Poynter v. Great American Insurance (In Re Poynter)

NOT RECOMMENDED FOR FULL-TEXT PUBLICATION
File Name: 13a0815n.06
No. 12-6424
UNITED STATES COURT OF APPEALS
FOR THE SIXTH CIRCUIT
FILED
In re: DEWAYNE ANTHONY POYNTER, ) Sep 06, 2013
) DEBORAH S. HUNT, Clerk
Debtor, )
)
DEWAYNE ANTHONY POYNTER, ) ON APPEAL FROM THE UNITED
) STATES DISTRICT COURT FOR
Appellant, ) THE WESTERN DISTRICT OF
) KENTUCKY
v. )
)
GREAT AMERICAN IN S U R A N C E ) OPINION
COMPANY,
Appellee.
Before: COLE and DONALD, Circuit Judges; MARBLEY, District Judge*
Bernice B. Donald, Circuit Judge. Great American Insurance Company provided payment
and performance bond insurance to Poynter Construction, as part of Poynter Construction’s
insurance requirement to bid for public contracts. Poynter Construction failed to complete three
bonded projects and Great American was forced to pay for the projects’ completion. Dewayne
Poynter, the sole proprietor of Poynter Construction, sought relief under Chapter 7 of the Bankruptcy
Code, seeking discharge of his debts to Great American. Great American filed a motion for
summary judgment, arguing that the debts were non-dischargeable under 11 U.S.C. § 523(a)(4).
*
The Honorable Algenon L. Marbley, United States District Judge for Southern District of
Ohio, sitting by designation.
No. 12-6424
Poynter v. Great Am. Ins. Co.
The bankruptcy court granted Great American’s motion and the district court affirmed. Poynter now
appeals.
I.
The debtor, Dewayne Poynter, was the sole proprietor of Poynter Construction, a commercial
construction company. (Bkr. Doc. 12-1, P. 6.) In order to qualify for and enter into contracts with
local and state governments as a builder for public projects, Poynter was required to obtain payment
and performance bonds. (Bkr. Doc. 12-1, P. 16-17.) For this reason, Great American Insurance
Company (GAIC) provided Poynter Construction (personally guaranteed by Poynter) performance
and payment bonds on public projects. (Id.) On June 1, 2007, Poynter and GAIC entered into an
Agreement of Indemnity (AOI). (Bkr. Doc. 12-1, P. 15-16,) Thereafter, GAIC and Poynter
Construction entered into several performance bonds and GAIC required Poynter Construction to
be capitalized in certain amounts for each construction project before issuing the bonds. (Bkr. Doc.
12-1, P. 16-17.) GAIC relied on misleading financial statements provided by Poynter Construction
in agreeing to write bonds for the project. (Bkr. Doc. 12-2, P. 45-46.)
Poynter Construction was unable to complete three construction projects. (Bkr. Doc. 12-1,
P. 24; Doc. 12-1, P. 32; Doc. 12-2, P. 3.) GAIC paid to have the projects completed and incurred
a net loss of $600, 210.01. (GAIC’s Mot. Summ. J. Doc. 11-1, P. 7.) Poynter Construction’s records
indicate that it received $2,502,209 in payments for the three bonded projects that it did not
complete. (Bkr. Doc. 12-12, P. 1.) Of this amount, $1,351,788.39 was paid to Poynter Homes, a
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residential construction company that Poynter owned and operated, and PBI Bank. (GAIC’s Mot.
Summ. J. Doc. 11-1, P. 7.)
On October 22, 2010, Poynter filed a Voluntary Petition seeking relief under Chapter 7 of
the United States Bankruptcy Code. On January 18, 2011, GAIC instituted a proceeding against
Poynter in order to have its debt declared non-dischargeable under 11 U.S.C. § 523(a)(4). GAIC
filed a motion for summary judgment and argued that Poynter’s debt to GAIC was non-dischargeable
because he failed to hold payment of bonded contract funds in trust in accordance with the terms of
the trust funds provision in the AOI that states:
TRUST FUNDS
Fourth: Undersigned covenant and agree that all funds received by them, or due or
to become due under any contract covered by any Bond are trust funds whether in the
possession of the Undersigned or another, for the benefit of all parties to whom the
Undersigned incurs obligations in the performance of the contract covered by the
Bond(s) and/or the benefit of, payment to or reimbursement of the Surety for any
liability, loss or expense the Surety may incur under the Bond(s) or in enforcing this
Agreement. If the Surety discharges any such obligation, the Surety shall be entitled
to assert the claims of any party to the trust funds. The Undersigned shall, upon
demand of the Surety and in implementation of the trust, open an account or separate
accounts with a bank designated by Surety, which account(s) shall be designated as
a trust account(s) for the deposit of such trust funds and the Undersigned shall
deposit therein all monies received pursuant to said contract. Withdrawals from such
account(s) shall be by check or other instrument signed by the Undersigned and
countersigned by a representative of the Surety. Notwithstanding anything to the
contrary herein above this dedication may be implemented in any other manner
provided at law or in equity.
