Reshetar Systems, Inc. v. Scott Thompson

United States Court of Appeals
FOR THE EIGHTH CIRCUIT
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No. 11-3397
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In re: Scott Alfred Thompson; *
Kirsten Marie Thompson, *
*
Debtors. *
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Reshetar Systems, Inc., * Appeal from the United States
* Bankruptcy Appellate Panel
Appellant, * for the Eighth Circuit.
*
v. *
*
Scott Alfred Thompson, *
*
Appellee. *
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Submitted: May 17, 2012
Filed: July 30, 2012
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Before LOKEN and BEAM, Circuit Judges, and PERRY,* District Judge.
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LOKEN, Circuit Judge.
Construction 70, Inc., contracted to build an Applebee’s restaurant in
Cambridge, Minnesota, promising to “promptly pay each Subcontractor, upon receipt
of payment from the Owner . . . the amount to which said Subcontractor is entitled.”
*
The Honorable Catherine D. Perry, Chief Judge of the United States District
Court for the Eastern District of Missouri, sitting by designation.
In building the restaurant, Reshetar Systems, Inc., became the Subcontractor for
carpentry and drywall work. The subcontract provided that Reshetar would be paid
for its work “upon receipt [by Construction 70] of payment by Owner.” Reshetar
satisfactorily completed its work in January 2004 but was not paid $48,293.81 of the
amount owed. Construction 70 settled a dispute with Applebee’s in March 2007 and
offered Reshetar a smaller sum, claiming it was Reshetar’s pro rata share of the
settlement proceeds.
Reshetar rejected the offer and sued Construction 70 and Scott A. Thompson,
its owner and manager, in state court for breach of contract, conversion, unjust
enrichment, and violations of Minn. Stats. §§ 337.10 and 514.02. Thompson signed
a $78,000 confession of judgment to settle that lawsuit in June 2009. Thompson and
his wife filed a petition for Chapter 7 bankruptcy relief in December 2009, with the
debt to Reshetar unsatisfied. Reshetar commenced this adversary proceeding to have
the debt declared nondischargeable, in whole or in part, and now appeals the
Bankruptcy Appellate Panel’s (BAP) determination that neither 11 U.S.C. § 523(a)(4)
nor 11 U.S.C. § 523(a)(6) bars discharge of the debt.
Section 523(a) defines classes of debts that are excepted from a Chapter 7
debtor’s discharge in bankruptcy. Section § 523(a)(4) bars discharge for “fraud or
defalcation while acting in a fiduciary capacity, embezzlement, or larceny”;
§ 523(a)(6) bars discharge for a debtor’s “willful and malicious injury” to another
entity or its property. We construe these exceptions narrowly, imposing the burden
of proof on the creditor opposing discharge. In re Nail, 680 F.3d 1036, 1038 (8th Cir.
2012). Here, the bankruptcy court2 granted judgment for the Debtors after the parties
submitted stipulated facts and a short bench trial. The BAP affirmed. Reviewing
findings of fact for clear error and the BAP’s conclusions of law de novo, we affirm.
2
The Honorable Gregory F. Kishel, Chief Judge of the United States
Bankruptcy Court for the District of Minnesota.
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I. The § 523(a)(4) Claims.
A. Fraud or Defalcation While Acting in a Fiduciary Capacity. “Whether
a relationship is a ‘fiduciary’ one within the meaning of § 523(a)(4) is a question of
federal law.” In re Nail, 680 F.3d at 1039 (quotation omitted). Section 523(a)(4) uses
the term fiduciary “in a ‘strict and narrow sense,’ and therefore does not embrace
trustees of constructive trusts imposed by law because of the trustee’s malfeasance.”
Hunter v. Philpott, 373 F.3d 873, 876 (8th Cir. 2004). The statute “speaks of
technical trusts, and not those which the law implies from the contract.” In re Nail,
680 F.3d at 1039 (quotation omitted). “It is not enough that, by the very act of
wrongdoing out of which the contested debt arose, the bankrupt has become
chargeable as a trustee ex maleficio. He must have been a trustee before the wrong
and without reference thereto.” Davis v. Aetna Acceptance Co., 293 U.S. 328, 333
(1934). Trusts satisfying § 523(a)(4) can be created by state statute or by common
law, as well as by contract. In re Long, 774 F.2d 875, 878 (8th Cir. 1985). Reshetar
argues that Thompson was a § 523(a)(4) fiduciary by reason both of a Minnesota
statute and his common law duties as an officer of an insolvent corporation.
1. Minn. Stat. § 514.02. Reshetar first contends that Minn. Stat. § 514.02created a § 523(a)(4) fiduciary relationship between Construction 70 and its
subcontractors. Part of Chapter 514, which creates statutory liens for those who
improve real estate, § 514.02, subd. 1(a), provides:
Proceeds of payments received by a person contributing to an
improvement to real estate within the meaning of section 514.01 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. Proceeds of the payment are not subject to garnishment,
execution, levy, or attachment. 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
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a fiduciary liability or tort liability on the part of any person receiving
payment or entitle any person to an award of punitive damages among
persons contributing to an improvement to real estate under section
514.01 for a violation of this subdivision. (Emphasis added.)
