. West Bend Mut. Ins. Co., 393 F.3d 786, 796
(8th Cir. 2005).
DISCUSSION
11 U.S.C. § 523(a)(4)–fraud or defalcation
Section 523(a)(4) excepts from discharge a debt "for fraud or defalcation while
acting in a fiduciary capacity[.]" State law may impose fiduciary duties on a debtor.
Barclays American/Business Credit, Inc. v. Long (In re Long), 774 F.2d 875, 878 (8th
Cir. 1985). However, whether a given relationship is a fiduciary relationship within
the meaning of § 523(a)(4) is a question of federal law. Tudor Oaks Limited
Partnership v. Cochrane (In re Cochrane), 124 F.3d 978, 984 (8th Cir. 1997). "[T]he
broad, general definition of fiduciary–a relationship involving confidence, trust and
4
On appeal, Reshetar abandoned its claim under § 523(a)(2)(A).
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good faith–is inapplicable in the dischargeability context." Cal-Micro, Inc. v.
Cantrell (In re Cantrell), 329 F.3d 1119, 1125 (9th Cir. 2003) (quoted in Hunter v.
Philpott, 373 F.3d 873, 876 (8th Cir. 2004)).
The fiduciary relationship between the debtor and the creditor must arise from
an express or technical trust. Cochrane, 124 F.3d at 984. An express trust is one
"created with the settlor's express intent, usu[ally] declared in writing." Black's Law
Dictionary 1650 (9th ed. 2009). A technical trust is one imposed by statute or
common law. E. Armata, Inc. v. Parra (In re Parra), 412 B.R. 99, 104 (Bankr.
E.D.N.Y. 2009) (citation omitted); A.J. Rinella & Co. v. Bartlett (In re Bartlett), 397
B.R. 610, 619 (Bankr. D. Mass. 2008).
Reshetar first argues MINN. STAT. § 514.02 created the requisite fiduciary
relationship between the parties5 with respect to the payments Construction 70
received from Applebee's for the carpentry and drywall work performed by Reshetar.
Pursuant to that statute, "[p]roceeds of payments received by a person contributing
to an improvement to real estate . . . shall be held in trust by that person for the
benefit of those persons who furnished the labor, skill, material, or machinery
contributing to the improvement." MINN. STAT. § 514.02, subd. 1. However, the
statute goes on to provide: "Nothing contained in this subdivision shall require
money to be placed in a separate account and not commingled with other money of
the person receiving payment or create a fiduciary liability or tort liability on the part
of any person receiving payment[.]" Id.
5
The bankruptcy court found Debtor had acknowledged he was personally
liable for the actions of Construction 70. Debtor did not challenge this finding on
appeal.
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The express bar against the creation of a fiduciary liability led the bankruptcy
court to conclude MINN. STAT. § 514.02 "does not create a fiduciary relationship
cognizable under Section 523(a)(4)." We agree:
[MINN. STAT. § 514.02] specifically precludes the finding
of a fiduciary relationship between the person contributing
to an improvement to real estate and the person for whose
benefit the proceeds were received. In other words, [the
contractor's principal], acting on behalf of [the contractor],
received payment and had an obligation to protect the
interest of [the subcontractor], but neither [the contractor
nor its principal] had a fiduciary liability to [the
subcontractor].
R & R Ready Mix, Inc. v. Freier (In re Freier), 402 B.R. 891, 900 (B.A.P. 8th Cir.
2009), rev'd on other grounds, 604 F.3d 583 (8th Cir. 2010).6
Alternatively, Reshetar argues because Construction 70 was insolvent when it
received its final payment from Applebee's in 2007, Minnesota common law created
the requisite fiduciary relationship between the parties with respect to Construction
70's disbursement of that final payment. Under Minnesota common law, "[w]hen a
corporation is insolvent, or on the verge of insolvency, its directors and officers
become fiduciaries of the corporate assets for the benefit of creditors." Snyder Elec.
6
Reshetar devoted a substantial portion of its opening brief to a preemptive
strike against any attempt by Debtor to rely on the Minnesota Court of Appeals'
opinion in Amcon Block & Precast, Inc. v. Suess, 794 N.W.2d 386 (Minn. App.
2011). In that case, which was decided 19 days after the trial in this case, the
Minnesota Court of Appeals held a corporate contractor's principal is not civilly liable
under MINN. STAT. § 514.02 in cases involving an improvement to commercial real
estate. While we are not precluded from considering the Minnesota Court of Appeals'
opinion, see Henning v. Mainstreet Bank, 538 F.3d 975, 979 (8th Cir. 2008), we see
no need to do so in this case.
-5-
Co. v. Fleming, 305 N.W.2d 863, 869 (Minn. 1981) (citation omitted). However, the
trust is imposed, not when the corporation becomes insolvent, but only if and when
the directors and officers prefer themselves over other corporate creditors: "Absent
self-dealings to the detriment of other creditors, the directors and officers of a
corporation, once it becomes insolvent, are not transformed into a trust
relationship[.]" St. James Capital Corp. v. Pallet Recycling Associates of North
America, Inc., 589 N.W.2d 511, 517 (Minn. App. 1999).
This is a classic example of a constructive trust. See Hunter, 373 F.3d at 876(referring to a constructive trust as one "imposed by law because of the trustee's
malfeasance"); Long, 774 F.2d at 878 (referring to a constructive trustee as one
"designated as such because of misconduct"). The trustee of a constructive trust is
not a fiduciary within the meaning of § 523(a)(4). Hunter, 373 F.3d at 875-76; Long,
774 F.2d at 878. Consequently, the Minnesota common law delineated in Snyder
Elec. Co. does not create the fiduciary relationship required by § 523(a)(4), either.