(Bkr. Doc. 12-4, P. 2-3.)
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Poynter v. Great Am. Ins. Co.
The bankruptcy court granted GAIC’s motion for summary judgment. The district court
affirmed the bankruptcy court’s decision and Poynter now appeals.
II.
“In considering an appeal from a district court decision which is on appeal from a bankruptcy
court, this court independently reviews the bankruptcy court’s findings of fact for clear error.” In re
Garver, 116 F.3d 176, 178 (6th Cir. 1997). Conclusions of law are reviewed de novo. Id.
The applicability of the Bankruptcy Act’s discharge exception regarding defalcation is at
issue here. A debtor may not discharge any debt that was incurred under “fraud or defalcation while
acting in fiduciary capacity, embezzlement, or larceny.” 11 U.S.C. § 523 (a)(4). GAIC did not argue
in either the bankruptcy court or the district court that embezzlement, larceny, or fraud occurred in
this case. Moreover, the bankruptcy court and the district made no such finding. Therefore, GAIC
must show by a preponderance of the evidence that the debt was incurred through defalcation while
acting in a fiduciary capacity. In re Garver, 116 F.3d at 178 (citing Grogan v. Garner, 498 U.S. 279,
291 (1991)) (adopting preponderance of the evidence standard for § 523(a) discharges).
We construe the term “fiduciary capacity” found in the defalcation provision of § 523(a)(4)
narrower than we construe the term “fiduciary relationship” in other contexts. Id. at 179-80.
Specifically, defalcation is “limited to only those situations involving an express or technical trust
relationship arising from placement of a specific res in the hands of the debtor.” Id. at 180 (citing
In re Young, 91 F.3d at 1371). A fiduciary capacity under § 523(a)(4) is “limited to only those
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situations involving an express or technical trust relationship arising from placement of a specific
res in the hands of the debtor.” Id. at 180 (citing In re Young, 91 F.3d 1367, 1371 (10th Cir. 1996)).
Therefore, GAIC must establish: “(1) the existence of a trust, either express or statutorily created;
(2) the debtor owed a fiduciary obligation with relation to that trust; and (3) the debtor breached his
or her fiduciary duty by either misappropriating the trust res or by simply failing, intentionally or
unintentionally, to properly account for the trust res.” In re Smith, 238 B.R. 664, 670 (Bankr. W.D.
Ky. 1999).
A. Existence of a trust
Poynter’s first issue on appeal is that the bankruptcy court and the district court erred in
finding that the AOI between Poynter Construction (and Poynter individually) and GAIC created an
express trust. State law governs whether an express or technical trust exists. Id. Under Kentucky
law, an express or technical trust is created by: “(1) an expressed intent to create a trust; (2) an
ascertainable res; (3) a sufficiently certain beneficiary; and (4) [a] trustee who administers the trust
for the beneficiary.” In re Grant, 325 B.R. 728, 734 (Bankr. W.D. Ky. 2005) (citing Cumberland
Sur. Ins. Co. v. Smith, 238 B.R. 664, 670-71 (Bankr. W.D. Ky. 1999)).
With regard to the first element, there must be a manifestation of an intent on the part of the
alleged trustee to create it in favor of the alleged beneficiary to the particular funds involved.
Frazier v. Hudson, 130 S.W.2d 809, 810 (Ky. Ct. App. 1939). Here, there is a contractual provision
in the AOI which refers to Poynter Construction holding “in trust” any funds that it received from
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Poynter v. Great Am. Ins. Co.
any contract covered by the bond. Specifically, the provision requires “that all funds received by
them [Poynter Construction & Poynter, individually], or due or to become due under any contract
covered by any Bond are trust funds.” (Doc. 1-1, Page 3.) In a somewhat similar case involving a
dispute with offset payments under a construction contract, we found similar language in a general
agreement of indemnity to be sufficient evidence of a manifestation of intent to create a trust. See
Fed. Ins. Co. v. Fifth Third Bank, 867 F.2d 330, 332-34 (6th Cir. 1989) (holding that language “[a]ll
monies paid on account to any contractor for materials or labor shall be regarded as fund [sic] in his
trust for payment of any and all obligations relating to this contract” is a sufficient manifestation of
an intent to create a trust). Other courts have also found similar language in indemnity agreements
to be sufficient to satisfy the first element of express trust creation. See Acuity v. Planters Bank, Inc.,
362 F. Supp. 2d 885, 891-892 (W.D. Ky. 2005) (finding that language “all monies due and to
become due under any contract or contracts covered by the Bonds are trust funds” to evince intent
to create a trust); see also In re Smith, 238 B.R. at 671 (finding “to hold all monies or other proceeds
[of bonded construction contracts] . . . as a trust” to be sufficient). We find that the AOI provision
in question expresses a clear intent to create a trust because the contractual language of the AOI at
issue here is largely the same as the language used in other cases, including one of our own, where
the first element was met.