The first question in considering this contention is whether the state statute
created an express trust, because § 523(a)(4) “does not operate in the absence of an
express trust.” Matter of Dloogoff, 600 F.2d 166, 170 (8th Cir. 1979). The
bankruptcy court and the BAP concluded that § 514.02 did not create an express trust
cognizable under § 523(a)(4) because of the statute’s “express bar against the creation
of a fiduciary relationship.” We agree. The Minnesota Legislature added the
language at issue in 2000, when it amended § 514.02 to add a private right of action.
Adding the words “held in trust” to § 514.02, subd. 1(a), was “intended to incorporate
the implied trust-like character” that prevents the theft-of-proceeds offense in
subdivision 1(b) from violating the State’s constitutional ban on imprisoning a person
for debt. State v. Bren, 704 N.W.2d 170, 175 (Minn. App. 2005); see State v. Reps,
223 N.W.2d 780, 784-86 (1974). However, the Minnesota Court of Appeals
concluded, the additional proviso disclaiming the creation of fiduciary liability means
that the new civil action created in the 2000 amendments “must be in the form of a
contract action.” Duluth Superior Erection, Inc. v. Concrete Restorers, Inc., 665
N.W.2d 528, 538 (Minn. App. 2003). “In other words,” the BAP explained in a later
case raising this § 523(a)(4) issue, a general contractor and the bankruptcy debtor, its
principal, “received payment and had an obligation to protect the interest of [the
subcontractor], but neither . . . had a fiduciary liability to [the subcontractor].” 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). This is not the kind of “technical trust” that § 523(a)(4) requires.
Even construing § 514.02, subd. 1(a), as creating an express trust would not
change our conclusion that the statute did not create a fiduciary responsibility in the
“strict and narrow sense” that § 523(a)(4) requires. “It is not enough that a statute
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purports to create a trust: A state cannot magically transform ordinary agents,
contractors, or sellers into fiduciaries by the simple incantation of the terms ‘trust’ or
‘fiduciary.’ Rather, to meet the requirements of § 523(a)(4), a statutory trust must (1)
include a definable res and (2) impose ‘trust-like’ duties.” In re Nail, 680 F.3d at
1040 (quotation omitted). Section 514.02 does not require general contractors to
place funds received for subcontractors into separate accounts, nor does it impose
other affirmative “trust-like” duties such as detailed record keeping. Even more
significantly, the statute only applies to proceeds received for the benefit of
subcontractors “who furnished” labor or materials contributing to the improvement
of real estate. Subdivision 1(b) is not violated unless “others contributed labor, skills,
material, or machinery to improve [real] property.” State v. Holmes, 787 N.W.2d
617, 623 (Minn. App. 2010). In other words, the purported trust is not created until
the subcontractor has a contractual right to be paid. For a debt to be
nondischargeable under this part of § 523(a)(4), the debtor “must have been a trustee
before the wrong and without reference thereto.” Davis, 293 U.S. at 333; see Matter
of Marchiando, 13 F.3d 1111, 1115-17 (7th Cir.), cert. denied, 512 U.S. 1205 (1994).
For these reasons, we conclude that no part of the debt is nondischargeable
under this subpart of § 523(a)(4) because Minn. Stat. § 514.02 did not create the
requisite “fiduciary capacity.”3 Like the BAP, we need not consider Thompson’s
3
Other States have lienholder protection statutes, but they differ significantly
in the extent to which they create express trusts and impose trust-like duties that can
satisfy the strict requirements of § 523(a)(4). Many circuit court decisions have
addressed this issue, reaching what may appear to be differing results. But ignoring
the few cases where the issue was either conceded or decided without careful analysis
of § 523(a)(4) principles, courts have barred discharge when the state statute had
detailed trust provisions and barred all diversion of funds owed present and future
lienholders, but have held that discharge is not barred by statutes imposing criminal
penalties but not trust-like duties and fiduciary liability. Compare In re Johnson, 691
F.2d 249, 250-54 (6th Cir. 1982) (Mich. statutes), Carey Lumber Co. v. Bell, 615
F.2d 370, 374-76 (5th Cir. 1980) (Okla. lien statutes), In re Baird, 114 B.R. 198-5-
contention that § 514.02, as construed in Amcon Block & Precast, Inc. v. Suess, 794
N.W.2d 386 (Minn. App. 2011), “does not apply to commercial contractors.”
2. Minnesota Common Law. Alternatively, Reshetar argues that $16,131.81
of the debt is nondischargeable under § 523(a)(4) because Thompson’s payments to
himself after Construction 70 received settlement proceeds from Applebee’s breached
a Minnesota common law fiduciary duty: “when 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. Co. v. Flemming, 305 N.W.2d 863,
869 (1981). This contention is without merit. First, this alleged fiduciary capacity
is not cognizable under § 523(a)(4) -- it is not a technical trust or other fiduciary
relation that “call[s] for the imposition of the same high standard,” nor does it have
“an existence independent of the debtor’s wrong.” Marchiando, 13 F.3d at 1115.