11 U.S.C. § 523(a)(4)–embezzlement
Section 523(a)(4) also excepts from discharge a debt for embezzlement. For
the purposes of this exception, embezzlement is the "fraudulent appropriation of
property of another by a person to whom such property has been entrusted or into
whose hands it has lawfully come." Belfry v. Cardozo (In re Belfry), 862 F.2d 661,
662 (8th Cir. 1988) (citation omitted). To prevail, the creditor must establish "the
debtor improperly used the creditor's property before complying with some obligation
to the creditor." Werner v. Hofmann, 5 F.3d 1170, 1172 (8th Cir. 1993) (citation
omitted).
Reshetar argues the funds Applebee's paid Construction 70 for Reshetar's
carpentry and drywall work belonged to Reshetar. It claims Minnesota
law–presumably MINN. STAT. § 514.02–and both the contract between Applebee's
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and Construction 70 and the subcontract between Construction 70 and Reshetar
required Construction 70 to deliver the funds it received from Applebee's to Reshetar
upon its receipt of those funds. Reshetar also claims Construction 70 had no right to
use those funds for any purpose other than to pay Reshetar.
The bankruptcy court correctly concluded otherwise. MINN. STAT. § 514.02,
the contract between Applebee's and Construction 70, and the subcontract between
Construction 70 and Reshetar gave Reshetar the contractual right to be paid for its
carpentry and drywall work. Nothing in the statute, the contract, or the subcontract,
however, gave Reshetar specific property rights in the payments Construction 70
received from Applebee's. Those payments belonged to Construction 70, and
Construction 70's use of its own property did not amount to embezzlement.
11 U.S.C. § 523(a)(4)–larceny
Section 523(a)(4) also excepts from discharge a debt for larceny. For the
purposes of this exception, larceny is the "wrongful taking and carrying away of the
property of another with the intent to convert such property to the taker's use without
the consent of the owner." Kansas Bankers Surety Co. v. Eggleston (In re Eggleston),
243 B.R. 365, 378 (Bankr. W.D. Mo. 2000) (citation omitted). The exception does
not apply if the debtor's original possession of the property is lawful. Hofmann, 5
F.3d at 1172.
The bankruptcy court found the payments from Applebee's to Construction 70
"certainly didn't come into [Construction 70's] possession and control unlawfully."
Inasmuch as Construction 70 was contractually entitled to receive those payments,
the bankruptcy court's finding cannot be said to be erroneous, much less clearly
erroneous. Again, those payments belonged to Construction 70, and its use of its own
property did not amount to larceny.
-7-
11 U.S.C. § 523(a)(6)
Section 523(a)(6) excepts from discharge a debt "for willful and malicious
injury by the debtor to another entity or to the property of another entity[.]" Such a
debt must be the result of an injury that is both a "willful injury" and a "malicious
injury." Blocker v. Patch (In re Patch), 526 F.3d 1176, 1180 (8th Cir. 2008) (citing
Fischer v. Scarborough (In re Scarborough), 171 F.3d 638, 641 (8th Cir. 1999); see
Sells v. Porter (In re Porter), 539 F.3d 889, 893-94 (8th Cir. 2008). A willful injury
is one resulting from the commission of an intentional tort. Geiger v. Kawaauhau (In
re Geiger), 113 F.3d 848, 853 (8th Cir. 1997), aff'd, 523 U.S. 57 (1998). A malicious
injury is one resulting from conduct "targeted at the creditor . . . at least in the sense
that the conduct is certain or almost certain to cause financial harm." Long, 774 F.2d
at 881.
With respect to the requirement of a willful injury, Reshetar argues
Construction 70's failure to pay Reshetar when Applebee's paid Construction 70 for
Reshetar's carpentry and drywall work amounts to the intentional tort of conversion.
Under Minnesota law, "[t]he elements of common law conversion are (1) the plaintiff
has a property interest and (2) the defendant deprives the plaintiff of that interest."
Lassen v. First Bank Eden Prairie, 514 N.W.2d 831, 838 (Minn. App. 1994), review
denied (Minn. June 29, 1994).
The bankruptcy court found "there was no property of [Reshetar] in the hands
of [Construction 70] . . . to convert[.]" For the reasons discussed above, we agree.
Construction 70's use of its own property did not amount to conversion.
While this effectively disposes of Reshetar's claim under § 523(a)(6), we note
the bankruptcy court also found there was no malicious injury:
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"[T]here just isn't the evidence [of malice] here because the
actions of the debtor . . . all were undertaken, according to
his really uncontroverted testimony, in an effort to try to
make good out of a bad situation. . . . [T]he evidence
doesn't support any guile, any intent to shaft anybody on
the part of [Construction 70] or [Debtor]."
Reshetar advances a different interpretation of the evidence. However, giving due
regard to the bankruptcy court's opportunity to judge Debtor's credibility–as we are
required by Fed.R.Bankr.P. 8013 to do–we cannot say the bankruptcy court's finding
was clearly erroneous.
CONCLUSION
For the foregoing reasons, we affirm the bankruptcy court's judgment
determining the debt owed to Reshetar Systems, Inc. by Debtor Scott A. Thompson
was not excepted from discharge.
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