In terms of the second element, “the subject matter of the trust must be definite or definitely
ascertainable from facts existing at the time of the creation of the trust.” Ridley v. Shepard, 168
S.W.2d 550, 551 (Ky. Ct. App. 1943). “[E]ven where the intent to create a trust is clear and
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unmistakable, the trust would be incomplete unless executed and effectuated by bringing property
within the trust.” Acuity, 362 F. Supp. 2d at 892 (quoting Deleuil Ex’rs v. DeLeuil, 74 S.W.2d 474,
477 (Ky. Ct. App. 1934)). Poynter argues that a two-year time lapse between the execution of the
AOI and the first bonded contract that Poynter Construction received makes the creation of a trust
impossible. While Poynter does not make clear which element of trust creation he takes issue with,
presumably it is the ability to ascertain the trust res at the time the trust was created. Poynter relies
heavily on Acuity to support his argument. The court’s issue in Acuity, however, was a subrogation
rights dispute between a surety and a creditor bank. Id. at 888. Our issue whether a sufficient
fiduciary relationship existed under 11 U.S.C. § 523(a)(4) such that the debt was non-
dischargeable is entirely different. Nevertheless, Acuity is not irrelevant because it explains that
under Kentucky law, a trust is not created by merely identifying a future trust res. Id. at 892. The
Acuity court found that one of the contractors competing for superior rights in the funds was out of
luck because it was “without an actual ownership interest in those funds until it received those funds
[or] until it performed work entitling it to payment.” Id. at 893. In other words, the subject matter
of the trust was still too abstract. The difference here is that GAIC had a definite pecuniary and legal
interest, at the time the agreement was signed, in the amount that it was agreeing to insure Poynter
Construction. Although there was a time lapse, Poynter Construction (and Poynter individually)
signed the AOI in consideration of GAIC’s issuance of the payment and performance bonds. When
the first contract was received, a payment and performance bond was issued by GAIC to Poynter
Construction. We believe the issuance of the bonds and the acceptance of the bonds by Poynter
Construction is sufficient to create a continuing obligation to abide by the trust provision in the AOI.
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See In re Smith, 238 B.R. at 672. For this reason, we conclude that the ascertainable res is all funds
received under any contract covered by the bond.
With respect to the third element, there is no dispute that there is a sufficiently certain
beneficiary. The beneficiaries are “all parties to whom the Undersigned [Poynter Construction]
incurs obligations in the performance of the contract.” This provision establishes a sufficiently
certain beneficiary. Id. at 673 (finding “job creditors” as being a sufficiently certain beneficiary).
Lastly, in regard to the designated trustee element, the AOI designates Poynter Construction.
Poynter seems to argue that a trust was not formed because he had unlimited use of construction
draws and was never required to segregate those funds from his other construction projects. We
addressed this exact argument in Federal Insurance and determined that “this is not a determining
factor of whether a trust was formed.” 867 F.2d at 334. Moreover, “the requirement to hold the
funds in a separate account is a fiduciary obligation of [Poynter Construction] as a trustee, and
therefore, when a trust is formed, the trustee has this obligation regardless of the trust agreement
wording.” Id. As a result, we hold Poynter Construction (and Poynter individually) was the
designated trustee and that an express trust was formed in accordance with the AOI trust fund
provision.
B. Defalcation
Having determined that the AOI trust fund provision created an express trust and that
Poynter owed fiduciary obligations to GAIC for these funds, we must answer the final inquiry of
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whether Poynter breached his fiduciary duty and thus committed defalcation. “Defalcation [] occurs
through the misappropriation or failure to properly account for [the] trust funds.” In re Garver, 116
F.3d at 180. Poynter did not argue in either the bankruptcy court or the district court, nor does he
argue here, that he did not misappropriate or fail to account for the trust funds. In fact, the opposite
is true: Poynter indicates in his appellate brief that he did not segregate the funds from bonded
construction contracts from funds received through other construction projects. Poynter’s co-
mingling of bond contract funds with other contract funds is a misappropriation of trust funds. In
re Smith, 238 B.R. at 674. Therefore, we determine that Poynter breached his fiduciary duty by
engaging in a defalcation while acting in a fiduciary capacity. Id.
III.
We AFFIRM the district court’s decision.
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