Second, even if this common law duty created a cognizable fiduciary capacity, it is
limited to precluding directors and officers of insolvent corporations from engaging
in “self-dealings to the detriment of other creditors.” St. James Capital Corp. v. Pallet
Recycling Assoc. of N. Am., 589 N.W.2d 511, 517 (Minn. App. 1999). The
bankruptcy court found that Reshetar failed to prove self dealing that violated the
duty, a finding that was not clearly erroneous.4
(B.A.P. 9th Cir. 1990) (Ariz. Construction Trust Fund Statute), and Matter of
Kawczynski, 442 F. Supp. 413 (W.D.N.Y. 1977) (N.Y. Lien Law), with In re
Nicholas, 956 F.2d 110 (5th Cir. 1992) (Tex. Construction Trust Fund Statute),
Matter of Cross, 666 F.2d 873, 881 & n.13 (5th Cir. 1982) (Ga. lien statute), In re
Pedrazzini, 644 F.2d 756, 758-59 (9th Cir. 1981) (Cal. statutes), Matter of Angelle,
610 F.2d 1335 (5th Cir. 1980) (La. law), and Matter of Dloogoff, 600 F.2d at 168-70(Neb. lien statute).
4
This finding also defeats any claim that Thompson was guilty of embezzling
Construction 70’s property when he disbursed a portion of the settlement proceeds
to himself, a claim Reshetar did not clearly present to the bankruptcy court, to the
BAP, or to this court.
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B. Embezzlement. “Embezzlement, for purposes of section 523(a)(4), 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.” In re Nail, 680 F.3d
at 1042 (quotation omitted). Reshetar argues that the debt is nondischargeable
because, under Minn. Stat. § 514.02, “funds paid by Applebee’s for Reshetar Systems
work belong to Reshetar Systems,” and therefore Thompson’s use of those funds for
any purpose other than paying Reshetar was a misappropriation that was “unlawful
under the two written contracts and Minnesota law.” The BAP agreed that Reshetar
had a contractual right to be paid for its work but concluded: “Nothing in [§ 514.02],
the contract, or the subcontract, however, gave Reshetar specific property rights in
the payments Construction 70 received from Applebee’s . . . . Construction 70’s use
of its own property did not amount to embezzlement.” We agree.
“One cannot embezzle one’s own property.” In re Belfry, 862 F.2d 661, 662
(8th Cir. 1988). Payments Construction 70 received from Applebee’s came lawfully
into the hands of Construction 70. The payments were subject to contractual and
statutory obligations to pay subcontractors amounts owing for their completed work
but, as in Belfry, 862 F.2d at 663, there was no obligation to segregate specific funds
for payment to specific subcontractors. Thus, like the bank’s security interest in In
re Phillips, 882 F.2d 302, 304 (8th Cir. 1989), Reshetar’s right to be paid did not
“give it an absolute ownership interest nor . . . defeat [Construction 70’s] ownership
interest” in the payments. In these circumstances, Construction 70’s failure to pay
Reshetar “was a dischargeable breach of contract, not a nondischargeable
embezzlement.” In re Nail, 680 F.3d at 1042, quoting Werner v. Hofmann, 5 F.3d
1170, 1172 (8th Cir. 1993). In addition, as in In re Littleton, 942 F.2d 551, 556 (9th
Cir. 1991), the bankruptcy court did not clearly err when it found no intent to defraud
because Thompson “applied [his] entire effort and resources to make the business
survive.”
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C. Larceny. Reshetar’s § 523(a)(4) larceny claim is without merit because
Construction 70’s original possession of the project and settlement payments by
Applebee’s was lawful. See Werner, 5 F.3d at 1172 .
II. The § 523(a)(6) Claim.
Section 523(a)(6) bars discharge of debts “for willful and malicious injury” of
a creditor or its property. To be “willful,” the injury must be “intentional or
deliberate.” In re Long, 774 F.2d at 880. “To qualify as ‘malicious,’ the debtor’s
action must be targeted at the creditor . . . at least in the sense that the conduct is
certain or almost certain to cause financial harm.” In re Masden, 195 F.3d 988, 989
(8th Cir. 1999) (quotation omitted). The bankruptcy court found that Thompson’s
conduct was not malicious: “there just isn’t any evidence [of malice] here because
the actions of the debtor . . . all were undertaken, according to his . . . 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 Mr. Thompson.” The BAP expressly upheld this finding. On appeal, Reshetar
advances a different interpretation of the evidence, emphasizing its rejected theory
that Construction 70 and Thompson were guilty of theft and conversion of payments
that were Reshetar’s property. After careful review of the record, we agree with the
BAP that the finding of no malicious injury was not clearly erroneous, which resolves
the § 523(a)(6) issue.
The judgment of the Bankruptcy Appellate Panel is affirmed.
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